UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended September 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33770

Power Medical Interventions, Inc.

(Exact name of registrant as specified in its charter)

Delaware		23-3011410
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

2021 Cabot Boulevard, Langhorne, Pennsylvania 19047

(Address of principal executive offices)

(267) 775-8100

(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 o.

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

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

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock.

As of November 14, 2008, 17,124,313 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

Power Medical Interventions, Inc.

Condensed Consolidated Balance Sheets

	September 30, 2008			December 31, 2007
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	15,883,961		$	36,592,220
Restricted cash	875,000			1,750,000
Accounts receivable less allowance of $104,000 and $120,000 in 2008 and 2007, respectively	1,616,620			1,514,776
Inventory	9,008,727			7,371,205
Prepaid expenses and other current assets	1,428,519			1,178,493
Total current assets	28,812,827			48,406,694
Property and equipment, net	4,696,139			4,713,010
Intangible assets, net	1,110,163			965,303
Deferred financing fees	850,673			1,276,010
Other assets	232,711			261,862
Restricted cash, long term	1,328,917			2,350,071
Total assets	$	37,031,430		$	57,972,950
Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accounts payable	3,380,525			$	4,422,198
Accrued expenses	3,422,209			4,506,748
Current portion of long-term debt	69,230			69,230
Total current liabilities	6,871,964			8,998,176

Long-term debt	24,877,939			24,742,891
Deferred revenue	12,500,000			—
Deferred rent, net of current portion	551,089			691,873
Total liabilities	44,800,992			34,432,940

Shareholders’ equity:
Common stock, $.001 par value:
Authorized shares—200,000,000 at September 30, 2008 and December 31, 2007, respectively; issued and outstanding shares 17,124,313 and 17,107,052 at September 30, 2008 and December 31, 2007, respectively	17,124			17,107
Additional paid-in capital	199,219,594			197,733,981
Accumulated other comprehensive loss	(136,379		)	(300,184		)
Accumulated deficit	(206,869,901		)	(173,910,894		)
Total shareholders’ equity (deficit)	(7,769,562		)	23,540,010
Total liabilities and shareholders’ equity (deficit)	$	37,031,430		$	57,972,950

See accompanying notes.

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Power Medical Interventions, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Sales	$	2,242,637		$	1,701,127		$	6,626,248		$	5,893,744
Cost of sales	1,701,175			1,281,410			7,276,590			4,581,337
	541,462			419,717			(650,342		)	1,312,407
Costs and expenses:
Research and development	1,539,139			1,820,676			4,629,670			4,373,862
Sales and marketing	5,104,859			3,977,684			17,862,358			11,087,967
General and administrative	2,578,688			2,005,227			8,214,130			6,331,109
	9,222,686			7,803,587			30,706,158			21,792,938
Operating loss	(8,681,224		)	(7,383,870		)	(31,356,500		)	(20,480,531		)

Other income (expense):
Interest income	58,058			198,553			342,568			564,051
Interest expense	(644,657		)	(1,084,034		)	(1,945,075		)	(2,176,348		)
Total other income (expense)	(586,599		)	(885,481		)	(1,602,507		)	(1,612,297		)
Net loss	$	(9,267,823	)	$	(8,269,351	)	$	(32,959,007	)	$	(22,092,828	)

Accretion of preferred stock	—			(2,259,411		)	—			(6,786,913		)
Net loss applicable to common shares	$	(9,267,823	)	$	(10,528,762	)	$	(32,959,007	)	$	(28,879,741	)
Net loss per common share:
Basic and diluted	$	(0.54	)	$	(2.78	)	$	(1.93	)	$	(7.59	)
Weighted average number of common shares outstanding:
Basic and diluted	17,124,313			3,782,405			17,113,665			3,805,800

See accompanying notes.

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Power Medical Interventions, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2008			2007
Operating activities
Net loss	$	(32,959,007	)	$	(22,092,828	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,461,382			1,649,268
Amortization of debt discount and deferred financing fees	612,141			124,536
Loss on the disposal of property and equipment	22,518			3,492
Stock-based compensation	1,413,006			395,978
Changes in operating assets and liabilities:
Accounts receivable	(20,571		)	159,499
Inventory	(1,578,052		)	(1,320,629		)
Prepaid expenses and other assets	(417,543		)	(1,092,011		)
Accounts payable	(1,166,001		)	1,039,006
Accrued expenses	(1,002,001		)	327,728
Deferred revenue	12,500,000			—
Deferred rent	(140,784		)	(18,545		)
Net cash used in operating activities	(21,274,912		)	(20,824,506		)

Investing activities
Purchase of property and equipment	(1,318,579		)	(1,301,340		)
Patent application costs	(293,879		)	(309,185		)
Change in restricted cash	1,890,690			(2,484,311		)
Net cash provided by (used in) investing activities	278,232			(4,094,836		)

Financing activities
Repayments on long-term debt	(51,757		)	(62,914		)
Proceeds of long-term debt, net	—			23,577,054
Net proceeds from the issuance of common stock and exercise of common stock warrants and options	72,626			637,764
Payment of deferred equity financing costs	—			(1,897,019		)
Net cash provided by financing activities	20,869			22,254,885

Effect of exchange rate changes on cash and cash equivalents	267,552			(308,641		)
Net decrease in cash and equivalents	(20,708,259		)	(2,973,098		)
Cash and cash equivalents, beginning of period	36,592,220			8,684,341
Cash and equivalents, end of period	$	15,883,961		$	5,711,243

Supplemental disclosure of cash flow information
Cash paid for interest	$	1,761,926		$	898,759

See accompanying notes.

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Power Medical Interventions, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2008

1. Business

Power Medical Interventions, Inc. (the Company), a Delaware corporation, is a medical device company that designs, manufactures and markets the SurgASSIST® system of computer-assisted, power-actuated endomechanical surgical instruments, referred to as Intelligent Surgical Instruments™. Surgeons use Intelligent Surgical Instruments for cutting, stapling and tissue manipulation in a variety of procedures in open surgery, minimally invasive surgery, or MIS, and in the emerging field of natural orifice translumenal endoscopic surgery, or NOTES. To date, the majority of the Company’s efforts have been devoted to research and development, raising capital, recruiting personnel, and the commercialization of products and the commencement of manufacturing activities.

The Company has wholly owned subsidiaries in Germany, Power Medical Interventions Deutschland GmbH; in France, Power Medical Interventions France; and in Japan, Power Medical Interventions Japan, which conduct sales and marketing operations. The Company also has a dormant U.S. subsidiary, Power Medical Vascular, Inc.

The Company believes that its cash and cash equivalents will be sufficient to meet its anticipated cash requirements through the fourth quarter 2009, however, there can be no assurance in this regard. The Company expects to achieve the development milestone necessary to entitle it to receive the first milestone payment under its license and development agreement with Intuitive Surgical, Inc. during the first half of 2009. The Company has also implemented plans to reduce its cash used in operations through reductions in headcount and other spending programs throughout the Company. Such costs include certain sales and marketing costs, product development costs, clinical research costs, employee bonuses, professional education, and capital expenditures. The Company’s future cash requirements will depend on many factors, primarily including its ability to increase its sales and improve its gross margins, its ability to achieve development milestones under its agreement with Intuitive Surgical, Inc. and receive the related milestone payments and the success of its recently announced restructuring initiative in reducing its operating expenses. The Company’s ability to meet its obligations in the normal course of business beyond the fourth quarter of 2009 will be dependent on its increasing its customer and revenue base, continuing to control expenses and securing additional external financing which it is actively pursuing through various structures. The Company has no arrangements to obtain additional financing, and there can be no assurance that such financing, if required or desired, will be available in amounts or on terms acceptable to the Company, if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s independent registered public accounting firm modified its audit report on the Company’s consolidated financial statements for the year ended December 31, 2007 to include an explanatory paragraph regarding this contingency.

2. Summary of Significant Accounting Policies

Unaudited interim financial data

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the requirements of Form 10-Q and Regulation S-X.

The accompanying condensed consolidated balance sheet as of September 30, 2008, the condensed consolidated statements of operations for the three and nine months ended September 30, 2008 and 2007, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007 are unaudited. The unaudited interim financial statements have been prepared on the same basis

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as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of September 30, 2008 and the results of its operations and cash flows for the three and nine months ended September 30, 2008 and 2007. The financial data and other information disclosed in these notes to the financial statements are unaudited. The results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for any future period.

Revenue recognition

The Company’s SurgASSIST surgical platform includes cutting and stapling devices in a variety of sizes and linear, right angle and circular configurations designed for differing surgical needs. The Company’s Intelligent Surgical Instruments are available as disposable, single-patient devices as well as in a reusable multiple-patient format which can be autoclaved and used in multiple cases. The Company’s reusable Intelligent Surgical Instruments use disposable cutting and stapling cartridges in various sizes, which the Company refers to as reload cartridges.

In the original configuration of the SurgASSIST system, Intelligent Surgical Instruments were connected through a flexible shaft, or FlexShaft, to a power console and, in some cases, a separate remote control unit. The Company’s next generation products, beginning with the i60 linear stapler that the Company introduced in the fourth quarter of 2007, are self-contained hand held instruments that do not require a FlexShaft or separate power console.

Most of the Company’s revenue is derived from the sale of single-patient, disposable Intelligent Surgical Instruments and from the sale of reload cartridges for reusable Intelligent Surgical Instruments. Revenue related to the sale of such products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed and determinable, and collectibility is reasonably assured, which is generally at the time of shipment upon delivery to a common carrier.

The Company historically provided power consoles, FlexShafts, remote control units and mobile carts associated with its first-generation SurgASSIST system to customers at no cost as loaner equipment. In addition, the Company has in certain cases agreed to transfer title to such systems to the customer upon the customer’s purchase of a specified number of disposable Intelligent Surgical Instruments although the customer is under no obligation to purchase the Intelligent Surgical Instruments. In these instances, the Company recognizes revenue attributable to the complete system as the Intelligent Surgical Instruments are delivered, in accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables.

In 2007, the Company instituted a program whereby it may provide reusable Intelligent Surgical Instruments and FlexShafts to customers at no cost. In certain cases, the Company has offered such Intelligent Surgical Instruments and FlexShafts at no cost in exchange for higher unit pricing on the sale of reload cartridges over a specified period of time. In these cases, the Company recognizes the revenue ratably over the period of delivery of the reload cartridges in accordance with the guidance of EITF 00-21, as long as such revenue is not contingent on the delivery of the undelivered products.

The Company currently makes its i60 and iDrive instruments available to customers at no charge under an “in service under evaluation” program and expects to derive recurring revenues from sales of the reload cartridges necessary for the evaluation instruments’ use.

Under multiple-element arrangements involving the sale of multiple products, services and/or rights to use assets, the multiple elements are divided into separate units of accounting when certain criteria are met, including whether the delivered items have stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. When separate units of accounting exist, consideration is allocated among the separate elements based on their respective fair values. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value for each undelivered element does exist or until all elements of the arrangement are delivered. See Note 3 for a description of the Company’s arrangement with Intuitive Surgical, Inc., entered into in September 2008.

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The Company’s customers generally order product using standard purchase orders and payment terms are 30 days. The Company provides discounted pricing to its customers based on volume and commitment levels. Allowance for product returns are estimated based on historical experience and provisions are recorded at the time of shipment. The Company also provides limited warranties to its customers against material defects in materials and workmanship. Such warranties are generally for a one year period from the date of shipment. Historically, warranty costs have not been material.

During the nine months ended September 30, 2008, the Company’s revenues were from customers located in North America (76%), Europe (18%) and Asia (6%). During the nine months ended September 30, 2007, the Company’s revenues were from customers located in North America (79%), Europe (20%) and Asia (1%). Amounts billed to customers for shipping and handling of products are included in sales. Costs incurred related to shipping and handling are included in cost of sales.

Stock-based compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period after December 15, 2005. SFAS No. 123(R) requires that an entity measure the cost of equity-based service awards based on the grant-date fair value of the award and recognize the cost of such award over the period during which the employee is required to provide service in exchange for the award (vesting period). The pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition. The Company adopted SFAS No. 123(R) on January 1, 2006 using the prospective transition method, which required that all new stock-based awards granted subsequent to adoption be recognized in the financial statements at fair value. The Company accounts for equity issued to nonemployees in accordance with EITF 96-18, Accounting for Equity Investments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services (EITF 96-18).

Net loss attributable to common shares

The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share (SFAS No. 128). Under SFAS No. 128, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.

The following summarizes the potential outstanding common stock of the Company as of the end of each period:

	September 30, 2008	December 31, 2007
Convertible senior secured promissory notes	2,686,882	2,643,175
Common stock warrants	1,033,861	1,137,864
Common stock options outstanding	2,530,565	1,728,844
Common stock options available for grant	769,742	643,510
Total	7,020,050	6,153,393

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If the outstanding options, warrants, and convertible notes were exercised or converted into common stock, the result would be anti-dilutive. Accordingly, basic and diluted net loss attributable to common stockholders per share are identical for all periods presented in the accompanying consolidated statements of operations.

Recent Accounting Pronouncements

The Company adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements, or SFAS 157, effective January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability, referred to as the exit price, in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets, called the market approach. As of September 30, 2008, the fair value of all of the Company’s financial assets are based on level one observable inputs. The Company has determined that its fair value measurements are in accordance with the requirements of SFAS 157, therefore, the implementation of SFAS 157 did not have any impact on its consolidated financial condition or results of operations.

3. License, Development and Supply Agreement with Intuitive Surgical

On September 9, 2008, the Company entered into two agreements with Intuitive Surgical, Inc. The first is a License and Development Agreement under which Intuitive Surgical, Inc. expects to develop a surgical stapling device that will attach to Intuitive’s da Vinci Surgical Systems and will utilize the Company’s patented technology. Once developed, this attachment will enable Intuitive’s da Vinci Surgical Systems to cut and staple tissue in a broad array of surgical applications. The second agreement is an exclusive Reload Supply Agreement whereby the Company will manufacture and be the exclusive supplier to Intuitive of staple reloads for the newly developed device at agreed upon prices. (The License and Development Agreement and the Reload Supply Agreement are referred to herein as the “Agreements”).

Under the terms of the Agreements, the Company received an up-front license payment of $12.5 million in September 2008, In addition, the Company may receive additional payments of up to $7.5 million based upon the achievement of agreed upon development milestones. The Company will also be responsible for providing at its expense up to an aggregate of 3,900 man hours of engineering and technical support services to Intuitive to assist Intuitive in designing and developing the new device.

The Company has identified four deliverables within this arrangement: (i) the license to utilize its patented technology, (ii) consultative services during Intuitive’s development of the new device, (iii) a six-year supply arrangement to supply reload cartridges to Intuitive, including a minimum purchase obligation during the first 18 months subsequent to the first commercial sale of the device to a third party, and (iv) a significant and incremental discount on the future purchases of reload cartridges. The Company has concluded that these deliverables should be accounted for as a single unit of accounting, with recognition of revenue for the single unit of accounting commencing upon the delivery of the final element in the arrangement (i.e., commencement of delivery of the staple reload cartridges contemplated by the Reload Supply Agreement). Accordingly, the $12.5 million up-front payment received in September 2008 has been deferred and is reported as deferred revenue as of September 30, 2008. The $7.5 million of milestone payments, if realized, will also be deferred until the first commercial sale of the device to a third party.

Should the project reach the state of the first commercial sale, the $20.0 million of up-front and milestone payments, as well as the guaranteed minimum amount of reload sales, will begin to be recognized as revenues over the term of the Reload Supply Arrangement (i.e., the six-year period following the date of the first commercial sale of the device by Intuitive to a third party). Revenues from the sale of additional reloads beyond the guaranteed minimum quantity will be recognized as such reloads are shipped.

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4. Long-Term Debt

During March 2007, the Company sold $25.0 million of convertible senior secured promissory notes due March 2010 (the “Convertible Notes”) which generated net proceeds to the Company of $23,298,654 ($25,000,000 less financing fees of $1,701,346). Of this amount, $3,500,000 was placed in escrow to fund the first four interest payments on the Convertible Notes. These notes are secured by substantially all of the Company’s assets and accrue interest at the rate of 7% per annum, payable semiannually in arrears. Interest accruing on or before March 31, 2009 is payable in cash, while interest accruing after March 31, 2009 is payable, at the Company’s option, in cash or paid-in-kind in the form of additional notes (“PIK Notes”). The principal amounts of such PIK Notes will have the same maturity as the Convertible Notes. Should the Company elect to pay interest on the Convertible Notes in PIK Notes, the interest rate on such PIK Notes shall be equal to the then applicable interest rate plus 1.5%.

The Convertible Notes also require the payment of a terminal value that (i) will be due upon redemption or conversion of the Convertible Notes, (ii) will be considered part of the conversion amount for purposes of determining the conversion rate (see below) or (iii) will be due upon maturity as part of the principal amount. In each case, the terminal value payment is defined as an amount equal to 7% per annum of the applicable principal from the closing date of the Convertible Notes in March 2007 to October 31, 2007, the date of the Company’s initial public offering. This amount equals $1.0 million. There is no possible future scenario in which the accrued terminal value would not be required to be paid to the holders of the Convertible Notes or realized by such holders upon conversion of the Convertible Notes. The accrued terminal value of $1.0 million is included in accrued expenses in the accompanying balance sheets at September 30, 2008 and December 31, 2007.

Upon the occurrence of the Company’s initial public offering, the Convertible Notes plus any accrued interest thereon as well as the accreted terminal value became convertible into the Company’s Common Stock at the option of the holder at any time through the maturity date of the Convertible Notes. The conversion price of the Convertible Notes was set at $10.01 per share upon the completion of the Company’s initial public offering.

The Company may, at its option, redeem the Convertible Notes in whole at any time or in part from time to time, upon 15 days prior written notice to the holder, at a redemption price payable in cash, equal to the principal amount plus any interest (including the terminal value) accrued and unpaid, subject to the satisfaction of the following conditions precedent:

(a) the declaration of effectiveness of a registration statement filed with the SEC for the resale of the underlying shares;

(b) the average of the high and low sale price of the Common Stock, as reported on the principal securities exchange on which the Common Stock is listed, on each of any 20 trading days during any period of 30 consecutive trading days ending within 45 days prior to the Redemption Date (so long as, during the entire 30 trading day period, the aforementioned registration statement has been effective and there has been no suspension of trading of the Common Stock), having been equal to or greater than $15.40 (in each case, with prices adjusted for stock splits, reverse splits, stock dividends, share combination and other antidilution events);

(c) no more than $12,500,000 of outstanding Convertible Notes may be redeemed pursuant to this provision in any period of 30 consecutive trading days; and

(d) any such redemption shall be effected on a pro rata basis with respect to all then outstanding Convertible Notes (including PIK Notes).

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5. Inventory

Inventory is stated at the lower of cost or market value, with cost being determined on a first-in, first-out (FIFO) basis and market value based on the lower of replacement cost, or the estimated net realizable value, reduced by an allowance for normal profit margin. Inventory consists of the following:

	September 30, 2008		December 31, 2007
Raw Materials	$	5,027,925	$	3,861,162
Work in process	1,024,797		1,066,864
Finished goods	2,956,005		2,443,179
	$	9,008,727	$	7,371,205

During the three and nine months ended September 30, 2008, and for the year ended December 31, 2007, the Company recorded inventory obsolescence charges in the amount of approximately $6,000, $507,000 and $506,000 respectively. Such charges are reflected in cost of sales in the accompanying condensed consolidated statements of operations. Inventory includes $2.8 million and $2.4 million as of September 30, 2008 and December 31, 2007, respectively, associated with i60 and iDrive instruments that the Company makes available to customers at no cost under its “in service under evaluation” program.

6. Comprehensive Loss

The Company’s comprehensive loss was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net loss	$	(9,267,823	)	$	(8,269,351	)	$	(32,959,007	)	$	(22,092,828	)
Foreign currency translation adjustment	(235,990		)	46,707			163,805			45,830
Comprehensive loss	$	(9,503,813	)	$	(8,222.644	)	$	(32,795,202	)	$	(22,046,998	)

7. Contingencies

The Company has, on occasion, been named as a defendant in lawsuits alleging product failure, patent infringement, breach of contract and employment related claims. Management has provided reserves for the estimated potential losses, when such losses are deemed probable and estimable. The Company currently has a patent infringement case outstanding. The Company received a favorable ruling from the German courts on two of the patent infringement claims and an unfavorable ruling on one of the claims. However, the Company is in the process of appealing the unfavorable ruling. The Company intends to defend this claim vigorously and has concluded it is too early to determine whether or not the Company will incur any loss under this claim. As such, no amounts are accrued in the accompanying consolidated balance sheets related to this claim.

In August 2008, the Company’s former Belgian distributor, Duo-Med, S.A., initiated a breach of contract action against the Company in the Commercial Court of Brussels in Belgium. The complaint alleges that the Company breached its distribution agreement with Duo-Med by failing to provide proper notice when it terminated that agreement in May 2007 and that, as the result of problems with the Company’s products, Duo-Med was unable to sell its existing inventory. The complaint asserts damages totaling approximately €460,000. The Company is reviewing the Duo-Med complaint and conducting a preliminary assessment of the allegations. The Company intends to defend this claim vigorously and has concluded it is too early to determine whether or not the Company will incur any loss under this claim. As such, no amounts are accrued in the accompanying consolidated balance sheets related to this claim.

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The Company also has a product liability case outstanding which is currently suspended and the Company has continued to contest the claim. The Company has accrued $100,000 related to this matter which represents its best estimate of the potential liability related to this claim.

8. Stock-based Compensation

As a private company during the first three quarters of 2007, the Company estimated the fair value of its common stock by utilizing a contemporaneous third party valuation. Grants issued during the first, second and third quarters of 2008 were valued at the closing price of the Company’s publicly traded stock. The per-share weighted average fair values on the dates of grant of the options granted was $2.28 and $4.48, during the three months ended September 30, 2008 and 2007, and $3.90 and $4.48 during the nine months ended September 30, 2008 and 2007, using the Black-Scholes option-pricing model with the following weighted average assumptions, which are based upon Company history or industry comparative information:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Expected dividend yield	0	%	0	%	0	%	0	%
Expected volatility	49.1	%	60.1	%	49.8	%	60.1	%
Risk-free interest rates	3.45	%	4.58	%	3.26	%	4.58	%
Expected life	7 years		7 years		7 years		7 years

The expected volatility was calculated for each date of grant based on an alternative method (defined as “calculated value”). The Company identified similar public entities for which share price information is available and considered the historical volatility of these entities’ share prices in estimating expected volatility. The Company used the average volatility of these guideline companies over a seven year period, consistent with the expected term calculated pursuant to Staff Accounting Bulletin No. 107. Compensation expense under SFAS No. 123(R) and EITF 96-18 for the three months ended September 30, 2008 related to share-based service awards was $513,436, of which $14,191 is included in cost of sales, $53,854 is included in research and development, $93,634 is included in sales and marketing and $351,757 is included in general and administrative expense in the accompanying statements of operations. Compensation expense under SFAS No. 123(R) and EITF 96-18 for the three months ended September 30, 2007 related to share-based service awards was $159,152 , of which $894 is included in cost of sales, $8,793 is included in research and development, $25,893 is included in sales and marketing and $123,572 is included in general and administrative expense in the accompanying statements of operations. Compensation expense under SFAS No. 123(R) and EITF 96-18 for the nine months ended September 30, 2008 related to share-based service awards was $1,413,006, of which $36,521 is included in cost of sales, $150,049 is included in research and development, $221,892 is included in sales and marketing and $1,004,544 is included in general and administrative expense in the accompanying statements of operations. Compensation expense under SFAS No. 123(R) and EITF 96-18 for the nine months ended September 30, 2007 related to share-based service awards was $395,978 of which $2,316 is included in cost of sales, $9,211 is included in research and development, $59,531 is included in sales and marketing and $324,920 is included in general and administrative expense in the accompanying statements of operations. The Company recognizes the compensation expense of such share-based service awards on a straight-line basis. Total unrecognized compensation cost of options granted but not yet vested as of September 30, 2008 was $6,272,686, net of estimated forfeitures, which is expected to be recognized over the weighted average period of 2.04 years. The Company utilized an estimated forfeiture rate of 15% for the 2007 and 2008 grants, based on the Company’s historical forfeiture rate as well as an analysis of current market conditions.

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The following table summarizes stock option activity for the nine months ended September 30, 2008:

	Number of Shares		Weighted Average Exercise Price
Outstanding, December 31, 2007	1,728,844		$	8.69
Options granted	1,191,430		7.15
Options cancelled/forfeited	(372,448	)	9.82
Options exercised	(17,261	)	4.90
Outstanding, September 30, 2008	2,530,565		$	7.76
Exercisable, September 30, 2008	1,037,789		$	7.40

9. Subsequent Event

On November 6, 2008, the Company announced that its Board of Directors had authorized the implementation of a restructuring plan to reduce operational expenses. The restructuring plan has three principal elements. The first is focused on reducing operational expenses in the near term so as to reduce our cash burn rate. The second element involves a restructuring of our sales and marketing efforts to concentrate on the iSeries family of wireless Intelligent Surgical Instruments. The final element of the restructuring will focus on allocating our research and development resources primarily to the Company’s agreement with Intuitive Surgical, Inc., with the objective of accelerating the achievement of the milestones under that agreement and the commencement of revenue-generating sales of the related reload cartridges.

The net effect of the restructuring actions, which are expected to be completed in the fourth quarter of 2008, will be to reduce headcount by approximately 35% from 161 at September 30, 2008 to approximately 107 on December 31, 2008, and to reduce the Company’s average quarterly operating expense run rate for 2009 by approximately $3.5 million, compared with the third quarter of 2008, to approximately $5.5 million. The Company expects to record a restructuring charge in the fourth quarter of 2008 in connection with the planned restructuring actions. The Company is unable at this time to accurately estimate the amount of this charge, but anticipates that it will be material to its results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this report.

Overview

We design, manufacture and market the SurgASSIST® system of computer-assisted, power-actuated endomechanical surgical instruments, which we refer to as Intelligent Surgical Instruments™. Surgeons use our Intelligent Surgical Instruments for cutting, stapling and tissue manipulation in a variety of procedures in open surgery, minimally invasive surgery, or MIS, and in the emerging field of natural orifice translumenal endoscopic surgery, or NOTES. Our SurgASSIST system has been used in tens of thousands of surgical procedures in more than 350 hospitals and medical institutions worldwide.

Since our inception, we have devoted substantially all our resources to the development and commercialization of our SurgASSIST system and, more recently, to the expansion of our manufacturing and direct sales and marketing operations. We currently outsource the manufacture of components such as machined and molded parts, mechanical sub-assemblies and circuit boards and perform the final assembly and testing of our products in our Langhorne, Pennsylvania facility. We sell our Intelligent Surgical Instruments through our direct sales force in the United States, parts of Europe and Japan and through distributors in other parts of Europe.

We have incurred net losses in each year since our inception and have an accumulated deficit at September 30, 2008 of $206.9 million. We expect our losses to continue through at least the first half of 2009. To date, we have financed our operations primarily through the initial public offering of our common stock, private placements of our preferred stock and the issuance of debt and, more recently, the $12.5 million up-front license payment we received in September 2008 under our license and development agreement with Intuitive Surgical, Inc.

The principal factor driving our results of operations in 2008 has been the continuing roll-out of our next generation wireless technology. As often occurs during a major release of a new technology platform, we have encountered challenges that have slowed the rate of adoption of our new technology. This has resulted in post-launch revenues that have been lower than expected and has negatively affected our gross margins during the first nine months of 2008. We believe that we have taken significant steps toward resolving these challenges. During the first nine months of 2008 we also continued to build out our i-Series product portfolio by introducing new Intelligent Surgical Instruments as well as enhanced and improved versions of our existing i-Series products.

Recent Developments

Arrangement with Intuitive Surgical, Inc.

On September 9, 2008, we entered into a License and Development Agreement (“License Agreement”) and a Reload Supply Agreement (“Supply Agreement,” and together with the License Agreement, the “Intuitive Agreements”) with Intuitive Surgical, Inc. (“Intuitive”). Pursuant to the Intuitive Agreements, Intuitive desires to co-develop with us, and to market and sell, a new cutting and stapling device to be installed on Intuitive’s Da Vinci Surgical System. Intuitive will be responsible for and control the development of the device. We will provide technical assistance to Intuitive at our expense, for up to a maximum of 3,900 man-hours.

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Under the License Agreement, we granted to Intuitive a worldwide, perpetual, non-transferable royalty-free license to all our intellectual property related to cutting and stapling devices and technology in the intended field of use of Intuitive, and Intuitive paid us in September 2008 an initial nonrefundable license fee of $12.5 million.

In addition to the initial license fee, Intuitive will make milestone payments upon the occurrence of specified events, as follows: $2.5 million upon the completion of the preliminary design review of the device; $2.0 million upon the completion of the critical design review of the device; and $3.0 million upon the first commercial sale of the device by Intuitive to a third party.

Under the Supply Agreement, we will manufacture and sell to Intuitive reload cartridges, as ordered from time to time. The reload cartridges will be substantially identical to other staple reload products sold by us, with the addition of a key feature to make the reload cartridge compatible only with the new device. During the first 18 month period beginning after the first commercial sale of the device, Intuitive has committed to purchase at least 350 boxes of reload cartridges from us at a discounted price.

Revenue attributable to our arrangement with Intuitive, including the initial $12.5 million license fee and $7.5 million of milestone payments, will be deferred until the first commercial sale of a device to a third party. For a more complete discussion of our accounting for the Intuitive arrangement, see “Critical Accounting Policies and Estimates” below.

Restructuring

On November 6, 2008, we announced that our Board of Directors has authorized the implementation of a restructuring plan to reduce operational expenses. Our restructuring plan has three principal elements. The first is focused on reducing operational expenses in the near term so as to reduce our cash burn rate. The second element involves a restructuring of our sales and marketing efforts to concentrate on the iSeries family of wireless Intelligent Surgical Instruments. The final element of the restructuring will focus on allocating our research and development resources primarily to our agreement with Intuitive Surgical, Inc., with the objective of accelerating the achievement of the milestones under that agreement and the commencement of revenue-generating sales of the related reload cartridges.

The net effect of the restructuring actions, which are expected to be completed in the fourth quarter of 2008, will be to reduce our headcount by approximately 35% from 161 at September 30, 2008 to approximately 107 on December 31, 2008, and to reduce our average quarterly operating expense run rate for 2009 by approximately $3.5 million, compared with the third quarter of 2008, to approximately $5.5 million. We expect to record a restructuring charge in the fourth quarter of 2008 in connection with our planned restructuring actions. We are unable at this time to accurately estimate the amount of this charge, but anticipate that it will be material to our results of operations.

As a result of these restructuring actions, the results of operations for the three and nine months ended September 30, 2008 reported in this Quarterly Report on Form 10-Q are not indicative of the results to be expected for the balance of 2008 or any subsequent period.

Financial Operations Overview

The following is a description of the principal components of our sales and expenses and of significant trends and challenges that we believe are important to an understanding of our business and results of operations.

Sales. Our SurgASSIST surgical platform includes cutting and stapling devices in a variety of sizes and linear, right angle and circular configurations designed for differing surgical needs. In the original configuration of our system, our Intelligent Surgical Instruments are connected through a flexible shaft, or FlexShaft, to a power console. Our next generation products, beginning with the i60 linear stapler that we

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introduced in the fourth quarter of 2007, are self-contained hand-held instruments that do not require a FlexShaft or separate power console. In December 2007, we also introduced our self-contained, wireless handheld iDrive system, which can be used to power and control our linear, right angle and circular staplers, without the need for a separate FlexShaft or power console.

Our Intelligent Surgical Instruments are available as disposable, single-patient devices as well as in a reusable multiple-patient format, using disposable cutting and stapling cartridges in various sizes, which we refer to as reload cartridges.

To date, most of our revenue has been derived from the sale of our single-patient, disposable Intelligent Surgical Instruments and, to a lesser extent, from the sale of reload cartridges for our reusable Intelligent Surgical Instruments. We expect that, as our installed base of reusable, multiple-patient Intelligent Surgical Instruments grows, sales of reload cartridges will become the largest component of our total sales.

We make power consoles and related accessories such as remote control units used with our first-generation SurgASSIST system available to institutions at no charge. We instituted a program in 2007 to make our PLC 60 instrument or FlexShaft available to the customer at no cost, in certain cases in exchange for a commitment by the customer to purchase a minimum number of reload cartridges at a higher unit price. We currently make our i60 and iDrive instruments available to customers at no charge under an “in service under evaluation” program and expect to derive recurring revenues from sales of the reload cartridges necessary for their use.

Our future success will depend on our ability to achieve and sustain significant growth in our sales. In the immediate term, our ability to grow our revenues will depend on many factors, including:

· continued growth in market acceptance of our SurgASSIST system;

· increased usage of our installed base of multiple-use Intelligent Surgical Instruments, resulting in recurring purchases of our reload cartridges;

· continued improvements in our supply chain and manufacturing operations to assure the quality and adequate supply of our products; and

· achievement of the development milestones under our License Agreement with Intuitive and successful commercialization by Intuitive of the resulting device, enabling us to realize the benefits of the Supply Agreement whereby we will manufacture and be the exclusive supplier to Intuitive of staple reloads for the device.

Cost of sales. Cost of sales includes the cost of supplies, components and sub-assemblies that we purchase from third parties and use in the assembly of our products. Cost of sales also includes personnel costs and overhead related to our assembly and test operations, related occupancy, equipment depreciation, shipping costs and charges for inventory obsolescence.

Our future success will depend on our ability to make significant improvements in our cost of sales as a percentage of sales, or gross margins. Since the introduction of our SurgASSIST system in 2001, our gross margins have ranged from a negative gross margin of (56.9)% in 2002 to a positive gross margin of 25.6% for the quarter ended March 31, 2007. Our high cost of sales has been attributable to a number of factors, including product defects that have required rework by us and by our suppliers, a labor-intensive manual assembly process that has resulted in high labor costs, and excess manufacturing capacity in relation to our sales, which has resulted in inefficient absorption of manufacturing overhead.

Charges associated with write-offs of excess and obsolete inventory have also contributed to our high cost of sales. During the nine months ended September 30, 2008, we recorded inventory obsolescence

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charges of $507,000, constituting 7.0% of our cost of sales. Our product development plans sometimes include introductions of new products that overlap functionally with existing products, while offering new or improved capabilities. We anticipate that in some cases, this may lead to a reduction in demand for, or discontinuation of, an existing product. In these circumstances, we must carefully manage our finished goods inventory to ensure that we have quantities of the existing product that are sufficient to meet customer demand pending introduction of the new product, but that do not leave us holding excess or obsolete inventory when a new product supplants the existing one. Changes in the design of our products can also result in the obsolescence of our inventory of components that are not used in redesigned products.

Historically, our cost of sales has included the substantial cost of our power consoles and related accessories and more recently of Intelligent Surgical Instruments that we place with customers at no charge, which has had a significant adverse effect on our gross margins. The cost of the iSeries instruments that we make available to customers at no charge is recorded as a charge to cost of sales when the units are shipped to the customer. Our gross margin in the three months ended September 30, 2008 improved to 24%, compared with negative gross margins of (40)% and (15)% in the second and first quarters of 2008, respectively, due in part to a reduction in the number of iSeries instruments that we placed with customers during the third quarter.

In order to achieve and sustain profitability, we will need to devote substantial resources to improving our procurement and manufacturing processes, upgrading our management information systems, and implementing new quality assurance, inventory and cost controls in order to reduce the cost of the components we purchase from third party vendors and improve the efficiency of our manufacturing operations. We also are taking steps to increase the integration of our manufacturing operations, for example, by acquiring the capital equipment necessary to enable us to more efficiently assemble critical components such as the reload cartridges that are used in our reusable multiple-patient linear staplers. Our new automated reload cartridge assembly system became operational during October 2008. Initial results of our new automated reload assembly process have been encouraging, and we expect this system to have a favorable impact on our gross margins beginning in the fourth quarter of 2008, as it will enable us to automate the assembly of reload cartridges for our PLC60 and iSeries instruments, which we previously assembled using a costly manual process. We believe this will enable us to significantly reduce the cost of these components, while also enabling us to better control their supply and quality. However, we cannot assure you that manufacturing yields or costs will not be adversely affected, at least initially, by the transition to in-house production or to new production processes. Because we have limited experience in manufacturing our products in commercial quantities, increasing our manufacturing capacity while significantly improving our gross margins and maintaining product quality will involve significant challenges.

Research and development expenses. Research and development expenses consist primarily of salaries and related expenses and overhead for our research, development and engineering personnel, prototype materials and research studies. We expense our research and development costs as incurred.

Our research and development expenses have fluctuated significantly in dollar amount and as a percentage of sales in the last five years, due primarily to the timing of research and development efforts associated with significant new product introductions. As a result of our recent restructuring initiative, we expect research and development expenses to remain flat or decrease slightly in the near term. We will limit new product development activities other than high priority product derivatives and enhancements that we expect to introduce in the next two to three months, and focus our existing research and development resources primarily on support of our License Agreement with Intuitive, with the objective of accelerating the achievement of the payment milestones under that agreement and the commencement of revenue-generating sales of the related reload cartridges.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and related expenses, sales commissions and overhead for personnel performing sales and marketing functions. Other significant sales and marketing expenses include travel and entertainment expense, costs of attending

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medical conferences and trade shows, clinician training and other promotional costs and costs of demonstration systems and samples.

Our sales and marketing expenses have substantially exceeded our sales in each year since 2004, as we have invested in building the sales and marketing organization and administrative infrastructure necessary to support our planned sales growth. During the first nine months of 2008, we took steps to reduce our sales and marketing expenses through a reduction in the number of our direct sales personnel. As a result of our recent restructuring initiative, we expect to effect further reductions in our international sales force and in our marketing programs, and to concentrate our sales and marketing resources primarily on the iSeries family of wireless Intelligent Surgical Instruments.

General and administrative expenses. General and administrative expenses consist primarily of salaries and related expenses and overhead for personnel performing executive, finance, information technology and human resource functions. Other significant general and administrative expenses include consulting fees and professional fees for legal services (including services related to obtaining and maintaining protection of our intellectual property) and accounting services.

Interest income. Interest income consists of interest earned on our cash and cash equivalents.

Interest expense. Interest expense consists of interest expense on our term loans, convertible notes and equipment loans.

Internal Control over Financial Reporting

Our management determined that as of September 30, 2008 and December 31, 2007 we had a material weakness in our internal control over financial reporting related to our financial statement close process that, until remediated, results in more than a remote likelihood that a material misstatement to the annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner. We concluded that there is a material weakness in our internal control over financial reporting because we do not have a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process. The material weakness resulted in the identification of adjustments during the financial statement close process during 2007 that have been recorded in the consolidated financial statements. In order to remediate this material weakness, we are taking the following actions:

· we are actively seeking additional accounting and finance staff members to augment our current staff and to improve the effectiveness of our financial statement close process; and

· we are expanding the training and education of our accounting and finance staff members in an effort to improve their effectiveness.

Our recent restructuring initiative does not contemplate any reduction in headcount in our accounting or finance staff.

Notwithstanding the material weakness that existed as of September 30, 2008 and December 31, 2007, our management has concluded that the consolidated financial statements included present fairly, in all material respects, our financial position, results of operation and cash flows in conformity with U.S. generally accepted accounting principles.

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Critical Accounting Policies and 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and judgments are inherently subject to uncertainty. On an ongoing basis, we re-evaluate our judgments and estimates, including those related to uncollectible accounts receivable, inventories, recoverability of long-lived assets, stock-based compensation, accrued expenses and other contingencies. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and material effects on our operating results and financial position could result.

Revenue Recognition—Arrangement with Intuitive Surgical, Inc.

Under multiple-element arrangements involving the sale of multiple products, services and/or rights to use assets, we divide the multiple elements into separate units of accounting when certain criteria are met, including whether the delivered items have stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. When separate units of accounting exist, we allocate consideration among the separate elements based on their respective fair values. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value for each undelivered element does exist or until all elements of the arrangement are delivered.

On September 9, 2008, we entered into two agreements with Intuitive Surgical, Inc. The first is a License and Development Agreement under which Intuitive expects to develop a surgical stapling device which will attach to Intuitive’s da Vinci Surgical Systems and will utilize our patented technology. Once developed, this attachment will enable Intuitive’s da Vinci Surgical Systems to cut and staple tissue in a broad array of surgical applications. The second agreement is an exclusive Reload Supply Agreement whereby we will manufacture and be the exclusive supplier to Intuitive of staple reloads for the newly developed device at agreed upon prices. We refer to the License and Development Agreement and the Reload Supply Agreement collectively as the “Intuitive Agreements.”

Under the terms of the Intuitive Agreements, we received an upfront license payment of $12.5 million in September 2008, In addition, we may receive additional payments of up to $7.5 million based upon the achievement of agreed upon development milestones. We will also be responsible for providing at our expense up to an aggregate of 3,900 man hours of engineering and technical support services to Intuitive to assist Intuitive in designing and developing the new device.

We have identified four deliverables within this arrangement: (i) the license to utilize our patented technology, (ii) consultative services during Intuitive’s development of the new device, (iii) a six-year supply arrangement to supply reload cartridges to Intuitive, including a minimum purchase obligation during the first 18 months subsequent to the first commercial sale of the device by Intuitive to a third party, and (iv) a significant and incremental discount on the future purchases of reload cartridges. We have concluded that these deliverables should be accounted for as a single unit of accounting, with recognition of revenue for the single unit of accounting commencing upon the delivery of the final element in the arrangement (i.e., commencement of delivery of the staple reload cartridges contemplated by the Reload Supply Agreement). Accordingly, the $12.5 million upfront payment received in September 2008 has been deferred and is reported in the consolidated financial statements included in this Form 10-Q as deferred revenue as of September 30, 2008. The $7.5 million of milestone payments, if received, will also be deferred until the first commercial sale of the device to a third party.

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Should the project reach the state of the first commercial sale, the $20.0 million of up-front and milestone payments, as well as the guaranteed minimum amount of reload sales, will begin to be recognized as revenues over the term of the Reload Supply Arrangement (i.e., the six-year period following the date of the first commercial sale of the device to a third party). Revenues from the sale of additional reloads beyond the minimum guaranteed quantity will be recognized as such reloads are shipped.

For a description of our other accounting policies that, in our opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgments or estimates were made, materially affect our reported results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 31, 2008.

Recent Accounting Pronouncements

We adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements, or SFAS 157, effective January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability, referred to as the exit price, in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets, called the market approach. As of September 30, 2008, the fair value of all of our financial assets is based on Level 1 observable inputs. We have determined that our fair value measurements are in accordance with the requirements of SFAS 157, therefore, the implementation of SFAS 157 did not have any impact on our consolidated financial condition or results of operations.

Results of Operations

Three month periods ended September 30, 2008 and September 30, 2007

Sales. Our sales in the three months ended September 30, 2008 increased by 31.8% to $2.2 million compared with $1.7 million during the corresponding period in 2007, and increased by 3.8% versus the second quarter of 2008. Included in the third quarter 2008 sales was approximately $950,000 of i60 reload revenues, compared with approximately $444,000 in the second quarter of 2008. Our third quarter sales were positively affected by the commercial launch of the i45 and i60 products with the upgraded banded articulation joint that is expected to extend their useful lives. The enhanced i60 and i45 became available in July and September 2008, respectively.

Cost of sales and gross profit. Our cost of sales in the three months ended September 30, 2008 increased by 33%, to $1.7 million compared with $1.3 million during the corresponding period in 2007. Our gross profit was $0.5 million, or 24% of sales, in the three months ended September 30, 2008 compared to $0.4 million, or 25% of sales, during the corresponding period in 2007. Our gross margin improved versus second quarter 2008 gross margin of (40%), as a result of increased linear cutter reload revenues which have a higher gross profit than our other products and a reduction in the number of iSeries instruments that we placed with customers under our “in service under evaluation” program during the third quarter of 2008, the cost of which is recorded to cost of sales when the units are shipped to the customer. We believe that, beginning in the fourth quarter of 2008, our gross margins will be affected positively by the availability of our new automated reload cartridge assembly system, which became operational in October 2008. However, gross margins are likely to fluctuate from period to period until we are able to realize further economies of scale in our purchasing and manufacturing process through increased manufacturing capacity utilization and automation.

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Research and development expenses. Our research and development expenses in the three months ended September 30, 2008 decreased by 15% to $1.5 million compared with $1.8 million during the corresponding period in 2007 due to a decrease in materials and components used for new product development. Research and development costs decreased as a percentage of sales to 69% in the three months ended September 30, 2008, compared with 107% of sales during the corresponding period in 2007. We expect the amount of our research and development expenses to remain flat or decrease slightly in the near term, as a result of our recent restructuring initiative.

Sales and marketing expenses. Our domestic and international sales and marketing expenses in the three months ended September 30, 2008 increased by 28%, to $5.1 million, compared with $4.0 million during the corresponding period in 2007, and decreased as a percentage of sales to 228% of sales in the three months ended September 30, 2008. This compares to 234% of sales during the corresponding period in 2007. The increase in dollar amount from 2007 to 2008 was due to domestic and international sales force expansion, training and increases in marketing expense associated with trade shows and conventions. Our sales and marketing expense in the third quarter of 2008 decreased by 15% compared with the second quarter of 2008, and decreased as a percentage of sales to 228%, compared with 276% in the second quarter. The decrease in both dollar amount and percentage of sales from the second quarter to the third quarter of 2008 was due primarily to a reduction in our sales force. For the balance of 2008, we will continue to take steps to reduce our sales and marketing expenses as part of our restructuring initiative, and as a result we expect sales and marketing expense for the fourth quarter of 2008 to be lower than third quarter 2008 levels.

General and administrative expenses. Our general and administrative expenses in the three months ended September 30, 2008 increased by 29%, to $2.6 million compared with $2.0 million during the corresponding period in 2007, and decreased as a percentage of sales to 116% in the three months ended September 30, 2008, compared to 118% during the corresponding period in 2007. The increase in dollar amount was due to increased stock compensation expense, directors and officers insurance premiums and consulting fees.

Interest income. Our interest income in the three months ended September 30, 2008 decreased by 71% to $58,000 compared with $199,000 during the corresponding period in 2007, due to lower average cash balances and lower interest rates.

Interest expense. Our interest expense in the three months ended September 30, 2008 decreased to $0.6 million compared with $1.1 million during the corresponding period in 2007. The decrease was the result of lower interest expense related to our convertible debt issued in March 2007, as the 7% terminal value payment accruing on such convertible debt was charged to interest expense only prior to the completion of our initial public offering in October 2007.

Nine month periods ended September 30, 2008 and September 30, 2007

Sales. Our sales in the nine months ended September 30, 2008 increased by 12% to $6.6 million compared with $5.9 million during the corresponding period in 2007, primarily due to the introduction in late 2007 of our next generation i60 and iDrive products. Also, our sales in the first nine months of 2007 were negatively affected by limited availability of demonstration units and sales collateral for the then newly introduced PLC 60 linear stapler, and by the fact that in 2007 we had a limited inventory of the linear stapler products that the PLC 60 was intended to replace.

Cost of sales and gross profit. Our cost of sales in the nine months ended September 30, 2008 increased by 59%, to $7.3 million compared with $4.6 million during the corresponding period in 2007. Our gross profit decreased to $(0.7) million, or (9)% of sales, in the nine months ended September 30, 2008 from $1.3 million, or 22% of sales, during the corresponding period in 2007. The decrease in our gross profit and our gross margin percentage is attributable to increased cost of sales, including approximately $1.2 million of costs of the i60 and iDrive devices that we placed with hospitals during the nine month period, an increase of $1.1 million in cost of sales associated with the write-off of components and finished

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goods inventory due to a design enhancement of the i60 device and as a result of the transition to the new wireless platform, and an increase in cost of sales of $0.3 million related to engineering samples used for validation testing.

Research and development expenses. Our research and development expenses in the nine months ended September 30, 2008 increased by 6% to $4.6 million compared with $4.4 million during the corresponding period in 2007 due to an increase in personnel, stock compensation expense and prototype costs associated with new product development. Research and development costs increased as a percentage of sales to 70% in the nine months ended September 30, 2008, compared with 74% of sales during the corresponding period in 2007.

Sales and marketing expenses. Our domestic and international sales and marketing expenses in the nine months ended September 30, 2008 increased by 61%, to $17.8 million, compared with $11.1 million during the corresponding period in 2007, and increased as a percentage of sales to 270% of sales in the nine months ended September 30, 2008. This compares to 188% of sales during the corresponding period in 2007. The increase in both dollar amount and percentage of sales was due to domestic and international sales force expansion, training and increases in marketing expense associated with trade shows and conventions.

General and administrative expenses. Our general and administrative expenses in the nine months ended September 30, 2008 increased by 30%, to $8.2 million compared with $6.3 million during the corresponding period in 2007, and increased as a percentage of sales to 124% in the nine months ended September 30, 2008, compared to 107% during the corresponding period in 2007. The increase in dollar amount and percentage of sales was due to higher, stock-based compensation expense and higher professional fees associated with being a public company.

Interest income. Our interest income in the nine months ended September 30, 2008 decreased by 39% to $343,000 compared with $564,000 during the corresponding period in 2007, due to lower average cash balances and lower interest rates.

Interest expense. Our interest expense in the nine months ended September 30, 2008 decreased by 11% to $1.9 million compared with $2.2 million during the corresponding period in 2007. The decrease was the result of lower interest expense related to our convertible debt issued in March 2007, as the 7% terminal value payment accruing on such convertible debt was charged to interest expense only prior to the completion of our initial public offering.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through private placements of our preferred stock, unsecured borrowings from our stockholders, a credit facility, the issuance in March 2007 of our convertible notes in the aggregate principal amount of $25.0 million and our initial public offering in October 2007, in which we received net proceeds, after underwriting discounts and offering expenses, of approximately $42 million. In September 2008, we also received $12.5 million in up-front license fees from our agreement with Intuitive. An additional $7.5 million of milestone payments may become payable to us contingent upon the successful achievement of certain development milestones. We expect to achieve the development milestone necessary for us to receive the first $2.5 million milestone payment during the first half of 2009, and to receive the remaining milestone payments by mid-to late 2010. Our principal sources of liquidity as of September 30, 2008 consisted of cash and cash equivalents of $15.9 million and our accounts receivable balance of $1.6 million.

In the first nine months of 2008, our operating activities used $21.3 million in cash, due primarily to our net operating loss of $33.0 million offset by the $12.5 million of deferred revenue relating to the Intuitive license fee. We used cash of $2.2 million to reduce accounts payable balances and accrued expenses and we used cash of $1.6 million to increase inventory, primarily raw materials and components required for assembly of our newly introduced Intelligent Surgical Instruments and related reload cartridges to support expected demand for these products. Our non-cash expenses were approximately $3.5 million

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consisting of $1.4 million stock compensation expense, depreciation and amortization of $1.5 million, and the amortization of debt discount of $0.6 million. We used $278,000 in our investing activities, primarily consisting of purchases of property and equipment of $1.3 million, related primarily to the purchase of our automated reload machine and $294,000 for patent application costs, offset by a decrease in restricted cash of $1.9 million primarily consisting of a reduction in the funds held in escrow for the scheduled interest payments on our outstanding convertible notes. Our financing activities generated cash of $73,000 related to proceeds of option exercises, offset by $52,000 used for repayment on our long-term debt.

We believe that our cash and cash equivalents, together with the first milestone payment under our Intuitive agreement, which we expect to receive during the first half of 2009, will be sufficient to meet our anticipated cash requirements through the fourth quarter of 2009, however, there can be no assurance in this regard. We have implemented plans to reduce our cash used in operations through reductions in headcount and other spending programs throughout the Company. Such costs include certain sales and marketing costs, clinical research costs, employee bonuses, professional education, and capital expenditures. Our future cash requirements will depend on many factors, primarily including our ability to increase our sales and improve our gross margins, our ability to achieve the development milestones under our agreement with Intuitive and receive the related milestone payments and the success of our recently announced restructuring initiative in reducing our operating expenses. Our ability to meet our obligations in the normal course of business beyond 2009 will be dependent on our increasing our customer and revenue base, continuing to control expenses and securing additional external financing which we are actively pursuing through various structures. We have no arrangements to obtain additional financing, and there can be no assurance that such financing, if required or desired, will be available in amounts or on terms acceptable to us, if at all. These conditions raise substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm modified its audit report on our consolidated financial statements for the year ended December 31, 2007 to include an explanatory paragraph regarding this contingency.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions.

We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents and debt and foreign exchange rate risk.

Interest rate risk. At September 30, 2008, we had $15.9 million of cash and cash equivalents. These amounts were invested primarily in certificates of deposit and U.S. treasury securities. The primary objective of our investment activity is to preserve principal, provide liquidity and maximize income without increasing risk. Our investments have limited exposure to market risk. The interest rates are variable and fluctuate with current market conditions. The risk associated with fluctuating interest rates is limited to our investments in certificates of deposit, and we do not believe that a 10% change in interest rates would have a material impact on our financial position or results of operations.

The interest rate on our 7% convertible senior secured promissory notes is fixed and therefore exposes us to limited market risk.

Foreign currency risk. To date, our international customer agreements have been denominated primarily in the local currency of the international customer. The functional currency of our foreign operations in Europe and Japan is the local currency and, as a result, any fluctuation in the exchange rates of these net assets, denominated in local currency, would be reflected in the translation gains or losses, which are accounted for in other comprehensive income in our statements of changes in equity. We do not believe that a change of 10% in foreign currency exchange rates would have a material impact on our financial position or results of operations.

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Item 4. Controls and Procedures.

(a) Our chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2008, our disclosure controls and procedures were ineffective, due to the material weaknesses in our internal control over financial reporting previously described in our Annual Report on Form 10-K for the year ended December 31, 2007, which identified the following material weakness that has not been fully remediated as of September 30, 2008:

Our management has determined that we have a material weakness in our internal control over financial reporting related to our financial statement close process that, until remediated, results in a reasonable possibility that a material misstatement to the annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner. We have concluded that there is a material weakness in our internal control over financial reporting because we do not have a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process. The material weakness resulted in the identification of adjustments during the financial statement close process during 2007 that have been recorded in the consolidated financial statements. In order to remediate this material weakness, we are taking the following actions:

· we are actively seeking additional accounting and finance staff members to augment our current staff and to improve the effectiveness of our financial statement close process; and

· we are expanding the training and education of our accounting and finance staff members in an effort to improve their effectiveness.

(b) There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.`

PART II: OTHER INFORMATION

Item 1: Legal Proceedings.

In August 2008, our former Belgian distributor, Duo-Med, S.A., initiated a breach of contract action against us in the Commercial Court of Brussels in Belgium. The complaint alleges that we breached our distribution agreement with Duo-Med by failing to provide proper notice when we terminated that agreement in May 2007 and that, as the result of problems with our products, Duo-Med was unable to sell its existing inventory. The complaint asserts damages totaling approximately €460,000. We are reviewing the Duo-Med complaint and conducting a preliminary assessment of the allegations.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the Risk Factors discussed below, which could materially affect our business, financial condition or future results and could cause actual events to differ materially from the forward-looking statements in this report. There has been no material change in the risk factors described in Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, except as follows:

· The risk factor under the heading “The success of our business is dependent on our ability to develop new and innovative products…” has been revised to disclose the risk that the curtailment of our new product development efforts as part of our restructuring initiative may adversely affect the longer term development of our business.

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· The risk factor under the heading “We may need substantial additional funding...” has been revised to disclose the impact of our recent Intuitive transaction and restructuring initiatives and to state that we believe that our capital resources will be adequate to meet our anticipated cash requirements through the fourth quarter of 2009.

· The risk factors under the headings “We must upgrade and correct deficiencies in our regulatory compliance operations…” and “Our failure to meet strict regulatory requirements could require us to pay fines, incur other costs or even close our facilities” have been expanded to disclose that we received an FDA Warning letter as a result of recent FDA inspections of our facilities in Langhorne, Pennsylvania.

· The risk factors under the heading “Risks Related to Ownership of Our Common Stock” have been expanded to include a risk factor disclosing that we received a Nasdaq Staff Deficiency letter advising us that we were not in compliance with the listing requirements of the Nasdaq Stock Market, and discussing risks relating to the possible delisting of our common stock.

Risks Related to Our Business

We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future.

We are a company with a limited operating history and have sustained net losses since our inception, including a net loss of $36.8 million for the year ended December 31, 2007 and a net loss of $33 million for the nine months ended September 30, 2008. We have an accumulated deficit of $206.9 million at September 30, 2008. We expect to continue to incur significant operating losses at least through 2008, as we invest in the development of our business. Our losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We are dependent on the success of our SurgASSIST platform and, in particular, of the next generation wireless handheld technology incorporated in our recently released i60 and iDrive products, and we cannot be certain that our technology and our products will achieve the broad market acceptance necessary to develop a sustainable, profitable business.

Historically, most of our revenue has been derived from the sale of our single-patient, disposable Intelligent Surgical Instruments and, to a lesser extent, from the sale of reload cartridges for our reusable Intelligent Surgical Instruments. However, we expect that, as our installed base of reusable, multiple-patient Intelligent Surgical Instruments grows and the number of firings of our instruments increases, sales of reload cartridges will become the largest component of our total sales. It is difficult to predict the penetration, future growth rate or size of the market for our SurgASSIST platform or the rate at which our installed base of instruments will be fired.

The commercial success of our various Intelligent Surgical Instruments will require broad acceptance of the SurgASSIST platform by the surgeons who specialize in the procedures we target, a limited number of whom may be able to influence device selection and purchasing decisions. If the concept of computer-assisted power-actuated devices for tissue manipulation, cutting and stapling is not broadly accepted and perceived as having significant advantages over manually-actuated devices, then we will not meet our business objectives. Broad acceptance of our SurgASSIST platform will require a determination by hospitals and surgeons that our products are safe, cost-effective and represent acceptable methods of treatment. In addition, certain components of our SurgASSIST platform in its current configuration may be considered to be capital purchases that require administrative procedures and approvals from senior hospital management, the result of which can be an extended sales cycle requiring multiple individuals to believe in the advantages of our products. We cannot assure that our existing relationships and arrangements with hospitals and surgeons can be maintained or that new relationships will be established in support of our products. In addition, our competitors may develop new technology for tissue manipulation, cutting and stapling that is more attractive to surgeons and hospitals. If surgeons do not consider our

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products to be suitable for application in the procedures we are targeting and an improvement over the use of competing products, our business goals will not be realized.

The success of our business is dependent on our ability to develop new and innovative products and to enhance our existing products, and the recent curtailment of our new product development activities as part of our expense reduction initiative may adversely affect our ability to perform these functions, and diminish our prospects in the longer term.

The success of our business and our competitive position are dependent on our ability to develop innovative new products and to introduce enhancements to our existing products on a timely basis. We have historically experienced difficulties in new product introductions that have adversely affected our revenues and the rate of adoption of our intelligent Surgical Instruments. For example, our ability to generate revenue from the new i60 and iDrive products that we introduced in late 2007 was adversely affected by delays in availability of green reload cartridges and by problems with the initial quality of units delivered to customers and other issues.

As part of our recently announced expense reduction initiative, we have determined that for at least the next several quarters, we will limit our new product development activities and devote our research and development resources primarily to our agreement with Intuitive, with the objective of accelerating the achievement of the development milestones under that agreement and the commencement of revenue-generating sales of the related reload cartridges.

The redirection to our Intuitive program of engineering resources that we would otherwise rely upon for the development of new and enhanced products and technologies could, in the near term, have a material adverse effect on our ability to deliver innovative new products and to support, enhance and improve the quality of our existing products, either of which could slow the rate of adoption of our Intelligent Surgical Instruments. Our reputation for innovation may be diminished, customers may forego purchases of our existing products or purchase our competitors’ products, and, in the longer term, our competitive position and our revenues and results of operations may be harmed.

We have limited manufacturing experience, have experienced significant manufacturing problems in the past, and may encounter difficulties in increasing production to provide an adequate supply to customers.

The manufacture of our products is a complex and costly operation involving a number of separate processes and components. To date, our manufacturing activities have consisted primarily of assembling limited quantities of our products. We have considered, and will continue to consider as appropriate, manufacturing components that are currently provided by third parties, as well as implementing new production processes. We do not have experience in manufacturing our products in the commercial quantities that might be required to market our products in the United States, Europe and Japan. We have experienced significant difficulties in our supply chain and manufacturing operations, which have impaired our ability to ship our products on a timely basis and had a material adverse impact on our results of operations. Manufacturing of our products in commercial quantities will require us to expand our manufacturing capabilities and to hire and train additional personnel. We expect that any expansion would be achieved through modified space utilization in our current leased facilities, improved efficiencies, increased automation and acquisition of additional tooling and equipment. We may encounter difficulties in increasing our manufacturing capacity and in manufacturing commercial quantities, including:

· maintaining product yields;

· maintaining quality control and assurance;

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· providing component and service availability;

· maintaining adequate control policies and procedures; and

· hiring and retaining qualified personnel.

Difficulties encountered in increasing our manufacturing capacity could impact our ability to adequately supply our customers.

In order to achieve and sustain profitability, we must substantially improve our gross margins.

The historical unit costs for our products, based on limited manufacturing volumes, have been very high in relation to our sales, resulting in low or negative gross margins. It will be necessary for us to achieve substantial further reductions in our cost of sales as a percentage of sales in order to become profitable. The transition to in-house production or to new production processes may initially have a negative effect on our manufacturing yields or costs, which would materially and adversely affect our business, financial condition and results of operations. Certain of our manufacturing processes are labor intensive, and achieving significant cost reductions will depend in part upon reducing the time required to perform these processes. We cannot assure you that we will be able to achieve the significant cost reductions in the manufacture of our products necessary for our business to achieve profitability.

If our products are not considered to be a safe and effective alternative to existing technologies, we will not be commercially successful.

Our Intelligent Surgical Instruments rely on new technology, and our success depends upon acceptance of this technology by the medical community as safe, clinically effective and cost effective and a preferred device as compared to products of our competitors. We have not collected, and are not aware that others have collected, long-term data regarding efficacy, safety and clinical outcomes associated with the use of our products. Any data that is generated in the future may not be positive or consistent with our current, largely anecdotal data, which would negatively affect market acceptance and the rate at which our Intelligent Surgical Instruments are adopted. Equally important will be physicians’ perceptions of the safety of our products. Our technology is relatively new in surgery, and the results of short-term clinical experience with our SurgASSIST system do not necessarily predict long-term clinical benefits as compared to the products of our competitors. If, over the long term, our SurgASSIST system does not meet surgeons’ expectations as to safety, efficacy and ease of use, the SurgASSIST system may not become widely adopted.

Even if the data collected from future clinical studies or clinical experience indicates positive results, each surgeon’s actual experience with our device outside the clinical study setting may vary. Consequently, both short- and long-term results reported in any future clinical studies may be significantly more favorable than typical results of other practicing surgeons, which could negatively affect rates of adoption and negatively affect our results.

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

Our SurgASSIST system is a new technology and must compete with the more established manual devices of our competitors, such as Covidien and Ethicon Endo-Surgery, Inc. Conventional manual devices are widely accepted in the medical community, have a long history of use and do not require the purchase of additional, expensive capital equipment. We cannot be certain that surgeons 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 competitive advantages over us, including:

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· significantly greater name recognition;

· longer operating histories;

· established relationships with healthcare professionals, customers and third-party payers;

· established distribution networks;

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

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

· greater financial and human resources for product development, sales and marketing and patent litigation.

In addition, our SurgASSIST system in its original configuration has certain perceived disadvantages compared to conventional manual endomechanical devices. Prior to the introduction of our new i60 linear stapler and our iDrive wireless handheld power and control system, our Intelligent Surgical Instruments had to be tethered by a flexible shaft to a power console which is located outside the sterile field. Some surgeons and operating room personnel found this to be cumbersome and not well suited for all procedures. This factor may initially have limited market acceptance of our SurgASSIST platform. Our next generation untethered self-contained Intelligent Surgical Instruments are designed to eliminate this disadvantage of our SurgASSIST system, but we may need to overcome an initial negative perception by clinicians of our first-generation tethered technology.

Our future success depends upon maintaining a competitive position in the development of products and technologies in our areas of focus and our recent cost reduction initiatives may make it more difficult to achieve this. Our competitors may:

· develop technologies and products that are more effective than our products or that render our technologies or products obsolete or noncompetitive;

· obtain patent protection or other intellectual property rights that would prevent us from developing or enhancing our products; or

· obtain regulatory approval for the commercialization of their products more rapidly or effectively than we do.

Additional competitors also may enter our market. As a result, we cannot assure you that we will be able to compete successfully against existing or new competitors. Our sales would be reduced or eliminated if our competitors develop and market products that are more effective and less expensive than our products. Volatility in the demand for our products could, among other things, make it more difficult to gauge the manufacturing capacity necessary to meet our demand, decrease our manufacturing efficiency and increase our working capital requirements. If any of these occur, your investment in our common stock may decrease in value.

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We assemble our Intelligent Surgical Instruments using our own customized equipment and are undertaking a new manufacturing process, making us vulnerable to production and supply problems that could negatively impact our sales.

We engaged a third party to develop and fabricate an automated system to enable us to assemble the reload cartridges for our PLC 60 and i60 linear staplers, a process which took longer than we expected. The system has now been installed at our facility and became operational during October 2008. While we believe the use of this new system should reduce our risk of supply problems, the automated system must be capable of manufacturing at our anticipated volume. However, there is no guarantee that the automated system will function at the capacity we require. The automated system is located at our facility in Langhorne, Pennsylvania, which requires us to be responsible for the day-to-day control and protection of the system. Delay in the availability of, or unanticipated problems in our utilization of, this automated system could jeopardize our initiatives to improve our gross margins.

We are dependent upon a number of key suppliers, including sole source suppliers, the loss of which would materially harm our business.

We rely upon sole source suppliers for a number of key components and services used in manufacturing our products and, in general, we do not have long-term contracts with these suppliers. We cannot assure you that we will be able to obtain sufficient quantities of such components or services in the future. Because we do not have long-term contracts, our suppliers generally are not required to provide us with any guaranteed minimum production levels.

In addition, our reliance on third parties involves a number of risks, including, among other things:

· 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 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;

· we may experience delays in delivery by our suppliers due to changes in demand from us or their other customers;

· we may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems;

· fluctuations in demand for products that our suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner;

· our suppliers may wish to discontinue supplying components or services to us for risk management reasons;

· we may not be able to find new or alternative components or reconfigure our system and manufacturing processes in a timely manner if the necessary components 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.

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

We cannot quickly replace suppliers or establish additional new suppliers for some of these components, due to both the complex nature of the manufacturing process used by our suppliers and the time and effort that may be required to obtain regulatory clearance or approval to use materials from alternative suppliers. Any significant supply interruption or capacity constraints affecting our facilities or those of our suppliers would impair our ability to manufacture our products.

If we are unable to manage our expected growth, our performance may suffer.

As of September 30, 2008, we had approximately 161 employees, compared with 227 at December 31, 2007, and we expect this number to decrease to approximately 107 by December 31, 2008 as a result of recently announced restructuring initiative. Despite these reductions, we will need to maintain sufficient managerial, operational, financial and other resources to effectively manage our operations. Transitions in our senior management team have in the past complicated the task of effectively managing our growing operations and implementing required systems improvements. In March 2008, our chief operations officer, who was one of our three executive officers and was responsible for our manufacturing operations as well as for our regulatory compliance operations, resigned. Following his departure, we undertook a detailed review of our operations. We concluded that gaps existed in quality control, quality assurance, and supply chain management. Due to the technical nature of our manufacturing requirements and to provide focus at the functional level and to increase feedback from our customers into the manufacturing process, we determined that we would be better served to divide our operations activity into three functional areas, consisting of operations (including inventory and supply chain management); manufacturing (comprising the manufacturing and assembly processes); and product development (the process of transferring a product from R&D through manufacturing ramp-up, including verification and validation). We assigned experienced senior executives to directly manage each of these functional areas. We believe that this reorganization of our operations functions, which was completed in the second quarter of 2008, will result in improved efficiency, product quality and customer satisfaction. However, there can be no assurance that this reorganization will achieve its intended goals. Although our recently announced restructuring initiative does not include reductions in the number of our finance or accounting staff or our regulatory compliance staff, it is possible that our management, finance, technical and regulatory personnel, systems and facilities currently in place may not be adequate to support our expected future growth. Our need to effectively manage our operations, growth and programs requires that we continue to improve our systems and procedures and to attract and retain sufficient numbers of talented employees. We may be unable to successfully accomplish these tasks and, accordingly, may not achieve our research, development and growth goals.

We must upgrade and correct deficiencies in our regulatory compliance operations, and our failure to do so could impair our ability to market our products or lead to regulatory enforcement action against us.

We are subject to extensive regulation in the United States and other countries, including by the United States Food and Drug Administration, or FDA. We maintain an organization of managers, engineers and administrative personnel whose responsibility it is to ensure that our products, facilities and operations comply with applicable regulatory requirements. However, we have from time to time experienced shortages of qualified regulatory compliance staff due to turnover and other factors, and we need to upgrade and carefully manage our regulatory compliance operations in order to accommodate our expected growth. The senior vice president of regulatory affairs and quality assurance whom we hired in the fourth quarter of 2007 resigned in January 2008, and we divided his responsibilities among several of our current employees. Our chief operations officer, to whom our senior vice president of regulatory affairs and quality assurance reported, also resigned in March 2008.

In May 2008, following an inspection of our facilities, the FDA issued a Notice of Inspectional Observations, or Form 483, which included ten inspectional observations relating to management controls,

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medical device reporting, design controls, and corrective and preventive action. We were also inspected by the FDA in 2002, 2003, 2005 and 2007, and some of the observations in the FDA’s May 2008 Form 483 are similar to those we received in earlier inspections. As a result of these events, we concluded that there were significant deficiencies in our regulatory compliance operations, and have been taking steps to make needed improvements in our corrective and preventive action, complaint handling and medical device reporting procedures, in our processes for compliance with other requirements of the FDA’s quality system regulations and in our related controls and internal audit functions.

On October 22, 2008, we received from the FDA a Warning Letter notifying us that the FDA has determined that we are not in compliance with the Current Good Manufacturing Requirements of the FDA’s Quality System regulations and with the FDA’s Medical Device Reporting regulations. The specified violations related to each of the ten observations noted in the May 2008 Form 483. The FDA Warning Letter advised that failure to promptly correct the noted violations could result in further regulatory action being taken by the FDA without notice, and that such actions could include, without limitation, seizure, injunction and/or civil money penalties.

If we are not successful in identifying and recruiting qualified personnel to manage and staff our regulatory compliance operations or in implementing necessary process improvements on a timely basis, we could be subject to regulatory enforcement actions which could damage our reputation, impair our ability to obtain regulatory clearances for new products, prevent us from manufacturing and selling our products and harm our business.

We have a material weakness in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, investors could lose confidence in our financial statements and our company, which could have a material adverse effect on our business and stock price.

We have concluded that there is a material weakness in our internal control over financial reporting because we do not have a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process. The material weakness resulted in the identification of adjustments during the financial statement close process in 2007 that have been recorded in our consolidated financial statements. A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements would not be prevented or detected. Until this design deficiency in our internal control over financial reporting is remediated, there is reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, when we file our Annual Report on Form 10-K for the fiscal year ending December 31, 2008, we must assess the effectiveness of our internal control over financial reporting as of the end of our 2008 fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting that are identified by management. If we are unable at that time to assert that our internal control over financial reporting is effective because the material weakness identified above has not been remediated, or for any other reason, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Any failure in our training efforts could result in lower than expected product sales and potential liabilities.

A critical component of our sales and marketing efforts is the training of a sufficient number of surgeons, other clinicians and hospital staff to properly use our SurgASSIST system. In order to operate effectively, our internal sales force must also be trained on the benefits and proper utilization of our technology, including newly introduced products. In connection with the introduction of our i60 and iDrive

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products, we have found that it takes longer than we expected to adequately train our internal sales force and customers’ clinical personnel on the use and care of these instruments, due in part to their novelty and to the need to employ new sterilization techniques. Additionally, the number of i60 and iDrive demonstration units available for use by our sales force was limited during the early phases of our i60 product launch. As a result, it has taken longer for our sales force to become fully effective in selling these new products, and the rate of adoption of our new technology has been adversely affected. Any further delays in adequately training our internal sales force or our customers’ clinical personnel on these or other products could harm our business.

Additionally, we rely on clinicians and hospital staff to devote adequate time to learn to use our products. If surgeons or hospital staff are not properly trained in the use of our Intelligent Surgical Instruments, they may misuse or ineffectively use our products. For example, during 2007, we received reports of incomplete firings of our reusable PLC 60 instrument that we believed were attributable to improper installation of reload cartridges by our customers’ medical personnel. More recently, we have received similar reports relating to the seating of reload cartridges in our i60 and PLC 75 linear staplers. We initiated improvements in our training procedures to alert customers to the need to properly seat the reload cartridges, and designed a new version of the reload cartridge to incorporate a positive locking feature to make this error less likely to occur. However, insufficient training may result in unsatisfactory patient outcomes, patient injury and related liability or negative publicity, which could have an adverse effect on our product sales.

It has always been a key component of our sales and marketing strategy that for at least the first 18 to 24 months following adoption by any institution of our next generation products we seek to have a PMI sales representative present in the operating room for every firing of the Intelligent Surgical Instrument. While this places an additional burden on the limited resources of our internal sales force, we believe that it is important to our ability to encourage the adoption of our Intelligent Surgical Instruments and adequately train hospital staff in their use. Although we believe that in the near term, we have a sufficient number of sales representatives to carry out this strategy and support our current 2008 revenue plan, our restructuring initiative could adversely affect our ability to achieve our training objectives. Further, in the longer term, the implementation of this strategy will likely require us to increase the size of our direct sales force, and our inability or failure to do so could constrain our revenue growth and the rate of adoption of our Intelligent Surgical Instruments.

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. The medical device industry has historically been subject to extensive product liability litigation. We have in the past been, and in the future may be, subject to claims by consumers, healthcare providers, third-party payers or others selling our products if the use of our products were to cause, or merely appear to cause, injury or death. We are currently the subject of a product liability suit in Belgium. Any weakness in training and service associated with our products may also result in product liability lawsuits. 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 or the availability of insurance coverage, could result in:

· decreased demand for our products;

· injury to our reputation;

· diversion of management’s attention;

· significant costs of related litigation;

· substantial monetary awards to patients;

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· product recalls or market withdrawals;

· loss of sales; and

· the inability to successfully commercialize our products that are under development.

If we deliver products with defects, our credibility may be harmed and market acceptance of our products may decrease.

The manufacturing and marketing of our products involve an inherent risk of product liability claims. In addition, our product development and production processes are complex and could expose our products to defects. Additionally, problems experienced by our customers, such as improper operation of the articulation joint or difficulty in consistently seating our reload cartridges, may be perceived by them as quality defects. Our SurgASSIST system also incorporates sophisticated computer software. Complex software frequently contains errors, especially when first introduced. We cannot assure you that our software will not experience errors or performance problems in the future.

We performed a thorough review of our operations in April 2008 which resulted in a reorganization with the goal of enhancing our quality processes and controls. We determined that there were gaps in quality control, quality assurance and supply chain management, that once addressed would increase customer satisfaction. In order to address these issues, we hired several new senior level executives to enhance our inventory and supply chain management, manufacturing and product development operations. In addition, to further support product quality, we have implemented our Quality is Caring program, which is an internal quality assurance plan to ensure that all of our products meet the rigorous expectations of the operating room.

If our products have, or are perceived to have, mechanical defects or software errors or have performance problems, we would likely experience:

loss of sales;

delay in market acceptance of our products;

damage to our reputation;

additional regulatory filings;

product recalls;

increased service or warranty costs; or

product liability claims.

We may need substantial additional funding and we may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

We believe that our existing cash and cash equivalent balances, together with the first milestone payment under our Intuitive agreement, which we expect to receive during the first half of 2009, will be sufficient to meet our anticipated cash requirements through the fourth quarter of 2009. Our ability to meet our obligations in the normal course of business beyond 2009 will be dependent on our increasing our customer and revenue base, controlling expenses and securing additional external financing which we are

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actively pursuing through various structures. We have no arrangements to obtain additional financing, and there can be no assurance that such financing, if required or desired, will be available in amounts or on terms acceptable to us, if at all. These conditions raise substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has modified its audit report on our consolidated financial statements to include an explanatory paragraph regarding this contingency. However, our actual capital requirements will depend on many factors, many of which are outside our control, including our ability to increase our sales and improve our gross margins, our ability to achieve the development milestones under our agreement with Intuitive and receive the related milestone payments and the success of our recently announced restructuring initiative in reducing our operating expenses, as well as the following:

· the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

· the cost of defending, in litigation or otherwise, any claims that we infringe third party patent or other intellectual property rights;

· the cost and timing of regulatory approvals;

· expenses of future clinical studies, if any;

· the effect of competing technological and market developments;

· licensing technologies for future development; and

· the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

Historically, we have financed our operations and internal growth primarily through private placements of equity securities and debt and, more recently, our initial public offering and the initial license fee under our Intuitive agreement. We cannot be certain that additional public or private financing will be available in amounts acceptable to us, or at all. If we raise additional funds by issuing equity securities, dilution may occur. Debt financing, if available, may involve restrictive covenants. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

If we are unable to raise additional funds when needed, we may have to delay or reduce the scope of or eliminate some or all of our development programs or we may be forced to seek protection under applicable bankruptcy laws. Any restructuring or bankruptcy could materially impair your investment.

We sell our systems internationally and are subject to various risks relating to these international activities, which could adversely affect our business, financial condition and results of operations.

During the three months ended September 30, 2008, 60% of our sales were derived from customers located in North America and 40% were derived from customers in Europe and Asia. During the three months ended September 30, 2007, 79% of our sales were derived from customers located in North America and 21% were derived from customers in Europe and Asia. For the nine months ended September 30, 2008 and 2007, sales occurring in international markets were 24% and 21%, respectively. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations. Our international business may be adversely affected by changing economic conditions in foreign countries. Because most of our international sales are denominated in the functional currency of the country where the product is being shipped, increases or decreases in the value of the U.S. dollar relative to foreign currencies could affect our results of operations. Engaging in international business inherently involves a number of other difficulties and risks, including:

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· export restrictions and controls relating to technology and government regulation;

· the availability and level of reimbursement within prevailing foreign healthcare payment systems;

· pricing pressure that we may experience internationally;

· required compliance with existing and changing foreign regulatory requirements and laws;

· laws and business practices favoring local companies;

· longer payment cycles;

· 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 and costs of staffing and managing foreign operations; and

· difficulties in enforcing intellectual property rights.

Our exposure to each of these risks may increase our costs, impair our ability to market and sell our products and require significant management attention. We cannot assure you that one or more of these factors will not harm our business.

If we choose to acquire or invest in new and complementary businesses, products or technologies instead of developing them ourselves, such acquisitions or investments could disrupt our business.

We may attempt to expand our business through acquisitions. To the extent we grow our business through acquisitions, our future success may be partially dependent upon our ability to effectively integrate acquired businesses with our own. There can be no assurance that our acquisitions will be successfully integrated or that any such acquisitions will otherwise be successful. If our acquisitions are unsuccessful for any reason, our business may be harmed and the value of your investment may decline.

We are dependent upon key personnel, the loss of any of which could harm our business.

Our future business and operating results depend significantly on the continued contributions of our key technical personnel and senior management, particularly those of our co-founder, Chief Executive Officer and President, Michael P. Whitman. These individuals and the services they provide would be difficult or impossible to replace. While we are subject to certain severance obligations to Mr. Whitman, either he or we may terminate his employment at any time and for any lawful reason or for no reason. Our business and future operating results also depend significantly on our ability to attract and retain qualified management, manufacturing, technical, regulatory, marketing, sales and support personnel for our operations. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting or retaining such personnel.

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Although we have key-person life insurance in the amount of $2.0 million on the life of Mr. Whitman, this amount would not fully compensate us for the loss of Mr. Whitman’s services. The loss of key employees, the failure of any key employee to perform or our inability to attract and retain skilled employees, as needed, could harm our business.

Lack of third-party coverage and reimbursement for our products could delay or limit their adoption.

We may experience limited sales growth resulting from limitations on reimbursements made to purchasers of our products by third-party payers, and we cannot assure you that our sales will not be impeded and our business harmed if third-party payers fail to provide reimbursement that hospitals view as adequate.

In the United States, our products are purchased primarily by medical institutions, which then bill various third-party payers, such as the Centers for Medicare and Medicaid Services, or CMS, which administers the Medicare program, and other government programs and private insurance plans, for the healthcare services provided to their patients. The process involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive. Moreover, many private payers look to CMS in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage for procedures utilizing our SurgASSIST system or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payers.

If a medical device does not receive incremental reimbursement from CMS, then a medical institution would have to absorb the cost of our products as part of the cost of the procedure in which the products are used. Acute care hospitals are now generally reimbursed by CMS for inpatient operating costs under a Medicare hospital inpatient prospective payment system. Under the Medicare hospital inpatient prospective payment system, acute care hospitals receive a fixed payment amount for each covered hospitalized patient based upon the Diagnosis-Related Group, or DRG, to which the inpatient stay is assigned, regardless of the actual cost of the services provided. At this time, we do not know the extent to which medical institutions would consider insurers’ payment levels adequate to cover the cost of our products. Failure by hospitals and surgeons to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used could deter them from purchasing our products and limit our sales growth. In addition, pre-determined DRG payments may decline over time, which could deter medical institutions from purchasing our products. If medical institutions are unable to justify the costs of our products, they may refuse to purchase them, which would significantly harm our business.

Our operations are currently conducted primarily at a single location that may be at risk from fire, earthquakes, terror attacks or other disasters.

We currently conduct all of our manufacturing and management activities and certain research and development activities at a single location in Langhorne, Pennsylvania. We have taken precautions to safeguard our facilities, including insurance, health and safety protocols and off-site storage of computer data. However, a casualty due to fire or natural disaster, such as an earthquake, storm or terrorist attack, could cause substantial delays in our operations, damage or destroy our equipment or inventory and cause us to incur additional expenses. A disaster could seriously harm our business and results of operations. Our insurance does not cover earthquakes and floods and may not be adequate to cover our losses in any particular case.

Risks Related to Our Intellectual Property

If we fail to adequately enforce or defend our intellectual property rights, our business may be harmed.

Much of the technology used in the markets in which we compete is covered by patents, and our commercial success will depend in large part on our ability to obtain and maintain patent and trade secret

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protection for our products and methods. We currently hold 24 issued United States patents, eight granted European patents and four other foreign patents, more than 100 pending United States and foreign patent applications and two licensed patents that cover key aspects of our technology. Our issued patents expire at various dates beginning in 2019. The loss of our patents could reduce the value of the related products. In addition, the cost to litigate infringements of our patents or the cost to defend ourselves against patent infringement actions by others could be substantial.

Our ability to obtain additional patents is uncertain and the legal protection afforded by these patents is limited and may not adequately protect our rights or permit us to gain or keep any competitive advantage. In addition, the specific content required of patents and patent applications that is necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or in interpretations of patent laws in the United States or elsewhere may diminish the value of our intellectual property or narrow the scope of our patent protection. Even if patents are issued regarding our products and methods, our competitors may challenge the validity of those patents. Patents also will not protect our products and methods if competitors devise ways of making competitive products without infringing our patents.

Proprietary trade secrets and unpatented know-how are also very important to our business. We rely on trade secrets to protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Our employees, consultants, contractors, outside clinical collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

If we infringe intellectual property rights of third parties, it may increase our costs or prevent us from being able to sell our existing products or commercialize new products.

There is a risk that we are infringing the proprietary rights of third parties under patents and pending applications belonging to third parties that may exist in the United States and elsewhere in the world and that relate to the products we market and develop. Because the patent application process can take several years to complete, there may be currently pending applications, unknown to us, which may result in issued patents that cover the production, manufacture, commercialization or use of our products. In addition, the production, manufacture, commercialization or use of our product candidates may infringe existing patents of which we are not aware.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the medical device industry. Defending ourselves against third-party claims, including litigation in particular, would be costly and time consuming and would divert management’s attention from our business, which could lead to delays in our development or commercialization efforts. Currently, we are involved in two appeal proceedings in Germany in connection with two of three patent-infringement lawsuits against us. The lawsuits alleged that certain of our products infringe three European patents held by Ethicon Endo-Surgery. We prevailed in two of the three infringement actions and the products in question were found not to infringe the Ethicon Endo-Surgery patents, and Ethicon Endo-Surgery is appealing one of those decisions. We lost the other infringement action and are appealing that decision. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business. As a result of intellectual property infringement claims, or to avoid potential claims, we might:

· be prohibited from selling or licensing any of our current products or any product that we may develop unless the patent holder licenses the patent to us, which it is not required to do;

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· be required to pay substantial royalties or grant a cross license to our patents to another patent holder; or

· be required to redesign a product so it does not infringe, which may not be possible or could require substantial funds and time.

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. 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.

Risks Related to Regulatory Compliance

Our failure to meet strict regulatory requirements could require us to pay fines, incur other costs or even close our facilities.

Our facilities and manufacturing techniques generally must conform to standards that are established by the United States Food and Drug Administration, or FDA, and other government agencies, including those of European and other foreign governments. These regulatory agencies may conduct periodic audits or inspections of our facilities or our processes to monitor our compliance with applicable regulatory standards. If a regulatory agency finds that we have failed to comply with the appropriate regulatory standards, it may impose fines on us, delay or withdraw pre-market clearances or other regulatory approvals or, if such a regulatory agency determines that our non-compliance is severe, it may close our facilities. Any adverse action by an applicable regulatory agency could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.

Since 2002, the FDA has conducted five inspections of our facilities. Each of those inspections resulted in the issuance of a Notice of Inspectional Observations, or Form 483. The most recent inspection concluded in May 2008 and resulted in ten observations related to management controls, medical device reporting, design control and corrective and preventive action. For each Form 483, we have prepared and submitted a response to the FDA, which included our proposed corrective actions to address the FDA’s observations. The FDA issued an Establishment Inspection Report, or EIR, which officially closed the FDA’s inspection for inspections conducted between 2002 and 2005. As of this date the FDA has not provided an EIR for its 2007 or 2008 inspections.

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corrective actions, or accepts them but finds that we have not implemented them adequately, if the FDA is concerned about the repetitive nature of the inspectional observations, or if we otherwise fail to comply with applicable regulatory requirements, the FDA could initiate an enforcement action, including any of the following sanctions:

· untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

· customer notifications or 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, or PMA, of new products or modified products;

· withdrawing 510(k) clearances or PMA approvals that have already been granted;

· refusal to grant export approval for our products; or

· criminal prosecution.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.

The federal anti-kickback laws and several similar state laws prohibit payments that are intended to induce physicians or others either to refer patients to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements and sales programs we may have with hospitals, physicians or other potential purchasers or users of medical devices. In particular, these laws influence how we structure our sales, customer support, education and training programs and physician consulting and other service arrangements. Although we seek to structure such arrangements in compliance with applicable requirements, these laws are broadly written and it is difficult to determine precisely how these laws will be applied in specific circumstances. We could be subject to a claim under these anti-kickback laws for our consulting arrangements with surgeons, grants for training and other education, grants for research and other interactions with doctors which have come under scrutiny by federal and state regulators and law enforcement entities. Anti-kickback laws prescribe civil, criminal and administrative penalties for noncompliance, which can be substantial. Due to the breadth of the statutory provisions and the lack of guidance in the form of regulations or court decisions addressing some industry activities, it is possible that our sales, marketing and promotional activities practices might be challenged under anti-kickback or related laws. Even an unsuccessful challenge to or investigation into our practices could cause adverse publicity and thus could harm our business and results of operations.

Foreign sales of our products also subject us to similar fraud and abuse laws, including application of the U.S. Foreign Corrupt Practices Act. If our operations, including any consulting arrangements we may enter into with physicians who use our products, are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. If enforcement action were to occur, our business and financial condition would be harmed.

Modifications to our products may require new regulatory clearances or approvals or 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 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

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and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer 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. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.

If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the European Union, we must notify Orion Registrar, Inc., or Orion, our E.U. Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Obtaining clearances and approvals can be a time consuming process, and failure to obtain or delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

There is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our emerging technologies and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.

Some of our new products will require FDA clearance of a 510(k), or may even require FDA approval of a PMA. We are in the process of developing our regulatory strategies for obtaining clearance or approval of these new products. The FDA may not approve or clear these products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products. Failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business.

If we or our contract manufacturers fail to comply with the FDA’s Quality System Regulations, our manufacturing operations could be interrupted and our product sales and operating results could suffer.

Our finished goods manufacturing processes, and those of some of our contract manufacturers, are required to comply with the FDA’s Quality System Regulations, or QSRs, 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 its QSRs through periodic inspections of manufacturing facilities. We and our contract manufacturers have been, and anticipate in the future being, subject to such inspections. As noted above, in October 2008, we received from the FDA a Warning Letter notifying us that the FDA has determined that we are not in compliance with the Current Good Manufacturing Requirements of the FDA’s Quality System regulations. If our manufacturing facilities or those of any of our contract manufacturers fail to take satisfactory corrective action in response to an adverse QSR inspection, the FDA could take enforcement action, including any of the following sanctions, which could have a material impact on our operations:

· untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

· customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

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· 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;

· withdrawing 510(k) clearances on PMA approvals that have already been granted;

· refusal to grant export approval for our products; or

· criminal prosecution.

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. 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 have initiated certain voluntary recalls involving products that have been distributed to our customers and may take additional such actions in the future. We believe that certain of those recalls 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, including any of the following sanctions for failing to report the recalls when they were conducted:

· untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

· customer notifications or repair, replacement, refunds, recall, detention of seizure of our products;

· operating restrictions or partial suspension or total shutdown of production;

· refusing or delaying requests for 510(k) clearance or premarket approval of new products or modified products;

· withdrawing 510(k) clearances or PMA approvals that have already been granted;

· refusal to grant export approval for our products; or

· criminal prosecution.

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

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

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injury or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or one of our similar devices were to recur. All manufacturers placing medical devices in the market in the European Union are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the Competent Authority in whose jurisdiction the incident occurred. Were this to happen to us, the relevant Competent Authority would file an initial report, and there would then be a further inspection or assessment if there are particular issues. This would be carried out either by the Competent Authority or it could require that Orion, as the Notified Body, carry out the inspection or assessment.

Any such adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Adverse events involving our products have been reported to us in the past, and we cannot guarantee that they will not occur in the future. 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. Failure to report such adverse events to appropriate government authorities on a timely basis, or at all, could result in an enforcement action against us.

Failure to obtain regulatory approval in additional foreign jurisdictions will prevent us from expanding the commercialization of our products abroad.

We intend to market our products in a number of international markets. Although certain of our products have been approved for commercialization in Japan and in the European Union, in order to market our products in other foreign jurisdictions we must obtain separate regulatory approvals. The approval procedure varies among jurisdictions and can involve substantial additional testing. Approval or clearance by the FDA does not ensure approval by regulatory authorities in other jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign jurisdictions or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval in addition to other risks. In addition, the time required to obtain foreign approval may differ from that required to obtain FDA approval, and we may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any foreign market other than in the European Union and Japan.

We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label” uses.

Our promotional materials and training methods for surgeons must comply with FDA and other applicable laws and regulations. Many of our products are cleared by the FDA for use in various surgical applications. We believe that the specific surgical procedures for which our products are marketed fall within the scope of the surgical applications that have been cleared by the FDA. However, the FDA could disagree and require us to stop promoting our products for those specific procedures until we obtain FDA clearance or approval for them. In addition, if the FDA determines that our promotional materials or training constitutes promotion of an unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products would be impaired.

Federal regulatory reforms may adversely affect our ability to sell our products profitably.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency

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in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

Without limiting the generality of the foregoing, Congress has recently enacted, and the President has signed into law, the Food and Drug Administration Amendments Act of 2007. The amendments require, among other things, that FDA propose, and ultimately implement, regulations that will require manufacturers to label medical devices with unique identifiers unless a waiver is received from FDA. Once implemented, compliance with those regulations may require us to take additional steps in the manufacture of our products and labeling. These steps may require additional resources and could be costly. In addition, the law, as amended, will require us to, among other things, pay annual establishment registration fees to the FDA for each of our FDA registered facilities.

Risks Related to Ownership of Our Common Stock

We expect that the price of our common stock will fluctuate substantially.

Since our initial public offering in October 2007, the market price of our common stock has ranged from $14.79 to $0.64. Recently, our common stock, like that of many other small companies, has experienced even greater than usual volatility due in part to macro-economic conditions that have affected U.S. companies and securities markets generally. The market price for our common stock is likely to continue to fluctuate as a result of a number of factors, including:

· actual or anticipated announcements of technological innovations;

· introduction by us or by others of new commercial products;

· actual or anticipated changes in laws and governmental regulations;

· disputes relating to patents or proprietary rights;

· changes in business practices;

· developments relating to our efforts to obtain additional financing to fund our operations or our issuance of additional debt or equity securities;

· announcements by us regarding transactions with potential strategic partners;

· changes in industry trends or conditions;

· trading volume of our common stock;

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

· developments in our industry; and

· general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors or potential competitors.

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. In the past, securities class action litigation often has been initiated against a company following a period of volatility

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in the market price of the company’s securities. If securities class action litigation is initiated against us, we will incur substantial costs and our management’s attention will be diverted from our operations. All of these factors may materially and adversely affect the market price of our common stock, and you may lose some or all of your investment.

Our common stock may not continue to trade on the Nasdaq Global Market, which could reduce the value of your investment and make your shares more difficult to sell.

In order for our common stock to trade on the Nasdaq Global Market, we must continue to meet the listing standards of that market. On October 22, 2008, we received from the Nasdaq Stock Market a Staff Deficiency Letter notifying us that we were not in compliance with the listing requirements of the Nasdaq Global Market because the market value of our listed securities had been below the minimum $50,000,000 requirement for continued listing set forth in Marketplace Rule 4450(b)(1)(A) for ten consecutive trading days. Under applicable Nasdaq rules, if we are not able to establish compliance with the minimum market value of listed securities requirement by November 21, 2008, we will receive a notice that our common stock will be delisted from the Nasdaq Global Market. If such a delisting notification is issued, we will be entitled to appeal the Staff’s determination to a Nasdaq Listing Qualifications Panel. A timely appeal would stay delisting pending the appeal. However, there can be no assurance that we will be able to reestablish or maintain compliance with the applicable Nasdaq listing criteria or that any such appeal, if taken, would be successful. If our common stock is delisted from the Nasdaq National Market, we could seek to have our common stock listed on the Nasdaq Capital Market or quoted on the OTB Bulletin Board. However, delisting of our common stock from the Nasdaq Global Market could hinder your ability to sell, or obtain an accurate quotation for the price of, your shares of our common stock. Delisting could also adversely affect the perception among investors of PMI and its prospects, which could lead to further declines in the market price of our common stock. Delisting would also make it more difficult and expensive for us to raise capital. In addition, delisting might subject us to an SEC rule that could adversely affect the ability of broker-dealers to sell or make a market in our common stock, thus hindering your ability to sell your shares and could have the effect of limiting sales by you of our common stock under the securities laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. In addition, if our common stock is no longer listed on Nasdaq, persons holding shares of our common stock that are “restricted securities” may have a more limited ability to effect sales of our common stock pursuant to Rule 144, as the market-based method for calculating volume limitations will not be available.

Securities analysts may not initiate or continue 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.

Securities analysts may elect not to provide research coverage of our common stock, and if a sufficient number of securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. 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 one or more of the analysts who elect to cover us downgrades our stock, our stock price could decline. 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. In addition, rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 between the Securities and Exchange Commission, or SEC, other regulatory agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms will be required to contract with independent financial analysts for their stock research. It may be difficult for companies such as ours, with smaller market capitalizations, to attract 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.

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Our executive officers, directors and stockholders holding 5% or more of our outstanding common stock beneficially own or control approximately 40.8% of the outstanding shares of our common stock, assuming no exercise of outstanding options and warrants or conversion of our convertible notes. Accordingly, these executive officers, directors and principal stockholders, acting as a group, will 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 our company, 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.

Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control of our company.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger, acquisition or change of control. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

· advance notice requirements for stockholder proposals and nominations;

· limitations on convening stockholder meetings;

· the elimination of stockholder action by written consent;

· the elimination of cumulative voting; and

· a classified board of directors.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock.

Sales of a substantial number of shares of our common stock in the public market, or the perception that they may occur, may depress the market price of our common stock.

If our existing stockholders sell substantial amounts of our common stock in the public market, or the public market perceives that existing stockholders might sell substantial shares of common stock, the market price of our common stock could decline significantly. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

Approximately 2.6 million shares of our common stock that are issuable upon conversion of the convertible notes that we issued in March 2007 are now eligible for resale under Rule 144. Approximately 17.1 million additional shares of our common stock are outstanding, assuming no exercise of outstanding options or warrants or conversion of our convertible notes. If the holders of these shares sell them or are perceived by the market as intending to sell them, the market price of our common stock could drop significantly. Any substantial sale of common stock pursuant to any resale registration statements or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Sales of Unregistered Securities:

None.

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(b) Use of Proceeds from Public Offering of Common Stock

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-142926) that was declared effective by the Securities and Exchange Commission on October 25, 2007. The net offering proceeds to us, after deducting underwriting discounts and offering expenses, were approximately $42 million. Through September 30, 2008, we have used all of the net proceeds from the offering for general working capital purposes.

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.

Item 6. Exhibits.

Exhibit		Filed with this Form	Incorporated by Reference
No.	Description	10-Q	Form	Filing Date	Exhibit No.
3.1	Fourth Amended and Restated Certificate of Incorporation of the Company		S-1/A	October 9, 2007	3.2

3.2	Amended and Restated By-Laws of the Company		S-1/A	October 9, 2007	3.4

4.1	Specimen certificate for common stock of Power Medical Interventions, Inc.		S-1/A	October 9, 2007	4.1

10.9	License and Development Agreement and Reload Supply Agreement between Power Medical Interventions, Inc. and Intuitive Surgical, Inc. each dated September 9, 2008 (Exhibits omitted) (Confidential treatment for portions of this Reload Supply Agreement has been requested pursuant to Rule 24b-2. A copy of the agreement including the confidential portions has been filed with the Securities and Exchange Commission.)	X

31.1	Certification of Chief Executive Officer	X

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	Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

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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.

		POWER MEDICAL INTERVENTIONS, INC.
		(Registrant)

November 14, 2008	By:	/s/ Michael P. Whitman
		Michael P. Whitman
		President and Chief Executive Officer

		POWER MEDICAL INTERVENTIONS, INC.
		(Registrant)

November 14, 2008	By:	/s/ John P. Gandolfo
		John P. Gandolfo
		Chief Financial Officer

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Exhibit Index

Exhibit		Filed with this Form	Incorporated by Reference
No.	Description	10-Q	Form	Filing Date	Exhibit No.
3.1	Fourth Amended and Restated Certificate of Incorporation of the Company		S-1/A	October 9, 2007	3.2

3.2	Amended and Restated By-Laws of the Company		S-1/A	October 9, 2007	3.4

4.1	Specimen certificate for common stock of Power Medical Interventions, Inc.		S-1/A	October 9, 2007	4.1

10.9	License and Development Agreement and Reload Supply Agreement between Power Medical Interventions, Inc. and Intuitive Surgical, Inc. each dated September 9, 2008 (Exhibits omitted) (Confidential treatment for portions of this Reload Supply Agreement has been requested pursuant to Rule 24b-2. A copy of the agreement including the confidential portions has been filed with the Securities and Exchange Commission.)	X

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X

32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

		PAGE
PART I:	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 (Unaudited)	1

	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007 (Unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	22

PART II:	OTHER INFORMATION	22

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Submission of Matters to a Vote of Security Holders	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

	Signatures	46