Summary of HANSEN MEDICAL INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Except for the historical information contained herein, the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that involve risks and uncertainties. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "could," "intends," "might," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in this report in Part II, Item 1A "Risk Factors." Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report. Overview
We develop, manufacture and sell a new generation of medical robotics designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Our SenseiTM Robotic Catheter System, or Sensei system, is designed to allow physicians to instinctively navigate flexible catheters with greater stability and control in interventional procedures. We believe our Sensei system and its corresponding disposable ArtisanTMControl Catheter, or Artisan catheter, will enable physicians to perform procedures that historically have been too difficult or time consuming to accomplish routinely with previously existing catheters and catheter-based technologies, or that we believe could be accomplished only by the most skilled physicians. We believe that our Sensei system has the potential to benefit patients, physicians, hospitals and third-party payors by improving clinical outcomes and permitting more complex procedures to be performed interventionally.
We were incorporated in Delaware on September 23, 2002. In March 2007, we established Hansen Medical UK Ltd, a wholly-owned subsidiary located in the United Kingdom and, in May 2007, we established Hansen Medical Deutschland, GmbH, a wholly-owned subsidiary located in Germany. In November 2007, we acquired AorTx, Inc., an early stage company developing heart valves to be delivered by catheters through the skin and blood vessels, which is known as "percutaneous" delivery. Since inception, we have devoted the majority of our resources to the development and commercialization of our Sensei system.
To date, we have incurred net losses in each year since our inception and, as of September 30, 2008, we had an accumulated deficit of $148.0 million. We expect our losses to continue as we advance our development activities, expand the commercialization of our Sensei system and Artisan catheter and continue to develop new products. We have financed our operations primarily through the sale of public and private equity securities and the issuance of debt. Most recently, on April 7, 2008, we sold 3,000,000 shares of our common stock, which resulted in approximately $39.5 million of net proceeds. Additionally, on August 25, 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million revolving credit line. As of September 30, 2008, we had drawn down approximately $12.5 million against the equipment line under this agreement.
We received CE Mark approval for our Sensei system in the fourth quarter of 2006 and made our first commercial shipments to the European Union in the first quarter of 2007. In May 2007, we received CE Mark approval for our Artisan catheter and also received FDA clearance for the marketing of our Sensei system and Artisan catheter for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. As a result, we recorded our first revenues in the second quarter of 2007.
We market our products in the United States through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our

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customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors to market, sell and support our products.
Critical Accounting Policies, Estimates and Judgments We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. We base our estimates on our past experience and on other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. Our significant accounting policies are fully described in Note 2 to our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies in the nine months ended September 30, 2008.
Financial Overview
Revenues
We made our first commercial shipments to Europe in the first quarter of 2007 and recognized our first revenues in the second quarter of 2007 for both European and U.S. customers. Revenues consist of sales of Sensei systems, Artisan catheters, other disposables and service revenue. We expect revenues for the remainder of 2008 to increase over 2007 levels but to be difficult to predict as we are still in the early stage of commercializing our products and face both sales and manufacturing challenges. In any event, 2008 revenues will not significantly reduce our continued losses resulting from our selling, general and administrative costs and our research and development and other activities.
Cost of Goods Sold
Cost of goods sold consists primarily of materials, direct labor, depreciation, overhead costs associated with manufacturing, training and installation costs, royalties, provisions for inventory valuation and warranty expenses. We expect that cost of goods sold both as a percentage of revenue and on a dollar basis for the remainder of 2008 will continue to vary from quarter to quarter due, among other things, to fluctuations in revenues, average selling prices, manufacturing levels and manufacturing yields. Research and Development Expenses
Our research and development expenses primarily consist of engineering, software development, product development, quality assurance and clinical and regulatory expenses, including costs to develop our Sensei system and disposable Artisan catheters. Research and development expenses include employee compensation, including stock-based compensation expense, consulting services, outside services, materials, supplies, depreciation and travel. We expense research and development costs as they are incurred. Prior to the second quarter of 2007, research and development expenses included manufacturing costs for commercial products, including start-up manufacturing costs. We expect our research and development expenses to increase moderately during the remainder of 2008 as we continue development activities for the electrophysiology market and explore other future potential applications. Selling, General and Administrative Expenses Our selling, general and administrative expenses consist primarily of compensation for executive, finance, sales, legal and administrative personnel, including sales commissions and stock-based compensation expense. Other significant expenses include costs associated with attending medical conferences, professional fees for legal services (including legal services associated with our efforts to

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obtain and maintain broad protection for the intellectual property related to our products) and accounting services, administrative expenses associated with operating as a public company, consulting fees and travel expenses. We expect our selling, general and administrative expenses to increase moderately during the remainder of 2008 as we continue to expand our sales and clinical support groups and as we prepare for a March 2009 trial in our litigation against Luna Innovations, Inc.
Results of Operations
Comparison of the three months ended September 30, 2008 to the three months ended September 30, 2007
Revenues

Three months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Revenues $ 10,864 $ 3,455 $ 7,409 214 %

Revenues for the third quarter of 2008 primarily related to the sale of five Sensei systems in Europe and nine Sensei systems in the United States at an average selling price of approximately $715,000 per unit and the shipment of approximately 420 Artisan catheters at an average selling price of approximately $1,800 per unit. Revenues for the third quarter of 2007 primarily related to the sale of one Sensei system in Europe and four Sensei systems in the United States at an average selling price of approximately $638,000 per unit and the shipment of approximately 140 Artisan catheters at an average selling price of approximately $2,000. Average selling prices of Sensei systems for the third quarter of 2008 were positively impacted by sales of Sensei systems with CoHesion modules and the sale of one system with an additional robotic arm. We expect revenues for the remainder of 2008 to increase over 2007 levels but to be difficult to predict as we are still in the early stage of commercializing our products.

Cost of Goods Sold

                                           Three months ended
                                             September 30,               Change
          (Dollars in thousands)            2008         2007          $          %
          Cost of goods sold             $  6,643      $ 3,266     $ 3,377       103 %
          As a percentage of revenues       61.1%         94.5%

Cost of goods sold for both the third quarter of 2008 and the third quarter of 2007 included stock-based compensation expense of $0.2 million. During the third quarter of 2008, we experienced an increase in the overhead applied to our inventory, primarily due to the move to a new facility. This increase in inventory costs did not impact cost of goods sold for the entire third quarter of 2008 due to the sale of preexisting inventory which had been manufactured with lower overhead costs. Essentially all existing finished goods inventory on hand as of September 30, 2008 was manufactured with the higher overhead costs. Had we experienced the higher inventory costs for the entire quarter, cost of goods sold and gross profit for the third quarter of 2008 would have been negatively impacted by approximately $0.9 million. During 2007 we sold certain inventory which had previously been written down to zero as a result of the uncertainty of receiving FDA clearance and CE Mark approval. As a result, cost of goods sold for the third quarter of 2007 did not include all of the cost for those sales, which resulted in a benefit of approximately $0.1 million. Cost of goods sold for the third quarter of 2007 also included a $0.4 million non-recurring milestone royalty charge. We expect that cost of goods sold, both as a percentage of revenue and on a dollar basis, will continue to vary from quarter to quarter due, among other things, to fluctuations in revenues, average selling prices, manufacturing levels and manufacturing yields.

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Operating Expenses
Research and Development

Three months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Research and development $ 7,249 $ 4,463 $ 2,786 62 %

The change in research and development expenses in the third quarter of 2008 compared to the third quarter of 2007 was primarily due to the following:
� An increase of $1.2 million in employee-related expenses, including travel expenses, related to an increase of 21 in research and development headcount;

� An increase of $1.5 million in outside services, materials and overhead expenses; and

� An increase of $0.1 million in stock-based compensation expense due to our larger employee base, partially offset by the effects of our lower average stock price.

Total research and development expenses in the third quarter of 2008 included $0.7 million of stock-based compensation expense compared to $0.6 million in 2007. We expect our research and development expenses to increase moderately during the remainder of 2008 as we continue development activities for the electrophysiology market and explore other future potential applications.
Selling, General and Administrative

Three months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Selling, general and administrative $ 8,931 $ 6,538 $ 2,393 37 %

Selling, general and administrative expenses increased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to the following:
� An increase of $1.6 million in employee-related expenses, including sales commissions and travel expenses, associated with an increase in sales and marketing headcount of 18 and an increase in general and administrative headcount of 7;

� An increase of $0.5 million in supplies, equipment and overhead expenses;

� An increase of $0.3 million in professional service fees, primarily consisting of legal fees necessary for the development of our intellectual property portfolio, Luna litigation costs and other intellectual property related legal expenses;

� An increase of $0.1 million in stock-based compensation expense due to our larger employee base, partially offset by the effects of our lower average stock price; and

� A decrease of $0.1 million in non-compensation marketing expenses.

Selling, general and administrative expenses in the third quarter of 2008 included $1.9 million of stock-based compensation expense compared to $1.8 million in the third quarter of 2007. We expect our selling, general and administrative expenses to increase moderately during the remainder of 2008 as we continue to expand our sales and clinical support groups and as we prepare for a March 2009 trial in our litigation against Luna Innovations, Inc.

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Interest Income

Three months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Interest income $ 317 $ 916 $ (599 ) (65 )%

Interest income decreased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to decreased average cash, cash equivalents and short-term investments balances in the third quarter of 2008 as compared to 2007, due primarily to the use of cash in operations and for the acquisition of AorTx, partially offset by the cash received from our financing activities in 2008. We expect our quarterly interest income to decrease in the remainder of 2008 as we continue to utilize our cash to cover our operating expenses.

   Interest and Other Expense, net

                                             Three months ended
                                               September 30,               Change
        (Dollars in thousands)                2008          2007        $          %

Interest and other expense, net $ (345 ) $ (115 ) $ (230 ) 200 %

Interest and other expense, net, consists mainly of interest expense, which increased in the third quarter of 2008 as compared to 2007 primarily due to paying off our previous debt and the interest on our new term equipment line. We expect our interest expense to increase in the remainder of 2008 as we have a full quarter of interest related to the term equipment line.
Comparison of the nine months ended September 30, 2008 to the nine months ended September 30, 2007
Revenues

Nine months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Revenues $ 22,921 $ 5,889 $ 17,032 289 %

Revenues for the first nine months of 2008 primarily related to the sale of nine Sensei systems in Europe and 21 Sensei systems in the United States at an average selling price of approximately $677,000 per unit and the shipment of approximately 1,100 Artisan catheters at an average selling price of approximately $1,800 per unit. Revenues for the first nine months of 2007 primarily related to the sale of four Sensei systems in Europe and five Sensei systems in the United States at an average selling price of $618,000 per unit and the shipment of approximately 170 Artisan catheters at an average selling price of $1,900. Average selling prices of Sensei systems for the first nine months of 2008 were positively impacted by sales of Sensei systems with CoHesion modules and the sale of one system with an additional robotic arm.

Cost of Goods Sold

                                           Nine months ended
                                             September 30,               Change
          (Dollars in thousands)           2008         2007          $           %
          Cost of goods sold             $ 16,315     $ 4,919     $ 11,396       232 %
          As a percentage of revenues        71.2%       83.5%

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Cost of goods sold for the first nine months of 2008 included stock-based compensation expense of $0.5 million as compared to $0.2 million for the first nine months of 2007. During the third quarter of 2008, we experienced an increase in the overhead applied to our inventory, primarily due to the move to a new facility. Had we experienced the higher inventory costs for the entire third quarter of 2008, cost of goods sold and gross profit would have been negatively impacted by approximately $0.9 million. During 2007 we sold certain inventory which had previously been written down to zero as a result of the uncertainty of receiving FDA clearance and CE Mark approval. As a result, cost of goods sold for the first nine months of 2007 did not include all of the cost for those sales, which resulted in a benefit of approximately $0.6 million. Cost of goods sold for the first nine months of 2007 also included a $0.4 million non-recurring milestone royalty charge.
Operating Expenses
Research and Development

Nine months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Research and development $ 18,763 $ 13,886 $ 4,877 35 %

In the first quarter of 2007, as a development-stage company, all manufacturing expenses were included in research and development expenses. Beginning in the second quarter of 2007, as we received the necessary regulatory approvals, commenced our commercial operations and exited the development stage, manufacturing expenses were included in cost of goods sold. Research and development expenses for the first nine months of 2007 included development-stage manufacturing expenses of $1.0 million. The remaining change in research and development expenses in the first nine months of 2008 compared to the first nine months of 2007 of approximately $5.9 million was primarily due to the following:
� An increase of $3.3 million in employee-related expenses, including travel expenses, related to an increase of 21 in research and development headcount;

� An increase of $2.5 million in outside services, materials and overhead expenses; and

� An increase of $0.1 million in stock-based compensation expense due to our larger employee base, partially offset by the effects of our lower average stock price.

Total research and development expenses in the first nine months of 2008 included $2.0 million of stock-based compensation expense compared to $1.9 million in the first nine months of 2007.
Selling, General and Administrative

Nine months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Selling, general and administrative $ 27,015 $ 16,241 $ 10,774 66 %

Selling, general and administrative expenses increased in the first nine months of 2008 compared to the first nine months of 2007 primarily due to the following:
� An increase of $5.5 million in employee-related expenses, including sales commissions and travel expenses, associated with an increase in sales and marketing headcount of 18 and an increase in general and administrative headcount of 7;

� An increase of $1.8 million in professional service fees, primarily consisting of legal fees necessary for the development of our intellectual property portfolio, Luna litigation costs and other intellectual property related legal expenses;

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� An increase of $1.2 million in stock-based compensation expense due to our larger employee base;

� An increase of $1.2 million in lease costs for our new facility, all of which were being charged to selling, general and administrative expenses prior to its occupancy in July 2008;

� An increase of $1.0 million in supplies, equipment and overhead expenses; and

� An increase of $0.1 million in non-compensation marketing expenses.

Selling, general and administrative expenses in the first nine months of 2008 included $5.1 million of stock-based compensation expense compared to $3.9 million in the first nine months of 2007.
Interest Income

Nine months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Interest income $ 1,155 $ 3,013 $ (1,858 ) (62 )%

Interest income decreased in the first nine months of 2008 compared to the first nine months of 2007 primarily due to decreased average cash, cash equivalents and short-term investments balances in the first nine months of 2008 as compared to 2007, due primarily to the use of cash in operations and for the acquisition of AorTx, partially offset by the cash received from our equity offering in April 2008.
Interest and Other Expense, net

Nine months ended September 30, Change (Dollars in thousands) 2008 2007 $ % Interest and other expense, net $ (508 ) $ (377 ) $ (131 ) 35 %

Interest and other expense, net, consists mainly of interest expense, which increased in the first nine months of 2008 as compared to the first nine months of 2007 primarily due to paying off our previous debt and the interest on our new term equipment line.
Liquidity and Capital Resources
We have incurred losses since our inception in September 2002 and, as of September 30, 2008 we had an accumulated deficit of $148.0 million. We have financed our operations to date principally through the sale of capital stock, debt financing and interest earned on investments. Prior to our initial public offering of stock in November 2006, we had received net proceeds of $61.3 million from the issuance of common and preferred stock and $7.0 million in debt financing. Through our initial public offering in 2006 we received net proceeds of $78.3 million. On April 7, 2008, we sold 3,000,000 shares of our common stock, resulting in approximately $39.5 million of net proceeds. On August 25, 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million revolving credit line. As of September 30, 2008, we had drawn down approximately $12.5 million against the equipment line under this agreement. Our cash and investment balances are held in a variety of interest bearing instruments, including corporate bonds, commercial paper and money market funds. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view to liquidity and capital preservation.

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Cash flow activity for the nine months ended September 30, 2008 and 2007 is summarized as follows:

                                                           Nine months ended
                                                             September 30,
                                                          2008          2007
      Cash used in operating activities                 $ (35,591 )   $ (22,703 )
      Cash used in investing activities                   (18,781 )     (20,822 )
      Cash provided by (used in) financing activities      49,853          (707 )

      Net decrease in cash and cash equivalents         $  (4,519 )   $ (44,232 )

Net Cash Used in Operating Activities Net cash used in operating activities primarily reflects the net loss for those periods, partially offset by non-cash charges such as depreciation and amortization and stock-based compensation. Additionally, net cash used in operating activities was negatively impacted by the increase in accounts receivable and inventory balances necessitated by our growth in commercial sales of our Sensei system and Artisan catheter, partially offset by increases in accounts payable and accrued liabilities.
Net Cash Used in Investing Activities Net cash used in investing activities primarily relates to the proceeds and purchases of investments as we manage our investment portfolio to provide interest income and liquidity. Investing activities were also negatively impacted by the purchase of property and equipment as we invested in the infrastructure of our growing company, especially in the first nine months of 2008 as we invested in the build-out of our new facility. We expect spending on the build-out of our new facility to continue into the fourth quarter of 2008, although not at the same level as in the previous quarters.
Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities in the first nine months of 2008 was mainly due to the cash received from our equity offering in April 2008 and the proceeds from our new term equipment line, in addition to receipts from our . . .