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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q







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

For the quarterly period ended March 31, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    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 April 30, 2010 was 53,648,666.









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INDEX



|                               |  |                                                                                                    |  |   
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION
|                               |  |                                                                                                   
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited)                                            |  |   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009                   |  | 1 
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 |  | 2 
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 |  | 3 
|                               |  |                                                                                                   
|                               |  | Notes to Condensed Consolidated Financial Statements                                               |  | 4 
|                               |  |                                                                                                   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations              |  | 17
|                               |  |                                                                                                   
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 27
|                               |  |                                                                                                   
|Item 4.                        |  | Controls and Procedures                                                                            |  | 27
|                              
|PART II - OTHER INFORMATION   
|                               |  |                                                                                                   
|Item 1.                        |  | Legal Proceedings                                                                                  |  | 29
|                               |  |                                                                                                   
|Item 1A.                       |  | Risk Factors                                                                                       |  | 31
|                               |  |                                                                                                   
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 62
|                               |  |                                                                                                   
|Item 3.                        |  | Defaults Upon Senior Securities                                                                    |  | 62
|                               |  |                                                                                                   
|Item 4.                        |  | (Removed and Reserved)                                                                             |  | 62
|                               |  |                                                                                                   
|Item 5.                        |  | Other Information                                                                                  |  | 63
|                               |  |                                                                                                   
|Item 6.                        |  | Exhibits                                                                                           |  | 64
|                               | 
|Signatures                     |  | 66                                                                                                



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANSEN MEDICAL, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)



|                                                                                                                                              |  |               |          |   |                  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                              |  | March 31,2010 |          |   | December 31,2009 |  
|ASSETS                                                                                                                                        | 
|Current assets:                                                                                                                               |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                     |  | $             | 6,780    |   |                  | $ | 9,553    |  
|Short-term investments                                                                                                                        |  |               | 16,350   |   |                  |   | 18,726   |  
|Accounts receivable, net                                                                                                                      |  |               | 5,376    |   |                  |   | 6,888    |  
|Inventories                                                                                                                                   |  |               | 6,691    |   |                  |   | 7,406    |  
|Deferred cost of goods sold                                                                                                                   |  |               | 3,225    |   |                  |   | 2,535    |  
|Current portion of note receivable                                                                                                            |  |               | 1,097    |   |                  |   |         |  
|Prepaids and other current assets                                                                                                             |  |               | 3,311    |   |                  |   | 1,929    |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                          |  |               | 42,830   |   |                  |   | 47,037   |  
|Property and equipment, net                                                                                                                   |  |               | 12,543   |   |                  |   | 13,460   |  
|Note receivable, net of current portion                                                                                                       |  |               | 3,903    |   |                  |   |         |  
|Restricted cash                                                                                                                               |  |               | 65       |   |                  |   | 65       |  
|Other assets                                                                                                                                  |  |               | 367      |   |                  |   | 179      |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                  |  | $             | 59,708   |   |                  | $ | 60,741   |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|                                                                                                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                          | 
|Current liabilities:                                                                                                                          |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                              |  | $             | 3,113    |   |                  | $ | 2,068    |  
|Accrued liabilities                                                                                                                           |  |               | 5,088    |   |                  |   | 4,825    |  
|Current portion of deferred revenue                                                                                                           |  |               | 12,105   |   |                  |   | 9,337    |  
|Current portion of long-term debt                                                                                                             |  |               | 3,565    |   |                  |   | 9,803    |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                     |  |               | 23,871   |   |                  |   | 26,033   |  
|Deferred revenue, net of current portion                                                                                                      |  |               | 84       |   |                  |   | 126      |  
|Long-term debt, net of current portion                                                                                                        |  |               | 5,347    |   |                  |   |         |  
|Other long-term liabilities                                                                                                                   |  |               | 1,236    |   |                  |   | 829      |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                             |  |               | 30,538   |   |                  |   | 26,988   |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|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: 37,544,957 and 37,512,458 shares at March 31, 2010 and
December 31, 2009, respectively |  |               | 4        |   |                  |   | 4        |  
|Additional paid-in capital                                                                                                                    |  |               | 255,310  |   |                  |   | 253,968  |  
|Accumulated other comprehensive loss                                                                                                          |  |               | (2,108   | ) |                  |   | (29      | )
|Accumulated deficit                                                                                                                           |  |               | (224,036 | ) |                  |   | (220,190 | )
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                    |  |               | 29,170   |   |                  |   | 33,753   |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                    |  | $             | 59,708   |   |                  | $ | 60,741   |  
|                                                                                                                                              |  |               |          |   |                  |   |          |  

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



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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)



|                                                            |  |                             |         |   |      |   |         |  
|----------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                            |  | Three months endedMarch 31, |        
|                                                            |  | 2010                        |         |   | 2009 |  
|Revenues                                                    |  | $                           | 2,711   |   |      | $ | 7,455   |  
|Cost of goods sold                                          |  |                             | 3,570   |   |      |   | 5,381   |  
|                                                            |  |                             |         |   |      |   |         |  
|Gross profit (loss)                                         |  |                             | (859    | ) |      |   | 2,074   |  
|                                                            |  |                             |         |   |      |   |         |  
|Operating expenses:                                         |  |                             |         |   |      |   |         |  
|Research and development                                    |  |                             | 4,767   |   |      |   | 5,651   |  
|Selling, general and administrative                         |  |                             | 7,731   |   |      |   | 10,111  |  
|Gain on settlement of litigation                            |  |                             | (10,003 | ) |      |   |        |  
|                                                            |  |                             |         |   |      |   |         |  
|Total operating expenses                                    |  |                             | 2,495   |   |      |   | 15,762  |  
|                                                            |  |                             |         |   |      |   |         |  
|Loss from operations                                        |  |                             | (3,354  | ) |      |   | (13,688 | )
|Interest income                                             |  |                             | 128     |   |      |   | 130     |  
|Interest and other expense, net                             |  |                             | (620    | ) |      |   | (575    | )
|                                                            |  |                             |         |   |      |   |         |  
|Net loss                                                    |  | $                           | (3,846  | ) |      | $ | (14,133 | )
|                                                            |  |                             |         |   |      |   |         |  
|                                                            |  |                            
|Basic and diluted net loss per share                        |  | $                           | (0.10   | ) |      | $ | (0.56   | )
|                                                            |  |                             |         |   |      |   |         |  
|                                                            |  |                            
|Shares used to compute basic and diluted net loss per share |  |                             | 37,540  |   |      |   | 25,344  |  
|                                                            |  |                             |         |   |      |   |         |  

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)



|                                                                            |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three months endedMarch 31, |        
|                                                                            |  | 2010                        |         |   | 2009 |  
|Cash flows from operating activities:                                       |  |                             |         |   |      |   |         |  
|Net loss                                                                    |  | $                           | (3,846  | ) |      | $ | (14,133 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Gain on settlement of litigation                                            |  |                             | (10,003 | ) |      |   |        |  
|Depreciation and amortization                                               |  |                             | 1,021   |   |      |   | 1,107   |  
|Stock-based compensation                                                    |  |                             | 1,294   |   |      |   | 2,624   |  
|Net losses on investments                                                   |  |                             | 282     |   |      |   |        |  
|Provision for doubtful accounts                                             |  |                             | (29     | ) |      |   |        |  
|Changes in operating assets and liabilities:                                |  |                             |         |   |      |   |         |  
|Accounts receivable                                                         |  |                             | 1,541   |   |      |   | 2,757   |  
|Inventories                                                                 |  |                             | 715     |   |      |   | 693     |  
|Deferred cost of goods sold                                                 |  |                             | (690    | ) |      |   | 259     |  
|Prepaids and other current assets                                           |  |                             | (1,326  | ) |      |   | 252     |  
|Other long-term assets                                                      |  |                             | 12      |   |      |   |        |  
|Accounts payable                                                            |  |                             | 1,045   |   |      |   | 493     |  
|Accrued liabilities                                                         |  |                             | 248     |   |      |   | 919     |  
|Deferred revenue                                                            |  |                             | 2,726   |   |      |   | (1,002  | )
|Deferred rent                                                               |  |                             | (16     | ) |      |   | (8      | )
|Other long-term liabilities                                                 |  |                             | 476     |   |      |   | 48      |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                             | (6,550  | ) |      |   | (5,991  | )
|                                                                            |  |                             |         |   |      |   |         |  
|                                                                            |  |                            
|Cash flows from investing activities:                                       |  |                             |         |   |      |   |         |  
|Purchase of property and equipment                                          |  |                             | (141    | ) |      |   | (255    | )
|Proceeds from sales and maturities of short-term investments                |  |                             | 14,474  |   |      |   | 6,175   |  
|Purchase of investments                                                     |  |                             | (9,712  | ) |      |   | (2,004  | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                             | 4,621   |   |      |   | 3,916   |  
|                                                                            |  |                             |         |   |      |   |         |  
|                                                                            |  |                            
|Cash flows from financing activities:                                       |  |                             |         |   |      |   |         |  
|Repayments of loans payable                                                 |  |                             | (891    | ) |      |   |        |  
|Proceeds from exercise of common stock options, net                         |  |                             | 47      |   |      |   | 69      |  
|Proceeds from employee stock purchase plan                                  |  |                             |        |   |      |   | 300     |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                         |  |                             | (844    | ) |      |   | 369     |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                             | (2,773  | ) |      |   | (1,706  | )
|Cash and cash equivalents at beginning of period                            |  |                             | 9,553   |   |      |   | 17,377  |  
|                                                                            |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                           | 6,780   |   |      | $ | 15,671  |  
|                                                                            |  |                             |         |   |      |   |         |  

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



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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. The Company 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 March 31, 2010, the Company has incurred losses totaling approximately $224.0 million and has not generated positive cash flows from operations. The Company expects such losses to continue through at least the year ended
December 31, 2010 as it continues to commercialize its technologies and develop new applications and technologies. The Company also faces significant short-term uncertainty related to current economic and capital market conditions and the
related impact of those conditions on the capital equipment market.

On April 20, 2010, the Company sold 16,100,000
shares of its common stock, resulting in approximately $29.8 million of net proceeds, after underwriting discounts and commissions and estimated offering expenses. However, the Company may seek to sell additional equity or debt securities or enter
into additional credit facilities in the future to address future needs. Any such required additional capital may not 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. If adequate funds are not available due to the Companys inability to obtain additional financing or if operating cash flows are insufficient
to meet the Companys existing debt covenants, the Company may be required to reduce the scope of, delay or eliminate some or all of its planned research, development and commercialization activities or to license to third parties the rights to
commercialize products or technologies that the Company would otherwise seek to commercialize. The Company might also have to reduce marketing, customer support or other resources devoted to its products. Any of these factors could harm its
financial condition. Failure to manage discretionary spending or raise additional capital as required may adversely impact the Companys ability to achieve its intended business objectives. The Company continues to evaluate the extent of its
implemented cost-saving measures based upon changing future economic conditions and the achievement of estimated revenue throughout 2010 and will consider the implementation of additional cost reductions during the remainder of the year if and as
circumstances warrant. The Company believes that its existing cash and cash equivalents balance at March 31, 2010, as supplemented by the net proceeds received from its April 2010 common stock issuance will be sufficient to meet its liquidity
needs through at least December 31, 2010.

As discussed in Note 7, under the terms of the loan and security agreement
with Silicon Valley Bank, the Company is subject to various financial covenants, including maintaining the required liquidity, achieving specified EBITDA amounts and fulfilling certain reporting requirements. The liquidity covenants require the
Company to maintain at the end of each month either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. Silicon Valley Bank has yet
to determine the quarterly EBITDA amounts with the Company. Additionally, the agreement limits the Companys ability to take the following corporate actions without prior consent from Silicon Valley Bank:



| |  |  | transfer all or any part of its business or properties, other than transfers made in the ordinary course of business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | engage in any business other than the business in which the Company is currently engaged;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | merge or consolidate with any other person, or acquire, all or substantially all of the capital stock or property of another person, subject to certain
exceptions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create, incur, assume, or be liable for any indebtedness, other than certain permitted indebtedness;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, subject to certain exceptions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create, incur, allow or suffer any lien on any of our property, including without limitation intellectual property, assign or convey any right to
receive income;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | directly or indirectly enter into or permit to exist any material transaction with any of its affiliates, subject to certain exceptions; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make or permit any payment on any subordinated debt.
| | - |  | ----------------------------------------------------

In the event the Company were to violate any covenants or if Silicon Valley Bank deems there to have been a material adverse change,
including (1) a material impairment in the perfection or priority of Silicon Valley Banks lien in the collateral or in the value of such collateral, (2) a material adverse change in the Companys business, operations or
condition (financial or otherwise), or (3) a material impairment of the prospect of repayment of any portion of the Companys obligations, the Company would seek to obtain a waiver from Silicon Valley Bank. If the Company were unable to
obtain a waiver, it would be in default under the loan and security agreement, which would entitle Silicon Valley Bank to exercise their remedies, including the right to accelerate the debt, upon which the Company may be required to repay all
amounts then outstanding under the loan and security agreement.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (GAAP). 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, 2009 was
derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Form 10-Q should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2009 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.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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 October 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance regarding revenue arrangements
with multiple deliverables. Under this new guidance, multiple-deliverable



5



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arrangements will be separated in more circumstances than under existing GAAP. This guidance also established a hierarchy for determining the selling price of a deliverable, using vendor specific
objective evidence (VSOE) if available, third party evidence if VSOE is not available or estimated selling price if neither VSOE nor third party evidence is available. The guidance is effective for fiscal years beginning on or after
June 15, 2010. Early adoption is permitted. The Company has not yet determined the effect which this new guidance will have on its condensed consolidated financial statements nor whether it will adopt this guidance early.

In October 2009, the FASB issued authoritative guidance regarding the applicability of software revenue guidance to certain arrangements
that include software elements, changing the accounting model for such arrangements so that they are no longer under the scope of the software revenue guidance. The guidance is effective for fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. The Company has not yet determined the effect which this new guidance will have on its condensed consolidated financial statements nor whether it will adopt this guidance early.

In January 2010, the FASB issued authoritative guidance regarding improving disclosures about fair value measurements. The guidance
requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The new guidance also
clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. The guidance became
effective for the Company at the beginning of fiscal 2010, except for the separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements, which is effective for the Company at the beginning of fiscal 2011.
The adoption of this guidance did not have a material impact, and the deferred provisions of this guidance are not expected to have a material impact, on the Companys condensed consolidated financial statements.

3. 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):



|                                                 |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    
|------------------------------------------------ |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ---------- | - | ---------------------------- | - | --------------------- |  | ----------- | ----- |  | - | ------ |  | - | ---
|                                                 |  |               |        |                      |   |                       |  |   |            |   | Balance Sheet Classification
|                                                 |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value |   | CashEquivalents              |   | Short-termInvestments |  | OtherAssets
|As of March 31, 2010:                            |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    
|Money market funds                               |  | $             | 758    |                      | $ |                      |  | $ |           |   |                              | $ | 758                   |  | $           | 758   |  | $ |       |  | $ |   
|U.S. government agency securities                |  |               | 10,756 |                      |   | 4                     |  |   | (1         | ) |                              |   | 10,759                |  |             | 1,000 |  |   | 9,759  |  |   |   
|Corporate debt securities                        |  |               | 7,216  |                      |   |                      |  |   |           |   |                              |   | 7,216                 |  |             | 3,100 |  |   | 4,116  |  |   |   
|Corporate equity securities                      |  |               | 4,421  |                      |   |                      |  |   | (2,046     | ) |                              |   | 2,375                 |  |             |      |  |   | 2,375  |  |   |   
|Warrants to purchase corporate equity securities |  |               | 583    |                      |   |                      |  |   | (282       | ) |                              |   | 301                   |  |             |      |  |   | 100    |  |   | 201
|                                                 |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    
|                                                 |  | $             | 23,734 |                      | $ | 4                     |  | $ | (2,329     | ) |                              | $ | 21,409                |  | $           | 4,858 |  | $ | 16,350 |  | $ | 201
|                                                 |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    
|                                                 |  |               |        |                      |   |                       | 
|As of December 31, 2009:                         |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    
|Money market funds                               |  | $             | 5,922  |                      | $ |                      |  | $ |           |   |                              | $ | 5,922                 |  | $           | 5,922 |  | $ |       |  | $ |   
|U.S. government agency securities                |  |               | 10,987 |                      |   | 16                    |  |   | (2         | ) |                              |   | 11,001                |  |             |      |  |   | 11,001 |  |   |   
|Corporate debt securities                        |  |               | 8,824  |                      |   | 1                     |  |   |           |   |                              |   | 8,825                 |  |             | 1,100 |  |   | 7,725  |  |   |   
|                                                 |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    
|                                                 |  | $             | 25,733 |                      | $ | 17                    |  | $ | (2         | ) |                              | $ | 25,748                |  | $           | 7,022 |  | $ | 18,726 |  | $ |   
|                                                 |  |               |        |                      |   |                       |  |   |            |   |                              |   |                       |  |             |       |  |   |        |  |   |    



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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 underlying investment has occurred. As of March 31, 2010, investments which are in an unrealized loss position are summarized as follows (in thousands):



|                                                 |  |            |        |                       |   |        |  
|------------------------------------------------ |  | ---------- | ------ | --------------------- | - | ------ | -
|                                                 |  | Fair Value |        | GrossUnrealizedLosses |  
|U.S government agency securities                 |  | $          | 7,719  |                       | $ | (1     | )
|Corporate equity securities                      |  |            | 2,375  |                       |   | (2,046 | )
|Warrants to purchase corporate equity securities |  |            | 301    |                       |   | (282   | )
|                                                 |  |            |        |                       |   |        |  
|                                                 |  | $          | 10,395 |                       | $ | (2,329 | )
|                                                 |  |            |        |                       |   |        |  

None of the above fixed income securities have contractual maturities of more than one year and no
investments have been in an unrealized loss position for longer than twelve months.

The gross unrealized losses on fixed
income securities 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
gross losses are minor and the Company has the ability to hold substantially all of these investments until maturity or until a recovery of fair value occurs. The gross unrealized losses on corporate equity securities are related to the shares of
restricted common stock acquired as a part of the Luna litigation settlement and are due to decreases in the stock price of the securities which are used in part to determine their fair value. Decreases in stock prices reflect investor estimates of
the value of the underlying company as well as general market conditions. As Lunas stock price has been quite volatile over the previous years and the Company is not aware of any facts which would indicate that the reduction in stock price is
permanent, these shares are not considered other-than-temporarily impaired. If, the Company determines in the future that the decline in value is other than temporary, there could be a material expense recorded at such time. The warrant to purchase
corporate equity securities is a derivative and, therefore, unrealized gains and losses are recorded in earnings, regardless of whether any impairment is other than temporary.

Fair Value Measurements

GAAP defines fair value as 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, inputs used in measuring fair value are prioritized 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.



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Investment instruments valued using Level 2 inputs include investment-grade corporate debts,
such as bonds and commercial paper. The fair value of these investments is determined based on modeling techniques that include inputs such as the credit rating of the company issuing the debt and the observable market value of similarly-termed
corporate debts with similar credit ratings.

Corporate equity securities and warrants to purchase corporate equity securities
obtained as a part of the Luna litigation settlement are valued using Level 3 inputs. The corporate equity securities are currently unregistered and their valuation consists of the quoted stock price adjusted for the impact of the non-marketability.
The non-marketability discount was determined based primarily on an analysis utilizing the Black-Scholes model to value a hypothetical put option to approximate the cost of hedging the restricted stock over the expected period of non-marketability,
which was then corroborated by reviewing published restricted stock studies. The warrant to purchase corporate equity securities was valued based on an estimate of the number of shares which will be issued over the three-year life of the warrant.
The estimated shares were valued utilizing the Black-Scholes option pricing model.

The fair value hierarchy of our cash
equivalents and short-term investments at March 31, 2010 is as follows (in thousands):



|                                                 |  |                                                                   |        |                                                    |   |                 |  |   |       |  |   |       
|------------------------------------------------ |  | ----------------------------------------------------------------- | ------ | -------------------------------------------------- | - | --------------- |  | - | ----- |  | - | ------
|                                                 |  | Fair Value Measurements Using                                     |        | Total                                             
|                                                 |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1 Inputs) |        | Significant 
otherObservableInputs(Level 2 Inputs) |   | (Level 3Inputs) | 
|Money market funds                               |  | $                                                                 | 758    |                                                    | $ |                |  | $ |      |  | $ | 758   
|U.S. government agency securities                |  |                                                                   | 10,759 |                                                    |   |                |  |   |      |  |   | 10,759
|Corporate debt securities                        |  |                                                                   |       |                                                    |   | 7,216           |  |   |      |  |   | 7,216 
|Corporate equity securities                      |  |                                                                   |       |                                                    |   |                |  |   | 2,375 |  |   | 2,375 
|Warrants to purchase corporate equity securities |  |                                                                   |       |                                                    |   |                |  |   | 301   |  |   | 301   
|                                                 |  |                                                                   |        |                                                    |   |                 |  |   |       |  |   |       
|                                                 |  | $                                                                 | 11,517 |                                                    | $ | 7,216           |  | $ | 2,676 |  | $ | 21,409
|                                                 |  |                                                                   |        |                                                    |   |                 |  |   |       |  |   |       

4. Inventories (in thousands)



|                |  |               |       |                  |   |      
|--------------- |  | ------------- | ----- | ---------------- | - | -----
|                |  | March 31,2010 |       | December 31,2009
|Raw materials   |  | $             | 2,391 |                  | $ | 2,834
|Work in process |  |               | 2,827 |                  |   | 2,996
|Finished goods  |  |               | 1,473 |                  |   | 1,576
|                |  |               |       |                  |   |      
|Inventories     |  | $             | 6,691 |                  | $ | 7,406
|                |  |               |       |                  |   |      

5. Litigation Settlement

On January 12, 2010, the Company entered into a series of agreements with Luna Innovations Incorporated and its wholly-owned
subsidiary (together, Luna) which settled the outstanding litigation between the two companies. According to the terms of the agreements, Luna issued the following to the Company:



| |  |  | 1,247,330 shares of common stock, which gives the Company 9.9% of outstanding Luna common stock.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | A three-year warrant to purchase, from time to time, a number of shares of Luna common stock, at a purchase price of $0.01 per share, such that the
total number of shares issuable under the warrant plus the 1,247,330 shares issued above will continue to equal 9.9% of Lunas shares of common stock outstanding over that period. The warrant contains a net exercise provision and is
exercisable for three years after January 12, 2010. Neither the warrant nor the shares issuable upon exercise of the warrant have been registered with the Securities and Exchange Commission.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A secured promissory note in the principal amount of $5,000,000. Payment of principal and interest will be made in 16 equal consecutive installments of
principal and interest commencing April 13, 2010. Subsequent installments will be payable on the last business day of each July, October, January and April of each calendar year thereafter, with the last such payment to be due and payable on
January 31, 2014. The outstanding principal amount under the note will accrue interest at 8.5 percent per annum, payable quarterly in arrears. Luna may prepay, in whole or in part, the outstanding amount of the note without premium or penalty.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, Hansen and Luna entered into a Development and Supply Agreement, under which Luna will
develop for the Company a localization and shape sensing solution for the Companys medical robotics system in accordance with the agreed-upon development plan and development milestones, for which the Company will pay Luna for Lunas
development work based on certain agreed upon rates and budgets. The rates charged are equivalent to rates Luna charges for development work under government contracts. Luna will also manufacture and supply the Company with products developed under
the agreement at certain agreed-upon pricing. Certain amounts billed under the Development and Supply Agreement in excess of a quarterly limit will be settled by a corresponding reduction of the principal of the $5 million note.

Under the agreements, Luna granted Hansen a co-exclusive (with Intuitive Surgical, Inc., (Intuitive)), royalty-free, fully
paid, perpetual and irrevocable license to Lunas fiber optic shape sensing/localization technology within the medical robotics field and a royalty-free, fully paid, perpetual and irrevocable license to Lunas fiber optic shape
sensing/localization technology for non-robotic medical devices.

Common Stock

Upon execution of these agreements, Luna issued approximately 1.2 million shares of common stock to the Company. These shares are not
registered with the Securities and Exchange Commission and may not be resold except pursuant to an effective registration statement under the Securities Act or an available exemption from registration. These shares are expected to become salable six
months after the date of issuance of the shares. The fair value of the shares recorded should reflect the value that market participants would demand due to the value of the shares and the risk relating to the inability to access a public market for
these securities for the specified period. The fair value of the unregistered shares was determined as of the market closing price on the dates the shares were issued less a 20% non-marketability discount, for a total value of $4.4 million.

The Company has concluded that 20% is an appropriate discount based primarily on an analysis utilizing the Black-Scholes
model to value a hypothetical put option to approximate the cost of hedging the restricted stock over the expected period of non-marketability. This approach calculates the amount required to buy the right to sell the presently restricted stock at
the then-current market price on the date the holder can count on the shares becoming salable on the public exchange. The assumptions input into the Black-Scholes option pricing model were based on the stock price on the date of the share issuance,
an expected term of eight months, expected volatility of 59%, risk-free interest rate of 0.14% and no expected dividends.

The
Company corroborated the conclusion indicated by the Black-Scholes model by assessing that the discount was generally consistent with the ranges noted from published restricted stock studies and comparable to discounts on restricted stock
transactions completed by other companies operating in similar industries as Luna.

The Company recorded the shares as a
short-term available-for-sale security which will be marked to market each reporting period with unrealized gains and losses recorded in accumulated other comprehensive income/loss in the equity section of the balance sheet. If a reduction in the
value of the shares is considered other than temporary, any such impairment will be recorded as a non-operating expense.



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Warrant to Purchase Common Stock

The warrant to purchase shares of common stock was valued based on an estimate of the number of shares which will be issued over the
three-year life of the warrant. The number of shares were valued utilizing the Black-Scholes option pricing model based on the stock price on the date of the agreements, expected terms ranging from three months to three years, expected volatility
ranging from 53% to 75%, risk-free interest rates ranging from 0.05% to 1.5% and no expected dividends. The total estimated fair value of the warrant was calculated at $583,000 at the date of issuance.

The Company determined that the warrant was a derivative instrument and will be marked to market each reporting period with unrealized
gains and losses recorded as non-operating income or expense.

Summary

Total amounts recorded in relation to the settlement of the litigation with Luna are as follows (in thousands):



|                                 |  |   |       
|-------------------------------- |  | - | ------
|Common stock                     |  | $ | 4,420 
|Warrant to purchase common stock |  |   | 583   
|Secured promissory note          |  |   | 5,000 
|                                 |  |   |       
|                                 |  | $ | 10,003
|                                 |  |   |       

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 March 31, 2010, annual contractual commitments associated with lease obligations were as follows (in thousands):



|                           |  |                            |      
|-------------------------- |  | -------------------------- | -----
|Periods ended December 31, |  | FutureMinimumLeasePayments
|2010 (remainder of year)   |  | $                          | 1,300
|2011                       |  |                            | 1,784
|2012                       |  |                            | 1,838
|2013                       |  |                            | 1,893
|2014                       |  |                            | 1,783
|                           |  |                            |      
|Total                      |  | $                          | 8,598
|                           |  |                            |      



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Warranties

Prior to the third quarter of 2009, the Company generally provided a limited one-year warranty on its Sensei system and accrued the
estimated cost of warranties at the time revenue was recognized. Beginning in the third quarter of 2009, the company began providing one year of post-contract customer service on the sale of its Sensei system. Post-contract customer service revenue
is recognized ratable over the life of the service period and associated expenses are charged to cost of goods sold as incurred. The Company continues to provide a limited warranty on the sale of Artisan catheters. 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 the warranty liability was as follows (in thousands):



|                                                 |  |                             |      |   |      |   |      |  
|------------------------------------------------ |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                                 |  | Three months endedMarch 31, |     
|                                                 |  | 2010                        |      |   | 2009 |  
|Balance at beginning of period                   |  | $                           | 134  |   |      | $ | 881  |  
|Accruals for warranties issued during the period |  |                             | 29   |   |      |   | 387  |  
|Warranty costs incurred during the period        |  |                             | (113 | ) |      |   | (428 | )
|                                                 |  |                             |      |   |      |   |      |  
|Balance at end of period                         |  | $                           | 50   |   |      | $ | 840  |  
|                                                 |  |                             |      |   |      |   |      |  

Legal Proceedings

On June 22, 2007, the Company filed suit in Santa Clara Superior Court against Luna Innovations Incorporated (Luna)
alleging that Luna had, among other things, breached a 2006-2007 development and intellectual property agreement with the Company. On July 17, 2009, following a jury award in Hansens favor, and while certain post-trial motions were
pending, Luna filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Virginia, automatically staying the motions pending in Santa Clara Superior Court. On
December 11, 2009, Hansen and Luna entered into a settlement agreement, and on January 12, 2010, following the bankruptcy courts approval of Lunas plan of reorganization, the parties executed a mutual release of claims,
including Hansens claims against Luna in the Santa Clara Superior Court action, as well as claims brought in Lunas bankruptcy action. In connection with the settlement and release, Luna issued Hansen a secured promissory note in the
principal amount of $5,000,000, 1,247,330 shares of Luna common stock (representing 9.9% of the outstanding shares of Luna common stock) and a warrant to purchase additional shares of Luna common stock. Hansen and Luna also entered into a license
agreement and a development and supply agreement. In connection with the settlement, Hansen also entered into a cross license agreement with Intuitive Surgical, Inc. Pursuant to the settlement agreement, the Santa Clara action was dismissed on
January 14, 2010.

Following the Companys October 19, 2009 announcement that it would restate certain of its
financial statements, a securities class action lawsuit was filed on October 23, 2009 in the United States District Court for the Northern District of California, naming the Company and certain of its officers: Curry v. Hansen Medical, Inc. et
al., Case No. 09-05094. The complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of Hansen stock between May 1, 2008 and October 18,
2009, inclusive, and alleges, inter alia, that defendants made false and/or misleading statements and/or failed to make disclosures regarding the Companys financial results and compliance with Generally Accepted Accounting Principles
(GAAP) while improperly recognizing revenue; that these misstatements and/or nondisclosures resulted in overstatement of Company revenue and financial results and/or artificially inflated the Companys stock price; and that
following the Companys October 19, 2009 announcement, the price of the Companys stock declined. On November 4, 2009 and November 13, 2009, substantively identical complaints were filed in the Northern District of
California by other purported Hansen stockholders asserting the same claims on behalf of the same putative class of Hansen stockholders: Livingstone v. Hansen Medical, Inc. et al., Case No. 09-05212 and Prenter v. Hansen Medical, Inc., et al.,
Case No. 09-05367. All three complaints seek certification as a class action and unspecified compensatory damages plus interest and attorneys fees. On December 22, 2009, two purported Hansen stockholders, Mina and Nader Farr, filed a joint
application for appointment as



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##### Table of Contents

lead plaintiffs and for consolidation of the three actions. On February 25, 2010, the Court issued an order granting Mina and Nader Farrs application for appointment as lead plaintiffs
and consolidating the three securities class actions. Lead plaintiffs have until May 10, 2010 to file a consolidated amended complaint. The Company and the named officers intend to defend themselves vigorously against these actions.

On November 12, 2009, Dawn Cates, a purported stockholder of Hansen, filed a shareholder derivative complaint in the Superior Court
of the State of California, County of Santa Clara, against the current members of Hansens board of directors and certain current and former officers of Hansen (the Individual Defendants), as well as Hansens independent
auditor, PricewaterhouseCoopers LLP (PwC): Cates v. Moll, et al., Case No 09cv157170 (the Cates Action). The Cates Action purports to be brought on behalf of Hansen. The complaint asserts claims for breach of fiduciary duties
and waste of corporate assets against the Individual Defendants, and professional negligence against PwC. The complaint alleges that the Individual Defendants disseminated false and misleading information in Hansens SEC filings, public
statements and other disclosures, failed to maintain adequate internal controls and willfully ignored problems with accounting and internal control practices and procedures, mismanaged and failed appropriately to oversee the operations of Hansen,
and wasted corporate assets. The complaint further alleges that the director defendants breached their fiduciary duties by allowing defendant Christopher Sells to resign from Hansen. The complaint seeks unspecified damages, internal control and
corporate governance reforms, restitution and an award of costs and fees incurred in bringing the action. A substantively identical complaint (although without any claims against PwC) was filed in Santa Clara Superior Court on November 19,
2009. Daneshmand v. Moll, et al., Case No. 09cv157592 (the Daneshmand Action). On December 22, 2009, the Santa Clara Superior Court entered an order consolidating the Cates and Daneshmand Actions and renaming the actions as In
re Hansen Medical, Inc. Shareholder Derivative Litigation, Case No. 09cv157170. To date, plaintiffs have not announced whether they will be filing a consolidated amended complaint and the deadline for defendants to respond to the complaint(s)
has not been set.

On December 15, 2009, Michael Brown, a purported stockholder of Hansen, filed a shareholder derivative
complaint in the United States District Court for the Northern District of California: Brown v. Moll, et al., Case No. 09-05881 (the Brown Action). The allegations of complaint in the Brown Action are substantively identical to the
allegations of the Cates and Daneshmand complaints (the Brown Action does not name PwC as a defendant). The Companys current deadline for responding to the complaint is June 11, 2010.

The Individual Defendants deny the allegations made in the Cates, Daneshmand and Brown Actions and intend to defend themselves vigorously
against those claims.

On December 1 and December 14, 2009, the Company received letters from counsel for purported
Hansen stockholders Naoum Baladi and Robert Rogowski demanding that the Companys Board of Directors take action to remedy breaches of fiduciary duty by the directors and certain officers of Hansen and professional negligence by the
Companys outside auditor PricewaterhouseCoopers LLP. These letters recite essentially the same allegations as are contained in the Cates complaint and demand that the Board take action against the officers and directors, and PwC, to
recover damages incurred by the Company and to correct deficiencies in the Companys internal controls. The letters state that if, within a reasonable time, the Board has not commenced the requested action or if the Board refuses to commence
the requested action, the named stockholders will commence derivative actions. The Company has responded in writing to counsel for Ms. Baladi and Mr. Rogowski, stating that the Board is considering the demands and will respond in a
reasonable time.

The Company cannot estimate whether any of the above actions will result in any significant expenses nor the
amount of any such expenses. No amounts have been accrued for any of the preceding actions based on the uncertainly of the outcomes. However, depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent
to injunctions on future conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse effect on the Companys results of operations, financial position and liquidity.



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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 Companys ability to draw down on the term equipment line ended on
March 31, 2009. The interest rate on borrowings under the one-year revolving credit line adjusts with the banks Prime Rate. The loans are collateralized by substantially all of the Companys assets, excluding intellectual property,
and are subject to certain covenants which, if not met, could constitute an event of default. These covenants include maintaining the required liquidity, achieving the specified EBITDA amounts, the non-occurrence of a material adverse change
(defined as a material impairment in the perfection or priority of the banks lien in the collateral or in the value of the collateral, a material adverse change in the business, operations or conditions (financial or otherwise) of the Company,
or a material impairment of the prospect of repayment of any portion of the Companys outstanding obligations) and fulfilling certain reporting requirements. The liquidity covenants require the Company to maintain at the end of each month
either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. The Company and Silicon Valley Bank have yet to determine the quarterly
EBITDA amounts. As of March 31, 2010, the Company was in compliance with all specified financial covenants. However, as of March 31, 2010, the Company was not in compliance with the covenant to deliver a board-approved 2010 plan within 45
days of year end. Silicon Valley Bank has issued the Company a waiver for this non-compliance. The Company has drawn down approximately $12.5 million against the term equipment line at an interest rate of 6.12% and, per the original agreement terms,
the remainder of this line is no longer available.

Future annual payments due on the amounts outstanding as of March 31,
2010 calculated according to the existing debt repayment schedule are as follows (in thousands):



|                                   |  |   |       |  
|---------------------------------- |  | - | ----- | -
|2010 (remainder of year)           |  | $ | 3,034 |  
|2011                               |  |   | 3,849 |  
|2012                               |  |   | 2,743 |  
|                                   |  |   |       |  
|                                   |  |   | 9,626 |  
|Less: Amount representing interest |  |   | (714  | )
|                                   |  |   |       |  
|                                   |  |   | 8,912 |  
|Less: Current portion              |  |   | 3,565 |  
|                                   |  |   |       |  
|Long-term portion                  |  | $ | 5,347 |  
|                                   |  |   |       |  

8. Stockholders Equity

Stock-based Compensation

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 was allocated as follows (in thousands):



|                                    |  |                              |       |      |   |      
|----------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                    |  | Three months endedMarch 
31,
|                                    |  | 2010                         |       | 2009
|Cost of goods sold                  |  | $                            | 167   |      | $ | 223  
|Research and development            |  |                              | 496   |      |   | 620  
|Selling, general and administrative |  |                              | 631   |      |   | 1,781
|                                    |  |                              |       |      |   |      
|Total                               |  | $                            | 1,294 |      | $ | 2,624
|                                    |  |                              |       |      |   |      



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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:



|                         |  |                             |   |  |      |  
|------------------------ |  | --------------------------- | - |  | ---- | -
|Employee Stock Options:  |  | Three months endedMarch 31, |  
|                         |  | 2010                        |   |  | 2009 |  
|Expected volatility      |  | 60.0                        | % |  | 58.0 | %
|Risk-free interest rate  |  | 2.3                         | % |  | 1.9  | %
|Expected term (in years) |  | 4.50                        |   |  | 4.75 |  
|Expected dividend rate   |  | 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:



|                            |  |                              |  |            
|--------------------------- |  | ---------------------------- |  | -----------
|Non-Employee Stock Options: |  | Three months endedMarch 
31,
|                            |  | 2010                         |  | 2009       
|Expected volatility         |  | 59.0%-61.0%                  |  | 59.0%-63.0%
|Risk-free interest rate     |  | 2.1%-3.3%                    |  | 1.7%-2.4%  
|Contractual term (in years) |  | 4.00-7.00                    |  | 5.00-7.75  
|Expected dividend rate      |  | 0%                           |  | 0%         

The estimated fair
values of the shares issued under the Companys Employee Stock Purchase Plan were calculated using the following assumptions:



|                              |  |                             |   |  |       |  
|----------------------------- |  | --------------------------- | - |  | ----- | -
|Employee Stock Purchase Plan: |  | Three months endedMarch 31, |  
|                              |  | 2010                        |   |  | 2009  |  
|Expected volatility           |  | 61.0                        | % |  | 126.4 | %
|Risk-free interest rate       |  | 0.2                         | % |  | 0.4   | %
|Expected term (in years)      |  | 0.50                        |   |  | 0.50  |  
|Expected dividend rate        |  | 0                           | % |  | 0     | %



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Stock Option and Equity Incentive Plans

Option activity under the Companys 2002 Stock Option Plan and 2006 Equity Incentive Plan was as follows:



|                                 |  |                    |   |  |                               |       |                                          |      |                          |   |    
|-------------------------------- |  | ------------------ | - |  | ----------------------------- | ----- | ---------------------------------------- | ---- | ------------------------ | - | ---
|                                 |  | OptionsOutstanding |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |      | AggregateIntrinsic Value
|                                 |  | (In thousands)     |   |  |                               |       | (In years)                               |      | (In thousands)          
|Balance, January 1, 2010         |  | 3,706              |   |  | $                             | 10.54 |                                          |      |                          |   |    
|Options granted                  |  | 373                |   |  | $                             | 2.73  |                                          |      |                          |   |    
|Options exercised                |  | (32                | ) |  | $                             | 1.44  |                                          |      |                          |   |    
|Options cancelled                |  | (89                | ) |  | $                             | 13.29 |                                          |      |                          |   |    
|                                 |  |                    |   |  |                               |       |                                          |      |                          |   |    
|Balance, March 31, 2010          |  | 3,958              |   |  | $                             | 9.81  |                                          | 5.35 |                          | $ | 191
|                                 |  |                    |   |  |                               |       |                                          |      |                          |   |    
|Options vested at March 31, 2010 |  | 2,037              |   |  | $                             | 11.39 |                                          | 4.88 |                          | $ | 190
|                                 |  |                    |   |  |                               |       |                                          |      |                          |   |    

As of March 31, 2010, total unamortized
stock-based compensation related to unvested stock options was $6,629,000, with a weighted-average recognition period of 2.22 years.

Restricted stock unit activity under the 2006 Equity Incentive Plan is as follows:



|                         |  |                                  |  |                                        |     
|------------------------ |  | -------------------------------- |  | -------------------------------------- | ----
|                         |  | Restricted StockUnitsOutstanding |  | Weighted-Average FairValue WhenAwarded
|                         |  | (In thousands)                   |  |                                       
|Balance, January 1, 2010 |  |                                 |  | $                                      |    
|Awarded                  |  | 10                               |  | $                                      | 2.29
|Vested                   |  |                                 |  | $                                      |    
|                         |  |                                  |  |                                        |     
|Balance, March 31, 2010  |  | 10                               |  | $                                      | 2.29
|                         |  |                                  |  |                                        |     

As of March 31, 2010, there was approximately $21,000 of unrecognized compensation costs
related to restricted stock units which is expected to be recognized over a weighted-average period of 0.40 years.

As of
March 31, 2010, 2,714,000 shares of common stock were available for grant under the 2006 Equity Incentive Plan.

9. Income Taxes

The Company currently has uncertain tax positions related to research and development credits. 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

10. Net Loss Per Share

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



|                                                              |  |                             |        |   |      |   |         |  
|------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                              |  | Three months endedMarch 31, |       
|                                                              |  | 2010                        |        |   | 2009 |  
|Net loss                                                      |  | $                           | (3,846 | ) |      | $ | (14,133 | )
|                                                              |  |                             |        |   |      |   |         |  
|Weighted-average common shares outstanding                    |  |                             | 37,540 |   |      |   | 25,350  |  
|Weighted-average unvested common shares subject to repurchase |  |                             |       |   |      |   | (6      | )
|                                                              |  |                             |        |   |      |   |         |  
|Shares used to calculate basic and diluted net loss per share |  |                             | 37,540 |   |      |   | 25,344  |  
|                                                              |  |                             |        |   |      |   |         |  
|Basic and diluted net loss per share                          |  | $                           | (0.10  | ) |      | $ | (0.56   | )
|                                                              |  |                             |        |   |      |   |         |  

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):



|                                             |  |           |  |      
|-------------------------------------------- |  | --------- |  | -----
|                                             |  | March 31,
|                                             |  | 2010      |  | 2009 
|Stock options outstanding                    |  | 3,958     |  | 4,334
|Unvested restricted stock units              |  | 10        |  | 35   
|Unvested common shares subject to repurchase |  |          |  | 4    
|Proceeds from employee stock purchase plan   |  | 101       |  |     

11. Comprehensive
Loss

Total comprehensive loss was as follows (in thousands):



|                                                     |  |                             |        |   |      |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                     |  | Three months endedMarch 31, |       
|                                                     |  | 2010                        |        |   | 2009 |  
|Net loss                                             |  | $                           | (3,846 | ) |      | $ | (14,133 | )
|Other comprehensive income (loss):                   |  |                             |        |   |      |   |         |  
|Change in unrealized gains and losses on investments |  |                             | (2,058 | ) |      |   | (70     | )
|Foreign currency translation adjustment              |  |                             | (21    | ) |      |   | (6      | )
|                                                     |  |                             |        |   |      |   |         |  
|Comprehensive loss                                   |  | $                           | (5,925 | ) |      | $ | (14,209 | )
|                                                     |  |                             |        |   |      |   |         |  

12. Subsequent Events

On April 20, 2010, the Company sold 16,100,000 shares of its common stock, resulting in approximately $29.8 million of net proceeds,
after underwriting discounts and commissions and estimated offering expenses.



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##### Table of Contents

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

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.

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 condensed consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q.

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 Sensei Robotic 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 Artisan catheter will enable
physicians to perform procedures that historically have been too difficult or time consuming to accomplish routinely with manually-controlled, hand-held 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.

To date, we have incurred net losses in each year since our inception and, as of March 31, 2010, we had an accumulated deficit of
$224.0 million. We expect our losses to continue through at least 2010 as we continue to 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 20, 2010, we sold 16,100,000 shares of our common stock, resulting in approximately $29.8 million of net proceeds, after underwriting discounts
and commissions and estimated offering expenses.

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. We deferred all revenue associated with those shipped systems as we had not yet received CE Mark approval for our Artisan catheters. 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.

We market our products in the United
States primarily 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. We have increased our manufacturing capacity to enable production of commercial quantities of our Sensei system and Artisan catheter.



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Additionally, in December 2009, we entered into an extended joint development agreement with
Royal Philips Electronics, or Philips. Under the terms of the extended joint development agreement, we are developing, with support and collaboration from Philips, a vascular robotics platform and associated catheters, or Vascular
System. The Vascular System will not include our Sensei Robotic Catheter System or any system used for endoluminal, cardiac or other non-vascular procedures. Pursuant to the Agreement, Philips will partially fund our development costs based
upon our achievement of development milestones for the Vascular System. For up to five years after the initial commercial shipment of the Vascular System, we will pay Phillips royalties based on the number of Vascular Systems and associated
catheters that are sold, subject to caps based on the amounts Philips contributes to the development. The extended joint development agreement will remain in effect until the earlier of April 1, 2012 or the completion of the Vascular System,
provided that either party may terminate the Agreement in the event of the other partys uncured failure to perform a material obligation. Philips may also terminate the Agreement for convenience upon 60 days prior written notice and the
payment of a variable termination fee.

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 2 to our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009
filed with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies in the three months ended March 31, 2010.

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. 2008 represented our first full year of revenues. Our revenues consist of sales of Sensei systems, Artisan catheters, other disposables and, beginning in 2008, post-contract customer service. We have
experienced significant fluctuations in quarterly revenues, primarily attributable to still being in the early stages of our commercial launch and, especially beginning in the fourth quarter of 2008 and continuing through the first quarter of 2010,
unfavorable general economic and capital market conditions. We expect these fluctuations to continue through the remainder of 2010, even as we expect to experience overall revenue growth as compared to 2009 levels due to what we perceive as an
improvement in general capital market conditions for our customers. We do not anticipate that revenues in 2010 will be sufficient to eliminate net losses.

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 revenues and on a dollar basis will continue to vary from quarter to quarter in 2010 due, among other
things, to fluctuations in revenue levels, the timing of revenue recognition on shipped systems, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.



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##### Table of Contents

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 our first commercial shipments in the second quarter of 2007, research and development expenses also included
manufacturing costs for commercial products, including start-up manufacturing costs. We expect research and development expenses in 2010 to increase moderately as compared to 2009 levels due to our on-going development activities for the
electrophysiology market, the development of a vascular platform and exploring certain other potential future applications of our technology.

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. 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, consulting fees and travel expenses. We expect our selling, general and administrative expenses in 2010 to decrease moderately as
compared to 2009 levels as we reduce general and administrative employee costs while we continue to maintain our sales and clinical support groups.

Gain on Settlement of Litigation

Gain on settlement of litigation consists of the value of common stock, a common stock warrant and a note receivable received in
connection with the settlement of our litigation with Luna Innovations, Inc, or Luna.

Results of Operations

Comparison of the three months ended March 31, 2010 to the three months ended March 31, 2009

Revenues



|                       |  |                             |       |        |   |       |  |   |        |   |  |     |   
|---------------------- |  | --------------------------- | ----- | ------ | - | ----- |  | - | ------ | - |  | --- | --
|                       |  | Three months endedMarch 31, |       | Change |  
|(Dollars in thousands) |  | 2010                        |       | 2009   |   | $     |  |   | %      |  
|Revenues               |  | $                           | 2,711 |        | $ | 7,455 |  | $ | (4,744 | ) |  | (64 | )%



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##### Table of Contents

Revenues primarily related to the following:



|                                                      |  |                             |       |      |   |    
|----------------------------------------------------- |  | --------------------------- | ----- | ---- | - | ---
|                                                      |  | Three months endedMarch
31,
|                                                      |  | 2010                        |       | 2009
|United States Sensei system units                     |  |                             |      |      |   | 8  
|International Sensei system units                     |  |                             | 1     |      |   | 2  
|                                                      |  |                             |       |      |   |    
|Total Sensei system units                             |  |                             | 1     |      |   | 10 
|                                                      |  |                             |       |      |   |    
|Sensei system average selling price (in thousands)    |  | $                           | 342   |      | $ | 610
|                                                      |  |                             |       |      |   |    
|Artisan catheter units                                |  |                             | 637   |      |   | 631
|                                                      |  |                             |       |      |   |    
|Artisan catheter average selling price (in thousands) |  | $                           | 1.7   |      | $ | 1.6
|                                                      |  |                             |       |      |   |    
|Post-contract customer service revenue (in thousands) |  | $                           | 1,098 |      | $ | 246
|                                                      |  |                             |       |      |   |    

The unit sold in the first quarter of 2010 was to an
international distributor, which tend to generate lower average selling prices. Additionally, beginning in the third quarter of 2009, we began to include one year of post-contract customer service, or PCS, with the sale of our Sensei
systems. PCS is recognized ratably over the service period. PCS was not included in Sensei system sales for the first quarter of 2009. Sales of Artisan catheters increased slightly in the first quarter of 2010 as compared to 2009 primarily due to
the larger installed base of Sensei systems. PCS revenue has increased in the first quarter of 2010 from 2009 due to our inclusion of one year of PCS with the sale of Sensei systems and as more existing customers transition from the first year of
warranty to our PCS contracts. We have experienced significant fluctuations in quarterly revenues, primarily due to the fact that we are still in the early stages of our commercial launch and, especially beginning in the fourth quarter of 2008 and
continuing through the first quarter of 2010, unfavorable general economic and capital market conditions. As discussed in our risk factors, these conditions can cause customers to delay purchases and can lengthen sales cycles and these factors
contributed to our results in the first quarter of 2010 being lower than we anticipated. We expect revenue fluctuations to continue throughout 2010 even as we expect to experience overall revenue growth as compared to 2009 levels due to what we
perceive as an improvement in general capital market conditions for our customers.

Cost of Goods Sold



|                            |  |                             |       |   |        |   |       |   |  |   |        |   |  |     |   
|--------------------------- |  | --------------------------- | ----- | - | ------ | - | ----- | - |  | - | ------ | - |  | --- | --
|                            |  | Three months endedMarch 31, |       |   | Change |  
|(Dollars in thousands)      |  | 2010                        |       |   | 2009   |   |       | $ |  |   | %      |  
|Cost of goods sold          |  | $                           | 3,570 |   |        | $ | 5,381 |   |  | $ | (1,811 | ) |  | (34 | )%
|As a percentage of revenues |  |                             | 131.7 | % |        |   | 72.2  | % |  |   |        |   |  |     |   

Cost of goods sold for the first quarter of 2010 included stock-based compensation expense of
$167,000 as compared to $223,000 for the first quarter of 2009. Cost of goods sold as a percentage of revenues for the first quarter of 2010 were negatively impacted by the decreased level of sales. As quarterly sales increase over the remainder of
2010 as we expect, we anticipate having positive gross margins. We expect that cost of goods sold both as a percentage of revenues and on a dollar basis will continue to vary from quarter to quarter throughout 2010 due, among other things, to
fluctuations in revenue levels, the timing of revenue recognition on shipped systems, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development



|                         |  |                             |       |        |   |       |  |   |      |   |  |     |   
|------------------------ |  | --------------------------- | ----- | ------ | - | ----- |  | - | ---- | - |  | --- | --
|                         |  | Three months endedMarch 31, |       | Change |  
|(Dollars in thousands)   |  | 2010                        |       | 2009   |   | $     |  |   | %    |  
|Research and development |  | $                           | 4,767 |        | $ | 5,651 |  | $ | (884 | ) |  | (16 | )%



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The decrease in research and development expenses in the first quarter of 2010 compared to
the first quarter of 2009 was primarily due to the following:



| |  |  | A decrease of $0.7 million in outside services, materials and overhead expenses, exclusive of Luna services;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.2 million related to expenses to be reimbursed by Philips;
| | - |  | ---------------------------------------------------------------------------



| |  |  | A decrease of $0.4 million in employee-related expenses, including travel expenses, primarily due to a decrease of 13 in average research and
development headcount;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.1 million in stock-based compensation expense due to the effects of our lower average stock price; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.5 million in outside services provided by Luna.
| | - |  | -----------------------------------------------------------------

Total research and development expenses in the first quarter of 2010 included $496,000 of stock-based compensation expense compared to
$620,000 in the first quarter of 2009. We expect research and development expenses for the remainder of 2010 to increase moderately compared to 2009 levels due to our development activities for the electrophysiology market and exploring certain
other potential future applications of our technology including vascular applications.

Selling, General and Administrative



|                                    |  |                             |       |        |   |        |  |   |        |   |  |     |   
|----------------------------------- |  | --------------------------- | ----- | ------ | - | ------ |  | - | ------ | - |  | --- | --
|                                    |  | Three months endedMarch
31, |       | Change |  
|(Dollars in thousands)              |  | 2010                        |       | 2009   |   | $      |  |   | %      |  
|Selling, general and administrative |  | $                           | 7,731 |        | $ | 10,111 |  | $ | (2,380 | ) |  | (24 | )%

The decrease
in selling, general and administrative expenses in the first quarter of 2010 compared to the first quarter of 2009 was primarily due to the following:



| |  |  | A decrease of $1.2 million in stock-based compensation expense, due primarily to the effects of our lower average stock price;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $1.8 million in litigation costs associated with our 2009 trial against Luna Innovations Incorporated;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.4 million in employee-related expenses, including sales commissions and travel expenses, in the first quarter of 2010 as compared to
2009, due primarily to a decrease in average general and administrative headcount of two and a decrease in average sales and marketing headcount of two;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.2 million in non-compensation marketing expenses; and
| | - |  | -----------------------------------------------------------------------



| |  |  | An increase of $0.8 million in professional service fees exclusive of Luna litigation costs, primarily due to legal fees related to our securities
class action lawsuits, derivative lawsuits and related inquiries from governmental agencies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling,
general and administrative expenses in the first quarter of 2010 included $631,000 of total stock-based compensation expense compared to $1,781,000 in the first quarter of 2009. We expect our selling, general and administrative expenses in 2010 to
decrease as compared to 2009 levels as we reduce general and administrative employee costs while we continue to maintain our sales and clinical support groups.



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Gain on Settlement of Litigation



|                                 |  |                             |         |        |      |   |   |  |   |         |   |  |    
|-------------------------------- |  | --------------------------- | ------- | ------ | ---- | - | - |  | - | ------- | - |  | ---
|                                 |  | Three months endedMarch
31, |         | Change
|(Dollars in thousands)           |  | 2010                        |         |        | 2009 |   | $ |  |   | %      
|Gain on settlement of litigation |  | $                           | (10,003 | )      |      | $ |  |  | $ | (10,003 | ) |  | N/A

Gain on settlement of
litigation consists of the value of common stock, a warrant to purchase common stock and a secured promissory note received in connection with the settlement of our litigation with Luna Innovations, Incorporated in January 2010. The items were
valued as follows:



|                                 |  |   |       
|-------------------------------- |  | - | ------
|Common stock                     |  | $ | 4,420 
|Warrant to purchase common stock |  |   | 583   
|Secured promissory note          |  |   | 5,000 
|                                 |  |   |       
|                                 |  | $ | 10,003
|                                 |  |   |       

Common Stock

Upon execution of these agreements, Luna issued us 1.2 million shares of common stock. These shares are not registered with the
Securities and Exchange Commission but are expected to become salable six months after the date of issuance of the shares. The fair value of the shares recorded reflects the value that market participants would demand due to the value of the shares
and the risk relating to the inability to access a public market for these securities for the specified period. The fair value of the unregistered shares was determined as of the market closing price on the dates the shares were issued less a 20%
non-marketability discount, for a total value of $4.4 million.

We concluded that 20% is an appropriate discount based
primarily on an analysis utilizing the Black-Scholes model to value a hypothetical put option to approximate the cost of hedging the restricted stock over the expected period of non-marketability. This approach calculates the amount required to buy
the right to sell the presently restricted stock at the then-current market price on the date the holder can count on the shares becoming salable on the public exchange. The assumptions input into the Black-Scholes option pricing model were based on
the stock price on the date of the share issuance, an expected term of eight months, expected volatility of 59%, risk-free interest rate of 0.14% and no expected dividends.

This conclusion was corroborated by the Black-Scholes model by assessing that the discount was generally consistent with the ranges noted
from published restricted stock studies and comparable to discounts on restricted stock transactions completed by other companies operating in similar industries as Luna.

Warrant to Purchase Common Stock

The warrant to purchase shares of common stock was valued based on an estimate of the number of shares which will be issued over the
three-year life of the warrant. The number of shares were valued utilizing the Black-Scholes option pricing model based on the stock price on the date of the agreements, expected terms ranging from three months to three years, expected volatility
ranging from 53% to 75%, risk-free interest rates ranging from 0.05% to 1.5% and no expected dividends. The total estimated fair value of the warrant was calculated at $583,000 at the date of issuance.

Interest Income



|                       |  |                             |     |        |   |     |  |   |    |   |  |    |   
|---------------------- |  | --------------------------- | --- | ------ | - | --- |  | - | -- | - |  | -- | --
|                       |  | Three months endedMarch
31, |     | Change |  
|(Dollars in thousands) |  | 2010                        |     | 2009   |   | $   |  |   | %  |  
|Interest income        |  | $                           | 128 |        | $ | 130 |  | $ | (2 | ) |  | (2 | )%

Interest
income from cash, cash equivalents and short-term investments decreased slightly in the first quarter of 2010 compared to the first quarter of 2009 primarily due to decreased average cash, cash equivalents and short-term investments balances in the
first quarter of 2010 as compared to 2009. This was



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##### Table of Contents

partially offset by an increase in interest income due to interest on the note receivable from Luna. We expect our quarterly interest income to increase in the remainder of 2010 as a result of
interest on the proceeds of our equity offering in April 2010 and the Luna note receivable.

Interest and Other Expense,
net



|                                |  |                             |      |   |        |   |      |   |  |   |     |   |  |   |  
|------------------------------- |  | --------------------------- | ---- | - | ------ | - | ---- | - |  | - | --- | - |  | - | -
|                                |  | Three months endedMarch
31, |      |   | Change |  
|(Dollars in thousands)          |  | 2010                        |      |   | 2009   |   |      | $ |  |   | %   |  
|Interest and other expense, net |  | $                           | (620 | ) |        | $ | (575 | ) |  | $ | (45 | ) |  | 8 | %

Interest and
other expense, net, consists mainly of interest expense, net realized and unrealized foreign exchange gains and losses and unrealized gains or losses on the Luna Warrant, which is accounted for as a derivative. The increase in interest and other
expense, net in the first quarter of 2010 as compared to the first quarter of 2009 was mainly due to unrealized losses on the Luna Warrant, partially offset by a decrease in net foreign exchange losses and a moderate decrease in interest expense due
to the reducing balance on our term equipment line.

Liquidity and Capital Resources

We have incurred losses since our inception in September 2002 and, as of March 31, 2010 we had an accumulated deficit of $224.0
million. We have financed our operations to date principally through the sale of capital stock, debt financing, interest earned on investments and the sales of our products. 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 April 22, 2009, we sold 11,692,000 shares of our common stock, resulting in approximately $35.1 million of net proceeds. On April 20, 2010,
the Company sold 16,100,000 shares of its common stock, resulting in approximately $29.8 million of net proceeds, after underwriting discounts and commissions and estimated offering expenses.

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 March 31, 2010, we had drawn down approximately $12.5 million against the equipment line under this agreement, and, per the original agreement terms, the remainder of
this line is no longer available to us. The $10 million available under the revolving credit line expired in August 2009. Our current debt with Silicon Valley bank is collateralized by substantially all of our assets, excluding intellectual
property, and is subject to certain covenants, including maintaining the required liquidity, achieving specified EBITDA amounts and fulfilling certain reporting requirements. The liquidity covenants require us to maintain at the end of each month
either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. Silicon Valley Bank has yet to determine the quarterly EBITDA amounts
with us. Additionally, the agreement limits our ability to take the following corporate actions without prior consent from Silicon Valley Bank:



| |  |  | transfer all or any part of our business or properties, other than transfers made in the ordinary course of business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | engage in any business other than the business in which we are currently engaged;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | merge or consolidate with any other person, or acquire, all or substantially all of the capital stock or property of another person, subject to certain
exceptions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create, incur, assume, or be liable for any indebtedness, other than certain permitted indebtedness;
| | - |  | ----------------------------------------------------------------------------------------------------



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| |  |  | pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, subject to certain exceptions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create, incur, allow or suffer any lien on any of our property, including without limitation intellectual property, assign or convey any right to
receive income;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | directly or indirectly enter into or permit to exist any material transaction with any of our affiliates, subject to certain exceptions; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make or permit any payment on any subordinated debt.
| | - |  | ----------------------------------------------------

In the event we were to violate any covenants or if Silicon Valley Bank deems there to have been a material adverse change, including
(1) a material impairment in the perfection or priority of Silicon Valley Banks lien in the collateral or in the value of such collateral, (2) a material adverse change in our business, operations or condition (financial or
otherwise), or (3) a material impairment of the prospect of repayment of any portion of our obligations, we would seek to obtain a waiver from Silicon Valley Bank. If we were unable to obtain a waiver, we would be in default under the loan and
security agreement, which would entitle Silicon Valley Bank to exercise their remedies, including the right to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the loan and security agreement. As of
March 31, 2009, we were in compliance with all financial covenants.

The majority of 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. As a result of the settlement of the litigation with Luna, we currently have investments in Luna common stock and in a warrant for Luna common stock.

Cash flow activity for the three months ended March 31, 2010 and 2009 is summarized as follows:



|                                                |  |                              |        |   |      |   |        |  
|----------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                |  | Three months endedMarch 
31, |       
|                                                |  | 2010                         |        |   | 2009 |  
|Cash used in operating activities               |  | $                            | (6,550 | ) |      | $ | (5,991 | )
|Cash provided by investing activities           |  |                              | 4,621  |   |      |   | 3,916  |  
|Cash provided by (used in) financing activities |  |                              | (844   | ) |      |   | 369    |  
|                                                |  |                              |        |   |      |   |        |  
|Net decrease in cash and cash equivalents       |  | $                            | (2,773 | ) |      | $ | (1,706 | )
|                                                |  |                              |        |   |      |   |        |  

Net Cash Used in Operating Activities

Net cash used in operating activities in the first quarter of 2010 and 2009 primarily reflects the net loss for those periods, exclusive
of non-cash charges such as the gain on settlement of litigation, depreciation and amortization and stock-based compensation. Additionally, net cash used in operating activities for the first quarter of 2010 was positively impacted by the net effect
of increased deferred revenue, deferred cost of goods sold and prepaid and other current assets balances, due primarily to increases in deferred revenue and the associated costs of those revenues, and was also positively impacted by decreased
accounts receivable balances and increased accounts payable balances. Net cash used in operating activities for the first quarter of 2009 was positively impacted by accounts receivable collections as we collected on higher previous period accounts
receivable balances than in the same periods in the previous year and the reduction of inventory levels.

Net Cash
Provided by Investing Activities

Net cash provided by investing activities in the first quarter of 2010 and 2009
primarily relates to the proceeds from and purchases of investments as we manage our investment portfolio to provide interest income and liquidity.



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Net Cash Provided by (used in) Financing Activities

Net cash used in financing activities for the first quarter of 2010 primarily related to repayments on our loan to Silicon Valley Bank,
partially offset by proceeds from the exercise of stock options. Net cash provided by financing activities in the first quarter of 2009 was primarily due to proceeds from our employee stock purchase plan and the exercise of stock options.

Future Capital Requirements

We are still in the early stages of commercializing our Sensei system and Artisan catheter and we have not achieved profitability. We
recognized our first revenues in 2007 and have not generated net income to date. We have experienced significant fluctuations in quarterly revenues and, beginning in the fourth quarter of 2008 and continuing through the first quarter of 2010, we saw
many potential customers lengthen their sales cycles and postpone purchase decisions due in large part to unfavorable general economic and capital market conditions. In an attempt to reduce our future spending, we reduced our work force in the third
quarter of 2008 and again in the first and third quarters of 2009. We anticipate that we will continue to incur substantial net losses for at least the next year as we continue to commercialize our products, maintain and develop the corporate
infrastructure required to manufacture and sell our products at sufficient levels and profit margins and operate as a publicly traded company as well as continue to develop new products and pursue additional applications for our technology platform.

We believe our existing cash, cash equivalents and short-term investment balances as of March 31, 2010, the
approximately $29.8 million of proceeds from the sale of 16,100,000 shares of our common stock on April 20, 2010 and the interest income we earn on these balances in addition to the amounts received through the sale of our products will be
sufficient to meet our anticipated cash requirements through 2010. However, if our cash flows from operating activities over the next year are significantly less than we expect, we may be required to adopt additional cost-cutting measures, including
additional reductions in our work force, reducing the scope of, delaying or eliminating some or all of our planned research, development and commercialization activities or to license to third parties the rights to commercialize products or
technologies that we would otherwise seek to commercialize and we may require additional capital. We might also have to reduce marketing, customer support or other resources devoted to our products. Any of these factors could harm our financial
condition. Failure to manage discretionary spending or raise additional capital as required may adversely impact our ability to achieve our intended business objectives. We will continue to evaluate the extent of our implemented cost-saving measures
based upon changing future economic conditions and the achievement of estimated revenue throughout 2010 and will consider the implementation of additional cost reductions during the remainder of the year if and as circumstances warrant.

If we are required to seek additional funding in the future by selling additional equity or debt securities or entering into a credit
facility, such additional capital may not be available on reasonable terms, if at all. If we are unable to obtain any needed additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of, our planned research,
development and commercialization activities or to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize, any of which could materially harm our business. The timing and exact
amounts of our current and future capital requirements will depend on many factors, including but not limited to the following:



| |  |  | our ability to maintain compliance with debt covenants;
| | - |  | -------------------------------------------------------



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



| |  |  | our ability to generate revenue in a time of overall economic and capital market uncertainty;
| | - |  | ---------------------------------------------------------------------------------------------



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



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



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| |  |  | our ability to achieve and maintain operating cost reductions;
| | - |  | --------------------------------------------------------------



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



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



| |  |  | the cost 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 costs of defending against lawsuits brought against the company;
| | - |  | --------------------------------------------------------------------



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

We cannot guarantee that future equity or debt financing or credit facilities 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 March 31, 2010:



|                              |  |                                       |        |                  |   |           |  |           |        |  |   |      
|----------------------------- |  | ------------------------------------- | ------ | ---------------- | - | --------- |  | --------- | ------ |  | - | -----
|                              |  | Payments Due by Period (in thousands)
|Contractual Obligations       |  | Total                                 |        | Less than1 
Year |   | 1-3 Years |  | 3-5 years
|Operating lease  real estate |  | $                                     | 8,598  |                  | $ | 1,300     |  | $         | 3,622  |  | $ | 3,676
|Debt                          |  |                                       | 9,626  |                  |   | 3,034     |  |           | 6,592  |  |   |     
|                              |  |                                       |        |                  |   |           |  |           |        |  |   |      
|Total                         |  | $                                     | 18,224 |                  | $ | 4,334     |  | $         | 10,214 |  | $ | 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. Current future debt payments relate to principal and interest payments related to the $12.5
million we have borrowed under our term equipment line with Silicon Valley Bank.

Additionally, we have minimum royalty
obligations of $100,000 per year under a license agreement with Mitsubishi Electric Research Laboratories, Inc. which reduces to $55,000 per year if the license becomes non-exclusive. The royalty obligation expires in 2018. We also have minimum
royalty obligations of $200,000 per year under the terms of our cross license agreement with Intuitive Surgical, Inc. We have an agreement with Philips which provides for the payment of royalties to Philips for up to five years after the initial
commercial shipment of a vascular system, subject to caps based on the amounts Philips contributes to the development. As of March 31, 2010, Philips had not contributed any amounts to the Company.

Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements under the caption Recent Accounting Pronouncements for
information regarding new accounting guidance that will impact our financial statements and disclosures.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated
with interest rate movements and foreign currency exchange risk. 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 March 31, 2010, the fair value of our cash, cash equivalents and
short-term investments was approximately $23.1 million, the majority of which will mature in one year or less. 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.

A portion of our operations consist of sales activities outside of the United States and, as such, we have foreign currency exposure to
non-United States dollar revenues and accounts receivable. Currently, we sell our products mainly in United States dollars, Euros and Great Britain Pounds although we may in the future transact business in other currencies. Future fluctuations in
the exchange rates of these currencies may impact our revenues. In the past, we have not hedged our exposures to foreign currencies or entered into any other derivative instruments and we have no current plans to do so. In the quarter ended
March 31, 2010, sales denominated in foreign currencies were approximately 39% of total revenue. A hypothetical 10% increase in the United States dollar exchange rate used would have resulted in a decrease of approximately $106,000 in revenues
for the first quarter of 2010.

ITEM 4. CONTROLS AND PROCEDURES

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-15e and 15d-15e 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.

Management, including our Chief Executive Officer and Interim Chief Financial Officer, performed an evaluation of our disclosure controls
and procedures as defined under the Exchange Act as of December 31, 2009. Based on this evaluation and the identification of material weaknesses in our internal control over financial reporting as described below, our Chief Executive Officer
and Interim Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2010.

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.



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Consistent to what was noted in our Annual Report on Form 10-K for the year ended
December 31, 2009, as of March 31, 2010, we did not maintain effective controls over our control environment, information and communication, revenue recognition process and complex arrangements. Specifically:



| | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We did not have the appropriate expertise or resources in order to effectively ensure the proper accounting related to complex areas in the application
of GAAP.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Information and Communication. We did not maintain effective information and communication. Specifically:
| | -- | ---------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These material weaknesses led to errors and
irregularities that in turn resulted in errors in the preparation of our consolidated financial statements. These material weaknesses also contributed to the existence of the material weakness described in item 3 below.



| | 3. | Revenue recognition process. We did not maintain effective controls related to the process for ensuring completeness and accuracy of our accounting for revenue.
Specifically, we did not maintain controls to provide reasonable assurance that all significant details of agreements with our distributors and customers were provided to those making revenue recognition decisions, that all appropriate personnel
received sufficient training on revenue recognition and that we had the appropriate resources with the relevant expertise to make complex judgments related to the accounting for revenue transactions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounting personnel did not have the appropriate expertise or resources to effectively ensure the proper accounting related to certain of our
multi-element revenue arrangements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Additionally, the control environment material weakness described above contributed to the
existence of the material weakness described below:



| | 4. | Complex Arrangements. We did not maintain effective controls over complex arrangements. Specifically, we did not maintain effective controls over the evaluation
of a joint development arrangement to ensure complete and accurate accounting in accordance with GAAP.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
material weaknesses previously resulted in material errors and the restatement of our financial statements for the year ended December 31, 2007, annual and interim financial statements for the year ended December 31, 2008 and interim
financial statements for the first and second quarters during the year ended December 31, 2009, and resulted in audit adjustments to our financial statements for the year ended December 31, 2009, impacting revenue, cost of goods sold,
other income, accounts receivable, 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.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2010, we have made the following changes in our internal control over financial
reporting that will materially affect or are reasonably likely to materially affect our internal control over financial reporting:



| |  |  | We have designed a new training protocol to expand training to our accounting personnel to enhance their ability to appropriately record transactions
in both revenue and other complex arrangements in accordance with GAAP commensurate with our financial reporting requirements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Managements Plan for Remediation

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, we implemented changes in our internal control
over financial reporting during the quarter ended December 31, 2009 to address most of the issues above. Additional changes in our internal control over financial reporting were developed in the quarter ended March 31, 2010, as also
discussed above. We believe these changes will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. However, these changes had not been in operation long enough to effectively measure
their operating effectiveness. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial reporting controls and procedures in order to ensure compliance with the requirements of the
Sarbanes-Oxley Act and the related rules promulgated by the Securities and Exchange Commission. However, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that the
control objectives will be met. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies and/or determine not to complete certain of the remediation
efforts we have disclosed. While these efforts are underway, we are relying on extensive manual procedures to help ensure the proper collection, evaluation, and disclosure of the information included in our consolidated financial statements.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 22, 2007, we filed suit in Santa Clara Superior Court against Luna Innovations Incorporated (Luna) alleging that
Luna had, among other things, breached a 2006-2007 development and intellectual property agreement with the Company. On July 17, 2009, following a jury award in our favor, and while certain post-trial motions were pending, Luna filed for
protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Virginia, automatically staying the motions pending in Santa Clara Superior Court. On December 11, 2009, We
entered into a settlement agreement with Luna, and on January 12, 2010, following the bankruptcy courts approval of



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Lunas plan of reorganization, the parties executed a mutual release of claims, including our claims against Luna in the Santa Clara Superior Court action, as well as claims brought in
Lunas bankruptcy action. In connection with the settlement and release, Luna issued us a secured promissory note in the principal amount of $5,000,000, 1,247,330 shares of Luna common stock (representing 9.9% of the outstanding shares of Luna
common stock) and a warrant to purchase additional shares of Luna common stock. We also entered into a license agreement and a development and supply agreement with Luna. In connection with the settlement, we also entered into a cross license
agreement with Intuitive Surgical, Inc. Pursuant to the settlement agreement, the Santa Clara action was dismissed on January 14, 2010.

Following our October 19, 2009 announcement that we would restate certain of our financial statements, a securities class action
lawsuit was filed on October 23, 2009 in the United States District Court for the Northern District of California, naming us and certain of our officers: Curry v. Hansen Medical, Inc. et al., Case No. 09-05094. The complaint asserts claims
for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of our stock between May 1, 2008 and October 18, 2009, inclusive, and alleges, inter alia, that defendants made
false and/or misleading statements and/or failed to make disclosures regarding our financial results and compliance with Generally Accepted Accounting Principles (GAAP) while improperly recognizing revenue; that these misstatements
and/or nondisclosures resulted in overstatement of our revenue and financial results and/or artificially inflated our stock price; and that following our October 19, 2009 announcement, the price of our stock declined. On November 4, 2009
and November 13, 2009, substantively identical complaints were filed in the Northern District of California by other purported Hansen stockholders asserting the same claims on behalf of the same putative class of Hansen stockholders:
Livingstone v. Hansen Medical, Inc. et al., Case No. 09-05212 and Prenter v. Hansen Medical, Inc., et al., Case No. 09-05367. All three complaints seek certification as a class action and unspecified compensatory damages plus interest and
attorneys fees. On December 22, 2009, two purported Hansen stockholders, Mina and Nader Farr, filed a joint application for appointment as lead plaintiffs and for consolidation of the three actions. On February 25, 2010, the Court issued
an order granting Mina and Nader Farrs application for appointment as lead plaintiffs and consolidating the three securities class actions. Lead plaintiffs have until May 10, 2010 to file a consolidated amended complaint. We and the named
officers intend to defend ourselves vigorously against these actions.

On November 12, 2009, Dawn Cates, a purported
stockholder of Hansen, filed a shareholder derivative complaint in the Superior Court of the State of California, County of Santa Clara, against the current members of our board of directors and certain current and former officers of Hansen (the
Individual Defendants), as well as our independent auditor, PricewaterhouseCoopers LLP (PwC): Cates v. Moll, et al., Case No 09cv157170 (the Cates Action). The Cates Action purports to be brought on behalf of
Hansen. The complaint asserts claims for breach of fiduciary duties and waste of corporate assets against the Individual Defendants, and professional negligence against PwC. The complaint alleges that the Individual Defendants disseminated false and
misleading information in our SEC filings, public statements and other disclosures, failed to maintain adequate internal controls and willfully ignored problems with accounting and internal control practices and procedures, mismanaged and failed
appropriately to oversee our operations, and wasted corporate assets. The complaint further alleges that the director defendants breached their fiduciary duties by allowing defendant Christopher Sells to resign from Hansen. The complaint seeks
unspecified damages, internal control and corporate governance reforms, restitution and an award of costs and fees incurred in bringing the action. A substantively identical complaint (although without any claims against PwC) was filed in Santa
Clara Superior Court on November 19, 2009: Daneshmand v. Moll, et al., Case No. 09cv157592 (the Daneshmand Action). On December 22, 2009, the Santa Clara Superior Court entered an order consolidating the Cates and
Daneshmand Actions and renaming the actions as In re Hansen Medical, Inc. Shareholder Derivative Litigation, Case No. 09cv157170. To date, the plaintiffs have not announced whether they will be filing a consolidated amended complaint and the
deadline for defendants to respond to the complaint(s) has not been set.

On December 15, 2009, Michael Brown, a
purported stockholder of Hansen, filed a shareholder derivative complaint in the United States District Court for the Northern District of California: Brown v. Moll, et al., Case No. 09-05881 (the Brown Action). The allegations of
complaint in the Brown Action are substantively identical to the allegations of the Cates and Daneshmand complaints (the Brown Action does not name PwC as a defendant). Our current deadline for responding to the complaint is June 11, 2010.



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The Individual Defendants deny the allegations made in the Cates, Daneshmand and Brown
Actions and intend to defend themselves vigorously against those claims.

On December 1 and December 14, 2009, we
received letters from counsel for purported Hansen stockholders Naoum Baladi and Robert Rogowski demanding that our Board of Directors take action to remedy breaches of fiduciary duty by the directors and certain officers of Hansen and
professional negligence by the Companys outside auditor PricewaterhouseCoopers, LLP. These letters recite essentially the same allegations as are contained in the Cates complaint and demand that the Board take action against the officers
and directors, and PwC, to recover damages incurred by us and to correct deficiencies in our internal controls. The letters state that if, within a reasonable time, the Board has not commenced the requested action or if the Board refuses to commence
the requested action, the named stockholders will commence derivative actions. We have responded in writing to counsel for Ms. Baladi and Mr. Rogowski, stating that the Board is considering the demands and will respond in a reasonable
time.



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

Risks Related to Our
Business

We have material weaknesses in internal control over financial reporting and cannot assure you that
additional material weaknesses will not be identified or develop in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could
require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial
reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered
public accounting firm to attest to, and report on, managements assessment of our internal control over financial reporting.

In assessing the results of an investigation conducted by the audit committee of our board in 2009 as well as the internal review and
recertification procedures performed for purposes of the preparation and certification of our restated consolidated financial statements in November 2009, our management has identified material weaknesses as of December 31, 2008 and
December 31, 2007 that resulted in errors in our financial reporting with regard to our accounting for revenue recognition with respect to the sale of our Sensei Robotic Catheter Systems. Such errors resulted in a restatement of the
Companys audited annual financial statements as of and for the years ended December 31, 2008 and December 31, 2007 and the unaudited interim financial statements as of and for the quarterly periods ended June 30,
2009, March 31, 2009, September 30, 2008, June 30, 2008 and March 31, 2008. Additionally, there were material weaknesses that resulted in audit adjustments in connection with the audit of our December 31, 2009
financial statements. We evaluated our disclosure controls and procedures in association with our assessment of the effectiveness of internal control over financial reporting as of March 31, 2010. While many remedial measures were undertaken to
correct the control structure under which the errors occurred, not all remedial measures were complete as of March 31, 2010 and not enough time had passed under those remedial measures to effectively measure their operating effectiveness. As
such, we continue to report material weaknesses in our internal control over financial reporting as of March 31, 2010. A description of the material weakness related to our inadequate controls over the accounting for, and disclosure of, the
application of our control environment, information and communication, revenue recognition process and complex arrangements is set forth in Part I Item 4 Controls and Procedures and, in more detail in our Annual Report on Form 10-K
for the year ended December, 31, 2009.



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We have adopted, or are in the process of adopting, various remedial measures that are
designed to improve our internal controls over the accounting for and disclosure of compliance with our revenue recognition process and accounting for complex arrangements. We cannot assure you, however, that these remedial measures will be
effective. We also cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not exist in the future. Any failure to maintain or implement new or improved controls, or any
difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements.
Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to
fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

We have been named as a defendant in three class action lawsuits and three shareholder derivative lawsuits that may adversely
affect our financial condition, results of operations and cash flows.

We and certain of our executive officers and
directors, are defendants in three securities class action lawsuits and three shareholder derivative lawsuits. These lawsuits are described under the heading Item 1. Legal Proceedings. Our attention may be diverted from our ordinary
business operations by these lawsuits and we may incur significant expenses associated with the defense of these lawsuits (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and
directors and our underwriters who may be parties to such action). Depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions on future conduct, or suffer other penalties, remedies or
sanctions. The ultimate resolution of these matters could have a material adverse effect on our results of operations, financial condition, liquidity, our ability to meet our debt obligations and, consequently, negatively impact the trading price of
our common stock.

The matters relating to the investigation by the audit committee of our board of directors and the
restatement of our consolidated financial statements may result in governmental enforcement actions and additional litigation.

On October 15, 2009, the audit committee of our board of directors, upon the recommendation of management, concluded that the
previously issued financial statements contained in our annual report on Form 10-K for the year ended December 31, 2008, and our quarterly reports on Form 10-Q for the quarters ended March 31, 2008, June 30,
2008, September 30, 2008, March 31, 2009 and June 30, 2009 (collectively, the Prior Periods) should no longer be relied upon because of errors in those financial statements, some of which arose from potential
irregularities outside of the accounting department. On November 9, 2009, the audit committee of our board of directors, upon recommendation of management, concluded that the previously issued financial statements contained in our annual report
on Form 10-K for the year ended December 31, 2007 should also no longer be relied upon because of an error in those financial statements regarding the recognition of revenue on one Sensei Robotic Catheter System sold to a distributor in the
quarter ending December 31, 2007. As a result of our investigation, we identified systems for which revenue should have been recognized in a later period than the period in which it was recognized and revenue on systems that should have been
deferred.

The internal review, the independent investigation, and related activities have required us to incur substantial
expenses for legal, accounting, tax and other professional services, and have diverted managements attention from our business. As a result of the restatement, we have become subject to a number of risks and uncertainties, including the
possibility of governmental investigations and enforcement actions and additional stockholder litigation and the possibility that the restatement could impact our relationship with customers and our ability to generate revenue and we will continue
to incur additional restatement-related accounting and legal costs.



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Continuing negative publicity may adversely affect our business.

As a result of the Audit Committee-led investigation, restatement of our financial statements and related matters as discussed herein, we
have been the subject of negative publicity. This negative publicity may have an effect on the terms under which some customers, lenders, landlords and suppliers are willing to continue to do business with us and could affect our financial
performance and financial condition. We also believe that certain of our employees perceive themselves to be operating under stressful conditions, which may cause them to terminate their employment or, if they remain, result in reduced morale that
could adversely affect our business. Continuing negative publicity also could have a material adverse effect on our business.

Potential indemnification obligations and limitations of our current and former director and officer liability insurance and
contractual indemnification obligations to underwriters of our securities offerings could adversely affect us.

One of
our current officers and employees and the current members of our Board of Directors are the subject of pending lawsuits related to our restatement and other current or former officers, employees or directors may become the subject of lawsuits.
Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our current and former officers and employees and directors in relation to these matters on certain terms and conditions. In
addition, we have contractual indemnification obligations to the underwriters of our April 2008, April 2009 and April 2010 public offerings of shares of our common stock. These indemnification obligations to directors, officers, employees and
our underwriters are generally unlimited in nature and some of these indemnification obligations may not be covered by our directors and officers insurance policies. If we incur significant uninsured indemnity obligations, this could
have a material adverse effect on our business, results of operations, financial condition and cash flows.

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 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. As of March 31, 2010, we have also received regulatory
approvals in Russia, Thailand and Australia. The future success of our business will depend on our ability to manufacture and assemble our current and future products in sufficient quantities in accordance with applicable regulatory requirements and
at lower costs, increase product sales and successfully introduce new products, 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 may be unable to complete our trial for the treatment of atrial fibrillation or other future trials,
or we may experience significant delays in completing our clinical trials, which could prevent or delay regulatory approval of our Sensei system and impair our financial position.

We have received conditional IDE approval for an approximately 300-patient study for the treatment of atrial fibrillation and hope to
enroll our first patient in the second quarter of 2010 and complete enrollment by the end of 2010.

Enrollment of patients in
trial could be delayed for a variety of reasons, including:



| |  |  | reaching agreement on acceptable terms with prospective clinical trial sites;
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| |  |  | obtaining additional institutional review board approval to conduct the trial at prospective sites; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | obtaining sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol,
the willingness of patients to randomize to manual catheter control, the proximity of patients to clinical sites and the eligibility criteria for the trial.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Once our trial has begun, the completion of the trial, and any future clinical trials, could be delayed, suspended or terminated for
several reasons, including:



| |  |  | ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial or requests for supplemental
information with respect to our preclinical results or clinical trial results;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our failure or inability to conduct the clinical trials in accordance with regulatory requirements;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | sites participating in the trial may drop out of the trial, which may require us to engage new sites or petition the FDA for an expansion of the number
of sites that are permitted to be involved in the trial;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | patients may not enroll in, remain in or complete, the clinical trial at the rates we expect;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | patients in either the control or test arm of the trial may experience serious adverse events or side effects during the trial, which, whether or not
related to our products, could cause the FDA or other regulatory authorities to place the clinical trial on hold; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical
practices.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

If our clinical trials are delayed it will take us longer to ultimately commercialize a product
for the treatment of atrial fibrillation and generate revenues from such product. Moreover, our development costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned.

Even if we complete our trial for the treatment of atrial fibrillation or other clinical trials, these trials may not
produce results that are sufficient to support approval of a PMA or 510(k) application.

We will consider our Sensei
system to be effective if the trial for the treatment of atrial fibrillation demonstrates non-inferiority to manual control of the NaviStar Thermocool catheter, but there is a risk that, even if we achieve our endpoints, the FDA may not approve our
Sensei system for use in the treatment of atrial fibrillation. In addition, there is a risk that the FDA may require us to conduct a longer clinical trial, submit additional follow-up data, or engage in other costly and time consuming activities
that may delay the FDAs approval of the Sensei system for use in atrial fibrillation. Although we plan to file a 510(k) application based on data from our trial for the use of Sensei system in the treatment of atrial fibrillation, the FDA may
require a us to file a PMA, which is more time consuming and costly. If our clinical trials fail to produce sufficient data to support a PMA or 510(k) application, it will take us longer to ultimately commercialize a product for the treatment of
atrial fibrillation, or any other intended treatment, and generate revenue or the delay could result in our being unable to do so. Moreover, our development costs will increase if we need to perform more or larger clinical trials than planned.

Even if we obtain the necessary regulatory approvals, our efforts to commercialize our Sensei system for atrial
fibrillation or vascular disease, we may not succeed or may encounter delays which could significantly harm our ability to generate revenue.

If we obtain regulatory approval to market our Sensei system for uses other than mapping electrophysiology procedures, such as the
treatment of atrial fibrillation or vascular disease, our ability to



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generate revenue will depend upon the successful commercialization of our Sensei system for such indications. Our efforts to commercialize our Sensei system may not succeed for a number of
reasons, including:



| |  |  | our Sensei system may not be accepted in the marketplace for other treatments by physicians;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | we may not be able to sell our Sensei system and Artisan catheter at a price that allows us to meet the revenue targets necessary to generate revenue
for profitability;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we, or the investigators of our product, may not be able to have information on the outcome of the trials published in medical journals;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the availability and perceived advantages and disadvantages of alternative treatments;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | any rapid technological change may make our products obsolete;
| | - |  | --------------------------------------------------------------



| |  |  | we may not be able to have our Sensei system manufactured in commercial quantities or at an acceptable cost;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | we may not have adequate financial or other resources to complete the development and commercialization of our Sensei system; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be sued for infringement of intellectual property rights and could be enjoined from manufacturing or selling our products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

If we are not successful in the commercialization of our Sensei system for uses other than for mapping in
electrophysiology procedures, we may never achieve profitability and may be forced to cease operations.

We have a debt
facility with Silicon Valley Bank that requires us to meet certain restrictive covenants that may limit our operating flexibility.

In August 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term
equipment loan and a one-year $10 million revolving credit line, which expired in August 2009. We have drawn down approximately $12.5 million on the term equipment loan and, per the original agreement terms, the remainder of the term equipment loan
is no longer available. The facility is collateralized by substantially all of our assets, excluding intellectual property, and is subject to certain covenants, including maintaining the required liquidity, achieving EBITDA amounts to be specified
and fulfilling certain reporting requirements. The liquidity covenants require us to maintain at the end of each month either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months
of projected operations, whichever is greater. Silicon Valley Bank has yet to determine the quarterly EBITDA covenant amounts with us. As of March 31, 2010, we were in compliance with all specified financial covenants. However, in the future,
the liquidity issues we face could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all the outstanding debt. Moreover, the agreement limits our ability to take the following corporate actions
without prior consent from Silicon Valley Bank:



| |  |  | transfer all or any part of our business or properties, other than transfers made in the ordinary course of business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | engage in any business other than the business in which we are currently engaged;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | merge or consolidate with any other person, or acquire, all or substantially all of the capital stock or property of another person, subject to certain
exceptions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create, incur, assume, or be liable for any indebtedness, other than certain permitted indebtedness;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, subject to certain exceptions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create, incur, allow or suffer any lien on any of our property, including without limitation intellectual property, assign or convey any right to
receive income;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | directly or indirectly enter into or permit to exist any material transaction with any of our affiliates, subject to certain exceptions; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make or permit any payment on any subordinated debt.
| | - |  | ----------------------------------------------------



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Complying with these covenants may make it more difficult for us to successfully execute our business
strategy.

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. Potential customers with limited capital budgets may decide
to spend those dollars on proven technologies rather than on our products. 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 or with uncertainty. Financial market conditions in the U.S. and the European Union, including especially the credit and capital markets, continue to be highly
volatile and uncertain. As a result, many potential customers delayed making a decision to purchase a Sensei system, which has significantly impacted our sales, financial condition and results of operations. Financial market conditions are likely to
continue to be volatile into the future. We believe that the macroeconomic environment and the deterioration in confidence and spending have impacted and will continue to impact potential customers and their decisions to purchase our products into
the foreseeable future. We cannot predict the timing, strength or duration of any economic slowdown or subsequent recovery, whether worldwide, regional or specific to our industry, nor the extent of its potential impact on our future sales,
financial condition and results of operations.

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 Sensei system for use in the mapping of electrophysiology procedures in the United States and Europe. We had no prior experience as a company in undertaking these efforts. In the United States, we market
our Sensei system and Artisan catheter 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. Our direct sales force competes
against the experienced and well-funded sales organizations of our competitors. Our revenues will depend largely on the effectiveness of our sales force. We face significant challenges and risks related to our direct sales force and the marketing of
our current and future products, including, among others:



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



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



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



| |  |  | our ability to promote our products effectively while maintaining compliance with government regulations and labeling restrictions with respect to the
healthcare industry.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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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 current 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. We face challenges in order to produce our Sensei system and disposable Artisan catheters effectively,
to appropriately phase in new products and product designs, to efficiently utilize our new manufacturing facility and to achieve planned manufacturing cost reductions. These challenges include equipment design and automation, material procurement,
low or variable production yields on Artisan catheters and quality control and assurance. The costs resulting from these challenges 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 manufacturing changes 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, these events were reported to the FDA in accordance with applicable regulations and we subsequently initiated a voluntary recall of the affected devices.
This recall was closed in June 2008. Also, following the introduction of a new catheter in the fall of 2009, some of the new catheters experienced a leak in the flush assembly. Although no patient is known or suspected to have experienced any
consequences associated with the new catheters, we voluntarily recalled all of the catheters and reported the events to the FDA in accordance with applicable regulations. Our manufacturing group is testing a revised catheter design which we believe
we will be able to ship to customers later this year. This catheter redesign or other manufacturing issues may result in our being unable to meet the expected demand for our Artisan catheters or our Sensei system, maintain control over our expenses
or otherwise successfully manage 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.

We may not be able to develop and commercialize the robotic platform and catheter suite for
endovascular procedures as planned.

We intend to develop and commercialize a novel robotic platform for vascular
intervention. Due to the advanced electrical, mechanical, and sensing capabilities of the new robotic platform, we may encounter challenges in designing the platform to function as intended, which may lead to performance errors or other defects in
the platform. Any such malfunctions could result in delays in our 510(k) submission to the FDA, negative press, lack of physician adoption of our system, higher than expected service claims and litigation. Furthermore, we have not previously
manufactured the robotic platform for vascular intervention on a commercial scale and we may encounter unexpected manufacturing problems when scaling up the production of the new platform. Any of these issues could negatively impact out business
financial condition and results of 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 current products, and have not
entered into formal agreements with several of these third parties. We



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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, Force Dimension Sàrl, a
single-source supplier, manufactures customized motion controllers that are a part of our Sensei system. We also 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. 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.

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 or a decision to discontinue our relationship
with a current manufacturer or supplier could result in operational problems, increased expenses or write-down of capitalized assets that would adversely affect operating results 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



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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. Accordingly,
the scope of the current label may be an obstacle to our ability to successfully market and sell our products in the United States to a broader group of potential customers. We will be required to seek a separate 510(k) clearance or PMA approval 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 plan to
seek future approval of our Sensei system for other indications, including atrial fibrillation and other cardiac ablation procedures. We have received conditional IDE approval for an approximately 300 patient study for the treatment of atrial
fibrillation and hope to enroll our first patient in the second quarter of 2010 and complete enrolment by the end of 2010. The study will include a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365
days. We cannot assure the timing or potential for success of those efforts if undertaken. The FDA can delay, limit or deny clearance of a 510(k), or PMA approval, for many reasons, including:



| |  |  | our inability to demonstrate safety or effectiveness to the FDAs satisfaction;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the data from our preclinical studies and clinical trials may be insufficient to support approval;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the facilities of our third-party manufacturers or suppliers may not meet applicable requirements;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | our compliance with preclinical, clinical or other regulations;
| | - |  | ---------------------------------------------------------------



| |  |  | our inability to meet the FDAs statistical requirements or changes in statistical tests or significance levels the FDA requires for approval of a
medical device, including ours; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the FDA approval policies, expectations with regard to the type or amount of scientific data required or adoption of new regulations may
require additional data or additional clinical studies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Furthermore, in order to market our Sensei system
outside of the United States, we will need to establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. We received the CE Mark in Europe for our Sensei system in September 2006 and
for our Artisan catheters in May 2007, but we may be required to seek separate clearances from the European Union in order to market our Sensei system for any additional uses. Such approval may be difficult and costly to achieve, or may not be
granted at all.

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. Seeking new approvals could also result in the FDA or other regulatory authorities reviewing prior submissions and modifying or revoking prior approvals. 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 clearances for our Sensei system and other products, including our proposed vascular system, 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 do not believe that our Sensei system and
Artisan catheters are a safe and effective alternative to existing technologies used in atrial fibrillation and other cardiac ablation procedures, they may choose not to use our Sensei system.

We believe that physicians will not use, and hospitals will not purchase, our Sensei system and Artisan catheters unless they determine
that our Sensei system provides a safe and effective alternative to



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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 until such clearance or approval is obtained. 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. A number of recent studies have been published on the efficacy, safety and efficiency of our products, especially by comparison to manual techniques.
While we believe many of those studies have validated our assessment of the benefits of our products, some of these studies have been cited by our competitors to portray our products in an unfavorable light. A number of additional studies are
underway both in the United States and Europe assessing early clinical experience with our products and continuing to compare usability and success of treatment between procedures performed with our Sensei system and manual technique. If these
studies, or other 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 not effective or safe for such uses,
physicians may choose not to use our Sensei system. For example, one study reported a statistically insignificant higher rate of major complications for patients treated with our system than those treated manually and one patient in the robotic arm
of the study died. This study or other studies may create a perception that our system is not as effective and safe as manual technique. Reluctance by physicians to use our Sensei system or to perform procedures enable by the Sensei system would
harm sales. Furthermore, we plan to develop a robotic system for the treatment of vascular diseases, and there is no clinical data for the proposed systems safety and efficacy. 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 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,
particularly in this period of economic volatility and uncertainty, 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.



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We have incurred substantial losses since inception and anticipate that we will incur
continued losses through at least the next year, we may not be able to raise additional financing to fund future losses and we may not be able to continue to operate as a going concern.

We have experienced substantial net losses since our inception in late 2002. At March 31, 2010, we had an accumulated deficit of
$224.0 million. We have funded our operations to date principally from the sale of our securities and through issuance of debt. In 2008, we both issued equity and entered into a new debt facility and, in 2009 and 2010, we issued additional equity;
however, we may at any time sell additional securities resulting in further dilution to existing stockholders and we may at any time incur additional indebtedness. The recent turmoil in the global financial and credit markets may limit our ability
to raise additional funds. We cannot guarantee that future equity or debt financing will be available in amounts or on terms acceptable to us, if at all. Further, even if financing becomes available, the cost to us may be significantly higher than
in the past. We will continue to 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 year as we continue our manufacturing, marketing and sales
operations to commercialize our products and seek additional regulatory clearances. We expect our research and development expenses to increase moderately and general and administrative expenses to decrease moderately in 2010 from 2009 levels as we
continue our product engineering efforts to develop a new platform for use in vascular surgery, develop our intellectual property portfolio, maintain the infrastructure necessary to support operating as a public company 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 have proposed a clinical
trial to the FDA for the use of our Artisan catheter in the treatment of atrial fibrillation as part of our process to expand our current labeling in the U.S. beyond mapping. Thus, efforts are underway to eventually seek regulatory clearance for the
use of our Sensei system in atrial fibrillation procedures. We may subsequently seek regulatory clearance for use of our Sensei system for use with other catheters. 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 with ablation catheters or 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 for use with ablation catheters and in cardiac ablation procedures and that we may not



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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 United States 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 or approval has not been obtained. Moreover, scrutiny of such practices by the FDA and other federal agencies has recently increased. Promotional activities for FDA regulated products of other companies have
been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. 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 two specific 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.

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.

It is our policy to only train physicians to insert, navigate, map and remove catheters using
our Sensei system. Physicians must obtain training elsewhere to learn how to ablate cardiac tissue to treat atrial fibrillation, which is an off-label procedure. This training may be provided by third parties, such as hospitals and universities and
through independent peer-to-peer training among doctors. We cannot assure you 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.

Training in the use of our products is regulated by the FDA. Our physician training and the training provided by third parties typically
includes facilitating an observation of a Sensei case by the trainee physician. We monitor our training to ensure that off-label use is not promoted or enabled. However, from time to time, we may sponsor third party training. There is a risk that
independent peer-to-peer interaction between physicians and other third party training may include discussion or observation of off-label procedures because most procedures performed to date using the Sensei system involve both mapping and cardiac
ablation. If any such activities are attributed to us, the FDA or other governmental entities could conclude that we have engaged in off-label promotion of our products, which could subject us to significant liability.



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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 still considered 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 has a lengthy sales cycle because it involves a relatively
expensive capital equipment purchase, which generally requires 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. Beginning with the fourth quarter of 2008 and continuing through the first quarter of 2010, in a
period of economic uncertainty, we have seen sales cycles for many potential customers lengthen and purchase decisions postponed. Additionally, the majority of our revenue is shipped in the last weeks of a given quarter. Any disruption in our supply
chain during those critical weeks or an inability to fulfill our deliverables during that compressed time frame could significantly impact the timing of our ability to recognize revenue on those items. These factors have contributed in the past and
may contribute in the future 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 differ from our announcements of guidance regarding



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future operating or financial results or may fail to meet 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.

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 United States 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 and the development and introduction of new products. In particular, we have recently begun
development of a new robotic system to be used in endovascular applications. We expect to spend considerable amount in the development of this device and in obtaining regulatory approval. In the three months ended March 31, 2010, net cash used
in operating activities was $6.6 million. We expect that our cash used by operations will be significant in each of the next several years, and we will need additional funds to continue the commercialization of our Sensei system.



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Additional financing may not be available on a timely basis on terms acceptable to us, or at
all. Furthermore, even if financing becomes available, the cost to us may be significantly higher than in the past. 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 gross margins generated by our revenues and cost of sales;
| | - |  | --------------------------------------------------------------



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



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



| |  |  | the cost of legal fees relating to shareholder lawsuits;
| | - |  | --------------------------------------------------------



| |  |  | 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 or we may be unable to address successfully financial and technology risks associated with new applications, including applications for the vascular market.

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 approval 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 including expansion of our electrophysiology applications as well as the development of non-electrophysiology applications.

We are dedicating significant resources to the development of a product for vascular applications. Such development efforts may not be
successful, may not achieve regulatory approval, may not produce viable commercial products and may divert our limited resources from more profitable market opportunities. Moreover, we may devote resources to developing products in 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.



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If we fail to maintain collaborative relationships with providers of imaging and
visualization 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.

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 United States 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 that we and St. Jude will maintain compatibility of our products under the collaboration or that the CoHesion Module will gain market acceptance. St. Jude has introduced and is promoting a new version of its Ensite
system that initially is not compatible with our CoHesion Module; however, St. Jude continues to promote its early version of Ensite and has indicated that it plans to achieve compatibility with the new Ensite system over time. The initial lack of
compatibility may adversely affect the sales of the CoHesion Module and the Sensei system until compatibility is achieved.

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.

Future acquisitions could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to expand our offerings and markets and grow our business in response to changing
technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, solutions or technologies rather than through internal development. The identification of
suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. Furthermore, even if we successfully complete an acquisition, we may not be able



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to successfully assimilate and integrate the business, technologies, solutions, personnel or operations of the company that we acquired, particularly if key personnel of an acquired company
decide not to work for us. In addition, we may issue equity securities to complete an acquisition, which would dilute our stockholders ownership and could adversely affect the price of our common stock. Acquisitions may also involve the entry
into geographic or business markets in which we have little or no prior experience. Consequently, we may not achieve anticipated benefits of the acquisitions which could harm our operating results.

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 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;
| | - |  | ----------------



| |  |  | an increase in reportable adverse events to applicable authorities such as the FDA;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | 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 service claims.

We typically provide post-contract customer service for each of our products against defects in materials and workmanship for a period of
approximately 12 months from the delivery or acceptance of our product by a customer which is normally when the system is installed. The associated expenses are charged to cost of goods sold as incurred. We have a very limited history of commercial
placements from which to judge our rate of claims against our service contracts. Our obligation under these service contracts may be impacted by product failure rates, material usage and service costs. Unforeseen exposure under these post-contract
customer service contracts 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 continue to 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



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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 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 Medicare-severity diagnosis related group, or MS-DRG system. We believe that the majority of procedures performed using our
technology fall under MS-DRG 251, percutaneous cardiovascular procedures without coronary artery stent or acute myocardial infarction without major cardiovascular complication, with an average reimbursement of $9,260 for fiscal 2008. The
Centers for Medicare & Medicaid Services update the MSDRG payment rates annually effective October 1 through September 30th of the following year. Because hospital inpatient reimbursement is largely dependent on geographical
location and other hospital-specific factors, an individual hospitals revenues from ablation procedures to treat atrial fibrillation using our technology can vary significantly. At this time, we cannot predict the full impact any rate
reductions will have on our future revenues or business.

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. Recent legislative proposals in the United States to reform healthcare and government insurance programs have
included a focus on healthcare costs which could limit the coverage and reimbursement for procedures utilizing our products. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to
continue and may increase. The failure of our customers to obtain sufficient reimbursement could have a material adverse impact on our financial condition and harm our business.

We have incurred substantial management and employee turnover and we may lose additional key personnel or fail to attract and
retain additional personnel needed for us to operate our business effectively.

We currently have an interim Chief
Financial Officer and are actively conducting searches for additional senior management personnel, including a search for a Chief Operating Officer or Chief Executive Officer. We are conducting a search for a Chief Operating Officer or Chief
Executive Officer in order to augment our experience in managing emerging businesses and to enable Frederic Moll, M.D., our founder and current Chief Executive Officer, to dedicate more effort towards formulating our clinical product development
strategy, particularly as it relates to our opportunity in vascular applications. We are conducting a search for a Vice President of Engineering as our current Vice President of Engineering is ending his employment with the Company in the middle of
May and has agreed to then provide consulting services to the Company through September. Also, our current Chief Technology Officer recently ended his employment with the Company and has agreed to then provide consulting services to the Company
through September. If we are unable to recruit qualified replacements in a timely manner or if the consulting services expected to be provided by these departing officers are insufficient to transition their work to others, our product development
and commercialization efforts could be materially delayed or be unsuccessful. Additionally, in the third quarter of 2008 and the first and third quarters of 2009, we reduced our work force. These reductions in force may make it more difficult to
retain and attract the qualified personnel required, placing a significant strain on our management. Accordingly, retaining such personnel and recruiting necessary new employees 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 management and personnel, we may be unable to
continue our development and commercialization activities and our business will be harmed.

We are highly dependent on the
principal members of our management and scientific staff. 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.



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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
possible future growth of our business. We have experienced significant growth in the scope of our operations 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.

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.



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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 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 stock compensation accounting required
for publicly-traded companies found in ASC 985-605. The adoption of this accounting treatment has had a significant impact on our financial statements since 2006 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



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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 such patent protection will confer any significant commercial advantage. United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to
reexamination proceedings in the United States 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 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.



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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.

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 is 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



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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. For example, we have received correspondence from a third party indicating it believes it holds a patent that our Sensei system may infringe. While we do
not believe that the Sensei system infringes this patent, there can be no assurance that the 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.

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.

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.

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 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.

For example, the European Union 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 European Union, we expect a changing regulatory
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characterized by a shift from a country-by-country regulatory system to a European Union-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.

If we or our contract manufacturers fail to comply with the FDAs Quality System Regulations or California Department of
Health Services requirements, our manufacturing operations could be interrupted and our product sales and operating results could suffer.

Our manufacturing processes, and those of some of our contract manufacturers, are required to comply with the FDAs Quality System
Regulations, or QSR, which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces the QSR through periodic
inspections of manufacturing facilities. We and our contract manufacturers are subject to such inspections. If our manufacturing facilities or those of any of our contract manufacturers fail to take satisfactory corrective action in response to an
adverse QSR inspection, the FDA could take enforcement action, including any of the following sanctions, which could have a material impact on our operations:



| |  |  | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | unanticipated expenditures to address or defend such actions;
| | - |  | -------------------------------------------------------------



| |  |  | customer notifications for repair, replacement, refunds;
| | - |  | --------------------------------------------------------



| |  |  | recall, detention or seizure of our products;
| | - |  | ---------------------------------------------



| |  |  | operating restrictions or partial suspension or total shutdown of production;
| | - |  | -----------------------------------------------------------------------------



| |  |  | refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | operating restrictions;
| | - |  | -----------------------



| |  |  | withdrawing 510(k) clearances on PMA approvals that have already been granted;
| | - |  | ------------------------------------------------------------------------------



| |  |  | refusal to grant export approval for our products; or
| | - |  | -----------------------------------------------------



| |  |  | criminal prosecution.
| | - |  | ---------------------

We are subject to the licensing requirements of the California Department of Health Services, or CDHS. We have been inspected and
licensed by the CDHS and remain 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.

If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical
device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. 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.

Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a
device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If
we fail to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such



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adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement
action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and
financial results.

We have filed Medical Device Reports, or MDRs, reporting adverse events during procedures utilizing our
technology and have developed internal systems and processes that are designed to evaluate future events that may require adverse event reporting to the FDA. As the frequency of use of our 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 products may in the
future be subject to product recalls that could harm our reputation, business and financial results.

The FDA and
similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be
based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material
deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur
as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. For example, in May 2008, we initiated a voluntary recall of a limited number of our Artisan Control Catheters that were subject to
potential leakage, and reported the recall to FDA in accordance with applicable regulations. No patient is known or suspected to have experienced any consequences associated with the recalled devices and the recall was closed in June 2008. Also,
following the introduction of a new catheter in the fall of 2009, some of the new catheters experienced a leak in the flush assembly. Although no patient is known or suspected to have experienced any consequences associated with the new catheters,
we voluntarily recalled all of the new catheters and reported the events to the FDA in accordance with applicable regulations. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial
condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are
not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions
as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

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.



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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 or approval 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.

Clinical trials necessary to support any future 510(k) or PMA application will be expensive and may require the enrollment of large
numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials may prevent us from commercializing any modified or new products and will adversely affect our business, operating results
and prospects.

Initiating and completing clinical trials necessary to support a 510(k) or PMA application for expanded
indications for use of our existing products, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical
trials may not have favorable results in later clinical trials.

Conducting successful clinical studies may require the
enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the
patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and
proximity of patients to clinical sites and able to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or
involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. We have received conditional IDE approval for an
approximately 300 patient study for the treatment of atrial fibrillation and hope to enroll our first patient in the second quarter of 2010 and complete enrolment by the end of 2010. The study will include a seven-day follow-up for safety and a
one-year follow-up for efficacy at intervals of 90, 180, and 365 days.

Development of sufficient and appropriate clinical
protocols to demonstrate safety and efficacy may be required and we may not adequately develop such protocols to support clearance or approval. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may
cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, FDA may not
consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.

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



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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 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



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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 April 30, 2010, our stock price has fluctuated from a low of $2.04 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the pace of enrollment or results of our 300 patient clinical trial or any other clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the impact of shareholder lawsuits both on the Company and on the public perception of the Company.
| | - |  | ---------------------------------------------------------------------------------------------------

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. Additional 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 five percent or more of our outstanding common stock beneficially own or control approximately 32.5 percent of the outstanding shares of our common stock as of April 30, 2010. 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, we must obtain Silicon
Valley Bank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
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 five 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.



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Our financial results may vary significantly from period to period, which may reduce
our stock price.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of
our control, which may cause the market price of our common stock to fall. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our
future performance. Our financial results may be negatively affected by any of the risk factors listed in this Risk Factors section.

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.

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 United States 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 devote a substantial amount of time to these requirements.
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 control 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 control over financial reporting to allow management and
our independent registered public accounting firm to report on the effectiveness of our internal control 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. (REMOVED AND RESERVED)

None.



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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.              
|              | 
|10.48(4)      |  | Development and Supply Agreement by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.               
|              | 
|10.49(4)      |  | License Agreement Between Hansen and Luna by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.      
|              | 
|10.50(4)      |  | Cross License Agreement Between Intuitive and Hansen by and between the Registrant and Intuitive Surgical, Inc., dated as of January 12, 2010.
|              | 
|10.51+(4)     |  | Separation Agreement by and between the Registrant and Steven M. Van Dick, dated February 22, 2010.                                           
|              | 
|10.52         |  | Confidential Settlement Agreement by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.              
|              | 
|10.53         |  | Warrant to Purchase Common Stock of Luna Innovations Incorporated, dated January 12, 2010.                                                    
|              | 
|10.54         |  | Secured Promissory Note by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.                        
|              | 
|10.55         |  | Security Agreement by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.                             
|              | 
|10.56         |  | Patent and Trademark Security Agreement between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.               
|              | 
|10.57         |  | Confidential Mutual Release between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.                           
|              | 
|10.58+        |  | Retention Agreement by and between the Registrant and Robert Mittendorff, dated as of January 11, 2010.                                       
|              | 
|10.59+        |  | Consulting Agreement by and between the Registrant and Peter Osborne, dated as of February 22, 2010.                                          
|              | 
|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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



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|(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 Annual Report on Form 10-K, filed on March 16, 2010 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|+ | Indicates management contract or compensatory plan.
|- | ---------------------------------------------------

|* | The certifications attached hereto 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 this 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: May 10, 2010 |  |  |  | By: |  | /s/ FREDERIC H. MOLL, M.D.                  
|                    |  |  |  |     |  | Frederic H. Moll, M.D.                      
|                    |  |  |  |     |  | Chief Executive Officer                     
|                    |  |  |  |     |  | (Principal Executive Officer)               
|                    |  |  | 
|Dated: May 10, 2010 |  |  |  | By: |  | /s/ PETER OSBORNE                           
|                    |  |  |  |     |  | Peter Osborne                               
|                    |  |  |  |     |  | Interim Chief Financial Officer             
|                    |  |  |  |     |  | (Principal Financial and Accounting Officer)



66