##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 4, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For
the transition period from

to
 Commission file number: 0-24663
 
 ASPECT MEDICAL SYSTEMS, INC.
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    04-2985553
(I.R.S. Employer Identification No.)One Upland Road, Norwood, Massachusetts
(Address of Principal Executive Offices)
    
    02062
(Zip Code)
 (617) 559-7000
 þ o
 o o
  Large accelerated filer o
Accelerated filer þNon-accelerated filer o(Do not check if smaller reporting company)Smaller reporting company o
 o þ




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##### 



PagePART I
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
as of July 4, 2009 and December 31, 2008
    
    
    1Condensed Consolidated Statements of Income
(unaudited) for the Three and Six Months Ended July
4, 2009 and June 28, 2008
    
    
    2Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended July 4, 2009
and June 28, 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    28PART II
    
    OTHER INFORMATION
    
    
    28Item 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    48Item 6.
    
    Exhibits
    
    
    50SIGNATURES
    
    
    51EX-10.2 Amendment 2 dated April 15, 2009 to OEM Development and Purchase Agreement, dated August 30, 2005, by and between Registrant and General Electric CompanyEX-10.3 BISx International License Agreement, dated April 14, 2009, by and between the Registrant and Philips Medizin Systeme Boblingen GmbHEX-31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amendedEX-31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amendedEX-32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002EX-32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 ASPECT MEDICAL SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and per share amounts)
(unaudited)
 July 4,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,401
    
    
    $
    12,066Short-term investments
    
    
    64,762
    
    
    
    65,985Accounts receivable, net of allowance of $198 at July
4, 2009 and $121 at December 31, 2008
    
    
    13,337
    
    
    
    13,193Current portion of investment in sales-type leases
    
    
    910
    
    
    
    1,057Inventory
    
    
    8,217
    
    
    
    7,796Deferred tax assets
    
    
    4,729
    
    
    
    4,729Other current assets
    
    
    2,816
    
    
    
    2,905Total current assets
    
    
    107,172
    
    
    
    107,731Property and equipment, net
    
    
    7,888
    
    
    
    8,319Restricted cash
    
    
    1,102
    
    
    
    839Long-term investments
    
    
    28
    
    
    
    4,561Long-term investment in sales-type leases
    
    
    1,092
    
    
    
    1,454Deferred financing fees
    
    
    1,500
    
    
    
    1,852Long-term deferred tax assets
    
    
    11,134
    
    
    
    12,090Other long-term assets
    
    
    95
    
    
    
    128Total assets
    
    $
    130,011
    
    
    $
    136,974LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,446
    
    
    $
    2,155Accrued liabilities
    
    
    8,969
    
    
    
    13,288Current portion of obligation under capital lease
    
    
    77
    
    
    
    71Deferred revenue
    
    
    114
    
    
    
    236Total current liabilities
    
    
    10,606
    
    
    
    15,750Long-term portion of obligation under capital lease
    
    
    46
    
    
    
    100Long-term portion of deferred revenue
    
    
    70
    
    
    
    94Long-term debt
    
    
    57,950
    
    
    
    65,000Commitments and contingencies
Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 60,000,000 shares
authorized, 17,440,673 and 17,352,438 shares issued
and outstanding at July 4, 2009 and December 31, 2008,
respectively
    
    
    176
    
    
    
    176Treasury stock, at cost; 276,493 shares
    
    
    (5,008
    )
    
    
    (5,008
    )Additional paid-in capital
    
    
    190,477
    
    
    
    187,374Accumulated other comprehensive loss
    
    
    (60
    )
    
    
    (105
    )Accumulated deficit
    
    
    (124,246
    )
    
    
    (126,407
    )Total stockholders equity
    
    
    61,339
    
    
    
    56,030Total liabilities and stockholders equity
    
    $
    130,011
    
    
    $
    136,974
  1




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJuly 4, 2009
    
    
    June 28, 2008
    
    
    July 4, 2009
    
    
    June 28, 2008Revenue
    
    $
    24,893
    
    
    $
    25,185
    
    
    $
    50,193
    
    
    $
    49,613Costs of revenue (1)
    
    
    6,186
    
    
    
    6,353
    
    
    
    12,123
    
    
    
    12,839Gross profit
    
    
    18,707
    
    
    
    18,832
    
    
    
    38,070
    
    
    
    36,774Operating expenses: (1)Research and development
    
    
    3,658
    
    
    
    3,934
    
    
    
    7,673
    
    
    
    7,873Sales and marketing
    
    
    10,176
    
    
    
    11,672
    
    
    
    21,004
    
    
    
    21,874General and administrative
    
    
    4,240
    
    
    
    4,172
    
    
    
    8,821
    
    
    
    8,114Total operating
expenses
    
    
    18,074
    
    
    
    19,778
    
    
    
    37,498
    
    
    
    37,861Income (loss) from operations
    
    
    633
    
    
    
    (946
    )
    
    
    572
    
    
    
    (1,087
    )Other income (expense):Interest income
    
    
    330
    
    
    
    1,103
    
    
    
    780
    
    
    
    2,381Interest expense
    
    
    (445
    )
    
    
    (928
    )
    
    
    (912
    )
    
    
    (1,876
    )Realized gain on sale of
investments
    
    
    10
    
    
    
    
    
    
    
    30
    
    
    
    Gain on repurchase of debt
    
    
    
    
    
    
    3,940
    
    
    
    3,049
    
    
    
    3,940Income before income taxes
    
    
    528
    
    
    
    3,169
    
    
    
    3,519
    
    
    
    3,358Provision for income taxes
    
    
    221
    
    
    
    1,270
    
    
    
    1,358
    
    
    
    1,694Net income
    
    $
    307
    
    
    $
    1,899
    
    
    $
    2,161
    
    
    $
    1,664Net income per share:Basic
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.10Diluted
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.10Weighted average shares used in
computing net income per share:Basic
    
    
    17,414
    
    
    
    17,217
    
    
    
    17,395
    
    
    
    17,183Diluted
    
    
    17,414
    
    
    
    23,754
    
    
    
    17,395
    
    
    
    17,409(1) Stock-based compensation
included in costs and expenses:Costs of revenue
    
    $
    108
    
    
    $
    124
    
    
    $
    218
    
    
    $
    243Research and development
    
    
    397
    
    
    
    487
    
    
    
    806
    
    
    
    956Sales and marketing
    
    
    452
    
    
    
    669
    
    
    
    932
    
    
    
    1,345General and administrative
    
    
    559
    
    
    
    650
    
    
    
    1,078
    
    
    
    1,328
  2




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedJuly 4,
    
    
    June 28,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    2,161
    
    
    $
    1,664Adjustments to reconcile net income to net cash provided by
operating activities Depreciation and amortization
    
    
    1,522
    
    
    
    1,500Gain on repurchase of debt
    
    
    (3,049
    )
    
    
    (3,940
    )Gain on sale of investment
    
    
    (30
    )
    
    
    Provision for doubtful accounts
    
    
    77
    
    
    
    13Stock-based compensation expense
    
    
    2,992
    
    
    
    3,821Tax benefit for stock option exercises
    
    
    33
    
    
    
    17Deferred taxes
    
    
    956
    
    
    
    1,489Changes in assets and liabilities Increase in accounts receivable
    
    
    (221
    )
    
    
    (497
    )(Increase) decrease in inventory
    
    
    (421
    )
    
    
    426Decrease (increase) in other current assets
    
    
    89
    
    
    
    (581
    )Decrease in investment in sales-type leases
    
    
    509
    
    
    
    851Decrease in other long-term assets
    
    
    33
    
    
    
    Decrease in accounts payable
    
    
    (709
    )
    
    
    (166
    )Decrease in accrued liabilities
    
    
    (4,319
    )
    
    
    (782
    )(Decrease) increase in deferred revenue
    
    
    (146
    )
    
    
    18Net cash (used for) provided by operating activities
    
    
    (523
    )
    
    
    3,833Cash flows from investing activities:Decrease in restricted cash
    
    
    (263
    )
    
    
    (5
    )Acquisitions of property and equipment
    
    
    (934
    )
    
    
    (836
    )Purchases of investments
    
    
    (39,261
    )
    
    
    (65,121
    )Proceeds from sales and maturities of investments
    
    
    45,000
    
    
    
    56,625Net cash provided by (used for) investing activities
    
    
    4,542
    
    
    
    (9,337
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    77
    
    
    
    611Repayment of long-term debt
    
    
    (3,805
    )
    
    
    (5,746
    )Repayment of capital lease
    
    
    (48
    )
    
    
    (52
    )Net cash used for financing activities
    
    
    (3,776
    )
    
    
    (5,187
    )Effect of exchange rate changes on cash
    
    
    92
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    335
    
    
    
    (10,691
    )Cash and cash equivalents, beginning of period
    
    
    12,066
    
    
    
    19,828Cash and cash equivalents, end of period
    
    $
    12,401
    
    
    $
    9,137
  3




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 (1) Basis of Presentation
   (2) Summary of Significant Accounting Policies
  Principles of Consolidation
  Foreign Currency
  Cash, Cash Equivalents and Investments
  Accounting for Certain Investments
in Debt and Equity Securities
 4




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ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 Revenue Recognition
  Revenue Arrangements with Multiple Deliverables Revenue Recognition
 Accounting For Leases
    Accounting for
Contingencies
 5




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 Research and Development Costs
  Allowance for Doubtful Accounts
  Inventory
  Warranty
  Three Months Ended
    
    
    Six Months EndedJuly 4, 2009
    
    
    June 28, 2008
    
    
    July 4, 2009
    
    
    June 28, 2008Beginning balance
    
    $
    259
    
    
    $
    226
    
    
    $
    270
    
    
    $
    250Warranty expense
    
    
    24
    
    
    
    41
    
    
    
    29
    
    
    
    30Deductions and other
    
    
    (17
    )
    
    
    (13
    )
    
    
    (33
    )
    
    
    (26
    )Ending balance
    
    $
    266
    
    
    $
    254
    
    
    $
    266
    
    
    $
    254
 Shipping and Handling Costs
  Advertising Costs
  6




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 Property and Equipment
 Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use
 Income Taxes
 Accounting for Income
Taxes Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109
 Concentration of Credit Risk
  Single or Limited Source Suppliers
  Net Income Per Share
 Earnings Per Share
  7




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
   Three Months Ended
    
    
    Six Months EndedJuly 4,
    
    
    June 28,
    
    
    July 4,
    
    
    June 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Basic:Net income
    
    $
    307
    
    
    $
    1,899
    
    
    $
    2,161
    
    
    $
    1,664Weighted average shares outstanding
    
    
    17,414
    
    
    
    17,217
    
    
    
    17,395
    
    
    
    17,183Basic net income per share
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.10Diluted:Net income
    
    $
    307
    
    
    $
    1,899
    
    
    $
    2,161
    
    
    $
    1,664Interest expense on convertible
debt, net
    
    
    
    
    
    
    558
    
    
    
    
    
    
    
    Net income as adjusted
    
    $
    307
    
    
    $
    2,457
    
    
    $
    2,161
    
    
    $
    1,664Weighted average shares outstanding
    
    
    17,414
    
    
    
    17,217
    
    
    
    17,395
    
    
    
    17,183Effect of dilutive stock options and
restricted stock
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    226Conversion of convertible notes
    
    
    
    
    
    
    6,426
    
    
    
    
    
    
    
    Weighted average shares assuming
dilution
    
    
    17,414
    
    
    
    23,754
    
    
    
    17,395
    
    
    
    17,409Diluted net income per share
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.10
 Comprehensive Income
  Stock-Based Compensation
  Share Based Payment Accounting for Stock-Based Compensation
 8




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
  Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 28,
    
    July 4,
    
    June 28,2009
    
    2008
    
    2009
    
    2008Options granted
    
    
    47
    
    
    
    26
    
    
    
    691
    
    
    
    298Weighted average exercise price
    
    $
    5.64
    
    
    $
    5.60
    
    
    $
    4.52
    
    
    $
    11.28Weighted average grant date
fair value
    
    $
    3.25
    
    
    $
    3.06
    
    
    $
    2.69
    
    
    $
    5.32Assumptions:Risk-free interest rate
    
    
    3.06
    %
    
    
    3.37
    %
    
    
    2.91
    %
    
    
    3.00
    %Expected term
    
    5.79
    years
    
    5.76
    years
    
    6.11
    years
    
    5.76
    yearsExpected volatility
    
    
    61
    %
    
    
    56
    %
    
    
    63
    %
    
    
    47
    %
     9




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 :
     Use of Estimates
  Fair Value of Financial Instruments
   10




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 Recent Accounting Pronouncements
 Amendments to the
Impairment Guidance of EITF Issue No. 99-20 Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in
Securitized Financial Assets
 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have
Significantly Decreased and Identifying Transactions That are not Orderly Interim Disclosures about Fair Value of
Financial Instruments Recognition and
Presentation of Other-Than-Temporary Impairments
 Subsequent Events
 (3) Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJuly 4,
    
    
    June 28,
    
    
    July 4,
    
    
    June 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    307
    
    
    $
    1,899
    
    
    $
    2,161
    
    
    $
    1,664Other comprehensive income:Foreign currency
translation
adjustments
    
    
    148
    
    
    
    
    
    
    
    92
    
    
    
    Unrealized gain (loss)
on investments
    
    
    136
    
    
    
    (447
    )
    
    
    (47
    )
    
    
    (224
    )Comprehensive income
    
    $
    591
    
    
    $
    1,452
    
    
    $
    2,206
    
    
    $
    1,440
 11




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
 (4) Investment in Sales-Type Leases
  July 4,
    
    
    December 31,2009
    
    
    2008Total minimum lease payments receivable
    
    $
    2,854
    
    
    $
    3,457Less:Unearned interest income
    
    
    361
    
    
    
    459Allowance for lease payments
    
    
    491
    
    
    
    487Net investment in sales-type leases
    
    
    2,002
    
    
    
    2,511Less  current portion
    
    
    910
    
    
    
    1,057$
    1,092
    
    
    $
    1,454
 (5) Inventory
  July 4,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    4,672
    
    
    $
    4,552Work-in-progress
    
    
    51
    
    
    
    25Finished goods
    
    
    3,494
    
    
    
    3,219$
    8,217
    
    
    $
    7,796
 (6) Income Taxes
    12




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ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
  (7) Fair Value Measurements
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueJuly 4, 2009 U.S. Government debt securities
    
    $
    55,922
    
    
    $
    108
    
    
    $
    
    
    
    $
    56,030Corporate obligations
    
    
    8,459
    
    
    
    33
    
    
    
    (26
    )
    
    
    8,466Certificates of deposit
    
    
    1,396
    
    
    
    
    
    
    
    
    
    
    
    1,396$
    65,777
    
    
    $
    141
    
    
    $
    (26
    )
    
    $
    65,892December 31, 2008 U.S. Government debt securities
    
    $
    50,952
    
    
    $
    323
    
    
    $
    
    
    
    $
    51,275Corporate obligations
    
    
    13,200
    
    
    
    
    
    
    
    (207
    )
    
    
    12,993Commercial paper
    
    
    5,953
    
    
    
    46
    
    
    
    
    
    
    
    5,999Certificates of deposit
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    279$
    70,384
    
    
    $
    369
    
    
    $
    (207
    )
    
    $
    70,546
     Fair Value Measurements,
 13




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##### Table of Contents



ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
  Balance at
    
    Fair Value Measurements at July 4, 2009July 4, 2009
    
    Level 1
    
    Level 2
    
    Level 3Money Market Funds
    
    $
    8,562
    
    
    $
    8,562
    
    
    $
    
    
    
    $
    Available for sale
securities
    
    $
    64,496
    
    
    $
    
    
    
    $
    64,496
    
    
    $
    
 (8) Segment Information and Enterprise Reporting
   Three Months Ended
    
    
    Six Months EndedJuly 4,
    
    
    June 28,
    
    
    July 4,
    
    
    June 28,2009
    
    
    2008
    
    
    2009
    
    
    2008Geographic Area by RegionDomestic
    
    $
    16,993
    
    
    $
    17,347
    
    
    $
    34,088
    
    
    $
    34,410International
    
    
    7,900
    
    
    
    7,838
    
    
    
    16,105
    
    
    
    15,203Total
    
    $
    24,893
    
    
    $
    25,185
    
    
    $
    50,193
    
    
    $
    49,613
 Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 28,
    
    July 4,
    
    June 28,2009
    
    2008
    
    2009
    
    2008Geographic Area by RegionDomestic
    
    
    68
    %
    
    
    69
    %
    
    
    68
    %
    
    
    69
    %International
    
    
    32
    
    
    
    31
    
    
    
    32
    
    
    
    31Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  (9) Commitments and Contingencies
 Leases
  14




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ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
  Legal Proceedings
    (10) Loan Agreements
   15




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ASPECT MEDICAL SYSTEMS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
  (12) Convertible Debt
  (13) Stock Repurchase Program
  (14) Subsequent Event
  rapid plus ®
  16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
 ®
  Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 28,
    
    July 4,
    
    June 28,2009
    
    2008
    
    2009
    
    2008(dollars in thousands)Domestic revenue
    
    $
    16,993
    
    
    $
    17,347
    
    
    $
    34,088
    
    
    $
    34,410Percent of total revenue
    
    
    68
    %
    
    
    69
    %
    
    
    68
    %
    
    
    69
    %International revenue
    
    $
    7,900
    
    
    $
    7,838
    
    
    $
    16,105
    
    
    $
    15,203Percent of total revenue
    
    
    32
    %
    
    
    31
    %
    
    
    32
    %
    
    
    31
    %Total revenue
    
    $
    24,893
    
    
    $
    25,185
    
    
    $
    50,193
    
    
    $
    49,613BIS Sensor revenue
    
    $
    21,532
    
    
    $
    21,395
    
    
    $
    43,113
    
    
    $
    42,031Percent of total revenue
    
    
    86
    %
    
    
    85
    %
    
    
    86
    %
    
    
    85
    %Equipment revenue
    
    $
    3,361
    
    
    $
    3,790
    
    
    $
    7,080
    
    
    $
    7,582Percent of total revenue
    
    
    14
    %
    
    
    15
    %
    
    
    14
    %
    
    
    15
    %Total revenue
    
    $
    24,893
    
    
    $
    25,185
    
    
    $
    50,193
    
    
    $
    49,613
      17




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Share-Based
Payment
 New England Journal of Medicine
 18




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Critical Accounting Policies and Estimates
  Revenue Recognition
 Revenue Arrangements with
Multiple Deliverables Revenue Recognition
 Accounting For Leases
   19




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Stock-Based Compensation
        Allowance for Doubtful Accounts
  Inventories
  20




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Warranty
  Income Taxes
  Accounting for Uncertainty in Income Taxes  an Interpretation of
FASB Statement No. 109 Accounting for
Income Taxes,
 Results of Operations
  Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 28,
    
    July 4,
    
    June 28,2009
    
    2008
    
    2009
    
    2008Revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of revenue
    
    
    25
    
    
    
    25
    
    
    
    24
    
    
    
    26Gross margin
    
    
    75
    
    
    
    75
    
    
    
    76
    
    
    
    74Operating expenses:Research and development
    
    
    15
    
    
    
    16
    
    
    
    15
    
    
    
    16Sales and marketing
    
    
    40
    
    
    
    46
    
    
    
    42
    
    
    
    44General and administrative
    
    
    17
    
    
    
    17
    
    
    
    18
    
    
    
    16Total operating expenses
    
    
    72
    
    
    
    79
    
    
    
    75
    
    
    
    76Income (loss) from operations
    
    
    3
    
    
    
    (4
    )
    
    
    1
    
    
    
    (2
    )Interest income, net
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    1Gain on repurchase of debt
    
    
    
    
    
    
    16
    
    
    
    6
    
    
    
    8Income before income taxes
    
    
    2
    
    
    
    13
    
    
    
    7
    
    
    
    7Provision for incomes taxes
    
    
    1
    
    
    
    5
    
    
    
    3
    
    
    
    4Net income
    
    
    1
    %
    
    
    8
    %
    
    
    4
    %
    
    
    3
    %
 21




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Three and Six Months Ended July 4, 2009 Compared with the Three and Six Months Ended June 28, 2008
 Three Months Ended
    
    
    Six Months EndedPercentage
    
    
    
    
    
    
    
    
    
    
    PercentageJuly 4,
    
    
    June 28,
    
    
    Increase
    
    
    July 4,
    
    
    June 28,
    
    
    Increase2009
    
    
    2008
    
    
    (Decrease)
    
    
    2009
    
    
    2008
    
    
    (Decrease)(in thousands, except unit amounts)
    
    
    (in thousands, except unit amounts)Revenue  WorldwideBIS Sensor
    
    $
    21,532
    
    
    $
    21,395
    
    
    
    1
    %
    
    $
    43,113
    
    
    $
    42,031
    
    
    
    3
    %BIS monitor
    
    
    1,963
    
    
    
    1,944
    
    
    
    1
    %
    
    
    3,861
    
    
    
    4,041
    
    
    
    (4
    )%Original equipment manufacturer products
    
    
    695
    
    
    
    986
    
    
    
    (30
    )%
    
    
    1,708
    
    
    
    1,967
    
    
    
    (13
    )%Other equipment and accessories
    
    
    703
    
    
    
    860
    
    
    
    (18
    )%
    
    
    1,511
    
    
    
    1,574
    
    
    
    (4
    )%Total Equipment
    
    
    3,361
    
    
    
    3,790
    
    
    
    (11
    )%
    
    
    7,080
    
    
    
    7,582
    
    
    
    (7
    )%Total revenue
    
    $
    24,893
    
    
    $
    25,185
    
    
    
    (1
    )%
    
    $
    50,193
    
    
    $
    49,613
    
    
    
    1
    %Unit Analysis  WorldwideBIS Sensors
    
    
    1,608,000
    
    
    
    1,575,000
    
    
    
    2
    %
    
    
    3,206,000
    
    
    
    3,061,000
    
    
    
    5
    %BIS monitors
    
    
    743
    
    
    
    669
    
    
    
    11
    %
    
    
    1,475
    
    
    
    1,387
    
    
    
    6
    %Original equipment manufacturer
BIS products
    
    
    1,195
    
    
    
    1,224
    
    
    
    (2
    )%
    
    
    2,557
    
    
    
    2,784
    
    
    
    (8
    )%Installed base
    
    
    60,633
    
    
    
    51,273
    
    
    
    18
    %
    
    
    60,633
    
    
    
    51,273
    
    
    
    18
    %
 Revenue.
    22




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Expense Overview
 Three Months Ended
    
    Percentage
    
    Six Months Ended
    
    PercentageJuly 4,
    
    June 28,
    
    Increase
    
    July 4,
    
    June 28,
    
    Increase2009
    
    2008
    
    (Decrease)
    
    2009
    
    2008
    
    (Decrease)(in thousands)
    
    
    
    
    
    (in thousands)ExpensesResearch and development
    
    $
    3,658
    
    
    $
    3,934
    
    
    
    (7
    )%
    
    $
    7,673
    
    
    $
    7,873
    
    
    
    (3
    )%Sales and marketing
    
    
    10,176
    
    
    
    11,672
    
    
    
    (13
    )
    
    
    21,004
    
    
    
    21,874
    
    
    
    (4
    )General and administrative
    
    
    4,240
    
    
    
    4,172
    
    
    
    2
    
    
    
    8,821
    
    
    
    8,114
    
    
    
    9
 Research and Development.
  Sales and Marketing.
  23




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General and Administrative.
  Interest Income.
 Interest Expense.
 Income Taxes.
   24




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Liquidity and Capital Resources
        25




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Cash (used for) provided by operations.
 Cash provided by (used for) investing activities.
 Cash used for financing activities.
 Off-Balance Sheet Arrangements
  Effects of Inflation
  Recent Accounting Pronouncements
 Amendments to the
Impairment Guidance of EITF Issue No. 99-20 Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in
Securitized Financial Assets
 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have
Significantly Decreased and Identifying Transactions That are not Orderly Interim Disclosures about Fair Value of
Financial Instruments
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Recognition and Presentation of
Other-Than-Temporary Impairments
 Subsequent Events
 Forward-Looking Statements
 This Quarterly Report on Form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, including information relating to our ability to maintain profitability, information with
respect to market acceptance of our BIS system, continued growth in sales of our BIS monitors,
original equipment manufacturer products and BIS Sensors, our dependence on the BIS system,
regulatory approvals for our products, our ability to remain competitive and achieve future growth,
information with respect to other plans and strategies for our business and factors that may
influence our revenue for the fiscal quarter ending October 3, 2009 and thereafter. These
forward-looking statements involve risks and uncertainties and are not guarantees of future
performance. Words such as expect, anticipate, intend, plan, believe, seek, estimate
and variations of these words and similar expressions are intended to identify forward-looking
statements. Our actual results could differ significantly from the results discussed in these
forward-looking statements. The important factors discussed under Part II  Item 1A. Risk
Factors below represent some of the current challenges to us that create risk and uncertainty. In
addition, subsequent events and developments may cause our expectations to change. While we may
elect to update these forward-looking statements we specifically disclaim any obligation to do so,
even if our expectations change.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Exposure
   Foreign Currency Exposure
  27




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Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Controls.
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   28




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Item 1A. Risk Factors
  We will not continue to be profitable if hospitals and anesthesia providers do not buy and use our
BIS system and purchase our BIS Sensors in sufficient quantities.
  New England Journal of Medicine
  We depend on our BIS system for substantially all of our revenue, and if the BIS system does not
gain widespread market acceptance, then our revenue will not grow.
  Various factors may adversely affect our quarterly operating results through the third fiscal
quarter of 2009.
  
    
    a third party study published in March 2008 in the New England Journal
of Medicinecompared BIS monitoring with a protocol based on end-tidal
gas anesthetic in a patient population considered to be at high risk
of awareness and concluded that, based upon a similar occurrence of
awareness in both groups, no benefit of BIS monitoring was
demonstrated. We believe that the publication of this study has had,
and may continue to have an adverse effect on the rate at which
existing
 29




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or potential new customers purchase and use our products,
which could adversely affect our operating results;
 
    
    we have expanded our sales force and expect that the resulting
increase in operating expenses would not be offset at least initially
by an increase in revenue; as a result our operating results in such
periods could be adversely affected;
    
    we have shifted the focus of our sales and marketing efforts from
expanding our customer base to deepening our relationships with our
existing customers and increasing their sensor utilization and
procedure penetration. As a result of this shift in focus, we expect
our revenue from the sale of equipment to continue to decrease. As
such, if we do not increase revenue from sales of our BIS Sensors
quickly, or at all, our operating results could be adversely affected;
    
    we have repurchased a portion of our 2.5% convertible senior notes due
2014, referred to as our notes, and we may make additional repurchases
in the future. If any such repurchases are made at a discount to the
face value of the note, we expect to record a gain on such
transaction, which could affect our operating results in the quarter
in which any such repurchase is made; and
    
    we face risks beyond our control with respect to the continued
challenges of the U.S. and worldwide economies, including without
limitation the effects of domestic inflation, declines in the value of
our investments, the global rise in energy costs and reductions in
hospital spending.
  Fluctuations in our quarterly operating results could cause our stock price to decrease.
  
    
    the timing and volume of customer orders for our BIS system;
    
    market acceptance of our BIS VISTA monitor;
    
    use of and demand for our BIS Sensors;
    
    the timing and amount of sales from new products and technologies we may introduce,
such as products we may sell under our distribution agreement with LiDCO Limited;
    
    transition of sales focus from expanding our customer base to developing our existing
customers and increasing their sensor utilization and procedure penetration;
    
    customer cancellations;
    
    introduction of competitive products;
    
    regulatory approvals;
    
    changes in management;
    
    turnover in our direct sales force;
    
    expansion of our direct sales force which has increased our operating expenses, and
this increase will not be offset, at least initially, by an increase in revenue;
    
    effectiveness of new marketing and sales programs;
    
    communications published by industry organizations or other professional entities in
the anesthesia community that are unfavorable to our business, including publication of
the results of clinical studies;
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
    
    trading in our convertible debt instruments;
    
    repurchases of shares of our common stock or our notes;
    
    the amount of our outstanding indebtedness and interest payments under debt obligations;
    
    reductions in orders by our distributors and original equipment manufacturers; and
    
    the timing and amount of our expenses.
  The current crisis in global credit and financial markets could materially and adversely affect our
business and results of operations and our investment portfolio may become impaired further by a
continuation of the global economic crisis.
   If the estimates we make, and the assumptions on which we rely, in preparing our financial
statements prove inaccurate, our actual results may vary from those reflected in our financial
statements.
  Compliance with changing regulation of corporate governance and public disclosure as well as
potential new accounting pronouncements are likely to impact our future financial position or
results of operations.
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Failure to maintain effective internal controls in accordance with section 404 of the
Sarbanes-Oxley act could have a material adverse effect on our business and stock price.
  We may need additional financing for our future capital needs and may not be able to raise
additional funds on terms acceptable to us, or at all.
  
    
    the research and development costs of our products or technology currently under development, including costs to fund
our neuroscience program following termination in June 2007 of our alliance with Boston Scientific Corporation,
increase beyond current estimates;
    
    we decide to expand faster than currently planned;
    
    we develop new or enhanced services or products ahead of schedule;
    
    we decide to undertake new sales and/or marketing initiatives;
    
    we are required to defend or enforce our intellectual property rights, or respond to other legal challenges with
respect to our products, including product liability claims;
    
    sales of our products do not meet our expectations domestically or internationally, including sales of our BIS Sensors;
    
    we are required or elect to pay the principal under our notes in cash at or prior to maturity or we determine to
repurchase any portion of our notes;
    
    we experience unexpected losses in our cash investments or are otherwise unable to liquidate these investments due to
unfavorable conditions in the capital markets;
    
    we need to respond to competitive pressures; or
    
    we decide to acquire complementary products, businesses or technologies.
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Cases of awareness with recall during monitoring with the BIS system could limit market acceptance
of the BIS system and could expose us to product liability claims.
  We may not be able to compete with new products or alternative techniques developed by others,
which could impair our ability to remain competitive and achieve future growth.
  
    
    other new monitoring products, based on new or improved technologies;
    
    new products or technologies used on patients or in the operating room during surgery in lieu of monitoring devices;
    
    electrical or mechanical interference from new or existing products or technologies;
    
    alternative techniques for evaluating the effects of anesthesia;
    
    significant changes in the methods of delivering anesthesia; and
    
    the development of new anesthetic agents.
  If we do not maintain our relationships with the anesthesia community and if anesthesiologists and
other healthcare providers do not recommend and endorse our products, our sales may decline or we
may be unable to increase our sales and profits.
  33




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New England Journal of
Medicine
 Negative publicity or unfavorable media coverage could damage our reputation and harm our
operations.
  New England Journal of Medicine
 If we do not successfully develop or acquire and introduce enhanced or new products we could lose
revenue opportunities and customers.
  
    
    identify and respond, in a timely manner, to new market trends or opportunities;
    
    assess customer needs;
    
    successfully develop or acquire competitive products;
    
    complete regulatory clearance in a timely manner;
    
    successfully develop cost effective manufacturing processes;
    
    introduce such products to our customers in a timely manner; and
    
    achieve market acceptance of the BIS system.
  
    
    we may not successfully adapt the BIS system to function properly for
procedural sedation, when used with
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anesthetics we have not tested or
with patient populations we have not studied, such as infants; and
    
    our technology is complex, and we may not be able to develop it
further for applications outside anesthesia monitoring, such as the
diagnosis and tracking of neurological diseases.
  rapid plus ®
 If our clinical trials are delayed or unsuccessful, our business could be adversely affected.
    
    
    delays or the inability to obtain required approvals from institutional review boards or other governing
entities at clinical sites selected for participation in our clinical trials;
    
    delays in enrolling patients and volunteers into clinical trials;
    
    lower than anticipated retention rates of patients and volunteers in clinical trials;
    
    failure of our clinical trials to demonstrate the efficacy or clinical utility of our potential products.
  If we do not develop and implement a successful sales and marketing strategy, we will not expand
our business.
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
    
    provide or assure that distributors and original equipment manufacturers provide the
technical and educational support customers need to use the BIS system successfully;
    
    promote frequent use of the BIS system so that sales of our disposable BIS Sensors increase;
    
    establish and implement successful sales and marketing and education programs that
encourage our customers to purchase our products or the products that are made by original
equipment manufacturers incorporating our technology;
    
    manage geographically dispersed operations; and
    
    modify our products and marketing and sales programs for foreign markets.
 We encourage our direct sales force, distributors and original equipment manufacturers to maximize
the amount of our products they sell and they may engage in aggressive sales practices that may
harm our reputation.
  Our third-party distribution and original equipment manufacturer relationships could negatively
affect our profitability, cause sales of our products to decline and be difficult to terminate if
we are dissatisfied.
  We may not be able to generate enough additional revenue from our international expansion to offset
the costs associated with establishing and maintaining foreign operations.
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We may not be able to meet the unique operational, legal and financial challenges that we will
encounter in our international operations, which may limit the growth of our business.
  
    
    failure of local laws to provide adequate protection against infringement of our intellectual property;
    
    protectionist laws and business practices that favor local competitors, which could slow or prohibit our
growth in international markets;
    
    difficulties in terminating or modifying distributor arrangements because of restrictions in markets
outside the United States;
    
    less acceptance by foreign anesthesia providers of the use of disposable products, such as BIS Sensors;
    
    delays in regulatory approval of our products;
    
    currency conversion issues arising from sales denominated in currencies other than the United States dollar;
    
    foreign currency exchange rate fluctuations;
    
    longer sales cycles to sell products like the BIS system to hospitals and outpatient surgical centers,
which could slow our revenue growth from international sales; and
    
    longer accounts receivable payment cycles and difficulties in collecting accounts receivable.
  We may experience customer dissatisfaction and our reputation could suffer if we fail to
manufacture enough products to meet our customers demands.
  Our reliance on sole-source suppliers could adversely affect our ability to meet our customers
demands for our products in a timely manner or within budget.
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We may be required to bring litigation to enforce our intellectual property rights, which may
result in substantial expense and may divert our attention from the implementation of our business
strategy.
  We may be sued by third parties which claim that our products infringe on their intellectual
property rights, particularly because there is substantial uncertainty about the validity and
breadth of medical device patents.
  
    
    cease selling, incorporating or using any of our products that incorporate the
challenged intellectual property, which would adversely affect our revenue;
    
    obtain a license from the holder of the infringed intellectual property right, which
license may not be available on reasonable terms, if at all; and
    
    redesign our products, which may be costly, time-consuming and may not be successful.
 We could be exposed to significant product liability claims which could divert management attention
and adversely affect our cash balances, our ability to obtain and maintain insurance coverage at
satisfactory rates or in adequate amounts and our reputation.
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Several class action lawsuits have been filed against the underwriters of our initial public
offering which may result in negative publicity and potential litigation against us that would be
costly to defend and the outcome of which is uncertain and may harm our business.
   We may not reserve amounts adequate to cover product obsolescence, claims and returns, which could
result in unanticipated expenses and fluctuations in operating results.
  We may not be able to compete effectively, which could result in price reductions and decreased
demand for our products.
  39




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Our ability to market and sell our products and generate revenue depends upon receipt of domestic
and foreign regulatory approval of our products and manufacturing operations.
       40




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All of our manufacturing activities are performed at a single site and any disaster at this site
could disrupt our ability to manufacture our products for a substantial length of time, which could
cause our revenues to decrease.
  Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply
with ongoing regulatory requirements our products could be subject to restrictions or withdrawal
from the market.
  
    
    untitled letters, warning letters, fines, injunctions and civil penalties;
    
    administrative detention, which is the detention by the FDA of medical devices believed to be
adulterated or misbranded;
    
    customer notification, or orders for repair, replacement or refund;
    
    voluntary or mandatory recall or seizure of our products;
    
    operating restrictions, partial suspension or total shutdown of production;
    
    refusal to review pre-market notification or pre-market approval submissions;
    
    rescission of a substantial equivalence order or suspension or withdrawal of a pre-market approval; and
    
    criminal prosecution.
  We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and
regulations and, if we are unable to fully comply with such laws, could face substantial penalties.
  If we do not retain our senior management and other key employees, we may not be able to
successfully implement our business strategy.
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If we do not attract and retain skilled personnel, or if we do not maintain good relationships with
our employees, we will not be able to expand our business.
   If we make any acquisitions, we will incur a variety of costs and may never successfully integrate
the acquired business into ours.
 rapid plus ®
 Our employees may engage in misconduct or other improper activities, including insider trading.
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Failure of users of the BIS system, or users of future products we may develop, to obtain adequate
reimbursement from third-party payors could limit market acceptance of the BIS system and other
products, which could prevent us from sustaining profitability.
   The market price of our stock is highly volatile, and this volatility could cause your investment
in our stock to suffer a decline in value and cause us to incur significant costs from class action
litigation.
  
    
    variations in our quarterly operating results or those of companies that are perceived to be similar to us;
    
    third-party sales of large blocks of our common stock;
    
    rumors relating to us or our competitors;
    
    changes to our research and development plans and/or announcements regarding new technologies by us or our
competitors;
    
    adverse results in clinical trials of our BIS monitoring system products and products under development;
    
    negative publicity or unfavorable media coverage;
    
    lawsuits involving us;
    
    sales by us of equity or debt to fund our operations;
    
    the loss of any of our key scientific or management personnel;
    
    FDA or international regulatory actions or lawsuits concerning the safety of our products; and
    
    market conditions, both in the medical device sector and generally.
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Transactions engaged in by our largest stockholders, our directors or executives involving our
common stock may have an adverse effect on the price of our stock.
   We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate
our stockholders ability to sell their shares for a premium in a change of control transaction.
  
    
    preferred stock that could be issued by our board of directors to make it more difficult for a third
party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting
stock;
    
    classification of our directors into three classes with respect to the time for which they hold office;
    
    non-cumulative voting for directors;
    
    control by our board of directors of the size of our board of directors;
    
    limitations on the ability of stockholders to call special meetings of stockholders;
    
    inability of our stockholders to take any action by written consent; and
    
    advance notice requirements for nominations of candidates for election to our board of directors or
for proposing matters that can be acted upon by our stockholders at stockholder meetings.
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Risks Related to our Issuance of $125 Million Principal Amount of
2.5% Convertible Senior Notes due 2014
 Our indebtedness as a result of the issuance of $125 million principal amount of 2.5% convertible
senior notes, or the notes, may harm our financial condition and results of operations.
  
    
    it could adversely affect our ability to satisfy our obligations under the notes;
    
    a substantial portion of our cash flows from operations will have to be dedicated to
interest payments, principal payments and, if we irrevocably elect to net share settle the
notes, conversion payments and may not be available for operations, working capital,
capital expenditures, expansion, acquisitions or general corporate or other purposes;
    
    it may impair our ability to obtain additional financing in the future;
    
    it may limit our flexibility in planning for, or reacting to, changes in our business
and industry; and
    
    it may make us more vulnerable to downturns in our business, our industry or the economy
in general.
  We may not have the cash necessary to pay interest on the notes, to settle conversions of the notes
(if we have obtained stockholder approval to elect net share settlement of the notes, and we
irrevocably elect such settlement method) or to repurchase the notes upon a fundamental change.
  
    
    pay cash in an amount equal to the lesser of one-fortieth of the principal amount of the
notes being converted and the daily conversion value (the product of the conversion rate
and the current trading price) of the notes being converted; and
    
    issue shares of our common stock only to the extent that the daily conversion value of
the notes exceeded one-fortieth of the principal amount of the notes being converted for
each trading day of the relevant 40 trading day observation period.
  The net share settlement feature of the notes, if available, may have adverse consequences.
  
    
    result in holders receiving no shares of our common stock upon conversion or fewer shares of our common stock relative to the conversion value of the notes;
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
    
    reduce our liquidity because we will be required to pay the principal portion in cash;
    
    delay holders receipt of the proceeds upon conversion; and
    
    subject holders to market risk before receiving any shares upon conversion.
   If we repurchase any portion of our notes, such repurchases could adversely affect the holders of
both our notes and our common stock and could also adversely affect our financial condition and
operating results.
  Future sales of our common stock in the public market or the issuance of securities senior to our
common stock could adversely affect the trading price of our common stock and the value of the
notes and our ability to raise funds in new securities offerings.
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Conversion of the notes will dilute the ownership interest of existing stockholders, including
holders who had previously converted their notes.
  Provisions in the indenture for the notes may deter or prevent a business combination that may be
favorable to note holders.
  The notes may not be rated or may receive a lower rating than anticipated.
  The effective subordination of the notes to our secured indebtedness to the extent of the
collateral securing such indebtedness may limit our ability to satisfy our obligations under the
notes.
  The structural subordination of the notes to our secured liabilities and all liabilities and
preferred equity of our subsidiaries may limit our ability to satisfy our obligations under the
notes.
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Item 4. Submission of Matters to a Vote of Security Holders.
  1.
    
    Election of Directors of Aspect, each to serve until our 2012 annual meeting of
stockholders or until their successors are duly elected and qualified:
 Nominee
    
    For
    
    Withheld
    
    Broker Non-VotesJon C. Biro
    
    
    12,548,583
    
    
    
    203,221
    
    
    
    Nassib G. Chamoun
    
    
    12,545,097
    
    
    
    206,707
    
    
    
    Melvin L. Keating
    
    
    12,084,085
    
    
    
    667,719
    
    
    
    
 2.
    
    Stockholders approved a one-time stock option exchange program, under which eligible
employees (excluding our executive officers and directors) would be able to elect to
exchange outstanding stock options with an exercise price of $15.00 or greater issued under
our 1998 Stock Incentive Plan or our 2001 Stock Incentive Plan for new lower-priced stock
options.
 For
    
    Against
    
    Abstaining
    
    Broker Non-Votes6,871,558
    
    2,602,834
    
    8,037
    
    3,269,375
 3.
    
    Stockholders approved the amendment of our Amended and Restated By-Laws, as amended,
which provides that, subject to limited exceptions, future annual meetings will be held no
later than May 25, in each year.
 For
    
    Against
    
    Abstaining
    
    Broker Non-Votes12,717,520
    
    4,852
    
    29,432
    
    
 4.
    
    Stockholders ratified the selection of Ernst & Young LLP by the audit committee of our
board of directors as our independent registered public accounting firm for the fiscal year
ending December 31, 2009.
 For
    
    Against
    
    Abstaining
    
    Broker Non-Votes12,648,118
    
    13,901
    
    89,785
    
    
   Item 5. Other Information.
 BISx International License Agreement with Philips
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Amendment to OEM Development and Purchase Agreement with General Electric
   
    
    provides for us and GE Healthcare to execute a Distribution Agreement pursuant to
which GE Healthcare may act as a distributor of BIS Sensors in a specified territory;
    
    extends the initial term of the purchase agreement to December 31, 2011, renewable
automatically for successive twelve-month periods unless either party provides notice of
termination to the other party at least ninety days prior to expiration of the purchase
agreement;
    
    amends the provision governing BIS Sensor commission payments to limit the commission
payments to a limited term based on the total number of BIS units installed by GE
Healthcare;
    
    modifies marketing authority by granting to GE Healthcare: (a) the exclusive,
perpetual, irrevocable, royalty-free right to promote, sell, resell, license,
sub-license, distribute and service certain products purchased from us on a
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world-wide
basis; (b) the limited, non-exclusive, perpetual, irrevocable, royalty-free right to
sell, resell, license, sub-license, distribute and service limited quantities of certain
BIS Sensors to customers who have previously entered into legally binding sensor
purchase commitments; (c) the limited, non-exclusive, perpetual, irrevocable,
world-wide,
royalty-free right to sell, resell, license, sub-license, distribute and service a
limited number of BIS Sensors solely to GE Healthcare customers who have purchased a
BIS/EEG Module Kit or BISx Kit provided that this limited number of sensors is sold and
delivered to the customer at the time of the purchase of the BIS module or BISx
technology; and (d) the non-exclusive, perpetual, irrevocable, royalty-free right to
promote, sell, resell, license, sub-license, distribute and service all other products
purchased from us on a world-wide basis
    
    allows us a non-exclusive, royalty-free right to purchase the Smart Chip Module
directly from the manufacturer to incorporate into the Custom Sensor, subject to certain
conditions;
    
    provides that we must certify the integration of products into GE Healthcares
Patient Monitoring System by verifying the accurate display of BIS; and
    
    updates the limitation on liability provisions to include the distribution of
products.
 
 Item 6. Exhibits.
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SIGNATURE
  ASPECT MEDICAL SYSTEMS, INC.Date: August 13, 2009
    By:
    /s/ J. Neal ArmstrongJ. Neal ArmstrongVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 51




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EXHIBIT INDEX
 EXHIBITNUMBER
    
    EXHIBIT10.1
    
    Sixteenth Amendment to Loan Agreement, dated June 30, 2009, by and
between the registrant and Bank of America, N.A. is incorporated
herein by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K dated July 7, 2009.10.2 
    
    Amendment 2 dated April 15, 2009 to OEM Development and Purchase
Agreement, dated August 30, 2005, by and between Registrant and
General Electric Company.10.3 
    
    BISx International License Agreement, dated April 14, 2009, by and
between the Registrant and Philips Medizin Systeme Boblingen GmbH.31.1
    
    Certification by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended.31.2
    
    Certification by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended.32.1
    
    Certification by Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification by Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 
    
    Confidential treatment has been
requested as to certain portions of this exhibit. Such portions have
been omitted and filed separately with the Securities and Exchange
commission.