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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 September 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 October 30, 2009 was 37,435,464.









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INDEX



|                            |  |                                                                                                                             |  |   
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --
|                            |  | PART I - FINANCIAL INFORMATION                                                                                              |  |   
|                            |  |                                                                                                                            
|Item 1.                     |  | Condensed Consolidated Financial Statements (unaudited)                                                                     |  | 1 
|                            |  |                                                                                                                            
|                            |  | Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
(Restated)                             |  | 1 
|                            |  |                                                                                                                            
|                            |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and
 2008 (Restated) |  | 2 
|                            |  |                                                                                                                            
|                            |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (Restated)            |  | 3 
|                            |  |                                                                                                                            
|                            |  | Notes to Condensed Consolidated Financial Statements                                                                        |  | 4 
|                            |  |                                                                                                                            
|Item 2.                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 16
|                            |  |                                                                                                                            
|Item 3.                     |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |  | 26
|                            |  |                                                                                                                            
|Item 4.                     |  | Controls and Procedures                                                                                                     |  | 27
|                            |  |                                                                                                                            
|Item 4T.                    |  | Controls and Procedures                                                                                                     |  | 28
|                            | 
|PART II - OTHER INFORMATION |  |                                                                                                                            
|                            |  |                                                                                                                            
|Item 1.                     |  | Legal Proceedings                                                                                                           |  | 28
|                            |  |                                                                                                                            
|Item 1A.                    |  | Risk Factors                                                                                                                |  | 29
|                            |  |                                                                                                                            
|Item 2.                     |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                 |  | 57
|                            |  |                                                                                                                            
|Item 3.                     |  | Defaults Upon Senior Securities                                                                                             |  | 57
|                            |  |                                                                                                                            
|Item 4.                     |  | Submission of Matters to a Vote of Security Holders                                                                         |  | 57
|                            |  |                                                                                                                            
|Item 5.                     |  | Other Information                                                                                                           |  | 57
|                            |  |                                                                                                                            
|Item 6.                     |  | Exhibits                                                                                                                    |  | 58
|                            |  |                                                                                                                            
|Signatures                  |  |                                                                                                                             |  | 59



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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)



|                                                                                                                   |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                   |  | September 30,2009 |          |   | December 31,2008 |  
|                                                                                                                   |  |                   |          |   | As Restated      |  
|ASSETS                                                                                                             |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                    |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                          |  | $                 | 12,091   |   |                  | $ | 17,377   |  
|Short-term investments                                                                                             |  |                   | 28,293   |   |                  |   | 17,846   |  
|Accounts receivable                                                                                                |  |                   | 6,802    |   |                  |   | 9,506    |  
|Inventories                                                                                                        |  |                   | 7,628    |   |                  |   | 6,426    |  
|Deferred cost of goods sold                                                                                        |  |                   | 2,925    |   |                  |   | 2,364    |  
|Prepaids and other current assets                                                                                  |  |                   | 1,509    |   |                  |   | 2,136    |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                               |  |                   | 59,248   |   |                  |   | 55,655   |  
|                                                                                                                   |  |                  
|Property and equipment, net                                                                                        |  |                   | 14,443   |   |                  |   | 18,195   |  
|Restricted cash                                                                                                    |  |                   | 65       |   |                  |   | 110      |  
|Other assets                                                                                                       |  |                   | 179      |   |                  |   | 174      |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                       |  | $                 | 73,935   |   |                  | $ | 74,134   |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|                                                                                                                   |  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                               |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                               |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                   |  | $                 | 2,041    |   |                  | $ | 3,089    |  
|Accrued liabilities                                                                                                |  |                   | 5,782    |   |                  |   | 5,634    |  
|Current portion of deferred revenue                                                                                |  |                   | 10,091   |   |                  |   | 8,794    |  
|Current portion of long-term debt                                                                                  |  |                   | 3,565    |   |                  |   | 2,451    |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                          |  |                   | 21,479   |   |                  |   | 19,968   |  
|                                                                                                                   |  |                  
|Deferred revenue, net of current portion                                                                           |  |                   | 180      |   |                  |   | 189      |  
|Long-term debt, net of current portion                                                                             |  |                   | 7,129    |   |                  |   | 10,025   |  
|Other long-term liabilities                                                                                        |  |                   | 1,090    |   |                  |   | 1,109    |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                  |  |                   | 29,878   |   |                  |   | 31,291   |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Commitments and contingencies (Note 7)                                                                             |  |                   |          |   |                  |   |          |  
|                                                                                                                   |  |                  
|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: 37,421,486 and 25,273,623 shares at September 30, 2009 and December 31, 2008, respectively |  |                   | 4        |   |                  |   | 3        |  
|Additional paid-in capital                                                                                         |  |                   | 252,554  |   |                  |   | 210,548  |  
|Deferred stock-based compensation                                                                                  |  |                   | (4       | ) |                  |   | (44      | )
|Accumulated other comprehensive income (loss)                                                                      |  |                   | (9       | ) |                  |   | 77       |  
|Accumulated deficit                                                                                                |  |                   | (208,488 | ) |                  |   | (167,741 | )
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                         |  |                   | 44,057   |   |                  |   | 42,843   |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                         |  | $                 | 73,935   |   |                  | $ | 74,134   |  
|                                                                                                                   |  |                   |          |   |                  |   |          |  

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 endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                            |  | 2009                            |         |   | 2008                           |   |         | 2009 |  |   | 2008        |  
|                                                            |  |                                 |         |   | As Restated                    |   |         |      |  |   | As Restated |  
|Revenues                                                    |  | $                               | 4,565   |   |                                | $ | 9,573   |      |  | $ | 14,969      |   |  | $ | 18,084  |  
|Cost of goods sold                                          |  |                                 | 3,268   |   |                                |   | 6,222   |      |  |   | 11,313      |   |  |   | 14,940  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Gross profit                                                |  |                                 | 1,297   |   |                                |   | 3,351   |      |  |   | 3,656       |   |  |   | 3,144   |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Operating expenses:                                         |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Research and development                                    |  |                                 | 4,879   |   |                                |   | 7,249   |      |  |   | 15,481      |   |  |   | 18,763  |  
|Selling, general and administrative                         |  |                                 | 8,153   |   |                                |   | 8,931   |      |  |   | 28,168      |   |  |   | 27,015  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Total operating expenses                                    |  |                                 | 13,032  |   |                                |   | 16,180  |      |  |   | 43,649      |   |  |   | 45,778  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Loss from operations                                        |  |                                 | (11,735 | ) |                                |   | (12,829 | )    |  |   | (39,993     | ) |  |   | (42,634 | )
|Interest income                                             |  |                                 | 54      |   |                                |   | 317     |      |  |   | 272         |   |  |   | 1,155   |  
|Interest and other expense, net                             |  |                                 | (248    | ) |                                |   | (345    | )    |  |   | (1,026      | ) |  |   | (508    | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Net loss                                                    |  | $                               | (11,929 | ) |                                | $ | (12,857 | )    |  | $ | (40,747     | ) |  | $ | (41,987 | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Basic and diluted net loss per share                        |  | $                               | (0.32   | ) |                                | $ | (0.51   | )    |  | $ | (1.25       | ) |  | $ | (1.76   | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Shares used to compute basic and diluted net loss per share |  |                                 | 37,418  |   |                                |   | 25,063  |      |  |   | 32,693      |   |  |   | 23,909  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  

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)



|                                                                            |  |                                |         |   |             |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------- | - | ------- | -
|                                                                            |  | Nine months endedSeptember 30, |        
|                                                                            |  | 2009                           |         |   | 2008        |  
|                                                                            |  |                                |         |   | As Restated |  
|Cash flows from operating activities:                                       |  |                                |         |   |             |   |         |  
|Net loss                                                                    |  | $                              | (40,747 | ) |             | $ | (41,987 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |         |   |             |   |         |  
|Depreciation and amortization                                               |  |                                | 3,246   |   |             |   | 1,653   |  
|Stock-based compensation                                                    |  |                                | 6,128   |   |             |   | 7,607   |  
|Asset impairment of tangible assets                                         |  |                                | 1,120   |   |             |   |        |  
|Loss on disposal of fixed assets                                            |  |                                | 23      |   |             |   | 55      |  
|Amortization of preferred stock warrants                                    |  |                                |        |   |             |   | 74      |  
|Changes in operating assets and liabilities:                                |  |                                |         |   |             |   |         |  
|Accounts receivable                                                         |  |                                | 2,704   |   |             |   | (7,138  | )
|Inventories                                                                 |  |                                | (1,202  | ) |             |   | (2,111  | )
|Deferred cost of goods sold                                                 |  |                                | (561    | ) |             |   | (1,114  | )
|Prepaids and other current assets                                           |  |                                | 837     |   |             |   | (737    | )
|Accounts payable                                                            |  |                                | (1,048  | ) |             |   | 1,124   |  
|Accrued liabilities                                                         |  |                                | 116     |   |             |   | 868     |  
|Deferred revenue                                                            |  |                                | 1,288   |   |             |   | 5,169   |  
|Deferred rent                                                               |  |                                | (22     | ) |             |   | 805     |  
|Other long-term liabilities                                                 |  |                                | 142     |   |             |   | 141     |  
|                                                                            |  |                                |         |   |             |   |         |  
|Net cash used in operating activities                                       |  |                                | (27,976 | ) |             |   | (35,591 | )
|                                                                            |  |                                |         |   |             |   |         |  
|Cash flows from investing activities:                                       |  |                                |         |   |             |   |         |  
|Purchase of property and equipment                                          |  |                                | (739    | ) |             |   | (17,168 | )
|Proceeds from sales and maturities of short-term investments                |  |                                | 23,175  |   |             |   | 13,467  |  
|Purchase of investments                                                     |  |                                | (33,923 | ) |             |   | (15,080 | )
|Changes in restricted cash                                                  |  |                                | 45      |   |             |   |        |  
|                                                                            |  |                                |         |   |             |   |         |  
|Net cash used in investing activities                                       |  |                                | (11,442 | ) |             |   | (18,781 | )
|                                                                            |  |                                |         |   |             |   |         |  
|Cash flows from financing activities:                                       |  |                                |         |   |             |   |         |  
|Proceeds from loans payable                                                 |  |                                |        |   |             |   | 12,476  |  
|Repayments of loans payable                                                 |  |                                | (1,782  | ) |             |   | (3,334  | )
|Proceeds from issuance of common stock, net of issuance costs               |  |                                | 35,278  |   |             |   | 39,492  |  
|Proceeds from exercise of common stock options, net                         |  |                                | 336     |   |             |   | 142     |  
|Proceeds from employee stock purchase plan                                  |  |                                | 300     |   |             |   | 1,077   |  
|                                                                            |  |                                |         |   |             |   |         |  
|Net cash provided by financing activities                                   |  |                                | 34,132  |   |             |   | 49,853  |  
|                                                                            |  |                                |         |   |             |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                                | (5,286  | ) |             |   | (4,519  | )
|Cash and cash equivalents at beginning of period                            |  |                                | 17,377  |   |             |   | 30,404  |  
|                                                                            |  |                                |         |   |             |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                              | 12,091  |   |             | $ | 25,885  |  
|                                                                            |  |                                |         |   |             |   |         |  
|Supplemental schedule of non-cash investing activities:                     |  |                                |         |   |             |   |         |  
|Unbilled construction costs incurred                                        |  | $                              |        |   |             | $ | 432     |  

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 September 30, 2009, the Company has
incurred losses totaling approximately $208.5 million and has not generated positive cash flows from operations. The Company expects such losses to continue through at least the year ended December 31, 2010 as it continues to commercialize its
technologies and develop new applications and technologies. The Company also faces significant short-term uncertainty related to current economic and capital market conditions and the related impact of those conditions on the capital equipment
market.

On April 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 revolving credit line expired in August 2009; however the Company and Silicon Valley Bank have initiated discussions to replace the credit line. As of September 30, 2009, the
Company had drawn down approximately $12.5 million against the term equipment line under this agreement. See Note 8.

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
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



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Companys management, these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair presentation. Interim results are not necessarily
indicative of results for a full year or any other interim period. The condensed consolidated balance sheet as of December 31, 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/A for the year ended December 31, 2008 as filed with the Securities
and Exchange Commission. The Companys fiscal year ends on December 31.

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

Subsequent events have been evaluated through November 16, 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

During the third quarter of 2009,
the Company adopted the authoritative guidance that establishes the Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification) as the source of authoritative accounting principles to be
applied by nongovernmental entities in the preparation of financial statements. The impact of adopting the Codification did not have an impact on the Companys consolidated financial statements.

In December 2007, the FASB issued authoritative guidance on accounting for business combinations. Under this new guidance, 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, this guidance 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. The adoption of this guidance 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 authoritative guidance regarding noncontrolling interests in consolidated financial
statement. This guidance 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. This guidance 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. This guidance 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 issued authoritative guidance regarding the accounting for
defensive intangible assets. This guidance applies to defensive intangible assets, which are acquired intangible assets



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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, this new guidance
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 GAAP. This guidance 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.

In April 2009, the FASB issued authoritative guidance regarding interim disclosures about the fair value of
financial instruments. This new guidance requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those
disclosures in summarized financial information at interim reporting periods. This guidance 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 authoritative guidance regarding determining fair value when the volume and level of activity
for the asset or liability have significantly decreased and identifying transactions that are not are not orderly. This guidance provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability
have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance 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 authoritative guidance regarding recognition
and presentation of other-than-temporary impairments. This guidance amends 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 guidance 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 authoritative guidance regarding subsequent events. This
guidance requires a company 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,
this guidance requires an entity to disclose the date through which subsequent events have been evaluated. The Company adopted this guidance for the second quarter of 2009.

In June 2009, the FASB issued authoritative guidance regarding variable interest entities. This guidance 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 guidance to have a material impact on its
consolidated financial statements.

In August 2009, the FASB issued authoritative guidance regarding fair value measurements
and disclosures. This guidance clarifies the measurement of liabilities at fair value. When a quoted price in an active market for the identical liability is not available, the fair value of a liability must be measured using one or more of the
listed valuation techniques that should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. In addition, the new guidance clarifies that when estimating the fair value of a liability, an entity is not required
to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance also clarifies how the price of a traded debt security should be considered in estimating
the fair value of the issuers liability. This guidance is effective the first reporting period (including interim periods) beginning after its issuance. The Company does not expect the adoption will have a material impact to its consolidated
financial statements.



6



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##### Table of Contents

In October 2009, the FASB issued authoritative guidance regarding revenue arrangements with
multiple deliverables. Under this new guidance, multiple-deliverable arrangements will be separated in more circumstances than under existing GAAP. This guidance also established a hierarchy for determining the selling price of a deliverable, using
vendor specific objective evidence (VSOE) if available, third party evidence if VSOE is not available or estimated selling price if neither VSOE nor third party evidence is available. The guidance is effective for fiscal years beginning
on or after June 15, 2010. Early adoption is permitted. The Company has not yet determined the effect which this new guidance will have on its consolidated financial statements nor whether it will adopt this guidance early.

In October 2009, the FASB issued authoritative guidance regarding the applicability of AICPA Statement of Position 97-2 (SOP
97-2) to certain arrangements that include software elements, changing the accounting model for such arrangements so that they are no longer under the scope of the software revenue guidance in Subtopic 985-605, formerly referred to as SOP
97-2. The guidance is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not yet determined the effect which this new guidance will have on its consolidated financial statements nor
whether it will adopt this guidance early.

3. Restatement of Financial Statements

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

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



|                                     |  |                       |          |   |                      |   |        |          |  |   |          |  
|------------------------------------ |  | --------------------- | -------- | - | -------------------- | - | ------ | -------- |  | - | -------- | -
|                                     |  | December 31, 2008     |         
|                                     |  | As PreviouslyReported |          |   | Effect ofRestatement |   |        | Restated | 
|                                     |  | (In thousands)        |         
|Assets                               |  |                       |          |   |                      |   |        |          |  |   |          |  
|Deferred cost of goods sold          |  | $                     | 248      |   |                      | $ | 2,116  |          |  | $ | 2,364    |  
|                                     |  |                       |         
|Liabilities and Stockholders Equity |  |                       |          |   |                      |   |        |          |  |   |          |  
|Accrued liabilities                  |  | $                     | 6,064    |   |                      | $ | (430   | )        |  | $ | 5,634    |  
|Current portion of deferred revenue  |  | $                     | 1,386    |   |                      | $ | 7,408  |          |  | $ | 8,794    |  
|Accumulated deficit                  |  | $                     | (162,879 | ) |                      | $ | (4,862 | )        |  | $ | (167,741 | )

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



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



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

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



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



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

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

4. Investments and Fair Value Measurements

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



|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|--------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ---------- | - | --------------------------- | - | --------------------- |  | - | ------ |  | - | ------
|                                  |  |               |        |                      |   |                       |  |   |            |   | Balance SheetClassification
|                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value |   | CashEquivalents             |   | Short-termInvestments
|As of September 30, 2009:         |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|Money market funds                |  | $             | 9,804  |                      | $ |                      |  | $ |           |   |                             | $ | 9,804                 |  | $ | 9,804  |  | $ |      
|U.S. government agency securities |  |               | 23,264 |                      |   | 34                    |  |   | (1         | ) |                             |   | 23,297                |  |   |       |  |   | 23,297
|Corporate debt securities         |  |               | 6,557  |                      |   |                      |  |   | (1         | ) |                             |   | 6,556                 |  |   | 1,560  |  |   | 4,996 
|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|                                  |  | $             | 39,625 |                      | $ | 34                    |  | $ | (2         | ) |                             | $ | 39,657                |  | $ | 11,364 |  | $ | 28,293
|                                  |  |               |        |                      |   |                       |  |   |            |   |                             |   |                       |  |   |        |  |   |       
|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):



|                        |  |                   |        |                  |   |       
|----------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                        |  | September 30,2009 |        | December 31,2008
|Contractual maturities: |  |                   |        |                  |   |       
|Less than one year      |  | $                 | 28,293 |                  | $ | 16,308
|One to two years        |  |                   |       |                  |   | 1,538 
|                        |  |                   |        |                  |   |       
|                        |  | $                 | 28,293 |                  | $ | 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



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



|                                  |  |            |       |                       |   |    |  
|--------------------------------- |  | ---------- | ----- | --------------------- | - | -- | -
|                                  |  | Fair Value |       | GrossUnrealizedLosses |  
|U.S. government agency securities |  | $          | 2,015 |                       | $ | (1 | )
|Corporate debt securities         |  |            | 2,996 |                       |   | (1 | )
|                                  |  |            |       |                       |   |    |  
|                                  |  | $          | 5,011 |                       | $ | (2 | )
|                                  |  |            |       |                       |   |    |  

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.

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 September 30, 2009 is as follows (in
thousands):



|                                  |  |                                                                   |        |                                                   |   |       |  |   |       
|--------------------------------- |  | ----------------------------------------------------------------- | ------ | ------------------------------------------------- | - | ----- |  | - | ------
|                                  |  | Fair Value Measurements Using                                    
|                                  |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1 Inputs) |        | Significant otherObservableInputs(Level 2 Inputs) |   | Total
|Money market funds                |  | $                                                                 | 9,804  |                                                   | $ |      |  | $ | 9,804 
|U.S. government agency securities |  |                                                                   | 23,297 |                                                   |   |      |  |   | 23,297
|Corporate debt securities         |  |                                                                   |       |                                                   |   | 6,556 |  |   | 6,556 
|                                  |  |                                                                   |        |                                                   |   |       |  |   |       
|                                  |  | $                                                                 | 33,101 |                                                   | $ | 6,556 |  | $ | 39,657
|                                  |  |                                                                   |        |                                                   |   |       |  |   |       



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5. Inventories (in thousands)



|                 |  |                   |       |                  |   |      
|---------------- |  | ----------------- | ----- | ---------------- | - | -----
|                 |  | September 30,2009 |       | December 31,2008
|Raw materials    |  | $                 | 2,158 |                  | $ | 1,984
|Work in process  |  |                   | 2,657 |                  |   | 2,980
|Finished goods   |  |                   | 2,813 |                  |   | 1,462
|                 |  |                   |       |                  |   |      
|Inventories, net |  | $                 | 7,628 |                  | $ | 6,426
|                 |  |                   |       |                  |   |      

6. 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. 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.

7. Commitments and Contingencies

Operating Commitments

The Company rents its office and laboratory facilities under operating leases
which expire at various dates through November 2014. The Company has an option to extend its main lease until approximately November 30, 2019. As of September 30, 2009, annual contractual commitments associated with lease obligations were
as follows (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|Remainder of 2009 |  | $ | 456  
|2010              |  |   | 1,743
|2011              |  |   | 1,784
|2012              |  |   | 1,838
|2013              |  |   | 1,893
|Thereafter        |  |   | 1,783
|                  |  |   |      
|Total             |  | $ | 9,497
|                  |  |   |      



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Warranties

Prior to the third quarter of 2009, the Company generally provided a limited one-year warranty on its Sensei system and accrued the estimated
cost of warranties at the time revenue was recognized. The Companys warranty obligation may be impacted by product failure rates, material usage and service costs associated with its warranty obligations. Beginning with the third quarter of
2009, the Company, rather than providing a warranty, instead provides a year of service support which includes software upgrades. The revenue associated with this service support is deferred at the time of sale and recognized ratably over the life
of the service support. The Company periodically evaluates and adjusts the warranty reserve to the extent actual warranty expense differs from the original estimates. Movement in warranty liability for Sensei systems sold prior to July 1, 2009
was as follows (in thousands):



|                                                 |  |                                 |      |   |                                |   |      |      |  |   |             |   |  |   |       |  
|------------------------------------------------ |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----------- | - |  | - | ----- | -
|                                                 |  | Three months endedSeptember 30, |      |   | Nine months endedSeptember 30, |  
|                                                 |  | 2009                            |      |   | 2008                           |   |      | 2009 |  |   | 2008        |  
|                                                 |  |                                 |      |   | As Restated                    |   |      |      |  |   | As Restated |  
|Balance at beginning of period                   |  | $                               | 524  |   |                                | $ | 584  |      |  | $ | 881         |   |  | $ | 488   |  
|Accruals for warranties issued during the period |  |                                 | 119  |   |                                |   | 694  |      |  |   | 621         |   |  |   | 1,419 |  
|Warranty costs incurred during the period        |  |                                 | (330 | ) |                                |   | (340 | )    |  |   | (1,189      | ) |  |   | (969  | )
|                                                 |  |                                 |      |   |                                |   |      |      |  |   |             |   |  |   |       |  
|Balance at end of period                         |  | $                               | 313  |   |                                | $ | 938  |      |  | $ | 313         |   |  | $ | 938   |  
|                                                 |  |                                 |      |   |                                |   |      |      |  |   |             |   |  |   |       |  

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 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 has opposed Lunas request and has moved to have the automatic stay lifted so that the Santa Clara Superior Court can rule on the pending post-verdict motions and enter judgment. The Bankruptcy Court held a hearing on
Lunas request for an estimation, and the Companys motion for relief from the automatic stay, on September 11, 2009. Luna and the Company have requested that the Bankruptcy Court defer ruling on Lunas request and the
Companys motion in order for the parties to continue to pursue a settlement; however, there can be no assurance that any settlement will be reached or whether any such settlement will be favorable to the Company. No receivable has been
recorded on the balance sheet for any amount relating to this verdict.

See Note 13. Subsequent Events.

8. 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, which expired in August 2009. 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



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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. As of September 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 September 30, 2009 are as follows (in thousands):



|                                   |  |   |        |  
|---------------------------------- |  | - | ------ | -
|Remainder of 2009                  |  | $ | 1,051  |  
|2010                               |  |   | 4,070  |  
|2011                               |  |   | 3,849  |  
|2012                               |  |   | 2,743  |  
|                                   |  |   |        |  
|                                   |  |   | 11,713 |  
|Less: Amount representing interest |  |   | (1,019 | )
|                                   |  |   |        |  
|                                   |  |   | 10,694 |  
|Less: Current portion              |  |   | (3,565 | )
|                                   |  |   |        |  
|Long Term Portion                  |  | $ | 7,129  |  
|                                   |  |   |        |  

9. Stockholders Equity

Stock-based Compensation

Employee and non-employee stock-based compensation expense for stock-based awards under the Companys 2002 Stock Option Plan, 2006 Equity Incentive Plan and 2006 Employee Stock Purchase Plan was
allocated as follows (in thousands):



|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                    |  | Three months endedSeptember 30, |       | Nine months endedSeptember 30,
|                                    |  | 2009                            |       | 2008                           |   | 2009  |  | 2008
|Stock-based Compensation:           |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Cost of goods sold                  |  | $                               | 180   |                                | $ | 168   |  | $    | 617   |  | $ | 500  
|Research and development            |  |                                 | 592   |                                |   | 668   |  |      | 1,900 |  |   | 2,001
|Selling, general and administrative |  |                                 | 794   |                                |   | 1,836 |  |      | 3,611 |  |   | 5,106
|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Total                               |  | $                               | 1,566 |                                | $ | 2,672 |  | $    | 6,128 |  | $ | 7,607
|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      



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



|                         |  |                                 |   |  |                                |   |  |           |  |          
|------------------------ |  | ------------------------------- | - |  | ------------------------------ | - |  | --------- |  | ---------
|                         |  | Three months endedSeptember 30, |   |  | Nine months endedSeptember 30,
|                         |  | 2009                            |   |  | 2008                           |   |  | 2009      |  | 2008     
|Employee Stock Options:  |  |                                 |   |  |                                |   |  |           |  |          
|Expected volatility      |  | 61                              | % |  | 49                             | % |  | 58%-61%   |  | 48%-51%  
|Risk-free interest rate  |  | 2.6                             | % |  | 3.3                            | % |  | 1.9%-2.6% |  | 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 endedSeptember 30, |  | Nine months endedSeptember 30,
|                                      |  | 2009                            |  | 2008                           |  | 2009      |  | 2008     
|Non-Employee Stock Options:           |  |                                 |  |                                |  |           |  |          
|Expected volatility                   |  | 60%-63%                         |  | 50%-59%                        |  | 59%-63%   |  | 50%-61%  
|Risk-free interest rate               |  | 2.1%-3.0%                       |  | 3.1%-3.6%                      |  | 1.7%-3.3% |  | 2.7%-4.1%
|Remaining contractual term (in years) |  | 4.50-7.25                       |  | 5.50-8.25                      |  | 4.50-7.75 |  | 5.50-8.75
|Expected dividend rate                |  | 0%                              |  | 0%                             |  | 0%        |  | 0%       

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



|                              |  |                                 |   |  |                                |   |  |           |  |          
|----------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | --------- |  | ---------
|                              |  | Three months endedSeptember 30, |   |  | Nine months endedSeptember 30,
|                              |  | 2009                            |   |  | 2008                           |   |  | 2009      |  | 2008     
|Employee Stock Purchase Plan: |  |                                 |   |  |                                |   |  |           |  |          
|Expected volatility           |  | 67                              | % |  | 50                             | % |  | 67%-126%  |  | 50%-53%  
|Risk-free interest rate       |  | 0.2                             | % |  | 1.6                            | % |  | 0.2%-0.4% |  | 1.6%-3.5%
|Expected term (in years)      |  | 0.67                            |   |  | 0.50                           |   |  | 0.50-0.67 |  | 0.50     
|Expected dividend rate        |  | 0                               | % |  | 0                              | % |  | 0%        |  | 0%       



12



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##### Table of Contents

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                      |  | 913                |   |  | $                              | 3.59  |                                          |      |                          |   |    
|Options exercised                    |  | (218               | ) |  | $                              | 1.54  |                                          |      |                          |   |    
|Options cancelled                    |  | (1,134             | ) |  | $                              | 11.27 |                                          |      |                          |   |    
|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |    
|Balances, September 30, 2009         |  | 3,764              |   |  | $                              | 11.15 |                                          | 5.61 |                          | $ | 996
|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |    
|Options vested at September 30, 2009 |  | 1,751              |   |  | $                              | 11.79 |                                          | 5.24 |                          | $ | 774
|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |    

As of September 30, 2009, total unamortized stock-based compensation related to
unvested stock options was $8,106,000, with a weighted-average recognition period of 2.4 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                                       |  | (150                             | ) |  | $                                      | 6.20 
|                                             |  |                                  |   |  |                                        |      
|Restricted stock units at September 30, 2009 |  | 15                               |   |  | $                                      | 12.95
|                                             |  |                                  |   |  |                                        |      

As of September 30, 2009, there was approximately $34,000 of unrecognized
compensation costs related to restricted stock units which is expected to be recognized over a weighted-average period of 0.2 years.

As of September 30, 2009, 1,480,000 shares of common stock were available for grant under the 2006 Equity Incentive Plan.

10. Income Taxes

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



|                                                             |  |                                |     |      |   |    
|------------------------------------------------------------ |  | ------------------------------ | --- | ---- | - | ---
|                                                             |  | Nine months endedSeptember 30,
|                                                             |  | 2009                           |     | 2008
|Balance at beginning of period                               |  | $                              | 810 |      | $ | 600
|Additions based on tax positions related to the current year |  |                                | 119 |      |   | 158
|                                                             |  |                                |     |      |   |    
|Balance at end of period                                     |  | $                              | 929 |      | $ | 758
|                                                             |  |                                |     |      |   |    

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



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##### Table of Contents

11. 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 endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                                                                   |  | 2009                            |         |   | 2008                           |   |         | 2009 |  |   | 2008        |  
|                                                                                                   |  |                                 |         |   | As Restated                    |   |         |      |  |   | As Restated |  
|Net loss                                                                                           |  | $                               | (11,929 | ) |                                | $ | (12,857 | )    |  | $ | (40,747     | ) |  | $ | (41,987 | )
|                                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Weighted-average common shares outstanding                                                         |  |                                 | 37,419  |   |                                |   | 25,091  |      |  |   | 32,696      |   |  |   | 23,953  |  
|Weighted-average unvested common shares subject to repurchase and unvested restricted common stock |  |                                 | (1      | ) |                                |   | (28     | )    |  |   | (3          | ) |  |   | (44     | )
|                                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Shares used to calculated basic and diluted net loss per share                                     |  |                                 | 37,418  |   |                                |   | 25,063  |      |  |   | 32,693      |   |  |   | 23,909  |  
|                                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Basic and diluted net loss per share                                                               |  | $                               | (0.32   | ) |                                | $ | (0.51   | )    |  | $ | (1.25       | ) |  | $ | (1.76   | )
|                                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  

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



|                                             |  |               |  |      
|-------------------------------------------- |  | ------------- |  | -----
|                                             |  | September 30,
|                                             |  | 2009          |  | 2008 
|Stock options outstanding                    |  | 3,764         |  | 4,392
|Proceeds from employee stock purchase plan   |  | 159           |  |     
|Unvested restricted stock units              |  | 15            |  | 75   
|Unvested common shares subject to repurchase |  | 1             |  | 22   

12. Comprehensive Loss

Total comprehensive loss was as follows (in thousands):



|                                              |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|--------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ----------- | - |  | - | ------- | -
|                                              |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                              |  | 2009                            |         |   | 2008                           |   |         | 2009 |  |   | 2008        |  
|                                              |  |                                 |         |   | As Restated                    |   |         |      |  |   | As Restated |  
|Net loss                                      |  | $                               | (11,929 | ) |                                | $ | (12,857 | )    |  | $ | (40,747     | ) |  | $ | (41,987 | )
|Other comprehensive income:                   |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Change in unrealized gain/loss on investments |  |                                 | (13     | ) |                                |   | (317    | )    |  |   | (101        | ) |  |   | (334    | )
|Foreign currency translation adjustment       |  |                                 | 5       |   |                                |   | (10     | )    |  |   | 15          |   |  |   | (10     | )
|                                              |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  
|Comprehensive loss                            |  | $                               | (11,937 | ) |                                | $ | (13,184 | )    |  | $ | (40,833     | ) |  | $ | (42,331 | )
|                                              |  |                                 |         |   |                                |   |         |      |  |   |             |   |  |   |         |  

13. Subsequent Events

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

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



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Following the Companys October 19, 2009 announcement that it would restate
certain of its financial statements, a securities class action lawsuit was filed on October 23, 2009 in the United States District Court for the Northern District of California, naming the Company and certain of its officers. Curry v. Hansen
Medical, Inc. et al., Case No. 09-05094. The complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of Hansen stock between May 1, 2008 and
October 18, 2009, inclusive, and alleges, inter alia, that defendants made false and/or misleading statements and/or failed to make disclosures regarding the Companys financial results and compliance with Generally Accepted
Accounting Principles (GAAP) while improperly recognizing revenue; that these misstatements and/or nondisclosures resulted in overstatement of Company revenue and financial results and/or artificially inflated the Companys stock
price; and that following the Companys October 19, 2009 announcement, the price of the Companys stock declined. On November 4, 2009, a substantively identical complaint was filed in the Northern District of California by
another purported Hansen stockholder asserting the same claims on behalf of the same putative class of Hansen stockholders. Livingstone v. Hansen Medical, Inc. et al., Case No. 09-05212. Both complaints seek certification as a class
action and unspecified compensatory damages plus interest and attorneys fees. To date, a lead plaintiff has not been appointed, no class has been certified and discovery has not commenced. The Company and the named officers intend to defend
themselves vigorously against these actions.

On November 12, 2009, Dawn Cates, a purported stockholder of the Company, filed
a shareholder derivative complaint in the Superior Court of the State of California, County of Sanata Clara, against the current members of the Companys board of directors and certain current and former officers of the Company (the
Individual Defendants), as well as the Companys independent auditor, PricewaterhouseCoopers (PwC). The action purports to be brought on behalf of the Company. The complaint asserts claims for breach of fiduciary duties
and waste of corporate assets against the Individual Defendants, and professional negligence against PwC. The complaint alleges that the Individual Defendants disseminated false and misleading information in the Companys SEC filings, public
statements and other disclosures, failed to maintain adequate internal controls and willfully ignored problems with accounting and internal control practices and procedures, mismanaged and failed appropriately to oversee the operations of the
Company, and wasted corporate assets. The complaint further alleges that the director defendants breached their fiduciary duties by allowing Defendant Sells to resign from the Company. The derivative complaint seeks unspecified damages, internal
control and corporate governance reforms, restitution and an award of costs and fees incurred in bringing the action. The Individual Defendants deny the allegations and intend to defend themselves vigorously against the claims made in this action.



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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 September 30, 2009,
we had an accumulated deficit of $208.5 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 third quarter of 2009 being lower than we
anticipated. Losses for the nine months ended September 30, 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 and third quarters 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.

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



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##### Table of Contents

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/A for the year ended December 31, 2008 filed
with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies in the nine months ended September 30, 2009.

Financial Overview

Restatement

In August 2009, we received an anonymous whistleblower report alleging a single irregularity that resulted in improper revenue
recognition in the quarter ended December 31, 2008. Our audit committee, with the assistance of independent outside counsel, undertook an investigation into the allegation and a review of our historical revenue recognition practices. The audit
committees investigation determined that information was withheld from our accounting department and independent auditors, documentation related to certain revenue transactions was falsified, and there was not an effective control environment
in our sales, clinical and field service departments. This led to incomplete information regarding temporary installations, unfulfilled training obligations, the inability of distributors to independently install systems and train end users, and
undisclosed side arrangements. As a result, there were instances where revenue was recognized prior to the completion of all of the elements required for revenue recognition under our revenue recognition policy. All of the irregularities that were
identified during the investigation occurred outside of the accounting department. We are implementing revised controls and procedures designed to prevent a recurrence of the improper recognition of revenue.

The Company is concurrently filing an amendment to the Companys annual report on Form 10-K/A for the year ended December 31,
2008, in order to restate its consolidated financial statements as of December 31, 2007 and 2008, and filing amendments to its quarterly reports on Form 10-Q for the quarters ended March 31, 2008, June 30,
2008, September 30, 2008, March 31, 2009 and June 30, 2009 to restate our consolidated financial statements for such periods. Results of operations for the three and nine months ended September 30, 2008 that are
included in this Quarterly Report on Form 10-Q reflect the effect of restatement adjustments. See Note 3 to the financial statements for more information.

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 three



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##### Table of Contents

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 first three quarters of 2009 being lower than we anticipated. We expect revenue fluctuations to continue throughout 2009 and 2010. We do not anticipate that revenues in 2009 or 2010 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 and through 2010 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 incurred. We expect research and development expenses for 2009 and through 2010 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 2009 to modestly decrease as compared to 2008 levels due primarily to our
reduced employee costs, including the effects of quarterly one-week furloughs, partially offset by expenses related to our dispute with Luna Innovations and the investigation of the whistleblower report.

Results of Operations

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

Revenues



|                       |  |                                 |       |             |   |       |  |   |        |   |  |     |   
|---------------------- |  | ------------------------------- | ----- | ----------- | - | ----- |  | - | ------ | - |  | --- | --
|                       |  | Three months endedSeptember 30, |       | Change      |  
|(Dollars in thousands) |  | 2009                            |       | 2008        |   | $     |  |   | %      |  
|                       |  |                                 |       | As Restated |   |       |  |   |        |  
|Revenues               |  | $                               | 4,565 |             | $ | 9,573 |  | $ | (5,008 | ) |  | (52 | )%



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##### Table of Contents

Revenues primarily related to the following:



|                                                      |  |                                 |     |             |   |    
|----------------------------------------------------- |  | ------------------------------- | --- | ----------- | - | ---
|                                                      |  | Three months endedSeptember 30,
|                                                      |  | 2009                            |     | 2008       
|                                                      |  |                                 |     | As Restated
|United States Sensei system units                     |  |                                 | 2   |             |   | 9  
|International Sensei system units                     |  |                                 | 3   |             |   | 3  
|                                                      |  |                                 |     |             |   |    
|Total Sensei system units                             |  |                                 | 5   |             |   | 12 
|                                                      |  |                                 |     |             |   |    
|Sensei system average selling price (in thousands)    |  | $                               | 601 |             | $ | 728
|                                                      |  |                                 |     |             |   |    
|Artisan catheter units                                |  |                                 | 497 |             |   | 413
|                                                      |  |                                 |     |             |   |    
|Artisan catheter average selling price (in thousands) |  | $                               | 1.7 |             | $ | 1.8
|                                                      |  |                                 |     |             |   |    

Our average selling prices of Sensei systems in the third 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. Average selling prices of Sensei systems for
the third quarter of 2008 were positively impacted by the sale of one system with an additional robotic arm. Sales of Artisan catheters in the third quarter of 2009 were negatively impacted by a voluntary recall which caused us to reverse revenue on
99 units that were shipped in the third quarter of 2009. The voluntary recall was initiated to address a leak in the flush assembly of our newly introduced Artisan Extend Control catheter and was reported to the FDA in accordance with applicable regulations. These catheters are expected to be replaced in the fourth quarter of 2009 and
the first quarter of 2010. 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 nine
months 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 third quarter
of 2009 being lower than we anticipated. We expect revenue fluctuations to continue throughout 2009 and 2010.

Cost of
Goods Sold



|                            |  |                                 |       |   |             |   |       |   |  |   |        |   |  |     |   
|--------------------------- |  | ------------------------------- | ----- | - | ----------- | - | ----- | - |  | - | ------ | - |  | --- | --
|                            |  | Three months endedSeptember 30, |       |   | Change      |  
|(Dollars in thousands)      |  | 2009                            |       |   | 2008        |   |       | $ |  |   | %      |  
|                            |  |                                 |       |   | As Restated |   |       |   |  |   |        |  
|Cost of goods sold          |  | $                               | 3,268 |   |             | $ | 6,222 |   |  | $ | (2,954 | ) |  | (47 | )%
|As a percentage of revenues |  |                                 | 71.6  | % |             |   | 65.0  | % |  |   |        |   |  |     |   

Cost of goods sold for the third quarter of 2009 included stock-based compensation
expense of $180,000 as compared to $168,000 for the third quarter of 2008. Cost of goods sold for the third 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 third quarter of 2009 was negatively impacted by the decreased level of sales. Cost of goods sold as a percentage of revenue in the third quarter
of 2008 was positively impacted by higher average selling prices. We expect that cost of goods sold both as a percentage of revenue and on a dollar basis will continue to vary from quarter to quarter due, among other things, to fluctuations in
revenues, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.

Operating
Expenses

Research and Development



|                         |  |                                 |       |        |   |       |  |   |        |   |  |     |   
|------------------------ |  | ------------------------------- | ----- | ------ | - | ----- |  | - | ------ | - |  | --- | --
|                         |  | Three months endedSeptember 30, |       | Change |  
|(Dollars in thousands)   |  | 2009                            |       | 2008   |   | $     |  |   | %      |  
|Research and development |  | $                               | 4,879 |        | $ | 7,249 |  | $ | (2,370 | ) |  | (33 | )%



19



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##### Table of Contents

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



| |  |  | A decrease of $1.3 million in outside services, materials and overhead expenses;
| | - |  | --------------------------------------------------------------------------------



| |  |  | A decrease of $1.0 million in employee-related expenses, including travel expenses, primarily due to a decrease of 21 in average research and
development headcount and the effects of the Companys one-week furlough during the third quarter of 2009; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Total research and development expenses in the third quarter of 2009 included $592,000 of stock-based
compensation expense compared to $668,000 in the third quarter of 2008. We expect research and development expenses for 2009 and through 2010 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 endedSeptember 30, |       | Change
|(Dollars in thousands)              |  | 2009                            |       | 2008   |   | $     |  |   | %   
|Selling, general and administrative |  | $                               | 8,153 |        | $ | 8,931 |  | $ | (778 | ) |  | (9)%

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



| |  |  | An increase of $0.9 million in litigation and other legal costs associated with our dispute with Luna Innovations Incorporated;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.5 million in legal costs due to the engagement by the Audit Committee of independent outside counsel to investigate the whistleblower
report;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | A decrease of $0.1 million in supplies, equipment and overhead expenses;
| | - |  | ------------------------------------------------------------------------



| |  |  | A decrease of $1.1 million in employee-related expenses, including sales commissions and travel expenses, due primarily to a decrease in average
general and administrative headcount of 13 and a decrease in average sales and marketing headcount of seven, and the effects of the Companys one-week furlough during the third quarter of 2009; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $1.1 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 third quarter of 2009 included $0.8 million of
stock-based compensation expense compared to $1.8 million in the third quarter of 2008. We expect our selling, general and administrative expenses for 2009 to modestly decrease as compared to 2008 levels primarily due to reduced employee costs,
including the effects of quarterly one-week furloughs, partially offset by costs related to our dispute with Luna Innovations and the investigation of the whistleblower report.



20



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##### Table of Contents

Interest Income



|                       |  |                                 |    |        |   |     |  |   |      |   |  |     |   
|---------------------- |  | ------------------------------- | -- | ------ | - | --- |  | - | ---- | - |  | --- | --
|                       |  | Three months endedSeptember
30, |    | Change |  
|(Dollars in thousands) |  | 2009                            |    | 2008   |   | $   |  |   | %    |  
|Interest income        |  | $                               | 54 |        | $ | 317 |  | $ | (263 | ) |  | (83 | )%

Interest income decreased in the third quarter of 2009 compared to the third 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
third quarter 2009 amounts for the remainder of 2009.

Interest and Other Expense, net



|                                |  |                                 |      |   |        |   |      |   |  |   |    |  |     |   
|------------------------------- |  | ------------------------------- | ---- | - | ------ | - | ---- | - |  | - | -- |  | --- | --
|                                |  | Three months endedSeptember
30, |      |   | Change |  
|(Dollars in thousands)          |  | 2009                            |      |   | 2008   |   |      | $ |  | % |   
|Interest and other expense, net |  | $                               | (248 | ) |        | $ | (345 | ) |  | $ | 97 |  | (28 | )%

Interest and other expense, net, consists mainly of interest expense and net realized
and unrealized foreign exchange gains and losses. Net foreign exchange losses decreased in the third quarter of 2009 due primarily to lower average balances of Euro-denominated accounts receivable as compared to the third quarter of 2008. Interest
expense increased in the third quarter of 2009 as compared to the third 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.

Comparison of the nine months ended September 30, 2009 to the nine months ended
September 30, 2008

Revenues



|                       |  |                                |        |             |   |        |  |   |        |   |  |      
|---------------------- |  | ------------------------------ | ------ | ----------- | - | ------ |  | - | ------ | - |  | -----
|                       |  | Nine months endedSeptember 30, |        | Change     
|(Dollars in thousands) |  | 2009                           |        | 2008        |   | $      |  |   | %     
|                       |  |                                |        | As Restated |   |        |  |   |       
|Revenues               |  | $                              | 14,969 |             | $ | 18,084 |  | $ | (3,115 | ) |  | (17)%

Revenues primarily related to the following:



|                                                      |  |                                |       |             |   |      
|----------------------------------------------------- |  | ------------------------------ | ----- | ----------- | - | -----
|                                                      |  | Nine months endedSeptember
30,
|                                                      |  | 2009                           |       | 2008       
|                                                      |  |                                |       | As Restated
|United States Sensei system units                     |  |                                | 11    |             |   | 18   
|International Sensei system units                     |  |                                | 6     |             |   | 5    
|                                                      |  |                                |       |             |   |      
|Total Sensei system units                             |  |                                | 17    |             |   | 23   
|                                                      |  |                                |       |             |   |      
|Sensei system average selling price (in thousands)    |  | $                              | 614   |             | $ | 677  
|                                                      |  |                                |       |             |   |      
|Artisan catheter units                                |  |                                | 1,754 |             |   | 1,098
|                                                      |  |                                |       |             |   |      
|Artisan catheter average selling price (in thousands) |  | $                              | 1.6   |             | $ | 1.8  
|                                                      |  |                                |       |             |   |      

Our average selling prices of Sensei systems in the first nine
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. Sales of Artisan catheters for 2009 were negatively impacted by a voluntary recall which caused us to reverse revenue on 99 units in the third quarter of 2009. The
voluntary recall was initiated to address a leak in the flush assembly of our newly introduced Artisan Extend
Control catheter and was reported to the FDA in accordance with applicable regulations. These catheters are expected to be replaced in the fourth quarter of 2009 and the first quarter of 2010. We have experienced significant fluctuations in
quarterly revenues, primarily due to the fact that we are still in the



21



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##### Table of Contents

early stages of our commercial launch and, especially in the fourth quarter of 2008 and the first three quarters of 2009, general economic and capital market conditions. During the fourth quarter
of 2008 and into the first three 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



|                            |  |                                |        |   |             |   |        |   |  |   |        |   |  |     |   
|--------------------------- |  | ------------------------------ | ------ | - | ----------- | - | ------ | - |  | - | ------ | - |  | --- | --
|                            |  | Nine months endedSeptember
30, |        |   | Change      |  
|(Dollars in thousands)      |  | 2009                           |        |   | 2008        |   |        | $ |  |   | %      |  
|                            |  |                                |        |   | As Restated |   |        |   |  |   |        |  
|Cost of goods sold          |  | $                              | 11,313 |   |             | $ | 14,940 |   |  | $ | (3,627 | ) |  | (24 | )%
|As a percentage of revenues |  |                                | 75.6   | % |             |   | 82.6   | % |  |   |        |   |  |     |   

Cost of goods sold for the first nine months of 2009 included stock-based
compensation expense of $617,000 as compared to $500,000 for the first nine months of 2008. Cost of goods sold as a percentage of revenues for the first nine months of 2009 benefited from manufacturing efficiencies as we have reduced the cost of
producing our products. This benefit was partially offset by the decreased level of sales and 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.

Operating Expenses

Research and Development



|                         |  |                                |        |        |   |        |  |   |        |   |  |     |   
|------------------------ |  | ------------------------------ | ------ | ------ | - | ------ |  | - | ------ | - |  | --- | --
|                         |  | Nine months endedSeptember 30, |        | Change |  
|(Dollars in thousands)   |  | 2009                           |        | 2008   |   | $      |  |   | %      |  
|Research and development |  | $                              | 15,481 |        | $ | 18,763 |  | $ | (3,282 | ) |  | (17 | )%

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



| |  |  | A decrease of $2.2 million in employee-related expenses, including travel expenses, primarily due to a decrease of 16 in average research and
development headcount and the effects of the Companys quarterly one-week furloughs during 2009;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $1.0 million in outside services, materials and overhead expenses; and
| | - |  | ------------------------------------------------------------------------------------



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

Total research and development expenses in the first nine months of 2009 included $1.9 million of
stock-based compensation expense compared to $2.0 million in the first nine months of 2008.

Selling, General and
Administrative



|                                    |  |                                |        |        |   |        |  |   |       |  |   |  
|----------------------------------- |  | ------------------------------ | ------ | ------ | - | ------ |  | - | ----- |  | - | -
|                                    |  | Nine months endedSeptember
30, |        | Change |  
|(Dollars in thousands)              |  | 2009                           |        | 2008   |   | $      |  | % |      
|Selling, general and administrative |  | $                              | 28,168 |        | $ | 27,015 |  | $ | 1,153 |  | 4 | %



22



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##### Table of Contents

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



| |  |  | An increase of $3.3 million in litigation and other legal costs associated with our dispute with 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 $0.5 million in supplies, equipment and overhead expenses;
| | - |  | -------------------------------------------------------------------------



| |  |  | An increase of $0.5 million in legal costs due to the engagement by the Audit Committee of independent outside counsel to investigate the whistleblower
report;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $1.3 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 11 and a decrease in average sales and marketing headcount of one, and the effects of the Companys quarterly one-week furloughs during 2009;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | An decrease of $0.3 million in professional service fees exclusive of Luna legal costs and costs associated with the investigation of the whistleblower
report;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $2.2 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses in the first nine months of 2009 included $3.6 million of stock-based compensation expense compared to $5.1 million in the first nine months of 2008.

Interest Income



|                       |  |                                |     |        |   |       |  |   |      |   |  |     |   
|---------------------- |  | ------------------------------ | --- | ------ | - | ----- |  | - | ---- | - |  | --- | --
|                       |  | Nine months endedSeptember 30, |     | Change |  
|(Dollars in thousands) |  | 2009                           |     | 2008   |   | $     |  |   | %    |  
|Interest income        |  | $                              | 272 |        | $ | 1,155 |  | $ | (883 | ) |  | (76 | )%

Interest income decreased in the first nine months of 2009 compared to the first nine
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



|                                |  |                                |        |   |        |   |      |   |  |   |      |   |  |     |  
|------------------------------- |  | ------------------------------ | ------ | - | ------ | - | ---- | - |  | - | ---- | - |  | --- | -
|                                |  | Nine months endedSeptember 30, |        |   | Change |  
|(Dollars in thousands)          |  | 2009                           |        |   | 2008   |   |      | $ |  |   | %    |  
|Interest and other expense, net |  | $                              | (1,026 | ) |        | $ | (508 | ) |  | $ | (518 | ) |  | 102 | %



23



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##### Table of Contents

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 nine months of 2009 as compared to the first nine 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 nine months of 2009 as compared to the first nine 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 September 30, 2009 we had an accumulated deficit of $208.5 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 expired in August 2009; however, we have initiated discussions with Silicon Valley Bank to replace the credit line. 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.

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



|                                          |  |                                |         |   |      |   |         |  
|----------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                          |  | Nine months endedSeptember 30, |        
|                                          |  | 2009                           |         |   | 2008 |  
|Cash used in operating activities         |  | $                              | (27,976 | ) |      | $ | (35,591 | )
|Cash used in investing activities         |  |                                | (11,442 | ) |      |   | (18,781 | )
|Cash provided by financing activities     |  |                                | 34,132  |   |      |   | 49,853  |  
|                                          |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents |  | $                              | (5,286  | ) |      | $ | (4,519  | )
|                                          |  |                                |         |   |      |   |         |  

Net Cash Used in Operating Activities

Net cash used in operating activities in the first nine 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 nine months of 2009 was positively impacted by
accounts receivable collected on higher previous period accounts receivable balances and higher deferred revenue balances. Cash flows for the first nine 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 nine 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 nine 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 nine 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.



24



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##### Table of Contents

Net Cash Provided by Financing Activities

Net cash provided by financing activities in the first nine months of 2009 and 2008 was primarily due to cash received from our equity
offerings in April 2008 and April 2009 and proceeds from long-term debt in 2008, in addition 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 nine months 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 and third quarters 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 and 2010 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 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 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;
| | - |  | --------------------------------------------------------------



25



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##### Table of Contents

| |  |  | 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 costs related to litigation or potential government actions related to our financial restatement;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | 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 September 30, 2009:



|                              |  |                                       |        |                 |   |          |  |          |        |                  |   |       |  |   |      
|----------------------------- |  | ------------------------------------- | ------ | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ----- |  | - | -----
|                              |  | Payments Due by Period (in thousands)
|Contractual Obligations       |  | Total                                 |        | Less than1 Year |   | 1-3Years |  | 3-5years |        | More than5
Years
|Operating lease  real estate |  | $                                     | 9,497  |                 | $ | 456      |  | $        | 3,527  |                  | $ | 3,731 |  | $ | 1,783
|Debt                          |  |                                       | 11,713 |                 |   | 1,051    |  |          | 7,919  |                  |   | 2,743 |  |   |     
|                              |  |                                       |        |                 |   |          |  |          |        |                  |   |       |  |   |      
|Total                         |  | $                                     | 21,210 |                 | $ | 1,507    |  | $        | 11,446 |                  | $ | 6,474 |  | $ | 1,783
|                              |  |                                       |        |                 |   |          |  |          |        |                  |   |       |  |   |      

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.

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.



26



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##### Table of Contents

The primary objective for our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities. As of September 30, 2009, the fair value of our cash,
cash equivalents and short-term investments was approximately $40.4 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 nine months ended
September 30, 2009, sales denominated in foreign currencies were approximately 29% of total revenue. A hypothetical 10% increase in the United States dollar exchange rate used would have resulted in a decrease of approximately $401,000 in
revenues for the first nine months of 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Management, including our Chief Executive Officer and
Chief Financial Officer, performed an evaluation of our disclosure controls and procedures as of September 30, 2009 and concluded that our disclosure controls and procedures were not effective as of September 30, 2009 as a result of the material
weaknesses in our internal control over financial reporting as discussed below.

Material Weaknesses in Internal Control over Financial
Reporting

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

We have identified the following material weaknesses in our internal control over financial reporting as of September 30, 2009:

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



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



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



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



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

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

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



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



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

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

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

Changes in Internal Control Over Financial Reporting

As described under
the paragraph entitled Material Weaknesses in Internal Control over Financial Reporting, there were changes in internal control over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

Managements Plan for Remediation

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

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

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



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



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



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

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



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



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



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



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



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



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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 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 have
opposed Lunas request and have moved to have the automatic stay lifted so that the Santa Clara Superior Court can rule on the pending post-verdict motions and enter judgment. The Bankruptcy Court held a hearing on Lunas request for an
estimation, and our motion for relief from the automatic stay, on September 11, 2009. Luna and we have requested that the Bankruptcy Court defer ruling on Lunas request and our motion in order for the parties to continue to pursue a
settlement; however, there can be no assurance that any settlement will be reached or whether any such settlement will be favorable to us.

See Note 13 to the financial statements.



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ITEM 1A. RISK FACTORS

Risks Related to Our Business

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

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

In assessing the results of the investigation conducted by the audit committee of our board as well as the recertification procedures
performed for purposes of the preparation and certification of our restated consolidated financial statements, our management has identified material weaknesses as of December 31, 2008 and December 31, 2007 and as of the end of each of the
completed fiscal quarters of 2008 and the first two fiscal quarters of 2009 that resulted in errors in our financial reporting with regard to our accounting for revenue recognition with respect to the sale of our Sensei Robotic Catheter Systems.
Such errors resulted in a financial restatement of the Companys audited annual financial statements as of and for the years ended December 31, 2008 and December 31, 2007 and the unaudited interim financial statements as of and for
the quarterly periods ended June 30, 2009, March 31, 2009, September 30, 2008, June 30, 2008 and March 31, 2008. A description of the material weaknesses related to our inadequate internal controls over
financial reporting is set forth in Part I Item 4 Controls and Procedures.

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

We have been named as a defendant in two class action lawsuits and certain of our current and former employees and our directors have been named as defendants in a stockholder derivative suit that
may adversely affect our financial condition, results of operations and cash flows.

We and certain of our executive
officers, one of whom is also a director, are defendants in two securities class action lawsuits related to our restatement. In addition, certain of our current and former officers and directors are defendants in a stockholder derivative action also
relating to our restatement. These lawsuits are described under the heading Note 13, Subsequent Events. Our attention may be diverted from our ordinary business operations by these lawsuits and we may incur significant expenses
associated with the defense of these lawsuits (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors and our underwriters who may be parties to such actions). Depending on
the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions on future conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse
effect on our results of operations, financial condition, liquidity, our ability to meet our debt obligations and, consequently, negatively impact the trading price of our common stock.



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

In August 2009, the Company received an anonymous whistleblower report alleging a single irregularity that resulted in improper revenue recognition in the quarter ended December 31, 2008. The
Companys audit committee, with the assistance of independent outside counsel, undertook an investigation into the allegation and a review of the Companys historical revenue recognition practices. The audit committees investigation
determined that information was withheld from the Companys accounting department and independent auditors, documentation related to certain revenue transactions was falsified, and there was not an effective control environment in our sales,
clinical and field service departments. This led to incomplete information regarding temporary installations, unfulfilled training obligations, the inability of distributors to independently install systems and train end users, and undisclosed side
arrangements. As a result, there were instances where revenue was recognized prior to the completion of all of the elements required for revenue recognition under the Companys revenue recognition policy. As a result of this investigation, we
restated our consolidated financial statements for the years ended December 31, 2007 and 2008, for each of the quarters of the year ended December 31, 2008, and for the first two quarters of the year ending December 31, 2009. For more information on
these matters, see Notes 3 and 13 of the Notes to Consolidated Financial Statements, and Part 1 Item 4.

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

Continuing negative publicity may adversely affect our business.

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

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

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



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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 September 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. This recall was closed in June 2008. Also, following the introduction of a new catheter in the fall of 2009, some of the
new catheters experienced a leak in the flush assembly. Although no patient is known or suspected to have experienced any consequences associated with the new catheters, we voluntarily recalled all of the catheters and reported the events to the FDA
in accordance with applicable regulations. Our manufacturing group is testing a revised catheter design which we expect to be able to ship to customers early next year. This catheter redesign or other manufacturing issues may result in our being
unable to meet the expected demand for our Artisan catheters or our Sensei system, maintain control over our expenses or otherwise successfully manage our manufacturing capabilities. If we are unable to satisfy demand for our Sensei system or
Artisan catheters, our ability to generate revenue could be impaired and hospitals may instead purchase, or physicians may use, our competitors products. Since our Sensei system requires the use of disposable Artisan catheters, our failure to
meet demand for Artisan catheters from hospitals that have purchased our Sensei system could adversely affect the market acceptance of our products and damage our commercial reputation.

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



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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 have begun the
process of seeking regulatory clearance for the use of our system in atrial fibrillation procedures and may seek future clearances or approvals of our Sensei system for other indications, 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



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widely used, latent or other defects could be identified, creating negative publicity and liability problems for us, thereby adversely affecting demand for our products. If physicians do not use
our products in cardiac ablation procedures, we likely will not become profitable and our business will be harmed.

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

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

Our initial commercial offering consists primarily of two products, our Sensei system and our corresponding
disposable Artisan catheters. The Sensei system has recently been supplemented by an optional CoHesion Module. In order for us to achieve sales, hospitals must purchase our Sensei system and Artisan catheters. Our Sensei system is a novel device,
and hospitals are traditionally slow to adopt new products and treatment practices. In addition, our Sensei system is an expensive capital equipment purchase, representing a significant portion of an electrophysiology laboratorys annual
budget. In addition, because it has only recently been commercially introduced, our Sensei system has limited product and brand recognition. Furthermore, particularly in this period of economic volatility and uncertainty, we do not believe hospitals
will purchase our products unless the physicians at those hospitals express a strong desire to use our products and we cannot predict whether or not they will do so. If hospitals do not widely adopt our Sensei system, or if they decide that it is
too expensive, we may never achieve significant revenue or become profitable. Such a failure to adequately sell our Sensei system would have a materially detrimental impact on our business, results of operations and financial condition.

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

We have experienced substantial net
losses since our inception in late 2002. At September 30, 2009, we had an accumulated deficit of $208.5 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 have begun the process of seeking regulatory clearance for the use of our system in atrial fibrillation procedures. We may subsequently seek regulatory clearance for use of our Sensei system for use with other 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 three 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 nine months ended September 30,
2009, net cash used in operating activities was $28.0 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



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

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

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

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.

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

Our success will depend, in part, on our ability to expand our
offerings and markets and grow our business in response to changing technologies, customer demands and competitive pressures. In some



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circumstances, we may determine to do so through the acquisition of complementary businesses, solutions or technologies rather than through internal development. The identification of suitable
acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. Furthermore, even if we successfully complete an acquisition, we may not be able to successfully assimilate
and integrate the business, technologies, solutions, personnel or operations of the company that we acquired, particularly if key personnel of an acquired company decide not to work for us. In addition, we may issue equity securities to complete an
acquisition, which would dilute our stockholders ownership and could adversely affect the price of our common stock. Acquisitions may also involve the entry into geographic or business markets in which we have little or no prior experience.
Consequently, we may not achieve anticipated benefits of the acquisitions which could harm our operating results.

Software defects may be discovered in our products.

Our Sensei system incorporates sophisticated
computer software. Complex software frequently contains errors, especially when first introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals will have an
increased sensitivity to the potential for software and other defects. We cannot assure you that our software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely
also experience:



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



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



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



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



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



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



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



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

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



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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.

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, and the first and third quarters of 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.



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

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



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



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



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



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



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

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

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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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



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

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

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

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

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

A change in accounting pronouncements or taxation rules or practices can have a
significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. During the first quarter of fiscal 2006, we adopted new accounting guidance regarding accounting for stock-based
compensation. Adoption of this guidance has had a significant impact on our financial statements since 2006 and is expected to have a significant impact on our future financial statements, as we are now required to expense the fair value of our
stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our net loss within our footnotes. Other new accounting pronouncements or taxation rules and varying interpretations of accounting
pronouncements or taxation practice have occurred and may occur in the future. Changes to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our
business.

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

In August 2008, we entered into a $25 million loan and security agreement with
Silicon Valley Bank, consisting of a $15 million term equipment loan and a one-year $10 million revolving credit line, which expired in August 2009. We have drawn down approximately $12.5 million on the term equipment loan and, per the original
agreement terms, the remainder of the term equipment loan is no longer available. The facility is collateralized by substantially all of our assets, excluding intellectual property, and is subject to certain covenants, including maintaining the
required liquidity, achieving EBITDA amounts to be specified



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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 September 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 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.



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We cannot assure you that we will obtain the patent protection we seek, that any protection
we do obtain will be found valid and enforceable if challenged or that such patent protection will confer any significant commercial advantage. United States patents and patent applications may also be subject to interference proceedings and United
States patents may be subject to reexamination proceedings in the United States Patent and Trademark Office, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings
could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, reexamination and opposition
proceedings may be costly. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or
license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may
not provide us with proprietary protection or competitive advantages against competitors with similar technology.

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

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

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

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

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



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

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

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

The medical device industry is characterized by frequent and extensive litigation and
administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves 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



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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.

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.



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

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

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

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

In many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards,
packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to those of the FDA. In addition, in many countries the national health or social security
organizations require our products to be qualified before procedures performed using our products become eligible for coverage and reimbursement. Failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material
adverse effect on our business, financial condition and results of operations. Due to the movement toward harmonization of standards in the European Union, we expect a changing regulatory 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



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manufacturing facilities or those of any of our contract manufacturers fail to take satisfactory corrective action in response to an adverse QSR inspection, the FDA could take enforcement action,
including any of the following sanctions, which could have a material impact on our operations:



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



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



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



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



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



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



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



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



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



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

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

If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement
actions. An increased frequency of filing Medical Device Reports concerning adverse events occurring during procedures performed with our technology could result in increased regulatory scrutiny of our products and could delay or prevent the
adoption of our products.

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



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Our products may in the future be subject to product recalls that could harm our
reputation, business and financial results.

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

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

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

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.



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



| |  |  | 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;
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| |  |  | 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.

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 November 5, 2009,
our stock price has fluctuated from a low of $2.50 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 restatement and the related litigation or governmental action or additional litigation related to the restatement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the effect of potential healthcare reform legislation or other legislative or regulatory action related to healthcare;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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



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

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

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

Currently, several
securities analysts provide research coverage of our common stock. Several analysts have already published statements that do not portray our technology, products or procedures using our products in a positive light and others may do so in the
future. If we are unable to educate those who



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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 30.2 percent of the outstanding shares of our common stock as of October 30, 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | 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.

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



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regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult
and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

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

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

(a) Sales of Unregistered Securities

Not applicable.

(b) Uses of Proceeds from Sale of Registered Securities

Not applicable.

(c) Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.



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ITEM 6. EXHIBITS

Exhibits



|              |  |                                                                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                           
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                                                                                  
|              | 
|3.2(2)        |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                        
|              | 
|4.1(3)        |  | Specimen Common Stock Certificate.                                                                                                                                                                                                    
|              | 
|4.2(3)        |  | Amended and Restated Investor Rights Agreement, dated November 10, 2005, between the Registrant and certain of its stockholders.                                                                                                      
|              | 
|10.24**       |  | Purchase Agreement by and between the Registrant and Plexus Services Corp., dated October 10, 2007.                                                                                                                                   
|              | 
|10.45         |  | Extension of Purchase Agreement by and between Plexus Corp. and the Registrant, dated August 28, 2009.                                                                                                                                
|              | 
|10.46         |  | Amendment to Agreement and Plan of Merger and Reorganization, among the Registrant, Redwood Merger Subsidiary, Inc., Redwood Second Merger Subsidiary, Inc., AorTx, Inc. and David
Forster and Louis Cannon, dated September 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Confidential treatment has been requested with respect to certain portions of this exhibit.
|-- | -------------------------------------------------------------------------------------------



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SIGNATURES

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



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



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