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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 June 30, 2009

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 July 31, 2009 was 37,420,821.









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INDEX



|           |  |                                                                                                           |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | --
|           |  | PART I - FINANCIAL INFORMATION                                                                            |  |   
|           |  |                                                                                                          
|Item 1.    |  | Condensed Consolidated Financial Statements (unaudited)                                                   |  |   
|           |  |                                                                                                          
|           |  | Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008                           |  | 1 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and
2008 |  | 2 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008           |  | 3 
|           |  |                                                                                                          
|           |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 4 
|           |  |                                                                                                          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 15
|           |  |                                                                                                          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 25
|           |  |                                                                                                          
|Item 4.    |  | Controls and Procedures                                                                                   |  | 25
|           |  |                                                                                                          
|Item 4T.   |  | Controls and Procedures                                                                                   |  | 26
|           |  |                                                                                                          
|           |  | PART II - OTHER INFORMATION                                                                               |  |   
|           |  |                                                                                                          
|Item 1.    |  | Legal Proceedings                                                                                         |  | 26
|           |  |                                                                                                          
|Item 1A.   |  | Risk Factors                                                                                              |  | 27
|           |  |                                                                                                          
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                               |  | 53
|           |  |                                                                                                          
|Item 3.    |  | Defaults Upon Senior Securities                                                                           |  | 53
|           |  |                                                                                                          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                       |  | 53
|           |  |                                                                                                          
|Item 5.    |  | Other Information                                                                                         |  | 54
|           |  |                                                                                                          
|Item 6.    |  | Exhibits                                                                                                  |  | 55
|           | 
|Signatures |  | 56                                                                                                       



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANSEN MEDICAL, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except
share and per share data)



|                                                                                                                                             |  |              |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                             |  | June 30,2009 |          |   | December 31,2008 |  
|ASSETS                                                                                                                                       |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                              |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                    |  | $            | 19,944   |   |                  | $ | 17,377   |  
|Short-term investments                                                                                                                       |  |              | 31,441   |   |                  |   | 17,846   |  
|Accounts receivable, net                                                                                                                     |  |              | 4,918    |   |                  |   | 9,506    |  
|Inventories                                                                                                                                  |  |              | 6,887    |   |                  |   | 6,674    |  
|Prepaids and other current assets                                                                                                            |  |              | 1,517    |   |                  |   | 2,136    |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                         |  |              | 64,707   |   |                  |   | 53,539   |  
|                                                                                                                                             |  |             
|Property and equipment, net                                                                                                                  |  |              | 15,428   |   |                  |   | 18,195   |  
|Restricted cash                                                                                                                              |  |              | 60       |   |                  |   | 110      |  
|Other assets                                                                                                                                 |  |              | 179      |   |                  |   | 174      |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                 |  | $            | 80,374   |   |                  | $ | 72,018   |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|                                                                                                                                             |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                         |  |              |          |   |                  |   |          |  
|                                                                                                                                             |  |             
|Current liabilities:                                                                                                                         |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                             |  | $            | 1,795    |   |                  | $ | 3,089    |  
|Accrued liabilities                                                                                                                          |  |              | 4,530    |   |                  |   | 6,064    |  
|Current portion of deferred revenue                                                                                                          |  |              | 2,080    |   |                  |   | 1,386    |  
|Current portion of long-term debt                                                                                                            |  |              | 3,565    |   |                  |   | 2,451    |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                    |  |              | 11,970   |   |                  |   | 12,990   |  
|                                                                                                                                             |  |             
|Deferred revenue, net of current portion                                                                                                     |  |              | 118      |   |                  |   | 189      |  
|Long-term debt, net of current portion                                                                                                       |  |              | 8,021    |   |                  |   | 10,025   |  
|Other long-term liabilities                                                                                                                  |  |              | 1,097    |   |                  |   | 1,109    |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                            |  |              | 21,206   |   |                  |   | 24,313   |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|                                                                                                                                             |  |             
|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: 37,415,862 and 25,273,623 shares at June 30, 2009 and December 31, 2008,
respectively |  |              | 4        |   |                  |   | 3        |  
|Additional paid-in capital                                                                                                                   |  |              | 250,988  |   |                  |   | 210,548  |  
|Deferred stock-based compensation                                                                                                            |  |              | (10      | ) |                  |   | (44      | )
|Accumulated other comprehensive income (loss)                                                                                                |  |              | (1       | ) |                  |   | 77       |  
|Accumulated deficit                                                                                                                          |  |              | (191,813 | ) |                  |   | (162,879 | )
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                   |  |              | 59,168   |   |                  |   | 47,705   |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                   |  | $            | 80,374   |   |                  | $ | 72,018   |  
|                                                                                                                                             |  |              |          |   |                  |   |          |  

The accompanying notes are an integral part of these unaudited 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 endedJune 30, |         |   | Six months endedJune 30, |  
|                                                            |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Revenues                                                    |  | $                          | 3,306   |   |                          | $ | 5,813   |      |  | $ | 10,429  |   |  | $ | 12,057  |  
|Cost of goods sold                                          |  |                            | 2,946   |   |                          |   | 4,735   |      |  |   | 8,186   |   |  |   | 9,672   |  
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                                |  |                            | 360     |   |                          |   | 1,078   |      |  |   | 2,243   |   |  |   | 2,385   |  
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses:                                         |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                    |  |                            | 4,951   |   |                          |   | 6,300   |      |  |   | 10,602  |   |  |   | 11,514  |  
|Selling, general and administrative                         |  |                            | 9,904   |   |                          |   | 10,007  |      |  |   | 20,015  |   |  |   | 18,084  |  
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                            |  |                            |         |  
|Total operating expenses                                    |  |                            | 14,855  |   |                          |   | 16,307  |      |  |   | 30,617  |   |  |   | 29,598  |  
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                        |  |                            | (14,495 | ) |                          |   | (15,229 | )    |  |   | (28,374 | ) |  |   | (27,213 | )
|Interest income                                             |  |                            | 88      |   |                          |   | 430     |      |  |   | 218     |   |  |   | 838     |  
|Interest and other expense, net                             |  |                            | (203    | ) |                          |   | (107    | )    |  |   | (778    | ) |  |   | (163    | )
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                    |  | $                          | (14,610 | ) |                          | $ | (14,906 | )    |  | $ | (28,934 | ) |  | $ | (26,538 | )
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                            |  |                            |         |  
|Basic and diluted net loss per share                        |  | $                          | (0.42   | ) |                          | $ | (0.60   | )    |  | $ | (0.96   | ) |  | $ | (1.14   | )
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                            |  |                            |         |  
|Shares used to compute basic and diluted net loss per share |  |                            | 35,187  |   |                          |   | 24,733  |      |  |   | 30,293  |   |  |   | 23,346  |  
|                                                            |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

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



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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)



|                                                                            |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six months endedJune 30, |        
|                                                                            |  | 2009                     |         |   | 2008 |  
|Cash flows from operating activities:                                       |  |                          |         |   |      |   |         |  
|Net loss                                                                    |  | $                        | (28,934 | ) |      | $ | (26,538 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                          | 2,213   |   |      |   | 710     |  
|Stock-based compensation                                                    |  |                          | 4,562   |   |      |   | 4,935   |  
|Asset impairment of tangible assets                                         |  |                          | 1,120   |   |      |   |        |  
|Amortization of preferred stock warrants                                    |  |                          |        |   |      |   | 27      |  
|Changes in operating assets and liabilities:                                |  |                          |         |   |      |   |         |  
|Accounts receivable                                                         |  |                          | 4,588   |   |      |   | (1,923  | )
|Inventories                                                                 |  |                          | (213    | ) |      |   | (1,649  | )
|Prepaids and other current assets                                           |  |                          | 695     |   |      |   | (1,496  | )
|Accounts payable                                                            |  |                          | (1,294  | ) |      |   | (224    | )
|Accrued liabilities                                                         |  |                          | (1,557  | ) |      |   | 1,533   |  
|Deferred revenue                                                            |  |                          | 623     |   |      |   | 757     |  
|Deferred rent                                                               |  |                          | (14     | ) |      |   | 22      |  
|Other long-term liabilities                                                 |  |                          | 94      |   |      |   | 281     |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                          | (18,117 | ) |      |   | (23,565 | )
|                                                                            |  |                          |         |   |      |   |         |  
|                                                                            |  |                         
|Cash flows from investing activities:                                       |  |                          |         |   |      |   |         |  
|Purchase of property and equipment                                          |  |                          | (633    | ) |      |   | (9,491  | )
|Proceeds from sales and maturities of short-term investments                |  |                          | 14,175  |   |      |   | 9,467   |  
|Purchase of investments                                                     |  |                          | (27,929 | ) |      |   | (15,080 | )
|Changes in restricted cash                                                  |  |                          | 50      |   |      |   |        |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                          | (14,337 | ) |      |   | (15,104 | )
|                                                                            |  |                          |         |   |      |   |         |  
|                                                                            |  |                         
|Cash flows from financing activities:                                       |  |                          |         |   |      |   |         |  
|Repayments of loans payable                                                 |  |                          | (890    | ) |      |   | (1,036  | )
|Proceeds from issuance of common stock, net of issuance costs               |  |                          | 35,278  |   |      |   | 39,492  |  
|Proceeds from exercise of common stock options, net                         |  |                          | 333     |   |      |   | 42      |  
|Proceeds from employee stock purchase plan                                  |  |                          | 300     |   |      |   | 604     |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                          | 35,021  |   |      |   | 39,102  |  
|                                                                            |  |                          |         |   |      |   |         |  
|                                                                            |  |                         
|Net increase in cash and cash equivalents                                   |  |                          | 2,567   |   |      |   | 433     |  
|Cash and cash equivalents at beginning of period                            |  |                          | 17,377  |   |      |   | 30,404  |  
|                                                                            |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                        | 19,944  |   |      | $ | 30,837  |  
|                                                                            |  |                          |         |   |      |   |         |  
|                                                                            |  |                         
|Supplemental schedule of non-cash investing activities:                     |  |                          |         |   |      |   |         |  
|Unbilled construction costs incurred                                        |  | $                        |        |   |      | $ | 2,173   |  

The accompanying notes are an integral part of these unaudited 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 and is headquartered in Mountain View, California. In March 2007, the Company established Hansen Medical UK Ltd., a wholly-owned subsidiary located in the United Kingdom and, in May
2007, the Company established Hansen Medical, GmbH, a wholly-owned subsidiary located in Germany. Both subsidiaries were established for the purpose of marketing the Companys products in Europe.

From inception to June 30, 2009, the Company has incurred losses totaling approximately $191.8 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, 2009 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 22, 2009, the Company sold 11,692,000 shares of its common stock, resulting in approximately $35.3 million of net proceeds, after underwriting discounts and commissions and offering expenses. On
August 25, 2008, the Company entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million revolving credit line. The Company and Silicon Valley Bank
are currently in negotiations to extend the credit line past its August 2009 expiration date. As of June 30, 2009, the Company had drawn down approximately $12.5 million against the term equipment line under this agreement. See Note 7.

If operating cash flows are significantly lower than current expectations, the Company may require capital in addition to the existing
cash, cash equivalents and short-term investment balances and the interest earned on those balances, in addition to the amounts available under the Companys revolving credit line and amounts received through the sale of products. 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 2009 and will consider the implementation of additional cost reductions during the remainder of the year if and as circumstances warrant.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company has prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States. The accompanying condensed consolidated financial statements and notes thereto are unaudited. In the opinion of the Companys management, these statements include all adjustments, which are of a normal



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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, 2008 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The
information included in this Form 10-Q should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission. The Companys fiscal year
ends on December 31.

The accompanying condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts from prior year periods have been reclassified to conform to the current year presentation.

Subsequent events have been evaluated through August 6, 2009, the date of financial statement issuance.

Use of Estimates

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

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 141 (revised 2007) Business Combinations (SFAS 141(R)). Under SFAS 141(R), in a business combination, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods
subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition,
acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. For the Company, SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition
date is on or after January 1, 2009 with the exception of the accounting for valuation allowances on deferred taxes and acquired contingencies under SFAS 109. The adoption of SFAS 141(R) did not have a significant impact on the Companys
consolidated financial statements. However, any future business combinations will be impacted by the new standard.

In December 2007, the
FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 became effective
for the Company beginning in the first quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, Accounting for Defensive Intangible Assets (EITF 08-7). EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that
the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets
as a separate unit of accounting. Defensive intangible assets must be recognized at fair value in accordance with SFAS 141(R) and SFAS 157. EITF 08-7 is effective for defensive intangible assets acquired in fiscal years beginning on or after
December 15, 2008. The impact of the standard on the Companys financial position and results of operation will be dependent upon the type of any acquisitions that are consummated in the future.



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In April 2009, the FASB issued FASB Staff Position SFAS 107-1 and APB No. 28-1, Interim
Disclosures about Fair Value of Financial Instruments. This FASB Staff Position amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FASB Staff Position also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. This FASB Staff Position became effective for the Company beginning in the second quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have significantly decreased. This FASB Staff Position also includes guidance on identifying circumstances that indicate a transaction is not orderly. This pronouncement became effective
for the Company beginning in the second quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, to amend the other-than-temporary impairment guidance in debt securities to be based on intent to
sell instead of ability to hold the security and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This pronouncement became effective for the Company beginning
in the second quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In May 2009, the FASB issued
SFAS No. 165, Subsequent Events (SFAS 165) which requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of
the balance sheet. For nonrecognized subsequent events that must be disclosed to keep the financial statements from being misleading, an entity will be required to disclose the nature of the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. In addition, SFAS 165 requires an entity to disclose the date through which subsequent events have been evaluated. The Company adopted SFAS 165 for the second quarter of 2009.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). This statement amends
the consolidation guidance applicable to variable interest entities and is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. Upon adoption, the Company does not expect this standard to have
a material impact on its consolidated financial statements.

In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with
generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of the SFAS 168 to have an impact on its consolidated
financial statements.



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##### Table of Contents

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 SheetClassification
|                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value |   | CashEquivalents             |   | Short-termInvestments
|As of June 30, 2009:              |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|Money market funds                |  | $             | 15,691 |                      | $ |                      |  | $ |           |   |                             | $ | 15,691                |  | $ | 15,691 |  | $ |      
|U.S. government agency securities |  |               | 22,892 |                      |   | 44                    |  |   | (2         | ) |                             |   | 22,934                |  |   |       |  |   | 22,934
|Corporate debt securities         |  |               | 10,504 |                      |   | 4                     |  |   | (1         | ) |                             |   | 10,507                |  |   | 2,000  |  |   | 8,507 
|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|                                  |  | $             | 49,087 |                      | $ | 48                    |  | $ | (3         | ) |                             | $ | 49,132                |  | $ | 17,691 |  | $ | 31,441
|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|                                  |  |               |        |                      |   |                      
|As of December 31, 2008:          |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|Money market funds                |  | $             | 7,486  |                      | $ |                      |  | $ |           |   |                             | $ | 7,486                 |  | $ | 7,486  |  | $ |      
|U.S. government agency securities |  |               | 10,992 |                      |   | 108                   |  |   |           |   |                             |   | 11,100                |  |   |       |  |   | 11,100
|Corporate debt securities         |  |               | 11,820 |                      |   | 22                    |  |   |           |   |                             |   | 11,842                |  |   | 5,096  |  |   | 6,746 
|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|                                  |  | $             | 30,298 |                      | $ | 130                   |  | $ |           |   |                             | $ | 30,428                |  | $ | 12,582 |  | $ | 17,846
|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       

Fixed income securities included in short-term investments above are summarized by their
contractual maturities as follows (in thousands):



|                        |  |              |        |                  |   |       
|----------------------- |  | ------------ | ------ | ---------------- | - | ------
|                        |  | June 30,2009 |        | December 31,2008
|Contractual maturities: |  |              |        |                  |   |       
|Less than one year      |  | $            | 31,441 |                  | $ | 16,308
|One to two years        |  |              |       |                  |   | 1,538 
|                        |  |              |        |                  |   |       
|                        |  | $            | 31,441 |                  | $ | 17,846
|                        |  |              |        |                  |   |       

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. The investments held by the Company are high investment grade and, as of June 30, 2009, investments which are in an
unrealized loss position are summarized as follows (in thousands):



|                                  |  |            |        |                       |   |    |  
|--------------------------------- |  | ---------- | ------ | --------------------- | - | -- | -
|                                  |  | Fair Value |        | GrossUnrealizedLosses |  
|U.S. government agency securities |  | $          | 4,557  |                       | $ | (2 | )
|Corporate debt securities         |  |            | 8,494  |                       |   | (1 | )
|                                  |  |            |        |                       |   |    |  
|                                  |  | $          | 13,051 |                       | $ | (3 | )
|                                  |  |            |        |                       |   |    |  

None of the above investments 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 investments were due primarily to
changes in interest rates and other market conditions as well as to changes in the credit conditions of the underlying securities. These investments are not considered other-than-temporarily impaired as the 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.



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##### Table of Contents

Fair Value Measurements

Accounting principles generally accepted in the United States define 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. Investment
instruments valued using Level 2 inputs include investment-grade corporate debts, such as bonds and commercial paper which tend to be very liquid but for which quoted prices for identical assets in an active market are not generally available.

The fair value hierarchy of our cash equivalents and short-term investments at June 30, 2009 is as follows (in thousands):



|                                  |  |                                                                   |        |                                                   |   |        |  |   |       
|--------------------------------- |  | ----------------------------------------------------------------- | ------ | ------------------------------------------------- | - | ------ |  | - | ------
|                                  |  | Fair Value Measurements Using                                     |        |                                                  
|                                  |  | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1Inputs) |        | Significant otherObservableInputs(Level 2
Inputs) |   | Total 
|Money market funds                |  | $                                                                 | 15,691 |                                                   | $ |       |  | $ | 15,691
|U.S. government agency securities |  |                                                                   | 22,934 |                                                   |   |       |  |   | 22,934
|Corporate debt securities         |  |                                                                   |       |                                                   |   | 10,507 |  |   | 10,507
|                                  |  |                                                                   |        |                                                   |   |        |  |   |       
|                                  |  | $                                                                 | 38,625 |                                                   | $ | 10,507 |  | $ | 49,132
|                                  |  |                                                                   |        |                                                   |   |        |  |   |       

4. Inventories (in thousands)



|                            |  |              |       |                  |   |      
|--------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                            |  | June 30,2009 |       | December 31,2008
|Raw materials               |  | $            | 1,740 |                  | $ | 1,984
|Work in process             |  |              | 2,054 |                  |   | 2,980
|Finished goods              |  |              | 2,646 |                  |   | 1,462
|Deferred cost of goods sold |  |              | 447   |                  |   | 248  
|                            |  |              |       |                  |   |      
|Inventories, net            |  | $            | 6,887 |                  | $ | 6,674
|                            |  |              |       |                  |   |      

5. Asset Impairment

In June 2009, the Company terminated its relationship with a subcontractor in Europe for the manufacture of catheters. In connection with the termination of this relationship, the Company analyzed the carrying value
of certain fixed assets purchased in association with that relationship to determine whether an impairment of those assets had occurred, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Based on that analysis, the Company recorded a $1.1 million charge to selling, general and administrative expenses in the quarter ended June 30, 2009. The charge relates to the write-off of non-recoverable fixed assets.



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##### Table of Contents

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 June 30, 2009, annual contractual commitments associated with lease obligations
were as follows (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|Remainder of 2009 |  | $ | 908  
|2010              |  |   | 1,743
|2011              |  |   | 1,784
|2012              |  |   | 1,838
|2013              |  |   | 1,893
|Thereafter        |  |   | 1,783
|                  |  |   |      
|Total             |  | $ | 9,949
|                  |  |   |      

Warranties

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



|                                                 |  |                            |       |   |                          |   |      |      |  |   |        |   |  |   |      |  
|------------------------------------------------ |  | -------------------------- | ----- | - | ------------------------ | - | ---- | ---- |  | - | ------ | - |  | - | ---- | -
|                                                 |  | Three months endedJune 30, |       |   | Six months endedJune 30, |  
|                                                 |  | 2009                       |       |   | 2008                     |   |      | 2009 |  |   | 2008   |  
|Balance at beginning of period                   |  | $                          | 1,087 |   |                          | $ | 722  |      |  | $ | 1,255  |   |  | $ | 537  |  
|Accruals for warranties issued during the period |  |                            | 153   |   |                          |   | 566  |      |  |   | 540    |   |  |   | 989  |  
|Warranty costs incurred during the period        |  |                            | (539  | ) |                          |   | (462 | )    |  |   | (1,094 | ) |  |   | (700 | )
|                                                 |  |                            |       |   |                          |   |      |      |  |   |        |   |  |   |      |  
|Balance at end of period                         |  | $                          | 701   |   |                          | $ | 826  |      |  | $ | 701    |   |  | $ | 826  |  
|                                                 |  |                            |       |   |                          |   |      |      |  |   |        |   |  |   |      |  

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 April 21, 2009, a jury awarded the Company approximately $36.3 million in damages, finding in favor of the Company on its breach
of contract, breach of the covenant of good faith and fair dealing, and misappropriation of trade secrets claims against Luna. The jury did not find in the Companys favor on its fraud claims against Luna, but did find that Lunas
misappropriation was willful or malicious. The verdict and recovery of damages is subject to customary post-trial motions and appeals, as well as collection risks.

After the verdict, the Company filed post-verdict motions seeking punitive damages and attorneys fees, as well as declaratory and equitable relief. Luna filed post-trial motions to reverse the verdicts or in the
alternative for reduction in damages or new trial. Those motions are pending review by Santa Clara Superior Court. On July 17, 2009, 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. Lunas bankruptcy petition requests that the bankruptcy court estimate the Companys damages at $1,258,177. The Company
will oppose Lunas request and will seek to have the automatic stay lifted so that the Santa Clara Superior Court can rule on the pending post-verdict motions and enter judgment. No receivable has been recorded on the balance sheet for any
amount relating to this verdict.



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##### Table of Contents

7. Long-term Debt

In August 2008, the Company entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line due in installments from April 2009 through September 2012
bearing annual interest equal to the U.S. Treasury note yield to maturity plus 3.5%, and a one-year $10 million revolving credit line, bearing interest at a floating per annum rate equal to the Prime Rate plus 1%. The interest rate on borrowings
under the equipment line becomes fixed for each borrowing at the time of the draw-down. The interest rate on borrowings under the 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 EBITDA amounts to
be specified, 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 covenant amounts and are currently in negotiations to extend the credit line past its August 2009 expiration date which may result in changes to the covenants described
above. As of June 30, 2009, the Company was in compliance with all specified financial covenants. 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
June 30, 2009 are as follows (in thousands):



|                                   |  |   |        |  
|---------------------------------- |  | - | ------ | -
|Remainder of 2009                  |  | $ | 2,119  |  
|2010                               |  |   | 4,070  |  
|2011                               |  |   | 3,849  |  
|2012                               |  |   | 2,743  |  
|                                   |  |   |        |  
|                                   |  |   | 12,781 |  
|Less: Amount representing interest |  |   | (1,195 | )
|                                   |  |   |        |  
|                                   |  |   | 11,586 |  
|Less: Current portion              |  |   | (3,565 | )
|                                   |  |   |        |  
|Long Term Portion                  |  | $ | 8,021  |  
|                                   |  |   |        |  



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##### Table of Contents

8. Stockholders Equity

Stock-based Compensation

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



|                                    |  |                            |       |                          |   |       |  |      |       |  |   |      
|----------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                    |  | Three months endedJune 30, |       | Six months endedJune 30,
|                                    |  | 2009                       |       | 2008                     |   | 2009  |  | 2008
|Cost of goods sold                  |  | $                          | 214   |                          | $ | 171   |  | $    | 437   |  | $ | 332  
|Research and development            |  |                            | 688   |                          |   | 763   |  |      | 1,308 |  |   | 1,333
|Selling, general and administrative |  |                            | 1,036 |                          |   | 1,978 |  |      | 2,817 |  |   | 3,270
|                                    |  |                            |       |                          |   |       |  |      |       |  |   |      
|Total                               |  | $                          | 1,938 |                          | $ | 2,912 |  | $    | 4,562 |  | $ | 4,935
|                                    |  |                            |       |                          |   |       |  |      |       |  |   |      

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



|                         |  |                            |  |                          |  |           |  |          
|------------------------ |  | -------------------------- |  | ------------------------ |  | --------- |  | ---------
|                         |  | Three months endedJune 30, |  | Six months endedJune 30,
|Employee Stock Options:  |  | 2009                       |  | 2008                     |  | 2009      |  | 2008     
|Expected volatility      |  | 61%                        |  | 48%-49%                  |  | 58%-61%   |  | 48%-51%  
|Risk-free interest rate  |  | 2.2%                       |  | 2.8%-3.7%                |  | 1.9%-2.2% |  | 2.8%-3.7%
|Expected term (in years) |  | 4.50                       |  | 5.00                     |  | 4.50-4.75 |  | 5.00     
|Expected dividend rate   |  | 0%                         |  | 0%                       |  | 0%        |  | 0%       

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



|                                      |  |                            |  |                          |  |           |  |          
|------------------------------------- |  | -------------------------- |  | ------------------------ |  | --------- |  | ---------
|                                      |  | Three months endedJune 30, |  | Six months endedJune 30,
|Non-Employee Stock Options:           |  | 2009                       |  | 2008                     |  | 2009      |  | 2008     
|Expected volatility                   |  | 59%-62%                    |  | 51%-61%                  |  | 59%-63%   |  | 51%-61%  
|Risk-free interest rate               |  | 2.4%-3.3%                  |  | 3.4%-4.0%                |  | 1.7%-3.3% |  | 2.7%-4.1%
|Remaining contractual term (in years) |  | 4.75-7.50                  |  | 5.75-8.50                |  | 4.75-7.75 |  | 5.75-8.75
|Expected dividend rate                |  | 0%                         |  | 0%                       |  | 0%        |  | 0%       



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##### Table of Contents

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



|                              |  |                            |  |                          |  |          |  |          
|----------------------------- |  | -------------------------- |  | ------------------------ |  | -------- |  | ---------
|                              |  | Three months endedJune 30, |  | Six months endedJune 30,
|Employee Stock Purchase Plan: |  | 2009                       |  | 2008                     |  | 2009     |  | 2008     
|Expected volatility           |  | 76%                        |  | 53%                      |  | 76%-126% |  | 51%-53%  
|Risk-free interest rate       |  | 0.4%                       |  | 2.2%                     |  | 0.4%     |  | 2.2%-3.5%
|Expected term (in years)      |  | 0.50                       |  | 0.50                     |  | 0.50     |  | 0.50     
|Expected dividend rate        |  | 0%                         |  | 0%                       |  | 0%       |  | 0%       

Stock Option and Equity Incentive Plans

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



|                                |  |                    |   |  |                                |       |                                          |      |                          |   |      
|------------------------------- |  | ------------------ | - |  | ------------------------------ | ----- | ---------------------------------------- | ---- | ------------------------ | - | -----
|                                |  | OptionsOutstanding |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractualTerm |      | AggregateIntrinsic Value
|                                |  | (In thousands)     |   |  |                                |       | (In years)                               |      | (In thousands)          
|Balances, December 31, 2008     |  | 4,203              |   |  | $                              | 12.33 |                                          |      |                          |   |      
|Options granted                 |  | 815                |   |  | $                              | 3.57  |                                          |      |                          |   |      
|Options exercised               |  | (217               | ) |  | $                              | 1.53  |                                          |      |                          |   |      
|Options cancelled               |  | (975               | ) |  | $                              | 10.94 |                                          |      |                          |   |      
|                                |  |                    |   |  |                                |       |                                          |      |                          |   |      
|Balances, June 30, 2009         |  | 3,826              |   |  | $                              | 11.43 |                                          | 5.83 |                          | $ | 2,872
|                                |  |                    |   |  |                                |       |                                          |      |                          |   |      
|Options vested at June 30, 2009 |  | 1,533              |   |  | $                              | 11.94 |                                          | 5.70 |                          | $ | 1,462
|                                |  |                    |   |  |                                |       |                                          |      |                          |   |      

As of June 30, 2009, total unamortized stock-based compensation related to unvested stock
options was $10,046,000, with a weighted-average recognition period of 2.57 years.

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



|                                            |  |                                  |   |  |                                        |      
|------------------------------------------- |  | -------------------------------- | - |  | -------------------------------------- | -----
|                                            |  | Restricted StockUnitsOutstanding |   |  | Weighted-Average FairValue WhenAwarded
|                                            |  | (In thousands)                   |   |  |                                       
|Restricted stock units at December 31, 2008 |  | 40                               |   |  | $                                      | 12.50
|Awarded                                     |  | 125                              |   |  | $                                      | 5.00 
|Vested                                      |  | (145                             | ) |  | $                                      | 6.15 
|                                            |  |                                  |   |  |                                        |      
|Restricted stock units at June 30, 2009     |  | 20                               |   |  | $                                      | 11.65
|                                            |  |                                  |   |  |                                        |      

As of June 30, 2009, there was approximately $94,000 of unrecognized compensation costs
related to restricted stock units which is expected to be recognized over a weighted-average period of 0.41 years.

As of June 30,
2009, 1,425,000 shares of common stock were available for grant under the 2006 Equity Incentive Plan.



12



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##### Table of Contents

9. Income Taxes

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



|                                                             |  |                          |     |      |   |    
|------------------------------------------------------------ |  | ------------------------ | --- | ---- | - | ---
|                                                             |  | Six months endedJune 30,
|                                                             |  | 2009                     |     | 2008
|Balance at beginning of period                               |  | $                        | 810 |      | $ | 600
|Additions based on tax positions related to the current year |  |                          | 79  |      |   |   
|                                                             |  |                          |     |      |   |    
|Balance at end of period                                     |  | $                        | 889 |      | $ | 600
|                                                             |  |                          |     |      |   |    

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.

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 endedJune 30, |         |   | Six months endedJune 30, |  
|                                                                                                   |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Net loss                                                                                           |  | $                          | (14,610 | ) |                          | $ | (14,906 | )    |  | $ | (28,934 | ) |  | $ | (26,538 | )
|                                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                   |  |                            |         |  
|Weighted-average common shares outstanding                                                         |  |                            | 35,190  |   |                          |   | 24,776  |      |  |   | 30,297  |   |  |   | 23,399  |  
|Weighted-average unvested common shares subject to repurchase and unvested restricted common stock |  |                            | (3      | ) |                          |   | (43     | )    |  |   | (4      | ) |  |   | (53     | )
|                                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Shares used to calculated basic and diluted net loss per share                                     |  |                            | 35,187  |   |                          |   | 24,733  |      |  |   | 30,293  |   |  |   | 23,346  |  
|                                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                   |  |                            |         |  
|Basic and diluted net loss per share                                                               |  | $                          | (0.42   | ) |                          | $ | (0.60   | )    |  | $ | (0.96   | ) |  | $ | (1.14   | )
|                                                                                                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

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):



|                                             |  |          |  |      
|-------------------------------------------- |  | -------- |  | -----
|                                             |  | June 30,
|                                             |  | 2009     |  | 2008 
|Stock options outstanding                    |  | 3,826    |  | 4,017
|Unvested restricted stock units              |  | 20       |  | 65   
|Unvested common shares subject to repurchase |  | 2        |  | 35   
|Proceeds from employee stock purchase plan   |  | 82       |  | 32   



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##### Table of Contents

11. Comprehensive Loss

Total comprehensive loss was as follows (in thousands):



|                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                              |  | Three months endedJune 30, |         |   | Six months endedJune 30, |  
|                                              |  | 2009                       |         |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Net loss                                      |  | $                          | (14,610 | ) |                          | $ | (14,906 | )    |  | $ | (28,934 | ) |  | $ | (26,538 | )
|Other comprehensive income:                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Change in unrealized gain/loss on investments |  |                            | (18     | ) |                          |   | (68     | )    |  |   | (88     | ) |  |   | (17     | )
|Foreign currency translation adjustment       |  |                            | 16      |   |                          |   | (4      | )    |  |   | 10      |   |  |   |        |  
|                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                            |  | $                          | (14,612 | ) |                          | $ | (14,978 | )    |  | $ | (29,012 | ) |  | $ | (26,555 | )
|                                              |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



14



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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

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. Since inception, we have devoted the majority of our resources to the development and commercialization of our Sensei
system.

To date, we have incurred net losses in each year since our inception and, as of June 30, 2009, we had an accumulated deficit
of $191.8 million. We expect our losses to continue through at least 2009 as we continue to expand the commercialization of our Sensei system and Artisan catheter and continue to develop new products. We have experienced significant quarterly
fluctuations in revenues primarily due to still being in the early stages of our commercial launch and, especially in the fourth quarter of 2008 and the first and second quarters of 2009, 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 second quarter of 2009 being lower than we anticipated. This included having no sales of
Sensei systems to United States customers in the second quarter of 2009. Losses in the second quarter of 2009 were also impacted by the write-off of non-recoverable fixed assets in the amount of $1.1 million related to the companys decision to
terminate its relationship with its European subcontractor for the manufacture of catheters. In 2009, we have initiated several cost-cutting measures, including a reduction in our work force in the first quarter of 2009 and the institution of four
mandatory one-week furloughs during the year.

We have financed our operations primarily through the sale of public and private equity
securities and the issuance of debt. Most recently, on April 22, 2009, we sold 11,692,000 shares of our common stock, resulting in approximately $35.3 million of net proceeds, after underwriting discounts and commissions and offering expenses.



15



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##### Table of Contents

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

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.

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, 2008 filed with the U.S. Securities and Exchange Commission. There have been no
significant changes to those policies in the six months ended June 30, 2009.

Financial Overview

Revenues

Our revenues consist
of sales of Sensei systems, Artisan catheters, other disposables and service contracts. We have experienced significant fluctuations in quarterly revenues, primarily due to still being in the early stages of our commercial launch and, especially in
the fourth quarter of 2008 and the first and second quarters of 2009, 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 second quarter of 2009 being lower than we anticipated. We expect revenue fluctuations to continue throughout 2009. We do not anticipate that revenues in 2009 will be sufficient to eliminate 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, service contract expenses and
warranty expenses. We expect that cost of goods sold both as a percentage of revenue and on a dollar basis will continue to vary from quarter to quarter in 2009 due, among other things, to fluctuations in revenue levels, average selling prices, the
mix of products sold, manufacturing levels and manufacturing yields.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, software development, product development, quality assurance and clinical and
regulatory expenses, including costs to develop our Sensei system and disposable Artisan catheters. Research and development expenses include employee compensation, including stock-based compensation expense, consulting services, outside services,
materials, supplies, depreciation and travel. We expense research and development costs as they are



16



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##### Table of Contents

incurred. We expect research and development expenses for the remainder of 2009 to decrease as compared to 2008 levels due primarily to our reduced employee
costs, including the effects of quarterly one-week furloughs, and as we carefully manage expenses related to our development activities for the electrophysiology market 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 for the remainder of 2009 to decrease as compared to 2008 levels due primarily to our reduced employee
costs, including the effects of quarterly one-week furloughs.

Results of Operations

Comparison of the three months ended June 30, 2009 to the three months ended June 30, 2008

Revenues



|                       |  |                            |       |        |   |       |  |   |        |   |  |     |   
|---------------------- |  | -------------------------- | ----- | ------ | - | ----- |  | - | ------ | - |  | --- | --
|                       |  | Three months endedJune 30, |       | Change |  
|(Dollars in thousands) |  | 2009                       |       | 2008   |   | $     |  |   | %      |  
|Revenues               |  | $                          | 3,306 |        | $ | 5,813 |  | $ | (2,507 | ) |  | (43 | )%

Revenues primarily related to the following:



|                                                      |  |                            |     |      |   |    
|----------------------------------------------------- |  | -------------------------- | --- | ---- | - | ---
|                                                      |  | Three months endedJune 30,
|                                                      |  | 2009                       |     | 2008
|United States Sensei system units                     |  |                            |    |      |   | 7  
|International Sensei system units                     |  |                            | 3   |      |   | 1  
|                                                      |  |                            |     |      |   |    
|Total Sensei system units                             |  |                            | 3   |      |   | 8  
|                                                      |  |                            |     |      |   |    
|Sensei system average selling price (in thousands)    |  | $                          | 556 |      | $ | 614
|                                                      |  |                            |     |      |   |    
|Artisan catheter units                                |  |                            | 626 |      |   | 284
|                                                      |  |                            |     |      |   |    
|Artisan catheter average selling price (in thousands) |  | $                          | 1.6 |      | $ | 1.8
|                                                      |  |                            |     |      |   |    

Our average selling prices of Sensei systems in the second quarter of 2009 were negatively
impacted by pressures related to the general economic and capital market conditions which have resulted in discounting and by the impact of unfavorable movements in exchange rates. Catheter sales for the second quarter of 2009 included the sale of
approximately 100 catheters to a single international medical center. 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 in the
fourth quarter of 2008 and the first and second quarters of 2009, 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 second quarter of 2009 being lower than we anticipated. During the fourth quarter of 2008 and into the first two quarters of 2009, in a period of economic uncertainty, we saw many potential customers
lengthen their sales cycles and postpone purchase decisions. We expect revenue fluctuations to continue throughout 2009.



17



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##### Table of Contents

Cost of Goods Sold



|                            |  |                            |       |   |        |   |       |   |  |   |        |   |  |     |   
|--------------------------- |  | -------------------------- | ----- | - | ------ | - | ----- | - |  | - | ------ | - |  | --- | --
|                            |  | Three months endedJune 30, |       |   | Change |  
|(Dollars in thousands)      |  | 2009                       |       |   | 2008   |   |       | $ |  |   | %      |  
|Cost of goods sold          |  | $                          | 2,946 |   |        | $ | 4,735 |   |  | $ | (1,789 | ) |  | (38 | )%
|As a percentage of revenues |  |                            | 89.1  | % |        |   | 81.5  | % |  |   |        |   |  |     |   

Cost of goods sold for the second quarter of 2009 included stock-based compensation expense of
$214,000 as compared to $171,000 for the second quarter of 2008. Cost of goods sold for the second quarter of 2009 include the effects of increases in the overhead applied to our inventory, primarily due to our move into a new facility during the
third quarter of 2008. Additionally, cost of goods sold as a percentage of revenues for the second quarter of 2009 was negatively impacted by the decreased level of sales. We expect that cost of goods sold both as a percentage of revenue and on a
dollar basis will continue to vary from quarter to quarter during 2009 due, among other things, to fluctuations in revenues, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development



|                         |  |                            |       |        |   |       |  |   |        |   |  |     |   
|------------------------ |  | -------------------------- | ----- | ------ | - | ----- |  | - | ------ | - |  | --- | --
|                         |  | Three months endedJune 30, |       | Change |  
|(Dollars in thousands)   |  | 2009                       |       | 2008   |   | $     |  |   | %      |  
|Research and development |  | $                          | 4,951 |        | $ | 6,300 |  | $ | (1,349 | ) |  | (21 | )%

The change in research and development expenses in the second quarter of 2009 compared to the
second quarter of 2008 was primarily due to the following:



| |  |  | A decrease of $0.8 million in employee-related expenses, including travel expenses, primarily due to a decrease of 20 in average research and development headcount
and the effects of the Companys one-week furlough during the second quarter of 2009; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.5 million in outside services, materials and overhead expenses.
| | - |  | --------------------------------------------------------------------------------

Total research and development expenses in the second quarter of 2009 included $688,000 of stock-based compensation expense compared to $763,000 in the
second quarter of 2008. We expect research and development expenses for the remainder of 2009 to decrease as compared to 2008 levels due primarily to our reduced employee costs, including the effects of quarterly one-week furloughs, and as we
carefully manage expenses related to our development activities for the electrophysiology market and exploring certain other potential future applications of our technology.

Selling, General and Administrative



|                                    |  |                            |       |        |   |        |  |   |      |   |  |    |   
|----------------------------------- |  | -------------------------- | ----- | ------ | - | ------ |  | - | ---- | - |  | -- | --
|                                    |  | Three months endedJune 30, |       | Change |  
|(Dollars in thousands)              |  | 2009                       |       | 2008   |   | $      |  |   | %    |  
|Selling, general and administrative |  | $                          | 9,904 |        | $ | 10,007 |  | $ | (103 | ) |  | (1 | )%

The change in selling, general and administrative expenses in the second quarter of 2009 compared
to the second quarter of 2008 was primarily due to the following:



| |  |  | A $1.1 million charge in 2009 for the write-off of non-recoverable fixed assets related to the Companys decision to terminate its relationship with its
European subcontractor for the manufacture of catheters;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

| |  |  | An increase of $0.9 million in litigation costs associated with our trial against Luna Innovations Incorporated;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.3 million in supplies, equipment and overhead expenses;
| | - |  | -------------------------------------------------------------------------



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



| |  |  | A decrease of $0.2 million in professional service fees exclusive of Luna litigation costs;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.5 million in employee-related expenses, including sales commissions and travel expenses, due primarily to a decrease in average general and
administrative headcount of 12, partially offset by an increase in average sales and marketing headcount of two, and the effects of the Companys one-week furlough during the second quarter of 2009;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.7 million in lease costs allocated to selling, general and administrative expenses as a result of all lease costs for our new facility prior to our
occupancy in the third quarter of 2008 having been charged to selling, general and administrative expenses; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.9 million in stock-based compensation expense due primarily to the effects of our lower average stock price and lower headcount.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses in the second quarter of 2009 included $1.0 million of stock-based
compensation expense compared to $1.9 million in the second quarter of 2008. We expect our selling, general and administrative expenses for the remainder of 2009 to decrease as compared to 2008 levels primarily due to reduced employee costs,
including the effects of quarterly one-week furloughs.

Interest Income



|                       |  |                            |    |        |   |     |  |   |      |   |  |     |   
|---------------------- |  | -------------------------- | -- | ------ | - | --- |  | - | ---- | - |  | --- | --
|                       |  | Three months endedJune 30, |    | Change |  
|(Dollars in thousands) |  | 2009                       |    | 2008   |   | $   |  |   | %    |  
|Interest income        |  | $                          | 88 |        | $ | 430 |  | $ | (342 | ) |  | (80 | )%

Interest income decreased in the second quarter of 2009 compared to the second quarter of 2008
primarily due to significantly lower interest rate returns available in the market for highly rated investments as compared to the rates available in the previous year. We expect our quarterly interest income to remain consistent with the second
quarter 2009 amounts for the remainder of 2009.

Interest and Other Expense, net



|                                |  |                            |      |   |        |   |      |   |  |   |     |   |  |    |  
|------------------------------- |  | -------------------------- | ---- | - | ------ | - | ---- | - |  | - | --- | - |  | -- | -
|                                |  | Three months endedJune 30, |      |   | Change |  
|(Dollars in thousands)          |  | 2009                       |      |   | 2008   |   |      | $ |  |   | %   |  
|Interest and other expense, net |  | $                          | (203 | ) |        | $ | (107 | ) |  | $ | (96 | ) |  | 90 | %

Interest and other expense, net, consists mainly of interest expense and net realized and
unrealized foreign exchange gains and losses. Net foreign exchange losses increased in the second quarter of 2009 as compared to the second quarter of 2008 due primarily to the impact of unfavorable movements in the Euro exchange rate on our
Euro-denominated accounts receivable. Interest expense increased in the second quarter of 2009 as compared to the second quarter of 2008 primarily due to the interest on our term equipment line. We expect our interest expense to increase in the
remainder of 2009 over 2008 levels as we have a full year of interest related to the term equipment line.



19



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##### Table of Contents

Comparison of the six months ended June 30, 2009 to the six months ended June 30, 2008

Revenues



|                       |  |                          |        |        |   |        |  |   |        |   |  |     |   
|---------------------- |  | ------------------------ | ------ | ------ | - | ------ |  | - | ------ | - |  | --- | --
|                       |  | Six months endedJune 30, |        | Change |  
|(Dollars in thousands) |  | 2009                     |        | 2008   |   | $      |  |   | %      |  
|Revenues               |  | $                        | 10,429 |        | $ | 12,057 |  | $ | (1,628 | ) |  | (14 | )%

Revenues primarily related to the following:



|                                                      |  |                          |       |      |   |    
|----------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ---
|                                                      |  | Six months endedJune 30,
|                                                      |  | 2009                     |       | 2008
|United States Sensei system units                     |  |                          | 7     |      |   | 12 
|International Sensei system units                     |  |                          | 6     |      |   | 4  
|                                                      |  |                          |       |      |   |    
|Total Sensei system units                             |  |                          | 13    |      |   | 16 
|                                                      |  |                          |       |      |   |    
|Sensei system average selling price (in thousands)    |  | $                        | 578   |      | $ | 644
|                                                      |  |                          |       |      |   |    
|Artisan catheter units                                |  |                          | 1,227 |      |   | 680
|                                                      |  |                          |       |      |   |    
|Artisan catheter average selling price (in thousands) |  | $                        | 1.6   |      | $ | 1.9
|                                                      |  |                          |       |      |   |    

Our average selling prices of Sensei systems in the first six months of 2009 were negatively
impacted by pressures related to the general economic and capital market conditions which have resulted in discounting and by the impact of unfavorable movements in exchange rates. Catheter sales for 2009 included the sale of approximately 100
catheters to a single international medical center. 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 in the fourth quarter of
2008 and the first and second quarters of 2009, general economic and capital market conditions. During the fourth quarter of 2008 and into the first two quarters of 2009, in a period of economic uncertainty, we saw many potential customers lengthen
their sales cycles and postpone purchase decisions.

Cost of Goods Sold



|                            |  |                          |       |   |        |   |       |   |  |   |        |   |  |     |   
|--------------------------- |  | ------------------------ | ----- | - | ------ | - | ----- | - |  | - | ------ | - |  | --- | --
|                            |  | Six months endedJune 30, |       |   | Change |  
|(Dollars in thousands)      |  | 2009                     |       |   | 2008   |   |       | $ |  |   | %      |  
|Cost of goods sold          |  | $                        | 8,186 |   |        | $ | 9,672 |   |  | $ | (1,486 | ) |  | (15 | )%
|As a percentage of revenues |  |                          | 78.5  | % |        |   | 80.2  | % |  |   |        |   |  |     |   

Cost of goods sold for the first six months of 2009 included stock-based compensation expense of
$437,000 as compared to $332,000 for the first six months of 2008. Cost of goods sold for the first six months of 2009 include the effects of increases in the overhead applied to our inventory, primarily due to our move into a new facility during
the third quarter of 2008. Additionally, cost of goods sold as a percentage of revenues for the first six months of 2009 benefited from manufacturing efficiencies as we have reduced the cost of producing our products, partially offset by the
negative impact of decreased level of sales.



20



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##### Table of Contents

Operating Expenses

Research and Development



|                         |  |                          |        |        |   |        |  |   |      |   |  |    |   
|------------------------ |  | ------------------------ | ------ | ------ | - | ------ |  | - | ---- | - |  | -- | --
|                         |  | Six months endedJune 30, |        | Change |  
|(Dollars in thousands)   |  | 2009                     |        | 2008   |   | $      |  |   | %    |  
|Research and development |  | $                        | 10,602 |        | $ | 11,514 |  | $ | (912 | ) |  | (8 | )%

The change in research and development expenses in the first six months of 2009 compared to the
first six months of 2008 was primarily due to the following:



| |  |  | A decrease of $1.2 million in employee-related expenses, including travel expenses, primarily due to a decrease of 12 in average research and development headcount
and the effects of the Companys quarterly one-week furloughs during 2009; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.3 million in outside services, materials and overhead expenses.
| | - |  | ---------------------------------------------------------------------------------

Total research and development expenses in the first six months of 2009 and the first six months of 2008 included $1.3 million of stock-based
compensation expense.

Selling, General and Administrative



|                                    |  |                          |        |        |   |        |  |   |       |  |    |  
|----------------------------------- |  | ------------------------ | ------ | ------ | - | ------ |  | - | ----- |  | -- | -
|                                    |  | Six months endedJune 30, |        | Change |  
|(Dollars in thousands)              |  | 2009                     |        | 2008   |   | $      |  | % |      
|Selling, general and administrative |  | $                        | 20,015 |        | $ | 18,084 |  | $ | 1,931 |  | 11 | %

The change in selling, general and administrative expenses in the first six months of 2009
compared to the first six months of 2008 was primarily due to the following:



| |  |  | An increase of $2.4 million in litigation costs associated with our trial against Luna Innovations Incorporated;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | A $1.1 million charge in 2009 for the write-off of non-recoverable fixed assets related to the companys decision to terminate its relationship with its
European subcontractor for the manufacture of catheters;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $1.0 million charge for executive severance in 2009, consisting of $0.4 million of severance and $0.6 million of stock-based compensation;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.6 million in supplies, equipment and overhead expenses;
| | - |  | -------------------------------------------------------------------------



| |  |  | A decrease of $0.2 million in employee-related expenses, exclusive of executive severance, including sales commissions and travel expenses, due primarily to a
decrease in average general and administrative headcount of 10, partially offset by an increase in average sales and marketing headcount of three, and the effects of the Companys quarterly one-week furloughs during 2009;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.3 million in non-compensation marketing expenses;
| | - |  | ------------------------------------------------------------------



| |  |  | A decrease of $0.4 million in professional service fees exclusive of Luna litigation costs;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | A decrease of $1.1 million in stock-based compensation expense, exclusive of stock compensation related to executive severance, due primarily to the effects of our
lower average stock price and lower headcount; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $1.2 million in lease costs allocated to selling, general and administrative expenses as a result of all lease costs for our new facility prior to our
occupancy in the third quarter of 2008 having been charged to selling, general and administrative expenses.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

Selling, general and administrative expenses in the first six months of 2009 included $2.8 million of
stock-based compensation expense compared to $3.3 million in the first six months of 2008.

Interest Income



|                       |  |                          |     |        |   |     |  |   |      |   |  |     |   
|---------------------- |  | ------------------------ | --- | ------ | - | --- |  | - | ---- | - |  | --- | --
|                       |  | Six months endedJune 30, |     | Change |  
|(Dollars in thousands) |  | 2009                     |     | 2008   |   | $   |  |   | %    |  
|Interest income        |  | $                        | 218 |        | $ | 838 |  | $ | (620 | ) |  | (74 | )%

Interest income decreased in the first six months of 2009 compared to the first six months of 2008
primarily due to significantly lower interest rate returns available in the market for highly rated investments as compared to the rates available in the previous year.

Interest and Other Expense, net



|                                |  |                          |      |   |        |   |      |   |  |   |      |   |  |     |  
|------------------------------- |  | ------------------------ | ---- | - | ------ | - | ---- | - |  | - | ---- | - |  | --- | -
|                                |  | Six months endedJune 30, |      |   | Change |  
|(Dollars in thousands)          |  | 2009                     |      |   | 2008   |   |      | $ |  |   | %    |  
|Interest and other expense, net |  | $                        | (778 | ) |        | $ | (163 | ) |  | $ | (615 | ) |  | 377 | %

Interest and other expense, net, consists mainly of interest expense and net realized and
unrealized foreign exchange gains and losses. Net foreign exchange losses increased in the first six months of 2009 as compared to the first six months of 2008 due primarily to the impact of unfavorable movements in the Euro exchange rate on our
Euro-denominated accounts receivable. Interest expense increased in the first six months of 2009 as compared to the first six months of 2008 primarily due to the interest on our term equipment line.

Liquidity and Capital Resources

We have incurred
losses since our inception in September 2002 and, as of June 30, 2009 we had an accumulated deficit of $191.8 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. On April 22, 2009, we sold 11,692,000 shares of our common stock, resulting in approximately $35.3 million of net proceeds, after underwriting discounts and commissions and 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. We have 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 expires in August 2009. We are currently in negotiations with Silicon Valley Bank to extend the credit line past its August 2009 expiration date. 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 EBITDA amounts to be specified and fulfilling
certain reporting requirements.

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.



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Cash flow activity for the six months ended June 30, 2009 and 2008 is summarized as follows:



|                                          |  |                          |         |   |      |   |         |  
|----------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                          |  | Six months endedJune 30, |        
|                                          |  | 2009                     |         |   | 2008 |  
|Cash used in operating activities         |  | $                        | (18,117 | ) |      | $ | (23,565 | )
|Cash used in investing activities         |  |                          | (14,337 | ) |      |   | (15,104 | )
|Cash provided by financing activities     |  |                          | 35,021  |   |      |   | 39,102  |  
|                                          |  |                          |         |   |      |   |         |  
|Net decrease in cash and cash equivalents |  | $                        | 2,567   |   |      | $ | 433     |  
|                                          |  |                          |         |   |      |   |         |  

Net Cash Used in Operating Activities

Net cash used in operating activities in the first six months of 2009 and 2008 primarily reflects the net loss for those periods, partially offset by
non-cash charges such as depreciation and amortization, stock-based compensation and the charge of impaired assets in 2009. Additionally, net cash used in operating activities for the first six months of 2009 was positively impacted by accounts
receivable collections as we collected on higher previous period accounts receivable balances than in the same periods last year. Cash flows for the first six months of 2009 were negatively impacted by decreasing accounts payable and accrued
liability balances due to the timing of payments and the decrease in operating expenses. Cash flows for the first six months of 2008 were negatively impacted by increasing accounts receivable and inventory balances as the Company experienced and
prepared for early revenue growth.

Net Cash Used in Investing Activities

Net cash used in investing activities in the first six months of 2009 and 2008 primarily relates to the proceeds from and purchases of investments as we
manage our investment portfolio to provide interest income and liquidity. Investing activities for the first six months of 2008 were also negatively impacted by the purchase of property and equipment as we invested in the build-out of our new
facility.

Net Cash Provided by Financing Activities

Net cash provided by financing activities in the first six months of 2009 and 2008 was primarily due to cash received from our equity offerings in April
2008 and April 2009, in additions to proceeds from our employee stock purchase plan and the exercise of stock options, partially offset by repayments of long-term debt.

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, especially in the fourth
quarter of 2008 and the first and second quarters of 2009, we saw many potential customers lengthen their sales cycles and postpone purchase decisions due in large part to 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 second quarter of 2009 being lower than we anticipated. In an attempt to reduce our future spending,
we reduced our work force in the third quarter of 2008 and again in the first quarter of 2009 and instituted quarterly one-week furloughs for 2009. We anticipate that we will continue to incur substantial net losses for at least the remainder of
2009 as we continue to commercialize our products, maintain 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. On April 22, 2009, we sold 11,692,000 shares of our common stock, resulting in approximately $35.3 million of net proceeds, after underwriting discounts and
commissions and offering expenses.

We believe our existing cash, cash equivalents and short-term investment balances and the interest
income we earn on these balances in addition to the amounts available under our revolving credit line and amounts received through the sale of our products will be sufficient to meet our anticipated cash requirements through at least the next year.
However, if our cash flows from operating



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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
the Company would otherwise seek to commercialize and we may require additional capital. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain 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 future capital requirements will
depend on many factors, including but not limited to the following:



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



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



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



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



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



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



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



| |  |  | the acquisition 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 June 30, 2009:



|                              |  |                                       |        |                 |   |           |  |           |        |                  |   |       |  |   |      
|----------------------------- |  | ------------------------------------- | ------ | --------------- | - | --------- |  | --------- | ------ | ---------------- | - | ----- |  | - | -----
|                              |  | Payments Due by Period (in thousands)
|Contractual Obligations       |  | Total                                 |        | Less than1 Year |   | 1-3 Years |  | 3-5 years |        | More than5 Years
|Operating lease  real estate |  | $                                     | 9,949  |                 | $ | 908       |  | $         | 3,527  |                  | $ | 3,731 |  | $ | 1,783
|Debt                          |  |                                       | 12,781 |                 |   | 2,119     |  |           | 7,919  |                  |   | 2,743 |  |   |     
|                              |  |                                       |        |                 |   |           |  |           |        |                  |   |       |  |   |      
|Total                         |  | $                                     | 22,730 |                 | $ | 3,027     |  | $         | 11,446 |                  | $ | 6,474 |  | $ | 1,783
|                              |  |                                       |        |                 |   |           |  |           |        |                  |   |       |  |   |      



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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 may also have minimum royalty obligations under the terms of our cross license agreement with Intuitive Surgical, Inc. Our agreement to acquire AorTx includes possible future payments of up
to $30.0 million payable upon achievement of regulatory clearances and revenue and partnering milestones. Such future payments are to be made 50% in cash and 50% in shares of our common stock. Pursuant to the terms of the AorTx acquisition, we
elected to license the acquired AorTx technologies back to an entity to be formed by the former AorTx stockholders rather than make a $5 million payment to the former AorTx stockholders that would have been payable on May 15, 2009. We are
currently negotiating a potential modification of the license terms with the former AorTx stockholders.

Recent Accounting Pronouncements

See Recent Accounting Pronouncements in Note 2 to our financial statements.

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 June 30, 2009, the fair value of our cash, cash equivalents and short-term investments was
approximately $51.4 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 six months ended June 30, 2009, sales denominated in foreign currencies were approximately 20% of total revenue. A
hypothetical 10% increase in the United States dollar exchange rate used would have resulted in a decrease of approximately $213,000 in revenues for the first six months of 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on our managements evaluation (with the participation of our principal executive officer and principal financial officer),
as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended, (the Exchange Act)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and

Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



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Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
second quarter of our fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and implemented, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed
relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual
acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated objectives under all potential future conditions.

ITEM 4T. CONTROLS AND PROCEDURES

Not applicable.

PART II. OTHER
INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 22, 2007, we filed suit in Santa Clara Superior Court against Luna Innovations Incorporated, or Luna, alleging that Luna had, among other
things, breached a 2006-2007 development and intellectual property agreement with us. On April 21, 2009, after an approximately four week trial, a jury awarded us approximately $36.3 million in damages, finding in our favor on our breach of
contract, breach of the covenant of good faith and fair dealing, and misappropriation of trade secrets claims against Luna. The jury did not find in our favor on our fraud claims against Luna, but did find that Lunas misappropriation was
willful or malicious. The verdict and recovery of damages is subject to customary post-trial motions and appeals, as well as collection risks.

After the verdict, we filed post-verdict motions seeking punitive damages and attorneys fees, as well as declaratory and equitable relief. Luna filed post-trial motions to reverse the verdicts or in the alternative for reduction in
damages or new trial. Those motions are pending review by the Santa Clara Superior Court. On July 17, 2009, 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. Lunas bankruptcy petition includes a request that the bankruptcy court estimate our damages at $1,258,177. We will oppose Lunas request and
will seek to have the automatic stay lifted so that the Santa Clara Superior Court can rule on the pending post-verdict motions and enter judgment.



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ITEM 1A. RISK FACTORS

Risks Related to Our Business

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

We are a medical device company with a limited operating history and first
recognized revenues in the second quarter of 2007. Prior to the second quarter of 2007, we were a development stage company. We have been engaged in research and product development since our inception in late 2002. Our Sensei 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 June 30, 2009, we have also received regulatory approvals in Russia and Australia. The future success of
our business will depend on our ability to manufacture and assemble our 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.

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 since the fourth quarter of 2008, including especially the credit and capital markets, have been extremely 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 products 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 products through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and
other services to our customers. 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 products, including, among others:



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



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| |  |  | 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 products. If we fail to select appropriate distributors or effectively use our distributors or sales personnel and coordinate our efforts for distribution of our products in the European
Union or if their and our sales and marketing strategies are not effective in generating sales of our products, our revenues would be adversely affected and we may never become profitable.

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

We do not have significant experience in
manufacturing, assembling or testing our products on a commercial scale. In addition, for our Sensei system, we subcontract the manufacturing of major components and complete the final assembly and testing of those components in-house. 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. The recall was closed in June 2008. We may encounter other manufacturing issues that result in our being unable to meet the expected demand for our
Sensei system or Artisan catheters, maintain control over our expenses or otherwise successfully increase our manufacturing capabilities. If we are unable to satisfy demand for our Sensei system or Artisan catheters, our ability to generate revenue
could be impaired and hospitals may instead purchase, or physicians may use, our competitors products. Since our Sensei system requires the use of disposable Artisan catheters, our failure to meet demand for Artisan catheters from hospitals
that have purchased our Sensei system could adversely affect the market acceptance of our products and damage our commercial reputation.

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



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

We depend on third-party manufacturers to produce most of the components of our Sensei system and other products, and have not entered into formal agreements with several of these third parties. We also depend on
various third-party suppliers for various components we use in our Sensei systems and for our Artisan catheters and sheaths. For example, 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.



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

The process of seeking
regulatory clearance or approval to market a medical device is expensive and time-consuming and clearance or approval is never guaranteed and, even if granted, clearance or approval may be suspended or revoked. In May 2007, we received FDA clearance
in the United States to commercialize our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control, for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording
systems. Because the FDA has determined that there is a reasonable likelihood that our products could be used by physicians for uses not encompassed by the scope of the present FDA clearance and that such uses may cause harm, we are required to
label our products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been established. 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 to market our Sensei system for uses other than
those currently cleared by the FDA. We cannot assure you that the FDA would not impose a more burdensome level of premarket review on other intended uses or modifications to approved products. We may seek future clearances or approvals of our Sensei
system for other indications, including atrial fibrillation or other cardiac ablation procedures but there can be no assurance as to the timing or potential for success of those efforts if undertaken. We received the CE Mark in Europe for our Sensei
system in September 2006 and for our Artisan catheters in May 2007, 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 clearance, our financial condition and cash flow may be adversely affected, and our ability to grow domestically and internationally may be limited.

If physicians and hospitals do not believe that our products 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 products unless they determine that our Sensei system provides a safe and effective alternative to existing treatments. Since we have received FDA clearance to market our Sensei system and disposable
Artisan catheters only for guiding catheters to map the heart anatomy, we will not be able to label or promote these products, or train physicians, for use in guiding catheters for cardiac ablation procedures 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. Studies are currently under way outside
the United States comparing the safety, usability and success of the treatment of atrial fibrillation with our Sensei system to manual techniques. 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. 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,



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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.

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

We have experienced substantial net losses since our inception in late
2002. At June 30, 2009, we had an accumulated deficit of $191.8 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, 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. Also, 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 and general and administrative expenses to decrease in 2009 from 2008 levels, but to remain significant as we maintain the infrastructure
necessary to support operating as a public company, develop our intellectual property portfolio and incur other intellectual property related legal expenses, including litigation expenses. Because we may not be successful in significantly increasing
sales of our products, the extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations. If we require more time than we expect to generate significant revenue and achieve
profitability, we may not be able to continue our operations. Even if we achieve significant revenues, we may never become profitable or we may choose to pursue a strategy of increasing market penetration and presence at the expense of
profitability.



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

We have received FDA clearance of our
Sensei system and Artisan catheters only to facilitate manipulation, positioning and control for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording systems, which is a critical step in the
identification of the heart tissue generating abnormal heart rhythms that may require ablation or other treatment. Because the FDA has determined that there is a reasonable likelihood that physicians may choose to use our products off-label, and
that harm may result, we are required to label our products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been established. We may
subsequently seek regulatory clearance for use of our Sensei system for use with other catheters, including ablation catheters, or for a variety of other interventional procedures in electrophysiology, including atrial fibrillation and other
cardiovascular procedures. Our business and future growth will depend primarily on the use of our Sensei system in the treatment of atrial fibrillation and other cardiovascular procedures, for which we do not yet, and may never, have FDA clearance
or approval.

Unless and until we receive regulatory clearance or approval for use of our Sensei system 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
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.



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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.

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

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

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

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



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



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



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



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



| |  |  | additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage;
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| |  |  | 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 during the first and second quarters of 2009, in a period of economic uncertainty,
we have seen sales cycles for many potential customers lengthen and purchase decisions postponed. 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 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;
| | - |  | ------------------------------------------



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| |  |  | 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 the six months ended June 30, 2009, net cash used in operating activities was $18.1
million. We expect that our cash used by operations will be significant in each of the next several years, and we may need additional funds to continue the commercialization of our Sensei system. 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 costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related
activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

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

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

Our Sensei system is designed to have the potential for applications beyond electrophysiology, including in a variety of endoscopic
procedures which require a control catheter to approach diseased tissue. We further believe that our Sensei system can provide multiple opportunities to improve the speed and capability of many diagnostic and therapeutic procedures. We will be
required to seek a separate 510(k) clearance or PMA 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. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities. Moreover, we may devote resources to
developing products in these



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additional areas but may be unable to justify the value proposition or otherwise develop a commercial market for products we develop in these areas, if any.
In that case, the return on investment in these additional areas may be limited, which could negatively affect our results of operations.

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

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

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. We expect that in 2009 St. Jude will introduce a new version of its Ensite system that initially will not be compatible with our CoHesion Module, however St. Jude has indicated that it plans to achieve
this compatibility 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.

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

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



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



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



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



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



| |  |  | the difficulty and cost of completing the development of and regulatory approval for technologies acquired at a development stage;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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



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



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



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

We acquired AorTx with the expectation that the acquisition would result
in various benefits including, among other things, leveraging our Sensei system into the developing market for percutaneous aortic heart valve replacement; however, we have decided to pursue this market opportunity independently from the development
of AorTxs technology. We have eliminated the research and development positions focused on developing the AorTx valve technology and while we continue to pursue the application of robotics to structural heart procedures, we do not expect that
the technologies acquired from AorTx will form a material, or any, part of that strategy. Pursuant to the terms of the AorTx acquisition, we elected to license the acquired AorTx technologies back to an entity to be formed by the former AorTx
stockholders rather than be required to make a $5 million payment to the former AorTx stockholders that would have been payable on May 15, 2009. We are currently negotiating a potential modification of the license terms with the former AorTx
stockholders. A modification of the license back of the AorTx technologies, or other risks associated with acquisitions which may materialize, could adversely affect our stock price.

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



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

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

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

We anticipate that third-party payors will continue to reimburse hospitals and physicians under existing
billing codes for the vast majority of the procedures involving our products. We expect that healthcare facilities and physicians in the United States will 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 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 Center for Medicare and Medicaid services updates the MSDRG annually effective October 1 through September 30th of the following
year. The proposed rule stating anticipated changes will be published June 2009 with a period for comments and the final rule becoming effective October 1, 2010. 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.



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

We are highly dependent on the principal members of our management and scientific staff, in particular Frederic Moll, M.D., our
Founder and Chief Executive Officer and one of our directors. Dr. Moll has extensive experience in the medical device industry, and we believe his expertise in the robotic device field may enable us to have proposals reviewed by key hospital
decision-makers earlier in the sales process than may otherwise be the case. 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.

Additionally, in the third quarter of 2008, the
first quarter of 2009 and in July 2009, we reduced our work force. This 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 personnel, we may be unable to continue our development and commercialization activities.

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

Our future revenue and operating results will depend on our ability to manage the 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;
| | - |  | ---------------------------------------------------------------



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



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



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



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



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



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



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



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

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

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

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

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

Our research and development,
manufacturing and clinical processes involve the handling of potentially harmful biological materials as well as other hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and
disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of
remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes.
Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political,
business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or
existing laws or regulations could harm our business, financial condition and results of operations.

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

A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. During the first quarter
of fiscal 2006, we adopted the provisions of the Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS No. 123(R), Share-Based Payment, which replaced Statement of
Financial Accounting Standards No. 123, or SFAS 123, Accounting for Stock-Based Compensation and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. Adoption of this statement has had a significant impact
on our financial statements since 2006 and is expected to have a



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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.

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. 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 June 30, 2009, we were in compliance with all specified financial covenants. If we fail to comply with any of the loan
covenants, we could be deemed to have an event of default. In the case of an event of default, we could be required to immediately remit all outstanding funds then due under the facility; or prepare our collateral for sale to satisfy the amount of
outstanding funds owed to Silicon Valley Bank. 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.
| | - |  | ----------------------------------------------------

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

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



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

We cannot assure you that we will obtain the patent protection we seek, that any protection we do obtain will be found valid and
enforceable if challenged or that 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



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that a third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to bar the
manufacture and sale of our Sensei system in the United States or elsewhere. We may also choose to defend ourselves by initiating litigation or administrative proceedings to clarify or seek a declaration of our rights. As competition in our market
grows, the possibility of a patent infringement claim against us or litigation we will initiate increases.

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

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.



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

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



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financial condition and results of operations. Due to the movement toward harmonization of standards in the European Union, we expect a changing regulatory
environment in Europe 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



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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 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. 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.

If required by the FDA to do so, 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.

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



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| |  |  | 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 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.



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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 July 31, 2009, our stock price has fluctuated from a low of $2.55 to a high of $39.32. The market price for our common stock may be affected by a number of factors, including:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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

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

Our executive officers, directors and stockholders holding 5 percent or
more of our outstanding common stock beneficially own or control approximately 30.3 percent of the outstanding shares of our common stock as of July 31, 2009. 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.

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



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| |  |  | 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 5 percent stockholders, which may be subject to volume limitations. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. Such
sales could reduce the market price of our common stock.



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

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

(a) Sales of Unregistered Securities

Not applicable

(b) Uses of Proceeds from Sale of Registered Securities

Not applicable

(c) Purchases of Equity
Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

The Companys 2009 Annual meeting of Stockholders was held on June 17, 2009 at our corporate headquarters in Mountain View, California. The
following proposals were submitted to a vote of stockholders:



| |  | The election of two directors to hold office until the 2012 Annual Meeting of Stockholders and until the directors successor is elected and has qualified, or,
if sooner, until the directors death, resignation or removal;
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| |  | The re-approval of Hansen Medical, Inc. 2006 Equity Incentive Plan; and
|- |  | -----------------------------------------------------------------------



| |  | The ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

The holders of our common stock voted as follows:

Board of Director Election Results



|                               |  |            |  |               
|------------------------------ |  | ---------- |  | --------------
|Nominee                        |  | Votes For  |  | Votes Withheld
|Russell C. Hirsch, M.D., Ph.D. |  | 22,318,347 |  | 848,445       
|Frederic H. Moll, M.D.         |  | 22,958,765 |  | 208,027       

Both nominees were elected to serve as directors until our 2012 Annual Meeting of Stockholders or
until their respective successors are elected and qualified.

Hansen Medical, Inc. 2006 Equity Incentive Plan Election Results

The results of the voting included 14,431,597 votes for, 484,189 votes against, 68,541 abstained and 8,182,465 broker non-votes. The plan was re-approved.

Ratification of the Appointment of PricewaterhouseCoopers LLP as independent registered public accountants of the Company

The results of the voting included 22,949,402 votes for, 70,167 votes against and 147,223 abstained. The appointment was ratified.

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.
|              | 
|10.44+        |  | Letter Agreement, by and between the Registrant and Christopher Sells, dated as of July 16, 2009.                               
|              | 
|31.1          |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                         
|              | 
|31.2          |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                         
|              | 
|32.1*         |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         
|              | 
|32.2*         |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         



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

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

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

|+ | 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 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), 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: August 6, 2009 |  | By: |  | /s/    FREDERIC H. MOLL, M.D.               
|                      |  |     |  | Frederic H. Moll, M.D.                      
|                      |  |     |  | Chief Executive Officer                     
|                      |  |     |  | (Principal Executive Officer)               
|                      |  |    
|Dated: August 6, 2009 |  | By: |  | /s/    STEVEN M. VAN DICK                   
|                      |  |     |  | Steven M. Van Dick                          
|                      |  |     |  | Chief Financial Officer                     
|                      |  |     |  | (Principal Financial and Accounting Officer)



56