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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

or

Commission File Number 000-50998

FOXHOLLOW TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

740 Bay Road

Redwood City, California 94063-2469

(Address of principal executive offices, including Zip Code)

(650) 421-8400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock,             $0.001 par value

(Title of Class)

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 requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on December 31, 2004 (which is the last business day of registrant’s most recently completed fourth fiscal quarter), as reported on the Nasdaq National Market was approximately $244.2 million. We were not a reporting company as of June 30, 2004. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At March 1, 2005, the Registrant had 23,017,979 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K incorporate information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this annual report.

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FOXHOLLOW TECHNOLOGIES, INC.

FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT

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PART 1

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements include, but are not limited to, those concerning the following: our intentions, beliefs and expectations regarding our future success and results; the timing and success of our clinical trials and regulatory submissions; our belief that our cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements; our operating results; our expectations regarding our revenues and customers; and our distributors and territorial expansion efforts. Forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

Overview

We design, develop, manufacture and sell medical devices primarily for the treatment of peripheral artery disease. PAD results from the accumulation of plaque in arteries, most commonly occurring in the pelvis and legs. Plaque accumulation, known as atherosclerosis, causes the narrowing of arteries, thereby reducing the flow of oxygenated blood to tissue and organs. Left untreated, PAD increases the risk of heart attack, stroke, amputation or death. Our first product, the SilverHawk Plaque Excision System, is a minimally-invasive, disposable catheter system that treats PAD by removing plaque in order to reopen narrowed or blocked arteries. In June 2003, FDA granted us 510(k) clearance to market the SilverHawk in the United States for treatment of atherosclerosis in the peripheral vasculature. We commenced full commercial introduction of the SilverHawk in the United States in January 2004.

PAD affects approximately 12 million people in the United States. PAD becomes more common with age and affects approximately 20% of the U.S. population over 70. Growth in the prevalence of diabetes and obesity, which are risk factors for PAD, is also contributing to an increase in the prevalence of PAD. PAD is currently underdiagnosed and undertreated. There are approximately 2.5 million people in the United States diagnosed with PAD. We believe that several factors are contributing to a growing diagnosed patient population, including increasing public and physician awareness, evolving physician practice patterns, and increasing diagnostic screening for PAD. Treatment for the approximately 2.5 million people in the United States diagnosed with PAD depends on the severity of the disease. Physicians typically treat patients with mild to moderate PAD through non-invasive management, including lifestyle changes and drug treatment, and, if symptoms worsen, they may recommend interventional procedures, including angioplasty and stenting, or surgical procedures, including bypass grafting and amputation.

The SilverHawk represents a new approach to the treatment of PAD that we believe offers significant benefits. Unlike most treatments for PAD that leave plaque behind, the SilverHawk is designed for removal of plaque from artery walls with minimal vascular trauma. Use of the SilverHawk does not involve stretching of the artery walls that can lead to dissection or perforation.

We market the SilverHawk through our direct sales force in the United States primarily to interventional cardiologists, as well as to vascular surgeons and interventional radiologists. Reimbursement claims for the SilverHawk procedure are typically submitted by the hospital and physician to Medicare or other third-party payors using established billing codes for atherectomy procedures. We were incorporated in Delaware in September 1996 as ArterRx, Inc. We changed our name to FoxHollow Technologies, Inc. in October 1996. For the year ended December 31, 2004, we sold over 19,000 devices, and ended the year with more than 500 current hospital customers in the United States.

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Industry Background

Cardiovascular Disease

Cardiovascular disease refers to diseases of the heart and blood vessels located throughout the body. The most common cause of cardiovascular disease is atherosclerosis, or “hardening of the arteries.” Atherosclerosis is a complex, progressive and degenerative condition resulting from the build-up of cholesterol and other obstructive materials, known as plaque, on the walls of arteries. The accumulation of plaque narrows the interior of arteries, thereby reducing blood flow. In addition, plaque may rupture and trigger a blood clot that can further narrow or block an artery. A significant reduction in blood flow can deprive tissue and organs of oxygen that may lead to tissue damage, stroke or heart attack.

Plaque occurs in several different forms and may be located throughout the arterial system. Plaque varies in composition, with portions that are hard and brittle, referred to as calcified plaque, and other portions that are fatty or fibrous. Plaque lesions can be long or short, focused or diffuse and can form in all types of arteries, including straight or curved arteries of varying diameters. Atherosclerosis in the arteries that supply the heart muscle with blood causes coronary artery disease, and atherosclerosis outside of the heart and brain causes PAD.

Peripheral Artery Disease

PAD, also known as peripheral vascular disease, is most common in the arteries of the pelvis and legs. The legs receive their supply of blood through the femoral arteries, which originate at the groin. The superficial femoral artery, or SFA, extends from the upper thigh to the knee. At the knee, the SFA becomes the popliteal artery, which branches into arteries that supply blood to the lower leg and foot. Arteries above the knee are generally long, straight and relatively wide, while arteries below the knee are shorter and branch into arteries that are progressively smaller in diameter.

Plaque build-up in the leg arteries reduces blood flow to the surrounding tissue, causing claudication, the most common early symptom of PAD. Claudication refers to pain, cramping or tiredness in the leg or hip muscles while walking. Symptoms may progress to include numbness, tingling or weakness in the leg and, in severe cases, burning or aching pain in the foot or toes while resting.

As PAD progresses, additional signs and symptoms occur, including loss of hair on the legs, cooling or color changes in the skin of the legs or feet, and sores on the legs and feet that do not heal. If untreated, PAD may lead

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to critical limb ischemia, or CLI, a condition where there is not enough oxygenated blood being delivered to the limb to keep the tissue alive. As reported in Endovascular Today in February 2004, up to 30% of the people diagnosed with PAD suffer from CLI. If untreated, CLI often leads to large non-healing ulcers, infections, gangrene and eventually limb amputation or death.

Primary risk factors associated with PAD are diabetes and smoking. Other significant risk factors include advanced age, high cholesterol, high blood pressure, obesity and physical inactivity. A family history of cardiovascular disease may also put individuals at higher risk for PAD. According to the Clinical Cardiology Review in 2002, 40% of people with coronary artery disease also suffer from PAD.

Market Overview

PAD affects approximately 12 million people in the United States, according to the December 2003 American Diabetes Association Consensus Statement. PAD becomes more common with age and, according to the American Heart Association, affects approximately 20% of the U.S. population over 70. Those with diabetes or who are obese are at increased risk of PAD. In 2002, the ADA estimated that there were 18 million U.S. adults with diabetes, with approximately 1.3 million new cases of diabetes diagnosed each year. According to the Centers for Disease Control, there were over 44 million obese adults in the United States in 2001, which reflects a 74% increase since 1991. These demographic trends are contributing to an increase in the prevalence of PAD.

Of the PAD population, there are only approximately 2.5 million people diagnosed in the United States, according to the Society of Interventional Radiology. Underdiagnosis is due in large part to the fact that over one-half of the PAD population does not display symptoms of the disease. In addition, others dismiss their symptoms as part of the normal aging process or attribute them to another cause. Approximately one-third of those with PAD have claudication, according to the ADA Consensus Statement. As PAD worsens, patients may eventually develop CLI. We believe approximately 750,000 people in the United States suffer from CLI. We believe that the following factors are contributing to a growing diagnosed PAD patient population:

Conventional Means of Treatment and Their Limitations

Treatment for the approximately 2.5 million people in the United States diagnosed with PAD depends on the severity of the disease. Physicians typically treat patients with mild to moderate PAD through non-invasive

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management, including lifestyle changes and drug treatment, and, if symptoms worsen, may recommend interventional or surgical procedures. Some patients who initially are diagnosed with severe PAD are treated immediately through interventional or surgical procedures.

Non-Invasive Management

Approximately 2.1 million cases of diagnosed PAD in the United States are considered mild to moderate, according to the Society of Interventional Radiology. For this population, lifestyle changes and drug treatment may slow or reverse the progression of PAD. Lifestyle changes include improving diet, exercising regularly and quitting smoking. Although these adjustments can be effective, many people are unable to maintain this new lifestyle. In addition to lifestyle changes, physicians often prescribe medications that increase blood flow but do not treat the underlying obstruction. Pletal, the most commonly prescribed medication for claudication, cannot be taken if the patient also has heart disease, which often exists in PAD patients. In addition, doctors often prescribe cholesterol-lowering drugs and drugs for high blood pressure. Patients generally need to take the prescribed drugs for the rest of their lives. According to the American Academy of Family Physicians, 20% to 30% of patients who are non-invasively managed for claudication develop more severe symptoms that require intervention.

Interventional Procedures

When PAD progresses beyond claudication, physicians may advise intervention, often beginning with minimally-invasive procedures. Based on publicly available information, we believe that there were approximately 400,000 endovascular procedures for the treatment of PAD in 2000, and that the number of procedures is growing annually. Angioplasty and stenting are the most commonly performed minimally-invasive interventional treatments.

There are several complications associated with the use of angioplasty in the peripheral arteries. The inflation of the balloon stretches the artery walls, which may result in dissections. Additionally, lesions from the superficial femoral artery, or SFA, through the popliteal arteries treated with angioplasty only remain open, or patent, in approximately 60% of all cases one year following the procedure, according to a 2000 Transatlantic Inter-Society Consensus study, or TASC. The TASC study also noted that complications occurred in roughly 10% of all angioplasty procedures with approximately half resulting in major complications, leading to more intensive care, prolonged hospitalization, permanent adverse injury or death.

Use of stents in the legs has been problematic due to restenosis and stent-fracture rates. Lesions treated with bare metal stents only remain patent in approximately two-thirds of all cases one year following the

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procedure, according to the TASC study. Longer lesions treated with stents close up, or restenose, more frequently than shorter lesions, which makes stents less effective for use in leg arteries than in coronary arteries since leg lesions typically are longer. Additionally, stents tend to fracture due to the torquing, bumping and stretching of arteries caused by leg movement. In cases where restenosis occurs within the stent, physicians are left with limited treatment alternatives because there are no approved treatments for peripheral in-stent restenosis.

Surgical Procedures

Surgery is used when non-invasive management or interventional procedures have failed or if the patient is diagnosed when PAD has progressed to an advanced state.

The FoxHollow Solution—The SilverHawk Plaque Excision System

Our SilverHawk Plaque Excision System represents a new approach to the treatment of PAD that we believe offers significant benefits. The SilverHawk is a minimally-invasive, single-use catheter system designed for rapid removal of plaque from artery walls with minimal vascular trauma. We believe that the principal benefits of the SilverHawk are:

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Treating certain lesions may require the use of more than one SilverHawk model, which would increase the cost of the procedure. Risks of using the SilverHawk peripherally include the risks that are common to use of interventional

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devices, including infection, perforation or dissection of the artery wall, internal bleeding, limb loss and death. In the United States, the SilverHawk is approved for use in the peripheral vasculature but is not approved for use in the carotid or coronary arteries. This means that our product may not be marketed or advertised in the United States for use in the heart, brain or in specific peripheral anatomy without additional clearances from FDA. Use of the SilverHawk in the coronary arteries has led to serious adverse events, including perforations, emergency bypass surgery, stroke, heart attack and patient death. In the United States, the SilverHawk is contraindicated, and should therefore not be used, for in-stent restenosis and for use in the carotid arteries. Within the peripheral vascular system, we do not recommend the SilverHawk for use in renal or iliac arteries.

Business Strategy

Our goal is to be the leading provider of medical devices for the treatment of atherosclerosis. The key elements of our strategy include:

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The SilverHawk Product

The SilverHawk is a single-operator, hand-held device that removes plaque from arteries. The SilverHawk has two primary components, consisting of a low profile catheter connected to a battery-driven control unit, both of which are disposable.

The SilverHawk’s catheter consists of a flexible shaft designed to track over a previously positioned guide wire, allowing for a minimally-invasive procedure. We offer five different SilverHawk catheters of various diameters and tip lengths to accommodate differing artery sizes and amounts of plaque.

At the leading end of the catheter is a motor-driven cutting blade within a platinum tubular housing. The cutting blade rotates at approximately 8,000 revolutions per minute and is made of carbide, which is significantly stronger than stainless steel, enabling it to cut through heavily calcified lesions.

The cutter height is fixed to achieve consistent cut depth in order to create a smooth surface. The cutter housing contains a mechanism that causes the tip of the catheter to deflect, which in turn pushes the blade against the lesion without requiring an inflated balloon to anchor the device. Since the cutting blade does not use a balloon, long lesions can be treated efficiently by continuously advancing the device along the entire length of the lesion. The SilverHawk’s unique torque shaft is designed for one-to-one correlation between the handle and the tip, allowing physicians to precisely control the cutting blade’s position.

The catheter tip consists of a hollow nose cone located in front of the cutter housing that is designed to collect plaque. Depending on the size of the nose cone, it can collect up to 100 milligrams of plaque before it must be removed and emptied. The control unit contains a battery-driven motor that drives the rotation of the cutting blade. A thumb-switch controls all functionality of the SilverHawk. Retracting the switch prepares the device for plaque excision by simultaneously turning on the motor, opening the cutter window, exposing the cutting blade and deflecting the tip. Advancing the switch closes the cutter window and returns the blade into its housing, straightening the tip and turning off the motor.

The SilverHawk Procedure

The SilverHawk treatment procedure is typically performed under local anesthesia in a catheterization lab, and less frequently performed under general anesthesia in an operating room. The procedure involves the following steps:

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The entire procedure takes approximately 90 minutes, of which on average a half hour is spent using the SilverHawk. Typically, the patient is kept overnight in a hospital for observation.

Clinical Studies

Premarketing Trials

Peripheral.    We have conducted clinical trials to demonstrate the safety and efficacy of the SilverHawk in treating PAD. Our first study was a 105-patient clinical trial in Europe, which began in January 2002. The purpose of the trial was to collect data to submit to FDA in support of 510(k) clearance for use of the SilverHawk in the peripheral vasculature and to support a European submission. We collected acute and 30-day follow-up data and received our CE Mark to market in Europe in May 2003 and our 510(k) clearance in the United States in June 2003. Our 510(k) clearance is for the treatment of atherosclerosis of the peripheral vasculature. This means that our product may not be marketed in the United States for use in the heart, brain or in specific peripheral anatomy without additional clearances from FDA. In the United States, the SilverHawk is contraindicated for in-stent restenosis and for use in the carotid arteries.

Coronary.    In February 2002, we commenced a European safety study in order to obtain a CE Mark for use of the SilverHawk in coronary arteries. We enrolled and treated 146 patients and obtained the right to affix the CE Mark to the SilverHawk for coronary use in October 2002. In October 2004, we received regulatory approval in Europe for use of the SilverHawk to treat in-stent restenosis in coronary arteries.

In October 2002, we initiated a trial to support FDA approval of the SilverHawk for use in the coronary arteries. The trial was designed to treat advanced bifurcation lesions, which form in locations where arteries branch. We enrolled 172 out of a planned 250 patients at 15 sites before voluntarily placing the trial on hold in December 2003. Prior to placing the trial on hold, we experienced 37 serious adverse events in treating 28 patients, including 10 perforations, two cases of emergency bypass surgery, three cases of stroke, 14 cases of heart attack and eight patient deaths. We are currently pursuing design modifications that we believe will improve the safety and efficacy of the device for coronary applications. Following a redesign of the device, we intend to meet with FDA regarding the resumption of the coronary trial. We may be required to resubmit and obtain FDA and Institutional Review Board, or IRB, approval of a new Investigational Device Exemption, or IDE, application before the trial can be restarted or resumed. We plan to restart this trial before the end of 2005. We cannot predict the outcome of such a trial or whether the results will adequately demonstrate the safety and efficacy of the SilverHawk for use in coronary arteries.

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Postmarketing Studies

Postmarketing studies are conducted to provide data regarding disease treatment outcomes. These studies often collect acute, procedural, safety and long-term efficacy data. Acute data from postmarketing studies on treatments for PAD often describe the amount of blockage caused by plaque, or stenosis, immediately pre- and post-procedure, as well as on procedure-related injuries, such as perforations, dissections and embolizations. Long-term efficacy data collected weeks, months or years after a procedure can be measured in terms of restenosis, patency or reintervention rates. Restenosis rates measure the number of lesions that have renarrowed in a group of treated lesions over a defined period of time. Patency rates are generally negatively correlated with restenosis rates and measure the number of lesions in a group of treated lesions that remain open following treatment over a defined period of time. Typically, an artery is considered “restenosed” once it is narrowed by 50% or more and an artery is considered “patent” if it has renarrowed by less than 50%. Some studies measure patency by techniques, such as an ankle-brachial index, or ABI, that do not quantify the amount of plaque build-up in the artery. Consequently, not all patency rates can be equated to the exact inverse of restenosis rates. Reintervention, or revascularization, rates measure the number of treated lesions that have required retreatment within a defined period of time. Reintervention is typically performed when arteries restenose, and thus is a related indicator of restenosis and patency.

Studies are subject to a number of factors that can influence results, making it difficult to draw general conclusions. PAD studies have historically involved very few patients, with even fewer patients available for long-term follow up and analysis. Moreover, restenosis and patency can be measured in a variety of ways. For example, the amount of plaque accumulation may be measured with varying degrees of accuracy by an ABI examination, duplex ultrasound or angiography. Additionally, the rate of plaque build-up and the need for reintervention may be influenced by factors unrelated to the method of treatment, such as the type of artery in which the lesion is located or a patient’s overall health. Among a small number of treated patients, these factors can influence the meaningfulness of clinical study results. Consequently, findings from one study should not be used to predict limitations or benefits of a particular means of treatment.

We have not conducted and we do not have any current plans to conduct studies designed to measure restenosis rates or patency rates after treatment with the SilverHawk. It would be expensive for us to compensate the site and the patient for these types of studies, which requires follow-up testing at six-month intervals using an angiography, ultrasound or ABI test. In addition, it would be difficult for us to find a comparable procedure to randomize against. Our TALON registry may produce limited subset data regarding restenosis and patency, but such an evaluation is not mandated by the registry protocol. Our TALON registry is designed to gather reintervention data, but we cannot provide any assurance that the data collected will be compelling to the medical community because it may not be scientifically meaningful and may not demonstrate that the SilverHawk is an attractive procedure when compared against data from alternative procedures. Clinical studies that have been conducted with the SilverHawk, as well as clinical experiences recorded in the TALON registry, have involved procedures performed by physicians who are technically-proficient and high-volume users of the SilverHawk. Consequently, both short and long-term results reported in these studies and the TALON registry may be significantly more favorable than typical results of practicing physicians, which could negatively impact rates of adoption of the SilverHawk.

TALON Registry.    We maintain a registry with participating sites called TALON to track outcomes of patients whose legs have been treated with the SilverHawk. We voluntarily initiated this registry following our FDA clearance. The primary purpose of the registry is to capture acute data, tissue specimens and short and long-term data on reintervention rates. The TALON registry is open to all physicians at participating sites that are willing and able to collect compliant data. Each participating physician must commit to enrolling all SilverHawk patients and tracking them to obtain follow-up data to reflect the average patient’s experience. Participating TALON sites must secure IRB approval and patients’ informed consent prior to site initiation and patient enrollment. Once the site IRB approves the study protocol, participating sites must adhere to the protocol. The protocol establishes the objectives of the study, requires the device to be used for its intended use in peripheral arteries and requires the

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collection of blood and tissue for subsequent analysis. Following a SilverHawk procedure, a case report form is completed to record certain acute and post-procedure data and patients are requested to return to the center at six, 12 and 24-month intervals to ensure that post-procedure data can be recorded. We believe that currently fewer than 5% of all SilverHawk procedures are performed at TALON sites. This prospective, noncontrolled, nonrandomized registry commenced enrollment in September 2003. The study is prospective because it records real-time data rather than retrospective data and noncontrolled and nonrandomized because all patients are enrolled and there is no control group receiving an alternative treatment. The majority of sites did not receive IRB approval until March 2004.

As of December 31, 2004, we had 10 U.S. sites participating in the TALON registry. Sites participating in the TALON registry typically have a high-volume practice, employ highly-skilled practitioners, have the staff available to collect follow-up data and are interested in publishing clinical results. Due to these criteria, the clinical results collected by the TALON registry may be significantly more favorable than typical results of practicing physicians. We expect to have one-year reintervention rate data on a subset of the registry available in the second quarter of 2005. As of December 31, 2004, data on 1,047 lesions in 505 patients were reported in the registry. Lesions above the knee accounted for approximately 75% of the lesions treated, with lesions below the knee accounting for the remainder. Prior to the procedure, arteries treated with the SilverHawk alone were on average 86% stenosed, as measured by visual angiography. Immediately following the procedure, these treated areas had on average 10% residual stenosis, with no adjunctive treatment, such as angioplasty or stenting. As of December 31, 2004, no major device-related complications have been reported and there have been dissections and perforations in less than 5% and 1%, respectively, of the lesions treated with the SilverHawk. We have completed our evaluation of preliminary six-month follow-up data from our TALON registry regarding retreatment rates collected through December 31, 2004. Based upon 317 lesions treated in 160 patients, physicians reported retreatment of 35 lesions, or 11%, within the first six months following initial treatment. Short-term data may not predict the long-term efficacy of the SilverHawk.

The TALON registry is also designed to provide histological data on plaque excised from patients. Removed plaque can also be used to research novel and existing markers that may be predictive of restenosis and PAD risk.

We estimate that there are approximately twelve physicians at TALON sites who use the SilverHawk, ten of whom are our consultants and eight of whom are securityholders in our company. Similarly, nearly all of the physicians who have contributed to the TALON registry are also consultants to our company, and have been compensated for their consulting services with both cash and stock. These consulting arrangements do not cover participation in the TALON registry. Additionally, many of these physicians are stockholders in our company holding approximately 1% our common stock. Physicians are not compensated for their participation in our TALON registry other than nominal reimbursement paid to partially offset the costs incurred due to participation in the registry and collection of long-term follow-up data.

Single-Center Clinical Experience.    Two abstracts describing single-center clinical experiences using the SilverHawk with six-month follow up were presented in September 2004 at the Transcatheter Cardiovascular Therapeutics conference. The first abstract reports on treatments conducted on 133 patients between September 2003 and June 2004 on 133 lesions within the superficial femoral artery, or SFA. Treated lesions ranged from 4 to 33 centimeters in length, averaging 16.2 centimeters. The SilverHawk was used alone to treat 119 of these lesions. Five lesions were treated with the SilverHawk and angioplasty as adjunctive therapy, and seven lesions were treated with angioplasty and stents as adjunctive therapy. Two lesions were not treated because the arteries were totally occluded and the SilverHawk could not be inserted through the lesion for treatment. There were no device-related complications, embolisms or thrombosis reported. Six-month follow up data on 52 lesions examined through angiography showed an approximately 10% restenosis rate. This center intends to continue following patients, collecting 12-month restenosis and reintervention rate data.

The second abstract reports on the treatment of 202 leg lesions, located above and below the knee, in 181 patients between June 2003 and June 2004. Adjunctive angioplasty was used in 44 lesions, and stents were placed in 14

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lesions. There was one major complication that involved a perforation that was treated with a bypass graft and minor complications in 4% of the cases that required no intervention. No embolisms were reported. At the time the abstract was presented, six-month follow-up data on 92 lesions had been collected using duplex ultrasound or ABI, showing a patency rate of 96%. In February 2005, this center reported 12-month follow-up data on 104 lesions and showed a patency rate of 86%. Patency rates here are measured as the percentage of patients who do not undergo a repeat procedure during the follow-up period.

In addition to these two abstracts, six additional abstracts were presented by physicians at the September 2004 Transcatheter Cardiovascular Therapeutics conference. These six abstracts also involved single-center clinical experience with the SilverHawk, examining immediate post-procedural results. These abstracts reported procedural safety and efficacy of the SilverHawk. Two of the six abstracts also presented patency and reintervention data from follow-up examinations performed up to nine months following treatment. They examined results from smaller patient populations (54 and 27 patients) than the first two abstracts described above, but the patency and retreatment data were consistent with the data from these larger studies. Four of the six abstracts indicate an intent to track and present long-term follow-up data regarding patency and retreatment. Such data may differ materially from short-term results currently available and such data may not be positive.

We did not conduct any of these studies, and we were not involved in gathering or analyzing the data. Nine of the 13 principal physicians involved in these eight studies are consultants to our company who have been compensated for their consulting services in cash and stock. These consulting arrangements do not include conducting these studies or publishing this data, but rather evaluating new product development, preparing individual patient studies, and delivering presentations at medical meetings. In addition, nine of these physicians are investors in our company and, excluding Dr. John Simpson, who is our founder, one of our major stockholders and one of our directors, hold approximately 1% of our common stock.

Sales and Marketing

We market and sell the SilverHawk through a direct sales force in the United States. As of December 31, 2004, we had an 82-person direct sales force, comprised of 69 direct sales representatives and 13 members of sales management including our vice president of sales. We expect to continue to grow our sales force. Our sales force is organized by geographic sales territories, and each territory is managed by a district sales manager, or direct sales representative, who acts as the primary customer contact. Our regional sales managers supervise the district sales managers and also focus on maintaining key customer relationships. We plan to continue to increase the size of our sales organization to expand our customer base and to increase utilization of the SilverHawk by our more than 500 U.S. hospital customers. While we sell directly to hospitals, interventional physicians typically drive the purchasing decision.

Our initial sales and marketing effort has primarily targeted high volume practitioners among the approximately 4,000 U.S. interventional cardiologists. We also market to the approximately 2,100 vascular surgeons and 4,000 interventional radiologists practicing in the United States. We have targeted interventional cardiologists because they generally have experience with similar catheter-based procedures, such as angioplasty. In addition, there is a high correlation between coronary artery disease and PAD. Consequently, cardiologists are well positioned to screen for, and often do screen for, PAD in patients experiencing coronary symptoms, resulting in diagnosis and treatment of patients who might otherwise go undiagnosed. We believe that these physicians are early adopters of new technologies, are rapidly adopting new PAD treatments like the SilverHawk, and are increasingly retaining patients for treatment after diagnosis, rather than referring them to other specialists.

Physician referrals and peer-to-peer selling are critical elements of our sales strategy. Our sales force helps interventional physicians develop referral networks to supplement their existing patient populations. Potential referrals come from general practitioners, podiatrists, nephrologists and endocrinologists. Although we do not market the SilverHawk for off-label uses, interventional physicians may use the SilverHawk off-label outside the peripheral vasculature in coronary and carotid arteries. In addition, off-label use for in-stent restenosis has

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occurred and is likely to continue. If FDA concludes that we promote our device for such off-label uses or that our promotional activities otherwise fail to comply with FDA’s regulations or guidelines, we may be subject to warning letters from, or other enforcement action by, FDA.

International sales in 2004 did not account for a significant portion of total sales, and we do not expect them to account for a significant portion of sales in the foreseeable future. We do not have a direct sales force outside of the United States. As of December 31, 2004, we had four distribution agreements in place in four countries in Europe, and one agreement in place with a distributor in Japan that is assisting us in applying for regulatory approval to market the SilverHawk in Japan.

As of December 31, 2004, our marketing department consisted of 11 employees who report to a vice president of marketing. Our marketing program focuses on:

We primarily target our marketing efforts to practitioners through marketing materials, medical conferences and journals. We also host seminars where industry leaders discuss case studies and treatment techniques using the SilverHawk. In addition, our direct sales force uses peer-reviewed publications, cost-benefit data and case studies in the selling process.

Competition

We believe that the SilverHawk competes primarily on the basis of:

We believe that we compete favorably with respect to these factors, although there can be no assurance that we will be able to continue to do so in the future or that new devices that perform better than the SilverHawk will not be introduced. We believe that our continued success depends on our ability to:

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Our industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of our competitors have significantly greater financial and human capital resources than we do and have established reputations with our target customers, as well as worldwide distribution channels that are more effective than ours. These competitors include Abbott Laboratories, Boston Scientific, Cook, Guidant, Johnson & Johnson and Medtronic. We also compete against smaller manufacturers including, among others: Cryovascular, a manufacturer of angioplasty devices containing a cooling mechanism; ev3, a manufacturer of peripheral vascular stents; Spectranetics, a manufacturer of excimer lasers for the treatment of coronary artery disease and PAD; and Vascular Architects, a manufacturer of stents and surgical tools used for plaque removal. There are also several other companies that provide products used by surgeons in peripheral bypass procedures. In addition, we compete against existing drug therapy treatments manufactured by many major pharmaceutical companies, including Otsuka Pharmaceutical, manufacturer of Pletal.

Because of the size of the peripheral and coronary market opportunities, competitors and potential competitors have historically dedicated and will continue to dedicate significant resources to aggressively promote their products. New product developments that could compete with us more effectively are likely because the cardiovascular disease treatment market is characterized by extensive research efforts and technological progress. Competitors may develop technologies and products that are safer, more effective, easier to use or less expensive than the SilverHawk. To compete effectively, we have to demonstrate that our products are attractive alternatives to other devices and treatments by differentiating our products on the basis of safety, efficacy, performance, ease of use, brand and name recognition, reputation and price. We have encountered and expect to continue to encounter potential customers who, due to existing relationships with our competitors, are committed to or prefer the products offered by these competitors. We expect that competitive pressures may result in price reductions and reduced margins over time for our products. The SilverHawk may be rendered obsolete or uneconomical by technological advances developed by one or more of our competitors.

Manufacturing

We manufacture the SilverHawk with components supplied by vendors and with parts manufactured in-house. The components manufactured in-house include the cutter driver assembly and the ramp that elevates the cutter to a fixed height against the lesion. The remaining components are purchased from outside manufacturers. We then assemble, test, package, and ship finished product to a contract sterilization facility. The sterilization facility sends samples to an independent laboratory to test for sterility.

Purchased components for the SilverHawk are available from more than one supplier, with three exceptions. We rely on one vendor for our torque shaft, one vendor for our cutting blade motor, and one vendor for our flex circuit. In addition, we rely on two vendors for our catheter tip housing and three vendors for our carbide cutting blade. Each of these components is critical to the SilverHawk, and there are relatively few, or in some cases no, alternative sources of supply available. We do not carry a significant inventory of these components. Establishing additional or replacement suppliers for any of the components used in the SilverHawk, if required, may not be accomplished quickly or at all and could involve significant additional costs. With the exception of SurModics, which supplies a lubricating coating for our catheters, our suppliers have no contractual obligations to supply us with, and we are not contractually obligated to purchase from them, any of our supplies. Any supply interruption from our vendors or failure to obtain additional vendors for any of the components would limit our ability to manufacture our product and could have a material adverse effect on our business, financial condition and results of operations.

Order quantities and lead times for components purchased from outside suppliers are based on our forecasts derived from historical demand and anticipated future demand. Lead times for components may vary significantly depending on the size of the order, time required to fabricate and test the components, specific supplier requirements and current market demand for the components and subassemblies. To date, we have not experienced significant delays in obtaining any of our components or subassemblies.

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To meet the growing demand for the SilverHawk, in the fourth quarter of 2004, we expanded the manufacturing areas at our Saginaw Drive facility by adding a 1,900 square-foot controlled-environment room, or CER, to the existing 800 square-foot CER. We are also building a 6,000 square-foot CER at our Bay Road facility. Before commencing commercial production in the Bay Road CER, the facility must be approved by the Food and Drug Branch, or FDB, of the California Department of Health Services, or CDHS, as well as by our European notified body for ISO 9001 certification. We expect that our Bay Road facility will be fully operational by the end of 2005, after which we will conduct all of our manufacturing at this facility. Manufacturers often experience difficulties in scaling up production, including problems with production yields and quality control and assurance. If we are unable to manufacture the SilverHawk to keep up with demand, we would not meet expectations for the growth of our business.

Our operations are subject to regulatory requirements relating to the environment, waste management and health and safety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of hazardous substances. We cannot ensure that we will not incur material costs or liability in connection with our operations, or that our past or future operations will not result in claims or injury by employees or the public. Environmental laws and regulations could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. Our leased Bay Road facility was formerly occupied by Rohm & Haas and Occidental Chemical Company and contains residual contamination in soil and groundwater from these past industrial operations. Rohm & Haas and Occidental Chemical Company previously performed soil remediation on the property under the supervision of the California Regional Water Quality Control Board. Rohm & Haas has indemnified the owner of the Bay Road facility and its tenants against costs associated with the residual contamination.

We have registered with FDA as a medical device manufacturer and have obtained a manufacturing license from CDHS. We and our component suppliers are required to manufacture our products in compliance with FDA’s Quality System Regulation, or QSR. The QSR regulates extensively the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. FDA enforces the QSR through periodic unannounced inspections that may include the manufacturing facilities of our subcontractors. We were recently inspected by FDA, and two minor observations were noted. We corrected the observations, and they were verified by FDA. Our failure or the failure of our component suppliers to maintain compliance with the QSR requirements could result in the shutdown of our manufacturing operations or the recall of our products, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We also could be subject to injunctions, product seizure, and civil or criminal penalties. In addition, we are subject to inspection by the FDB to determine our compliance with the QSR and other regulations. We have been previously inspected by the CDHS, and no significant findings were made, although observations were noted. Our responses to these observations have been accepted by the FDB and CDHS, and we believe that we are in substantial compliance with the QSR. We have opted to maintain quality assurance and quality management certifications to enable us to market our products in the member states of the European Union, the European Free Trade Association and countries which have entered into Mutual Recognition Agreements with the European Union. Our Saginaw Drive facility is ISO 9001 and EN 13485 certified. We cannot assure you that we comply with all applicable manufacturing regulations.

In June 2004, we initiated a voluntary recall of two lots of the SilverHawk due to the possibility of improper sterilization at one of two approved sterilization facilities. In total, 127 units in the affected lots had been shipped to customers and our customers returned 89 units following our recall notice. Thirty-eight systems were used in procedures on patients. While no adverse events were reported 30 days after these procedures, we have been unable to determine whether the devices we recalled were contaminated or whether the laboratory that initially tested the recalled devices incorrectly concluded that the units were not sterile. We continue to use both the testing facility and sterilization facility involved in the recall. In October 2004, we received a formal closure notice from the FDA regarding the recall.