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As filed with the Securities and Exchange Commission on September 20, 2007

Registration No. 333-145547



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


CardioNet, Inc.
(Exact name of registrant as specified in its charter)


California
(State or other jurisdiction of
incorporation or organization)
  8090
(Primary Standard Industrial
Classification Code Number)
  33-0604557
(I.R.S. Employer
Identification Number)

1010 Second Avenue
San Diego, California 92101
(619) 243-7500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)


James M. Sweeney
Chief Executive Officer and Chairman
CardioNet, Inc.
1010 Second Avenue
San Diego, California 92101
(619) 243-7500
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Frederick T. Muto, Esq.
Ethan E. Christensen, Esq.
Cooley Godward Kronish LLP
4401 Eastgate Mall
San Diego, California 92121
(858) 550-6000
  Donald J. Murray, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
(212) 259-8000

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.


        If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. o

        If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o


CALCULATION OF REGISTRATION FEE


Title of each class of
securities to be registered

  Proposed maximum
aggregate
offering price(1)

  Amount of
registration fee


Common Stock, $0.001 par value per share   $150,000,000   $4,605(2)

(1)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes $                  of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)
Previously paid.



        The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell or accept an offer to buy these securities under this preliminary prospectus until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated September 20, 2007

PROSPECTUS

                    Shares

LOGO

Common Stock


        CardioNet, Inc. is selling                        shares of common stock. This is the initial public offering of our common stock. The selling stockholders included in this prospectus are selling an additional                        shares of common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. The estimated initial public offering price is between $            and $            per share.

        Prior to this offering, there has been no public market for our common stock. We have applied for listing on the Nasdaq Global Market under the symbol "BEAT."

        Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 11.


 
  Per share
  Total
Initial public offering price   $     $  
Underwriting discounts and commissions   $     $  
Proceeds to CardioNet, before expenses   $     $  
Proceeds to selling stockholders, before expenses   $     $  

        We have granted the underwriters an option for a period of 30 days to purchase up to                        additional shares of common stock on the same terms and conditions set forth above to cover over-allotments, if any.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares of common stock to investors on                        .


Citi

CIBC World Markets

 

SunTrust Robinson Humphrey



TABLE OF CONTENTS

 
  Page
PROSPECTUS SUMMARY   1
RISK FACTORS   11
FORWARD-LOOKING STATEMENTS   28
USE OF PROCEEDS   29
DIVIDEND POLICY   30
CAPITALIZATION   31
DILUTION   34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS   37
SELECTED CONSOLIDATED FINANCIAL DATA   42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   44
BUSINESS   60
MANAGEMENT   84
EXECUTIVE COMPENSATION   90
RELATED PARTY TRANSACTIONS   109
PRINCIPAL AND SELLING STOCKHOLDERS   113
DESCRIPTION OF CAPITAL STOCK   116
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS   122
SHARES ELIGIBLE FOR FUTURE SALE   125
UNDERWRITING   128
LEGAL MATTERS   132
EXPERTS   132
WHERE YOU CAN FIND ADDITIONAL INFORMATION   133
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

        You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with different information. We and the selling stockholders are offering to sell, and seeking offers to buy, common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale or our common stock.

        No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

        Through and including                        ,          (25 days after the commencement of this offering), all dealers that buy, sell or trade in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

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        We use "CardioNet" and "PDSHeart" as registered trademarks in the United States. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.

        We are a California company. We intend to reincorporate in Delaware prior to the consummation of the offering. Unless the context indicates otherwise, as used in this prospectus, the terms "CardioNet," "we," "us" and "our" refer to CardioNet, Inc., a California corporation, and its subsidiaries taken as a whole, with respect to periods prior to the reincorporation, and to CardioNet, Inc., a Delaware corporation, with respect to periods after the reincorporation.

ii



PROSPECTUS SUMMARY

        This summary highlights what we believe is the most important information about us and this offering. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock. The information in this summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. Before you decide to invest in our common stock, you should read this entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and related notes included in this prospectus.

Overview

        We are the leading provider of ambulatory, continuous, real-time outpatient management solutions for monitoring relevant and timely clinical information regarding an individual's health. We have raised over $200 million of capital and spent seven years developing a proprietary integrated patient monitoring platform that incorporates a wireless data transmission network, internally developed software, FDA-cleared algorithms and medical devices, and a 24-hour digital monitoring service center. Our initial efforts are focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders, with a solution that we market as the CardioNet System.

        We believe that the CardioNet System's continuous, heartbeat-by-heartbeat monitoring is a fundamental advancement in arrhythmia monitoring, with the potential to transform an industry that has historically relied on memory-constrained, intermittent digital or tape recorders, such as event monitors and Holter monitors. Existing technologies have one or more drawbacks including the inability to detect asymptomatic events, which are defined as clinically significant events that the patient cannot feel, algorithms with limited detection capabilities, failure to provide real-time data, memory constraints, frequent inaccurate diagnoses and an inability to monitor patient compliance and interaction. We believe these drawbacks lead to suboptimal diagnostic yields, adversely impacting clinical outcomes and health care costs. In a recently completed randomized clinical trial, the CardioNet System detected clinically significant arrhythmias nearly three times as often as traditional loop event monitors in patients who had previously experienced negative or nondiagnostic Holter monitoring.

        The CardioNet System incorporates a lightweight patient-worn sensor attached to electrodes that capture two-lead electrocardiogram, or ECG, data measuring electrical activity of the heart and communicates wirelessly with a compact, handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from the sensor on a real-time basis by applying proprietary algorithms designed to detect arrhythmias. When the monitor detects an arrhythmic event, it automatically transmits the ECG to the CardioNet Monitoring Center, even in the absence of symptoms noticed by the patient and without patient involvement. At the CardioNet Monitoring Center, which operates 24 hours a day and 7 days per week, experienced certified cardiac monitoring specialists analyze the sent data, respond to urgent events and report results in the manner prescribed by the physician. The CardioNet System currently stores 96 hours of ECG data, in contrast to 10 minutes for a typical event monitor. We are in the process of upgrading our monitors to provide expanded storage of 21 days of ECG data. The CardioNet System employs two-way wireless communications, enabling continuous transmission of patient data to the CardioNet Monitoring Center and permitting physicians to remotely adjust monitoring parameters and request previous ECG data from the memory stored in the monitor.

        Since our commercial introduction of the CardioNet System in January 2003, physicians have enrolled over 80,000 patients. Through the end of 2006, we marketed our solution in select territories, principally in 23 states in the Mid-Atlantic, Northeast and Midwest. In addition, we have achieved reimbursement levels that we believe reflects the clinical efficacy of the CardioNet System relative to

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existing technologies. We have secured direct contracts with 154 commercial payors which, combined with Medicare, represents more than 154 million covered lives as of June 30, 2007.

Recent Developments

Industry Overview

        An arrhythmia is categorized as a temporary or sustained abnormal heart rhythm that is caused by a disturbance in the electrical signals in the chambers of the heart. Proper transmission of electrical signals through the heart is necessary to ensure effective heart function. There are two main categories of arrhythmia: tachycardia, meaning too fast a heartbeat, and bradycardia, meaning too slow a heartbeat.

        Arrhythmias affect more than 4 million people in the United States. According to the American Heart Association, arrhythmias result in more than 780,000 hospitalizations and contribute to approximately 480,000 deaths per year.

        The ability to diagnose or rule out an arrhythmia as a symptom of a cardiac condition is important both to treat those patients with serious cardiovascular diseases as well as to identify those patients that may not require further medical attention. Arrhythmias may be diagnosed either in a physician's office or other health care facility or remotely by monitoring a patient's heart rhythm. Typically, physicians

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will initially administer a resting ECG that monitors the electrical impulses in a patient's heart. If a physician determines that a patient needs to be monitored for a longer period of time to produce a diagnosis, the physician will typically prescribe an ambulatory cardiac monitoring device, such as a Holter monitor or an event monitor.

        Despite major advances in cardiology with new therapeutic drugs, such as beta blockers and statins, and new therapeutic devices and procedures over the last several decades, there have been few advances in ambulatory monitoring. We believe that there is a significant opportunity for new arrhythmia monitoring solutions that exploit the convergence of wireless, low power microelectronic

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and software technologies to address the shortcomings of traditional Holter and event monitors. We believe these shortcomings often lead to suboptimal diagnostic yields, adversely impacting clinical outcomes and health care costs.

CardioNet Solution

        We have developed an ambulatory, continuous and real-time arrhythmia monitoring solution that we believe represents a significant advancement over event and Holter monitoring. The CardioNet System incorporates a patient-worn sensor attached to electrodes that capture two-lead ECG data and communicates wirelessly with a compact monitor that analyzes incoming information by applying proprietary algorithms designed to detect arrhythmias and eliminate data noise. When the monitor detects an arrhythmic event, it automatically transmits the ECG data to the CardioNet Monitoring Center, where experienced certified cardiac monitoring specialists analyze the sent data, respond to urgent events and report results in the manner prescribed by the physician. The CardioNet System, on average, is worn by the patient for a period of approximately 14 days.

        The CardioNet System results in a high diagnostic yield of clinically significant arrhythmias, allowing for real-time detection and analysis as well as timely intervention and treatment by the physician. In a recently completed randomized 300-patient clinical study, the CardioNet System detected clinically significant arrhythmias nearly three times as often as traditional loop event monitors in patients who have previously experienced negative or nondiagnostic Holter monitoring or 24 hours of telemetry.

        We believe that the CardioNet System offers the following advantages to physicians, payors and patients:

4


Our Business Strategy

        Our goal is to maintain our position as the leading provider of ambulatory, continuous and real-time outpatient monitoring services by establishing our proprietary integrated technology and service offering as the standard of care for multiple health care markets. The key elements of the business strategy by which we intend to achieve these goals include:

5


Risks Affecting Us

        We are subject to a number of risks that you should be aware of before you buy our common stock, including:

        These and other risks are discussed more fully in the "Risk Factors" section of this prospectus.

Corporate Information

        We were incorporated in the State of California in March 1994. We will reincorporate in the State of Delaware prior to the consummation of this offering. Our principal executive offices are located at 1010 Second Avenue, San Diego, California 92101, and our telephone number is (619) 243-7500. Our website address is www.cardionet.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

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The Offering

 
   
Common stock offered by CardioNet               shares

Common stock offered by the selling stockholders

 

            shares

Over-allotment option

 

We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to            additional shares of common stock.

Common stock to be outstanding after this offering

 

            shares, assuming an initial public offering price of $        per share, the mid-point of the price range set forth on the cover page of this prospectus.

Use of proceeds.

 

We intend to use the net proceeds to us from this offering (i) to repay in full a term loan with and to pay a success fee to Silicon Valley Bank, (ii) to make required payments to former stockholders of PDSHeart, (iii) for research and development, to build our inventory of future generations of the CardioNet Systems, increase our sales and marketing capabilities for our CardioNet System, hire additional personnel, invest in infrastructure and pursue new markets and geographies, (iv) to acquire or license products, technologies or businesses, and (v) for working capital and general corporate purposes.

 

 

We will not receive any of the proceeds from the sale of common stock by the selling stockholders. See "Use of Proceeds."

Proposed symbol on The Nasdaq Global Market

 

BEAT

        The share amounts listed above are based on shares outstanding as of June 30, 2007. These amounts exclude:



        Unless otherwise noted, the information in this prospectus assumes:

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The number of shares of our common stock issuable upon conversion of our mandatorily redeemable convertible preferred stock and upon exercise of warrants to purchase shares of our Series D-1 preferred stock, which convert into shares of common stock, will vary based on the initial public offering price of our common stock in this offering. The number of shares of our common stock outstanding after this offering would be            shares if the initial public offering price is $            per share, the low end of the price range set forth on the cover page of this prospectus, and            shares if the initial public offering price is $            per share, the high end of the price range set forth on the cover page of this prospectus. See "Capitalization" and "Description of Capital Stock."

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Summary Consolidated Financial Information

        The following summary consolidated financial data should be read together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The summary consolidated financial data for the years ended December 31, 2004, 2005 and 2006 are derived from our audited financial statements, which are included elsewhere in this prospectus. The summary consolidated financial data for the six months ended June 30, 2006 and 2007 and at June 30, 2007 are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus.

        The summary unaudited pro forma consolidated statements of operations data for the year ended December 31, 2006 and the six months ended June 30, 2007 are based on the historical statements of operations of CardioNet, Inc. and PDSHeart, Inc., giving effect to our acquisition of PDSHeart as if the acquisition had occurred on January 1, 2006 and January 1, 2007, respectively. The summary unaudited pro forma consolidated statement of operations data is based on the estimates and assumptions set forth in the notes to the unaudited pro forma consolidated statements of operations, which are included elsewhere in this prospectus. These estimates and assumptions are preliminary and subject to change, and have been made solely for the purposes of developing such pro forma information. The summary unaudited pro forma consolidated statement of operations data is presented for illustrative purposes only and is not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during these periods.

        The pro forma balance sheet data reflects the balance sheet data at June 30, 2007, after giving effect to (i) the conversion of all our outstanding shares of preferred stock into common stock, (ii) the automatic cashless exercise of warrants upon the completion of this offering pursuant to the terms thereof and (iii) the repayment of the term loan from Guidant Investment Corporation that occurred on August 15, 2007. The pro forma as adjusted balance sheet data reflects the pro forma balance sheet data at June 30, 2007, as further adjusted for the sale by us of              shares of our common stock in this offering at an initial offering price to the public of $            per share, after deducting the estimated underwriting discounts, commissions and offering expenses payable by us.

        We have prepared the summary unaudited consolidated financial data set forth below on the same basis as our audited financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. The pro forma basic net loss per share data are unaudited and give effect to the conversion into common stock of all outstanding shares of our preferred stock for the periods indicated. The interim results set forth below are not necessarily indicative of results for future periods.

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  Year ended December 31,
  Six months ended June 30,
 
 
  Actual
  Pro Forma
  Actual
  Pro Forma
 
 
  2004
  2005
  2006
  2006
  2006
  2007
  2007
 
 
   
   
   
  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

 
 
  (in thousands, except share and per share data)

 
Statement of Operations Data:                                            
Revenues:                                            
  Net patient revenues   $ 20,956   $ 29,467   $ 33,019   $ 53,700   $ 15,516   $ 28,221   $ 32,276  
  Other revenues     1,275     1,471     904     1,075     632     299     313  
   
 
 
 
 
 
 
 
Total revenues     22,231     30,938     33,923     54,775     16,148     28,520     32,589  
Cost of revenues     16,971     16,963     12,701     20,194     6,866     9,743     11,389  
   
 
 
 
 
 
 
 
Gross profit     5,260     13,975     21,222     34,581     9,283     18,776     21,200  
Operating expenses:                                            
  Research and development     2,412     3,361     3,631     3,631     1,980     2,010     2,010  
  General and administrative     15,252     13,853     15,631     22,064     7,462     11,974     13,014  
  Sales and marketing     7,695     6,456     6,448     11,304     2,979     7,696     8,758  
  Amortization                 985         307     493  
   
 
 
 
 
 
 
 
Total operating expenses     25,359     23,670     25,710     37,984     12,422     21,987     24,275  
   
 
 
 
 
 
 
 
Loss from operations     (20,099 )   (9,695 )   (4,488 )   (3,403 )   (3,139 )   (3,211 )   (3,075 )
Other income (expense):                                            
  Interest income     141     97     114     132     42     905     910  
  Interest expense     (989 )   (1,865 )   (3,271 )   (3,643 )   (1,253 )   (1,625 )   (1,667 )
   
 
 
 
 
 
 
 
Total other expense     (848 )   (1,768 )   (3,157 )   (3,511 )   (1,211 )   (720 )   (757 )
   
 
 
 
 
 
 
 
Net loss     (20,947 )   (11,463 )   (7,645 )   (6,914 )   (4,350 )   (3,931 )   (3,832 )
Dividends on and accretion of mandatorily redeemable convertible preferred stock                         (2,844 )   (2,844 )
   
 
 
 
 
 
 
 
Net loss applicable to common shares   $ (20,947 ) $ (11,463 ) $ (7,645 ) $ (6,914 ) $ (4,350 ) $ (6,775 ) $ (6,676 )
   
 
 
 
 
 
 
 
Basic and diluted net loss per share(1):                                            
  Historical   $ (3.67 ) $ (2.02 ) $ (1.31 )       $ (0.76 ) $ (1.09 )      
  Pro Forma                     $ (0.29 )             $ (0.20 )
Shares used to compute basic and diluted net loss per share(1):                                            
  Historical     5,712,144     5,675,544     5,816,719           5,751,700     6,214,067        
  Pro Forma                       23,619,018                 33,673,580  

(1)
Please see Note 2 to our consolidated financial statements for an explanation of the method used, the historical and pro forma net (loss) income per share and the number of shares used in computation of the per share amounts.

 
  As of June 30, 2007
 
  Actual
  Pro Forma
  Pro Forma
As Adjusted(2)

 
  (unaudited)

  (unaudited)

  (unaudited)

 
  (in thousands)

Summary Consolidated Balance Sheet Data:                  
Cash and cash equivalents   $ 50,334   $     $  
Working capital     32,863            
Total assets     121,573            
Total debt     26,448            
Mandatorily redeemable convertible preferred stock     109,802        
Total shareholders' deficit   $ (26,328 ) $     $  

(2)
A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents, working capital, total assets and total stockholders' equity by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriter discounts and commissions and estimated offering expenses payable by us.

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RISK FACTORS

        Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks comes to fruition, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks related to our business and industry

        We have incurred net losses from our inception through June 30, 2007, including net losses of $11.5 million for the year ended December 31, 2005, $7.6 million for the year ended December 31, 2006 and $3.9 million for the six months ended June 30, 2007. Even giving effect to the PDSHeart acquisition, we are operating at a loss, with pro forma losses for the six months ended June 30, 2007, giving effect to the acquisition, of $3.8 million. As of June 30, 2007, we had total shareholders' deficit of approximately $26.3 million. We expect our operating expenses to increase as we, among other things:

With increasing expenses, we will need to substantially increase our revenues to become profitable. Because of the risks and uncertainties associated with further developing and marketing the CardioNet System, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

        The success of our business is dependent upon physicians prescribing our services for patients and cross-selling the respective CardioNet and PDSHeart customer bases. Our success in obtaining prescriptions and cross-selling will be directly influenced by a number of factors, including:


        If we are unable to educate physicians regarding the benefits of the CardioNet System, obtain sufficient prescriptions and cross-sell our respective customer bases, revenues from the provision of our arrhythmia monitoring solutions could fail to grow and could decrease.

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        We receive reimbursement for our services from commercial payors and from Medicare Part B carriers where the services are performed on behalf of the Centers for Medicare and Medicaid Services, or CMS. The Medicare Part B carriers in each state change from time to time, which may result in changes to our reimbursement rates, increased administrative burden and reimbursement delays.

        In addition, our prescribing physicians receive reimbursement for professional interpretation of the information provided by our products and services from commercial payors or Medicare carriers within the state where they practice. The efficacy, safety, performance and cost-effectiveness of our products and services, on a stand-alone basis and relative to competing services, will determine the availability and level of reimbursement we and our prescribing physicians receive. Our ability to successfully contract with payors is critical to our business because physicians and their patients will select arrhythmia monitoring solutions other than ours in the event that payors refuse to adequately reimburse our technical fees and physicians' professional fees.

        Many commercial payors refuse to enter into contracts to reimburse the fees associated with medical devices or services that such payors determine to be "experimental and investigational." Commercial payors typically label medical devices or services as "experimental and investigational" until such devices or services have demonstrated product superiority evidenced by a randomized clinical trial. We recently completed a clinical trial in which the CardioNet System provided higher diagnostic yield than traditional loop event monitoring. Prior to our clinical trial, the CardioNet System was labeled "experimental and investigational" by 21 commercial payors, representing over 95 million covered lives. Subsequent to our trial, three commercial payors, representing over 11 million covered lives, removed the designation of the CardioNet System as "experimental and investigational." Several of the remaining payors, however, have informed us that they do not believe the data from this trial justifies the removal of this designation. Other commercial payors may also find the data from our clinical trial not compelling. Additional commercial payors may also label the CardioNet System as "experimental and investigational" and, as a result, refuse to reimburse the technical and professional fees associated with the CardioNet System.

        Administration of the claims process for the many commercial payors is complex. As a result we sometimes bill payors for services for which we have no reimbursement contract. These payors may require that we return any funds that they pay in respect of these claims.

        If commercial payors or Medicare decide not to reimburse our services or the related services provided by physicians, or the rates of such reimbursement change, or if we fail to properly administer claims, our revenues could fail to grow and could decrease.

        We receive approximately 30% of our revenues as reimbursement from Medicare. The Medicare program is administered by Centers for Medicare & Medicaid Services, or CMS, which imposes extensive and detailed requirements on medical services providers, including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims, how we operate our monitoring facilities and how and where we provide our arrhythmia monitoring solutions. Our failure to comply with applicable Medicare rules could result in discontinuing our reimbursement under the Medicare payment program, our being required to return

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funds already paid to us, civil monetary penalties, criminal penalties and/or exclusion from the Medicare program.

        In addition, reimbursement from Medicare is subject to statutory and regulatory changes, rate adjustments and administrative rulings, all of which could materially affect the range of services covered or the reimbursement rates paid by Medicare for use of our arrhythmia monitoring solutions. For example, CMS adopted a new payment policy in January 2007 that reduced the rate of reimbursement for a number of services reimbursed by Medicare. Although this modification to Medicare's reimbursement rates did not affect the amount paid by Medicare for reimbursement of the fees associated with the CardioNet System, it resulted in the reduction of reimbursement rates for event services by 3% to 8%, depending on the type of service, and Holter services by 8% as compared to the corresponding rates in effect in 2006. Based on current proposed Medicare rates for 2008 through 2010, we expect that reimbursement for event and Holter services will continue to decline at an annual rate similar to 2007. In addition, we cannot predict whether future modifications to Medicare's reimbursement policies could reduce the amounts we receive from Medicare for the solutions we provide. In addition, Medicare's reimbursement rates can affect the rate that commercial payors are willing to pay for our products and services. Consequently, any future limitation or reduction in the reimbursement rates provided by Medicare for our arrhythmia monitoring solutions could result in a reduction in the rates we receive from commercial payors.

        When we bill Medicare and certain other commercial payors for the service we provide in connection with the CardioNet System, we submit the bill using the nonspecific billing, or CPT, code "93799." Unlike dedicated CPT codes approved by the American Medical Association, or AMA, and CMS, claims using non-specific codes may require semi-automated or manual processing, as well as additional review by payors. The claims processing requirements associated with a nonspecific code can make our services less attractive to physicians because added time and effort is often required in order to receive payment for their services. Furthermore, the Medicare reimbursement rate for non-specific codes is determined by local Medicare carriers. As a result, the reimbursement rates relating to our CardioNet System are subject to change without notice.

        A request to the AMA for a specific CPT code that describes our CardioNet System has been made. If this request is approved by the AMA CPT Editorial Panel, the specific CPT code could be available for use in 2009. However, we cannot guarantee that we will receive a specific CPT code for the CardioNet System in that timeframe, or ever. Moreover, if we do receive a CPT code, the reimbursement rate associated with that code, which would be subject to change on an annual basis through a public notice and comment process, may be lower than our current reimbursement rates.

        A small number of commercial payors represent a significant percentage of our revenues. In the year ended December 31, 2006, our top 10 commercial payors by revenues accounted for approximately 37.4% of our total revenues. Our agreements with these commercial payors typically allow either party to the contract to terminate the contract by providing between 60 and 120 days prior written notice to the other party at any time following the end of the initial term of the contract. Our commercial payors may elect to terminate or not to renew their contracts with us for any reason and, in some instances can unilaterally change the reimbursement rates they pay. In the event any of our key commercial payors terminate their agreements with us, elect not to renew their agreements with us or elect not to enter into new agreements with us upon expiration of their agreements with us on terms as favorable as our current agreements, our business, operating results and prospects would be adversely affected.

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        The commercial payor industry is undergoing significant consolidation. When payors combine their operations, the combined company may elect to reimburse our CardioNet System at the lowest rate paid by any of the participants in the consolidation. If one of the payors participating in the consolidation does not reimburse for the CardioNet System at all, the combined company may elect not to reimburse for the CardioNet System. Our reimbursement rates tend to be lower for larger payors. As a result, as payors consolidate, our average reimbursement rate may decline.

        Our recent acquisition of PDSHeart involves numerous risks, including the risk that we will not take advantage of the cross-selling opportunities brought about by the acquisition. In addition, our acquisition of PDSHeart, as well as acquisitions in which we may engage in the future, involve risks associated with our assumption of the liabilities of an acquired company, which may be liabilities that we were or are unaware of at the time of the acquisition, potential write-offs of acquired assets and potential loss of the acquired company's key employees or customers.

        We may encounter difficulties in successfully integrating our operations, technologies, services and personnel with that of the acquired company, and our financial and management resources may be diverted from our existing operations. For example, following our acquisition of PDSHeart we have offices in Pennsylvania, California, Florida, Georgia and Minnesota. Our offices in multiple states creates a strain on our ability to effectively manage our operations and key personnel. If we elect to consolidate our facilities we may loose key personnel unwilling to relocate to the consolidated facility, may have difficulty hiring appropriate personnel at the consolidated facility and may have difficulty providing continuity of service through the consolidation.

        Physician and patient satisfaction or performance problems with an acquired business, technology, service or device could also have a material adverse effect on our reputation. Additionally, potential disputes with the seller of an acquired business or its employees, suppliers or customers and amortization expenses related to goodwill and other intangible assets could adversely affect our business, operating results and financial condition.

        We may not be able to realize the anticipated benefits of the PDSHeart acquisition or any other acquisition we may pursue or to profitably deploy acquired assets. If we fail to properly evaluate and execute acquisitions, our business may be disrupted and our operating results and prospects may be harmed.

        Our business plans call for rapid expansion of our sales and marketing operations and growth of our research and development, product development and administrative operations. We had a sales force of 27 account executives at December 31, 2006 and 77 account executives at June 30, 2007. We intend to expand our sales force to 88 individuals by December 31, 2007. We expect this expansion will place a significant strain on our management and operational and financial resources. Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth. To manage our growth we will be required to improve existing and implement new operational and financial systems, procedures and controls and expand, train and manage our growing employee base. If we are unable to manage our growth effectively, revenue growth may not be realized or may

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not be sustainable, may not result in improved operating results or earnings, and our business, financial condition and results of operations could be harmed.

        When a physician prescribes the CardioNet System to a patient, our customer service department begins the patient hook-up process, which includes procuring a monitor and sensors from our distribution department and sending them to the patient. While our goal is to provide each patient with a monitor and sensors in a timely manner, we have experienced and may in the future experience delays due to the availability of monitors, primarily when converting to a new generation of monitor or, more recently, in connection with the increase in prescriptions following our acquisition of PDSHeart.

        We may also experience shortages of monitors or sensors due to manufacturing difficulties. Multiple suppliers provide the components used in the CardioNet System, but our facilities in San Diego, California are registered and approved by the United States Food and Drug Administration, or FDA, as the ultimate manufacturer of the CardioNet System. Our manufacturing operations could be disrupted by fire, earthquake or other natural disaster, a work stoppage or other labor-related disruption, failure in supply or other logistical channels, electrical outages or other reasons. If there was a disruption to our facilities in San Diego, we would be unable to manufacture the CardioNet System until we have restored and re-qualified our manufacturing capability or developed alternative manufacturing facilities.

        We are currently in the process of developing the next generation of the CardioNet System, called C3, which will feature several technology enhancements. We expect that we will begin filling prescriptions with the C3 monitors and sensors in the second half of 2007. In order to produce the quantities of the C3 that we believe will be required to meet anticipated market demand, we will need to increase our C3 manufacturing capacity significantly over the current level. There are technical challenges to increasing manufacturing capacity, including the investment of substantial funds and hiring and retaining management and technical personnel who have the necessary manufacturing experience. We may not successfully complete this process in a timely manner or at all. If we are unable to do so, we would not be able to produce sufficient quantities of our next generation C3 monitors and sensors to satisfy anticipated demand and to replace our inventory of existing monitors and sensors prior to their obsolescence.

        Our primary manufacturer of components for the CardioNet System has announced the closing of its facility near San Diego, California where it was manufacturing these components. Following the closing of this facility, all monitor and sensor production will take place at its existing and fully operational facility in Tempe, Arizona. The transfer of production to the new production facility poses several risks to our supply of CardioNet System monitors, including potential issues related to the quality of our monitors and sensors, training of a new workforce and production shortages and delays.

        Our success in obtaining future prescriptions from physicians is dependent upon our ability to promptly deliver monitors and sensors to our patients, and a failure in this regard would have an adverse effect on our revenues and growth prospects.

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        The success of the CardioNet System is dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processing and communication capabilities. The monitors we use in connection with the CardioNet System rely on a third party wireless carrier to transmit data over its data network during times that the monitor is removed from its base. All data sent by our monitors via this wireless data network or via landline is routed directly to QUALCOMM data centers and subsequently routed to our monitoring center. We are dependent upon these third parties to provide data transmission and data hosting services to us. We do not have an agreement directly with this third party wireless carrier. Although we do have an agreement with QUALCOMM that has an initial termination date in September 2010, QUALCOMM may terminate its agreement with us if certain conditions occur, including if QUALCOMM's agreement with the third party wireless carrier terminates or in the event we fail to maintain an agreed-upon number of active cardiac monitoring devices on the QUALCOMM network. We have no control over the status of the agreement between QUALCOMM and the wireless carrier. If we fail to maintain our relationships with QUALCOMM or if we lose wireless carrier services, we would be forced to seek alternative providers of data transmission and data hosting services, which might not be available on commercially reasonable terms or at all.

        As we expand our commercial activities, an increased burden will be placed upon our data processing systems and the equipment upon which they rely. Interruptions of our data networks or the data networks of QUALCOMM for any extended length of time, loss of stored data or other computer problems could have a material adverse effect on our business, financial condition and results of operations. Frequent or persistent interruptions in our arrhythmia monitoring services could cause permanent harm to our reputation and could cause current or potential users of the CardioNet System or prescribing physicians to believe that our systems are unreliable, leading them to switch to our competitors. Such interruptions could result in liability, claims and litigation against us for damages or injuries resulting from the disruption in service.

        Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, break-ins, sabotage, and acts of vandalism. Despite any precautions that we may take, the occurrence of a natural disaster or other unanticipated problems could result in lengthy interruptions in these services. We do not carry business interruption insurance to protect against losses that may result from interruptions in service as a result of system failures. Moreover, the communications and information technology industries are subject to rapid and significant changes, and our ability to operate and compete is dependent in significant part on our ability to update and enhance the communication technologies used in our systems and services.

        The market for arrhythmia monitoring solutions is evolving rapidly and becoming increasingly competitive. Our industry is highly fragmented and characterized by a small number of large providers and a large number of smaller regional service providers. These third parties compete with us in marketing to payors and prescribing physicians, recruiting and retaining qualified personnel, acquiring technology and developing solutions complementary to our programs. In addition, as companies with substantially greater resources than ours enter our market, we will face increased competition. If our competitors are better able to develop and patent arrhythmia monitoring solutions than us, or develop more effective and/or less expensive arrhythmia monitoring solutions that render our solutions obsolete

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or non-competitive or deploy larger or more effective marketing and sales resources than ours, our business will be harmed and our commercial opportunities will be reduced or eliminated.

        We believe that the net proceeds from this offering, together with our existing cash and cash equivalent balances, will be sufficient to meet our anticipated cash requirements for the foreseeable future. However, our future funding requirements will depend on many factors, including:

        If we need to, or choose to, raise additional capital in the future, such capital may not be available on reasonable terms, or at all. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring additional debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and financial ratios that may restrict our ability to operate our business.

        We currently manufacture the monitors and sensors for the CardioNet System in San Diego, California. Monitors used in the provision of services by PDSHeart are purchased from several third parties. In order to maintain compliance with FDA and other regulatory requirements, our manufacturing facilities must be periodically re-evaluated and qualified under a quality system to ensure they meet production and quality standards. Suppliers of components of and products used to manufacture the CardioNet System and the manufacturers of the monitors used in the provision of services by PDSHeart must also comply with FDA and foreign regulatory requirements, which often require significant resources and subject us and our suppliers to potential regulatory inspections and stoppages. We or our suppliers may not satisfy these requirements. If we or our suppliers do not maintain regulatory approval for our manufacturing operations, our business would be harmed.

        We currently rely on a limited number of suppliers of components for the CardioNet System. If these suppliers became unable to provide components in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply.

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Qualifying suppliers is a lengthy process. Delays or interruptions in the supply of our requirements could limit or stop our ability to provide sufficient quantities of devices on a timely basis, meet demand for our services, which could have a material adverse effect on our business, financial condition and results of operations.

        The design, manufacture and marketing of services of the types we provide entail an inherent risk of product liability claims. Any such claims against us may require us to incur significant defense costs, irrespective of whether such claims have merit. In addition, we provide information to health care providers and payors upon which determinations affecting medical care are made, and claims may be made against us resulting from adverse medical consequences to patients resulting from the information we provide. In addition, we may become subject to liability in the event that the monitors and sensors we use fail to correctly record or transfer patient information or if we provide incorrect information to patients or health care providers using our services. We have also agreed to indemnify QUALCOMM for any claims resulting from the provision of our services. If we incur one or more significant claims against us, if we are required to indemnify QUALCOMM as a result of the provision of our services, or if we are required to undertake remedial actions in response to any such claims, such claims or actions would adversely affect our business and results of operations.

        Our liability insurance is subject to deductibles and coverage limitations. In addition, our current insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverages may not be adequate to protect us against any future claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against any claims against us, we will be exposed to significant liabilities, which may harm our business.

        Our business and competitive positions are dependent in part upon our ability to protect our proprietary technology. To protect our proprietary rights, we rely on a combination of trademark, copyright, patent, trade secret and other intellectual property laws, employment, confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual provisions with other third parties. We attempt to protect our intellectual property position by filing trademark applications and U.S., foreign and international patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.

        As of June 30, 2007, we had 14 issued U.S. patents, seven foreign patents and 42 pending U.S., foreign and international patent applications relating to various aspects of the CardioNet System. As of June 30, 2007, we also had eight trademark registrations and four pending trademark applications in the United States for a variety of word marks and slogans. We do not believe that any single patent, trademark or other intellectual property right of ours, or combination of our intellectual property rights, is likely to prevent others from competing with us using a similar business model. There are many issued patents and patent applications held by others in our industry and the electronics field. Our competitors may independently develop technologies that are substantially similar or superior to our technologies, or design around our patents or other intellectual property to avoid infringement. In addition, we may not apply for a patent relating to products or processes that are patentable, we may fail to receive any patent for which we apply or have applied, and any patent owned by us or issued to us could be circumvented, challenged, invalidated, or held to be unenforceable, or rights granted thereunder may not adequately protect our technology or provide a competitive advantage to us. For example, with respect to one of our U.S. patents, we have a corresponding foreign patent, the claims of

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which were amended substantially more so than in the U.S., to overcome art that was of record in the U.S. patent. If a third-party challenges the validity of any patents or proprietary rights of ours, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming.

        Although third parties may infringe our patents and other intellectual property rights, we may not be aware of any such infringement, or we may be aware of potential infringement but elect not to seek to prevent such infringement or pursue any claim of infringement, and the third party may continue its potentially infringing activities. Any decision whether or not to take action in response to potential infringement of our patent or other intellectual property rights may be based on any one or more of a variety of factors, such as the potential costs and benefits of taking such action, and business and legal issues and circumstances. Litigation of claims of infringement of a patent or other intellectual property rights may be costly and time-consuming and divert the attention of key company personnel, and may not be successful or result in any significant recovery of compensation for any infringement or enjoining of any infringing activity. Litigation or licensing discussions may also involve or lead to counterclaims or proceedings that could be brought by a potential infringer to challenge the validity or enforceability of our patents and other intellectual property.

        To protect our trade secrets and other proprietary information, we generally require our employees, consultants, contractors and outside collaborators to enter into written nondisclosure agreements. These agreements, however, may not provide adequate protection to prevent any unauthorized use, misappropriation or disclosure of our trade secrets, know-how or other proprietary information. These agreements may be breached, and we may not become aware of, or have adequate remedies in the event of, any such breach. Also, others may independently develop the same or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

        Our success is dependent in part upon our ability to avoid infringing the patents or proprietary rights of others. Our industry and the electronics field are characterized by a large number of patents, patent filings and frequent litigation based on allegations of patent infringement. Competitors may have filed applications for or have been issued patents and may obtain additional patents and proprietary rights related to devices, services or processes that we compete with or are similar to ours. We may not be aware of all of the patents or patent applications potentially adverse to our interests that may have been or may later be issued to or filed by others. U.S. patent applications may be kept confidential while pending in the Patent and Trademark Office. If other companies have or obtain patents relating to our products or services, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. We may not be able to obtain any such licenses on acceptable terms, or at all. Any failure to obtain such licenses could impair or foreclose our ability to make, use, market or sell our products and services.

        Based on the litigious nature of our industry and the electronics field and the fact that we may pose a competitive threat to some companies who own or control various patents, it is always possible that one or more third parties may assert a patent infringement claim seeking damages and to enjoin the manufacture, use, sale and marketing of our products and services. If a third-party asserts that we have infringed its patent or proprietary rights, we may become involved in intellectual property disputes and litigation that would be costly and time-consuming and could impair or foreclose our ability to make, use, market or sell our products and services. For example, a competitor initiated a patent infringement lawsuit against us in November 2004, which we defended and ultimately settled in March 2006. Other lawsuits may have already been filed against us without our knowledge, or may be filed prior to the completion of this offering. Additionally, we have received and expect to continue to receive notices from third parties suggesting that we are infringing their patents and inviting us to

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license such patents. We do not believe, however, that we are infringing any such patent or that a license to any such patent is necessary. Should litigation over such patents arise, which could occur if, for example, a third party files a lawsuit alleging infringement of such patents or if we file a lawsuit challenging such patents as being invalid or unenforceable, we intend to vigorously defend against any allegation of infringement. If we are found to infringe the patent or intellectual property rights of others, we may be required to pay damages, stop the infringing activity or obtain licenses or rights to the patents or other intellectual property in order to use, manufacture, market or sell our products and services. Any required license may not be available to us on acceptable terms or at all. If we succeed in obtaining such licenses, payments under such licenses would reduce any earnings from our products. In addition, licenses may be non-exclusive and, accordingly, our competitors may have access to the same technology as that which may be licensed to us. If we fail to obtain a required license or are unable to alter the design of our product candidates to make a license unnecessary, we may be unable to manufacture, use, market or sell our products and services, which could significantly affect our ability to achieve, sustain or grow our commercial business. Moreover, regardless of the outcome, patent litigation against or by us could significantly disrupt our business, divert our management's attention and consume our financial resources. We cannot predict if or when any third party will file suit for patent or other intellectual property infringement.

        We are highly dependent upon our Chief Executive Officer and other key employees. The loss of their services could have a material adverse effect on our business, financial condition and results of operations. In particular, our Chief Executive Officer, James M. Sweeney, is critical to our operations and function. In addition, in the event we desire to appoint a replacement to Mr. Sweeney following his resignation or termination, such replacement must be approved by Silicon Valley Bank. The employment of our executive officers and key employees with us is "at will," and each employee can terminate his or her relationship with us at any time. We do not carry "key person" life insurance on any of our employees other than James M. Sweeney, our Chief Executive Officer.

        We will need to hire additional senior executives and qualified scientific, commercial, regulatory, sales, quality assurance and control and administrative personnel as we continue to expand our commercial activities. We may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel among companies that provide arrhythmia monitoring solutions. We have offices in Pennsylvania, California, Florida, Georgia and Minnesota. Competition for personnel with arrhythmia monitoring experience in each of those areas is intense. If we fail to identify, attract, retain and motivate these highly skilled personnel, or if we lose current employees, we may be unable to continue our business operations.

        The monitors and sensors that we manufacture and sell as part of the CardioNet System are classified as medical devices and are subject to extensive regulation by the FDA. Further, we maintain establishment registration with the FDA as a distributor of medical devices. FDA regulations govern manufacturing, labeling, promotion, distribution, importing, exporting, shipping and sale of these devices.

        The CardioNet System, including our C3 monitor, and our arrhythmia detection algorithms have "510(k) clearance" status from the FDA. Modifications to the CardioNet System or our algorithms that could significantly affect safety or effectiveness, or that could constitute a significant change in intended use, would require a new clearance from the FDA. If in the future we make changes to the CardioNet System or our algorithms, the FDA could determine that such modifications require new FDA clearance, and we may not be able to obtain such FDA clearances in a timely fashion or at all.

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        We are subject to continuing regulation by the FDA, including quality regulations applicable to the manufacture of the CardioNet System and various reporting regulations and regulations that govern the promotion and advertising of medical devices. The FDA could find that we have failed to comply with one of these requirements, which could result in a wide variety of enforcement actions, ranging from a warning letter to one or more severe sanctions, including the following:

        Any of these enforcement actions could be costly and significantly harm our business, financial condition and results of operations.

        The use and disclosure of certain health care information by health care providers and their business associates have come under increasing public scrutiny. Recent federal standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish rules concerning how individually-identifiable health information may be used, disclosed and protected. Historically, state law has governed confidentiality issues, and HIPAA preserves these laws to the extent they are more protective of a patient's privacy or provide the patient with more access to his or her health information. As a result of the implementation of the HIPAA regulations, many states are considering revisions to their existing laws and regulations that may or may not be more stringent or burdensome than the federal HIPAA provisions. We must operate our business in a manner that complies with all applicable laws, both federal and state, and that does not jeopardize the ability of our customers to comply with all applicable laws. We believe that our operations are consistent with these legal standards. Nevertheless, these laws and regulations present risks for health care providers and their business associates that provide services to patients in multiple states. Because these laws and regulations are recent, and few have been interpreted by government regulators or courts, our interpretations of these laws and regulations may be incorrect. If a challenge to our activities is successful, it could have an adverse effect on our operations, may require us to forego relationships with customers in certain states and may restrict the territory available to us to expand our business. In addition, even if our interpretations of HIPAA and other federal and state laws and regulations are correct, we could be held liable for unauthorized uses or disclosures of patient information as a result of inadequate systems and controls to protect this information or as a result of the theft of information by unauthorized computer programmers who penetrate our network security. Enforcement of these laws against us could have a material adverse effect on our business, financial condition and results of operations.

        Our operations may be directly or indirectly affected by various broad state and federal health care fraud and abuse laws, including the Federal Healthcare Programs' Anti-Kickback Statute, which prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration,

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directly or indirectly, to induce or reward either the referral of an individual for an item or service, or the ordering, furnishing or arranging for an item or service, for which payment may be made under federal health care programs, such as the Medicare and Medicaid programs. For some of our services, we directly bill physicians for our services, who in turn bill payors. Although we believe such payments to be proper and in compliance with laws and regulations, we may be subject to claims that we are in violation of these laws and regulations. If our past or present operations 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 results of operations could be adversely affected.

        We have call centers and monitoring facilities in Pennsylvania, Georgia, Florida, and Minnesota that analyze the data obtained from arrhythmia monitors and report the results to physicians. In order for us to receive reimbursement from Medicare and some commercial payors, we must have a call center certified as an Independent Diagnostic Testing Facility, or IDTF. Certification as an IDTF requires that we follow strict regulations governing how the center operates, such as requirements regarding the experience and certifications of the technicians who review data transmitted from our monitors. These rules and regulations vary from location to location and are subject to change. If they change, we may have to change the operating procedures at our monitoring facilities and call centers, which could increase our costs significantly. If we fail to obtain and maintain IDTF certification, our services may no longer be reimbursed by Medicare and some commercial payors, which could have a material adverse impact on our business.

        Many of the physicians and patients who use our services file claims for reimbursement with government programs such as Medicare and Medicaid. As a result, we may be subject to the federal False Claims Act if we knowingly "cause" the filing of false claims. Violations may result in substantial civil penalties, including treble damages. The federal False Claims Act also contains "whistleblower" or "qui tam" provisions that allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the government. In recent years, the number of suits brought in the medical industry by private individuals has increased dramatically. Various states have enacted laws modeled after the federal False Claims Act, including "qui tam" provisions, and some of these laws apply to claims filed with commercial insurers.

        We are unable to predict whether we could be subject to actions under the federal False Claims Act, or the impact of such actions. However, the costs of defending claims under the False Claims Act, as well as sanctions imposed under the False Claims Act, could significantly affect our financial performance.

        Health care laws and regulations change frequently and may change significantly in the future. We may not be able to adapt our operations to address every new regulation, and new regulations may adversely affect our business. We cannot assure you that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenues and operating results, or that the health care regulatory environment will not change in a way that restricts our operations. In addition, as a result of the focus on health care reform in connection with the 2008

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presidential election, there is risk that Congress may implement changes in laws and regulations governing health care service providers, including measures to control costs, or reductions in reimbursement levels, which may adversely affect our business and results of operations.

        Changes in the health care industry directed at controlling health care costs or perceived over-utilization of arrhythmia monitoring solutions could reduce the volume of solutions ordered by physicians. If more health care cost controls are broadly instituted throughout the health care industry, the volume of cardiac monitoring solutions could decrease, resulting in pricing pressure and declining demand for our services, which could harm our operating results. In addition, it has been suggested that some physicians order arrhythmia monitoring solutions even when the services may have limited clinical utility in large part to establish a record for defense in the event of a claim of medical malpractice against the physician. Legal changes making it more difficult to bring medical malpractice cases, known as tort reform, could reduce the amount of our services prescribed as physicians respond to reduced risks of litigation, which could harm our operating results.

Risks related to the securities market and investment in our common stock

        Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Global Market or any other stock market or how liquid any such market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

        Following this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

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        In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many health care companies. Stock prices of many health care companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.

        Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have             outstanding shares of common stock based on the number of shares outstanding as of June 30, 2007, assuming an initial public offering price of $    per share, the mid-point of the price range set forth on the cover page of this prospectus. This includes the shares that we and the selling stockholders are selling in this offering, which may be resold in the public market immediately unless held by an affiliate of ours. Of the remaining shares,            shares may be sold upon the expiration of lock-up agreements at least 180 days after the date of this offering and the remaining shares may be sold from time to time after the expiration of such lock-up agreements and applicable holding periods specified in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, as more fully described in the "Shares Eligible for Future Sale" section of this prospectus. In addition, following the offering, we will have outstanding warrants to purchase up to 12,500 shares of our common stock that, if exercised, would result in these additional shares becoming available for sale upon expiration of the lock-up agreements.

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        In July 2007, the SEC announced proposed revisions to Rule 144. If the proposed changes to Rule 144 are approved:

We do not know whether these proposed revisions to Rule 144 will be adopted as proposed or in a modified form, or at all.

        After this offering, based on the number of shares outstanding as of June 30, 2007, assuming an initial public offering price of $    per share, the mid-point of the price range set forth on the cover page of this prospectus, holders of up to approximately            shares of common stock (including shares of our common stock issuable upon the exercise of warrants) will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These rights will terminate    years following the completion of this offering, or for any particular holder with registration rights who holds less than one percent of our outstanding capital stock, at any time following this offering when all securities held by that stockholder that are subject to registration rights may be sold pursuant to Rule 144 under the Securities Act within a single 90 day period. We also intend to register all shares of common stock that we may issue after this offering under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described above.

        We agreed to register the            shares of our common stock that will be issued at the closing of this offering upon conversion of our mandatorily redeemable convertible preferred stock within 90 days of the completion of this offering, and use commercially reasonable best efforts to cause the registration statement to become effective within 180 days after the completion of this offering. Once registered, these shares will be freely tradable. If we fail to register these shares when and as required, we will be required to pay liquidated damages at a rate of 0.5% of the original purchase price of the mandatorily redeemable convertible preferred stock, plus accrued and unpaid dividends, for the initial failure and 1.0% of the original purchase price of the mandatorily redeemable convertible preferred stock, plus accrued and unpaid dividends, for each 30-day period thereafter that the failure goes uncured. We intend to comply with our obligations relating to such registration.

        If a large number of our shares of our common stock or securities convertible into our common stock are sold in the public market after they become eligible for sale, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

        Upon completion of this offering, our amended and restated certificate of incorporation and bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions will:

25


        In addition, upon completion of this offering we will be subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change of control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

        If you purchase shares of common stock in this offering, you will incur immediate and substantial book value dilution in the amount of $            per share, assuming an initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus. By "book value" dilution, we mean the amount by which the initial public offering price in this offering exceeds the pro forma net book value per share of our outstanding common stock would be after this offering. This dilution is due in large part to the fact that, when they purchased their shares, our earlier investors paid substantially less than the initial public offering price. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See the "Dilution" section of this prospectus.

        Upon completion of this offering, assuming no exercise of the underwriters' over-allotment option and including stock options that are exercisable within 60 days of June 30, 2007, our existing principal stockholders, executive officers and directors, together with their affiliates, will beneficially own, in the aggregate, approximately            % of our outstanding common stock. These stockholders may have interests that conflict with yours and, if acting together, have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, may have the ability to control our management and affairs. Accordingly, this concentration of ownership may harm the market price of our common stock by:

26


        The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

        Our management will have considerable discretion over the use of proceeds from this offering. We intend to use the net proceeds from this offering:

We have no present understandings, commitments or agreements with respect to the acquisition or license of any products, technologies or businesses.

        A significant portion of the net proceeds from this offering have not been allocated for any specific transaction. As a result, our management will have broad discretion in the application of much of the net proceeds from this offering and could spend such proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock. You will be relying on the judgment of our management concerning these uses, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline.

        The continued expansion of our business may require substantial funding. In addition, the terms of our loan and security agreement with Silicon Valley Bank prohibit us from paying cash dividends under certain circumstances. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Even if we were not prohibited from paying dividends, any determination to do so in the future would be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

27



FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business." Forward-looking statements include all statements that are not historical facts and can sometimes be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those statements.

        Forward-looking statements include, but are not limited to, statements about:

        Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in "Risk Factors." Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

        Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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USE OF PROCEEDS

        We estimate that the net proceeds to us from the shares we are selling in this offering will be approximately $             million, based upon an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any of the proceeds from the sale of common stock by the selling stockholders. If the underwriters exercise their over-allotment option in full, then the net proceeds to us will be approximately $             million.

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriter discounts and commissions and estimated offering expenses payable by us. If the underwriters fully exercise their over-allotment option, we estimate that the net proceeds to us from this offering will be approximately $             million.

        The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets.

        We intend to use the net proceeds to us from this offering as follows:

        We anticipate using the remaining net proceeds to us from this offering for working capital and general corporate purposes. Accordingly, our management will have broad discretion in the application of the net proceeds of this offering to us, and investors will be relying on the judgment of our management regarding the application of these proceeds.

        Pending their use, we plan to invest the net proceeds to us from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

        We believe that the net proceeds to us from this offering, together with interest thereon, our existing cash, cash equivalents and short-term investments, will be sufficient to fund our operations for the forseeable future.

29



DIVIDEND POLICY

        We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors. In addition, unless waived, the terms of our loan and security agreement with Silicon Valley Bank prohibit us from paying dividends on our common stock.

30



CAPITALIZATION

        The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2007:

31


        You should read the information in this table together with our consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.

 
  As of June 30, 2007
 
  Actual
  Pro Forma
  Pro Forma
As Adjusted(1)

 
  (unaudited)

 
  (in thousands, except share
and per share data)

Debt obligations:                  
  Note payable to shareholder (net of discount)   $ 23,204   $   $
  Long term debt, including current portion     3,243            
Redeemable Preferred Stock:                  
  Mandatorily redeemable convertible preferred stock: 114,883 shares authorized; 114,839 issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted     109,803        
Shareholders' equity:                  
  Series A, B, C, D and D-1 convertible preferred stock: 18,646,681 shares authorized; 17,670,106 shares issued and outstanding, actual shares authorized, no shares issued or outstanding, as adjusted     53,456        
  Series D1 Preferred Stock Warrants     1,664            
  Common stock, $0.001 par value: 36,000,000 shares authorized; 6,392,203 shares issued and outstanding, actual; shares authorized, no shares issued or outstanding, as adjusted     1,567            
  Additional paid-in capital                
  Deferred compensation     (501 )          
  Accumulated deficit     (82,514 )          
   
 
 
Total shareholders' equity (deficit)     (26,328 )          
   
 
 
Total capitalization   $ 109,922            
   
 
 

(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriter discounts and commissions and estimated offering expenses payable by us.

32


        The number of shares of common stock outstanding as of June 30, 2007 excludes:

        In addition, the number of shares of common stock outstanding as of June 30, 2007 actual also excludes the issuance of                        shares of our common stock, assuming an initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, upon the automatic cashless exercise of warrants upon the completion of this offering pursuant to the terms thereof.

        The number of shares of our common stock issuable upon conversion of each share of our mandatorily redeemable convertible preferred stock and the number of shares of common stock issuable upon the cashless exercise of outstanding warrants to purchase shares of our Series D-1 preferred stock each varies according to a formula that depends on the initial public offering price. As a result, the total number of shares of our common stock that will be outstanding following this offering depends on the initial public offering price. The following table shows how the number of shares varies over a range of initial public offering prices:

 
  Initial public offering price
    $     $     $     $  
   
 
 
 
Number of shares of common stock outstanding, actual                        
Number of shares of common stock issued upon conversion of preferred stock other than mandatorily redeemable convertible preferred stock                        
Number of shares of common stock issued upon conversion of mandatorily redeemable convertible preferred stock                        
Number of shares of common stock issued upon automatic cashless exercise of warrants                        
Number of shares of our common stock issued in the offering                        
   
 
 
 
Total number of shares of common stock outstanding following the offering, as adjusted                        
   
 
 
 

        For more information on the conversion provisions of our mandatorily redeemable convertible preferred stock and exercise provisions of warrants to purchase our Series D-1 preferred stock, see "Description of Capital Stock."

33



DILUTION

        If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering. The historical net tangible book value of our common stock as of June 30, 2007 was approximately $39.4 million, or approximately $6.34 per share, based on the number of shares of common stock outstanding as of June 30, 2007. Historical net tangible book value per share is determined by dividing the number of shares of common stock outstanding as of June 30, 2007 into our total tangible assets (total assets less intangible assets less total liabilities). After giving effect to the conversion of all outstanding shares of preferred stock into            shares of common stock and the automatic cashless exercise of warrants for              shares of common stock pursuant to the terms thereof, assuming an initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, in this offering, our pro forma net tangible book value per share as of June 30, 2007 would have been approximately $            million, or approximately $            per share.

        Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock offered by us in this offering at an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2007 would have been approximately $            million, or approximately $            per share of common stock. This represents an immediate increase in net tangible book value of $            per share to existing stockholders, and an immediate dilution of $            per share to investors participating in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share         $  
Historical net tangible book value per share as of June 30, 2007   $        
Pro forma decrease in net tangible book value per share attributable to conversion of preferred stock and automatic exercise of warrants     (         )    
Pro forma net tangible book value per share as of June 30, 2007   $        
Increase in net tangible book value per share attributable to investors participating in this offering            
   
     
Pro forma as adjusted net tangible book value per share after this offering            
         
Dilution per share to investors participating in this offering         $  
         

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value as of June 30, 2007 by approximately $             million, the pro forma as adjusted net tangible book value per share after this offering by $            and the dilution in pro forma as adjusted net tangible book value to new investors in this offering by $            per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        If the underwriters exercise their over-allotment option in full to purchase            additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $    per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $     per share and the dilution to new investors purchasing common stock in this offering would be $            per share.

34



        The following table summarizes, on a pro forma as adjusted basis as of June 30, 2007, the differences between the number of shares of common stock issued by us, the total consideration and the average price per share paid to us by stockholders prior to this offering and by investors purchasing shares of common stock in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses, at an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus. The shares to be offered by the selling stockholders in this offering are included in the row entitled "Existing stockholders before this offering."

 
   
   
  Total consideration
paid to us

   
 
  Shares issued by us
   
 
  Average price
per share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders before this offering         % $       % $  
Investors purchasing shares of common stock from us in this offering                        
   
 
 
 
 
  Total         % $       % $  
   
 
 
 
 

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid to us by investors participating in this offering by approximately $            million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        If the underwriters' over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be further reduced to             , or    % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to            , or    % of the total number of shares of common stock to be outstanding after this offering.

        The following table summarizes the information in the table set forth immediately above with the exception that the shares to be offered by the selling stockholders in this offering have been included in the row entitled "Investors purchasing shares of common stock in this offering." This presentation compares the number of shares sold and the consideration paid by purchasers in this offering to the number of shares sold and the consideration paid by purchasers prior to this offering and not included in this offering.

 
  Shares purchased
by investors

  Total consideration
paid by purchasers

   
 
  Average price
per share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders before this offering         % $       % $  
Investors purchasing shares of common stock in this offering                        
   
 
 
 
 
  Total         % $       % $  
   
 
 
 
 

        The following table sets forth the information from the table above, which includes the shares to be offered by the selling stockholders in this offering in the row entitled "Existing stockholders before this offering," but assumes the issuance of the 1,921,791 shares of common stock issuable upon the

35



exercise of options under our 2003 Equity Incentive Plan and the 12,500 shares of common stock issuable upon the exercise of an outstanding warrant.

 
   
   
  Total consideration
paid to us

   
 
  Shares issued by us
   
 
  Average price
per share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders before this offering         % $       % $  
Investors purchasing shares of common stock from us in this offering                        
   
 
 
 
 
  Total         % $       % $  
   
 
 
 
 

        The following table sets forth the information from the table above, which includes the shares to be offered by the selling stockholders in this offering in the row entitled "Investors purchasing shares of Common Stock in this offering," but assumes the issuance of the 1,921,791 shares of common stock issuable upon the exercise of options under our 2003 Equity Incentive Plan and the 12,500 shares of common stock issuable upon the exercise of an outstanding warrant.

 
  Shares purchased
by investors

  Total consideration
paid by purchasers

   
 
  Average price
per share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders before this offering         % $       % $  
Investors purchasing shares of common stock in this offering                        
   
 
 
 
 
  Total         % $       % $  
   
 
 
 
 

        Unless otherwise noted, the discussion and tables above assume no exercise of the underwriters' over-allotment option and assume the automatic cashless exercise of warrants to purchase shares of our Series D-1 preferred stock upon the completion of this offering in accordance with the terms thereof. In addition, unless otherwise noted, the discussion and tables above exclude:

        To the extent that any options or warrants are exercised, new options or shares of common stock are issued under our 2003 Equity Incentive Plan, 2007 Equity Incentive Plan, 2007 Non-Employee Directors' Stock Option Plan or our 2007 Employee Stock Purchase Plan or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

36




UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

        The following unaudited pro forma consolidated statements of operations for the year ended December 31, 2006 and the six months ended June 30, 2007 are based on the historical statements of operations of CardioNet, Inc. and PDSHeart, Inc. giving effect to our acquisition of PDSHeart as if the acquisition had occurred on January 1, 2006, in the case of the year ended December 31, 2006, and as if the acquisition had occurred on January 1, 2007, in the case of the six months ended June 30, 2007.

        The unaudited pro forma consolidated statements of operations are based on estimates and assumptions which are preliminary and subject to change, as set forth in the related notes to such statements. The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during these periods. This information should be read in conjunction with the historical financial statements and related notes of CardioNet and PDSHeart included in this prospectus, and in conjunction with the accompanying notes to these unaudited pro forma consolidated statements of operations.

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CardioNet, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Year ended December 31, 2006
(in thousands, except share and per share data)

 
  CardioNet
  PDSHeart
  Notes
  Pro Forma
Adjustments

  Pro Forma
Consolidated

 
 
   
   
   
  (unaudited)

 
Revenues:                              
  Net patient revenues   $ 33,019   $ 20,681       $   $ 53,700  
  Other revenues     904     171             1,075  
   
 
     
 
 
Total revenues     33,923     20,852             54,775  
Cost of revenues     (12,701 )   (7,493 )           (20,194 )
   
 
     
 
 
Gross profit     21,222     13,359               34,581  
Operating expenses:                              
  Research and development     (3,631 )               (3,631 )
  General and administrative     (15,631 )   (6,760 ) (a )   (327 )   (22,064 )
  Sales and marketing     (6,448 )   (4,969 ) (b )   113     (11,304 )
  Amortization         (183 ) (c )   (802 )   (985 )
   
 
     
 
 
Total expenses     (25,710 )   (11,912 )       (362 )   (37,984 )
   
 
     
 
 
Income (loss) from operations     (4,488 )   1,447         (362 )   (3,403 )
Other income (expense):                              
  Interest income     114     40   (d )   (22 )   132  
  Interest expense     (3,271 )   (817 ) (e )   445     (3,643 )
   
 
     
 
 
Total other income (expense)     (3,157 )   (777 )       423     (3,511 )
Income tax (expense) benefit         (3 ) (f )   3      
   
 
     
 
 
Net income (loss)   $ (7,645 ) $ 667       $ 64   $ (6,914 )
   
 
     
 
 
Basic and diluted net loss per share(1):                              
  Historical   $ (1.31 )                      
   
                       
  Pro forma                         $ (.29 )
                         
 
Shares used to compute basic and diluted net loss per share(1):                              
  Historical     5,816,719                        
   
                       
  Pro forma                           23,619,018  
                         
 

(1)
Please see Note 2 to our consolidated financial statements for an explanation of the method used, the historical and pro forma net (loss) income per share and the number of shares used in the computation of the per share amounts.

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CardioNet, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Six Months ended June 30, 2007
(in thousands, except share and per share data)

 
  Six Months
Consolidated
CardioNet

  January 1 to
March 7
PDSHeart

  Notes
  Pro Forma
Adjustments

  Pro Forma
Consolidated

 
 
   
   
   
  (unaudited)

 
Revenues:                              
  Net patient revenues   $ 28,221   $ 4,055       $   $ 32,276  
  Other revenues     299     14             313  
   
 
     
 
 
Total revenues     28,520     4,069             32,589  
Cost of revenues     (9,743 )   (1,646 )           (11,389 )
   
 
     
 
 
Gross profit     18,776     2,423               21,200  
Operating expenses:                              
  Research and development     (2,010 )               (2,010 )
  General and administrative     (11,974 )   (1,128 ) (a )   88     (13,014 )
  Sales and marketing     (7,696 )   (1,098 ) (b )   36     (8,758 )
  Amortization     (307 )   (32 ) (c )   (154 )   (493 )
   
 
     
 
 
Total expenses     (21,987 )   (2,258 )       (30 )   (24,275 )
   
 
     
 
 
Income (loss) from operations     (3,211 )   165         (30 )   (3,075 )
Other income (expense):                              
  Interest income     905     5             910  
  Interest expense     (1,625 )   (122 ) (e )   80     (1,667 )
   
 
     
 
 
Total other income (expense)     (720 )   (117 )       80     (757 )
Income tax (expense) benefit                      
   
 
     
 
 
Net income (loss)     (3,931 )   48         50     (3,832 )
   
 
     
 
 
  Dividends on and accretion of mandatorily redeemable convertible preferred stock     (2,844 )               (2,844 )
   
 
     
 
 
Net loss available to common shareholders   $ (6,775 ) $ 48       $ 50   $ (6,676 )
   
 
     
 
 
Basic and diluted net loss available to common shareholders per share(1):                              
  Historical   $ (1.09 )                      
   
                       
  Pro forma                         $ (0.20 )
                         
 
Shares used to compute basic and diluted net loss available to common shareholders per share(1):                              
  Historical     6,214,067                        
   
                       
  Pro forma                           33,673,580  
                         
 

(1)
Please see Note 2 to our consolidated financial statements for an explanation of the method used, the historical and pro forma net (loss) income per share and the number of shares used in the computation of the per share amounts.

39



CardioNet, Inc.
Notes to Unaudited Pro Forma Consolidated Statements of Operations

        On March 8, 2007, we acquired PDSHeart, Inc. for an aggregate purchase price of $51.6 million. The $51.6 million purchase price was comprised of $44.3 million in cash at closing, $5.2 million in assumed debt, $1.4 million in transaction expenses and the assumption of a $0.7 million liability related to payments due to certain key employees of PDSHeart on March 8, 2008. Approximately $1.5 million of the assumed debt was satisfied through the issuance of 1,456 shares of our mandatorily redeemable convertible preferred stock at an original issue price per share of $1,000. In addition to the $51.6 million, we agreed to pay PDSHeart shareholders $5.0 million of contingent consideration in the event of a qualifying liquidation event, including a public offering or acquisition. Due to the contingent nature of this payment, no liability has been recorded in our historical financial statements.

        The unaudited pro forma consolidated statements of operations are based on the historical financial statements of the Company and PDSHeart after giving effect to our acquisition of PDSHeart, as if it occurred on January 1, 2006, in the case of the year ended December 31, 2006, and as if the acquisition had occurred on January 1, 2007 in the case of the six months ended June 30, 2007.

        The pro forma consolidated statements of operations do not give effect to any restructuring or integration costs or any potential cost savings or other operating efficiencies that could result from the acquisition.

        The effects of the acquisition have been presented using the purchase method of accounting under Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. The total estimated purchase price of the acquisition has been allocated to assets and liabilities based on management's preliminary estimate of their fair values. The preliminary allocation of the purchase price will be subject to further adjustments, as the Company finalizes its allocation of purchase price in accordance with U.S. generally accepted accounting principles ("GAAP").

        Under the purchase method of accounting, the total purchase price is allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using information currently available, and we may adjust the preliminary purchase price allocation. The following is a summary of our preliminary purchase price allocation (in thousands):

Aggregate purchase price consideration   $ 50,178
Acquisition related costs     1,415
   
    Total purchase price   $ 51,593
   

Net tangible assets

 

$

7,334
Identifiable intangible assets      
  Trade Name     1,810
  Customer Relationships     1,551
  Non Compete Agreements     245
Goodwill     40,653
   
    Total allocated purchase price   $ 51,593
   

40


        The following table summarizes the pro forma adjustments for the respective periods presented (in thousands):

 
  Six Months Ended
June 30, 2007

  Year Ended
December 31, 2006

 
(a) Elimination of executive salary   $ 88   $ 327  
(b) Elimination of marketing salary     36     113  
(c) Additional amortization expense     (154 )   (802 )
(d) Reduction of interest income on officer loans         (22 )
(e) Reduction of interest expense     80     445  
(f) Elimination of historical tax provision         3  
   
 
 
  Net reduction in net loss   $ 50   $ 64  
   
 
 

 
  Amount
  Useful
Life

  Annual
Amortization

Trade Name   $ 1,810   3.0   $ 603
Customer Relationships     1,551   6.0     259
Non Compete Agreements     245   2.0     123
   
     
    $ 3,606       $ 985
   
     

41



SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial data should be read together with our consolidated financial statements and notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The selected consolidated financial data as of and for the years ended December 31, 2004, 2005 and 2006 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated financial data as of and for the years ended December 31, 2002 and 2003 are derived from our audited consolidated financial statements, which are not included in this prospectus. The selected consolidated statements of operations data for the six months ended June 30, 2006 and 2007 and the selected consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. We have prepared the unaudited financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. The pro forma basic net income per share data are unaudited and give effect to the conversion into common stock of all outstanding shares of our preferred stock for the periods indicated. The interim results set forth below are not necessarily indicative of results for future periods.

 
  Year ended December 31,
  Six months ended June 30,
 
 
  2002
  2003
  2004
  2005
  2006
  2006
  2007
 
 
   
   
   
   
   
  (unaudited)

 
 
 
(in thousands, except share and per share data)

 
Statement of Operations Data:                                            
Revenues:                                            
  Net patient revenues   $ 126   $ 7,640   $ 20,956   $ 29,467   $ 33,019   $ 15,516   $ 28,221  
  Other revenues         283     1,275     1,471     904     632     299  
   
 
 
 
 
 
 
 
Total revenues     126     7,923     22,231     30,938     33,923     16,148     28,520  
Cost of revenues     637     5,664     16,971     16,963     12,701     6,866     9,743  
   
 
 
 
 
 
 
 
Gross profit     (510 )   2,259     5,260     13,975     21,222     9,283     18,776  
Operating expenses:                                            
  Research and development     4,717     4,438     2,412     3,361     3,631     1,980     2,010  
  General and administrative     3,713     7,020     15,252     13,853     15,631     7,462     11,974  
  Sales and marketing     2,029     3,527     7,695     6,456     6,448     2,979     7,696  
  Amortization                             307  
   
 
 
 
 
 
 
 
Total operating expenses     10,459     14,985     25,359     23,670     25,710     12,422     21,987  
   
 
 
 
 
 
 
 
Loss from operations     (10,969 )   (12,726 )   (20,099 )   (9,695 )   (4,488 )   (3,139 )   (3,211 )
Other income (expense):                                            
  Interest income     129     120     141     97     114     42     905  
  Interest expense     (12 )   (74 )   (989 )   (1,865 )   (3,271 )   (1,253 )   (1,625 )
   
 
 
 
 
 
 
 
Total other income (expense)     118     46     (848 )   (1,768 )   (3,157 )   (1,211 )   (720 )
   
 
 
 
 
 
 
 
Net loss   $ (10,852 ) $ (12,680 ) $ (20,947 ) $ (11,463 ) $ (7,645 ) $ (4,350 ) $ (3,931 )
   
 
 
 
 
 
       
Dividends on and accretion of mandatorily redeemable convertible preferred stock                                         (2,844 )
                                       
 
Net loss applicable to common shares   $ (10,852 ) $ (12,680 ) $ (20,947 ) $ (11,463 ) $ (7,645 ) $ (4,350 ) $ (6,775 )
   
 
 
 
 
 
 
 
Basic and diluted net loss per share(1):                                            
  Historical   $ (2.78 ) $ (2.62 ) $ (3.67 ) $ (2.02 ) $ (1.31 ) $ (0.76 ) $ (1.09 )
  Pro Forma                           $ (0.32 )       $ (0.20 )
Shares used to compute basic and diluted net loss per share(1):                                            
  Historical     3,909,055     4,846,143     5,712,144     5,675,544     5,816,719     5,751,700     6,214,067  
  Pro Forma                             23,619,018           33,673,580  

(1)
Please see Note 2 to our consolidated financial statements for an explanation of the method used, the historical and pro forma net (loss) income per share and the number of shares used in computation of the per share amounts.

42


 
  December 31,
  June 30,
 
 
  2002
  2003
  2004
  2005
  2006
  2007
 
 
   
   
   
   
   
  (unaudited)
 
 
 
(in thousands)

 
Balance Sheet Data:                                      
Cash and cash equivalents   $ 14,855   $ 10,106   $ 5,718   $ 2,758   $ 3,909   $ 50,334  
Working capital     13,961     11,862     8,666     3,648     (18,713 )   32,863  
Total assets     16,876     22,151     22,802     16,451     17,170     121,573  
Total debt     7     10,525     20,661     23,606     29,488     26,448  
Total mandatorily redeemable convertible preferred stock                         109,802  
Total shareholders' equity (deficit)     15,639     8,000     (2,763 )   (13,660 )   (19,857 )   (26,328 )

43



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk Factors," and elsewhere in this prospectus. In this discussion and analysis of our financial condition and results of operations and elsewhere in this prospectus, we present unaudited pro forma consolidated financial data relating to our acquisition of PDSHeart. This data is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of operations that actually would have been realized had our acquisition of PDSHeart occurred prior to the covered periods. Investors should not rely on this unaudited pro forma data to predict our future results of operations as a combined company. We are on a calendar year end, and except where otherwise indicated below, "2007" refers to the year ending December 31, 2007; "2006" refers to the year ended December 31, 2006; "2005" refers to the year ended December 31, 2005; and "2004" refers to the year ended December 31, 2004.

Overview

        We are the leading provider of ambulatory, continuous, real-time outpatient management solutions for monitoring relevant and timely clinical information regarding an individual's health. We incorporated in the state of California in March 1994, but did not actively begin developing our product platform until April 2000. From 2000 through 2002, we devoted substantially all of our resources to developing an integrated patient monitoring platform that incorporates a wireless data transmission network, internally developed software, FDA-cleared algorithms and medical devices, and a 24-hour monitoring service center.

        In February 2002, we received FDA 510(k) clearance for the first and second generation of our core CardioNet System (Mobile Cardiac Outpatient Telemetry). We opened the CardioNet Monitoring Center in Conshohocken, Pennsylvania in July 2002 and currently provide all of our CardioNet System arrhythmia monitoring solutions at that location. We established our relationship with QUALCOMM Incorporated, which provides us its wireless cellular data connectivity solution and data hosting and queuing services, in May 2003. Pursuant to our agreement with QUALCOMM, we have no fixed or minimum financial commitment. However, in the event we fail to maintain an agreed-upon number of active cardiac monitoring devices on the QUALCOMM network, QUALCOMM has the right to terminate this agreement.

        In November 2006, we received FDA 510(k) clearance for our third generation product, or C3, which we intend to incorporate as part of our monitoring solution beginning in the second half of 2007 and on a broader scale by January 2008. We had previously received FDA 510(k) clearance for the proprietary algorithm included in our C3 system in October 2005.

        In September 2002, we were approved as an Independent Diagnostic Testing Facility for Medicare. The local Medicare carrier in Pennsylvania sets the terms for reimbursement of our CardioNet System for approximately 40 million covered lives. We have also worked to secure contracts with commercial payors. We increased the number of contracts with commercial payors from six at year-end 2003 to 41 at year-end 2004 to 97 at year-end 2005 to 114 at year-end 2006. Over this period of time, the number of covered commercial lives increased from six million at year-end 2003 to 33 million at year-end 2004 to 70 million at year-end 2005 to 102 million at year-end 2006. The current total of 154 million Medicare and commercial lives for which we have reimbursement contracts represents approximately 65% of the total covered lives in the United States. The majority of the remaining covered lives are insured by a relatively small number of large commercial insurance companies that, beginning in 2003, deemed the CardioNet System to be "experimental and investigational" and do not currently reimburse us for services provided to their beneficiaries. We believe a primary reason for the "experimental and

44



investigational" designation has been the lack of a published peer reviewed prospective randomized clinical trial that demonstrates the clinical efficacy of the CardioNet System. As a result, we significantly slowed our geographic expansion in 2005 and 2006, as we awaited results of a randomized clinical trial comparing the CardioNet System to traditional loop event monitors.

        On March 8, 2007, we acquired all of the outstanding capital stock of PDSHeart for an aggregate purchase price of $51.6 million. The $51.6 million purchase price was comprised of $44.3 million in cash at closing, $5.2 million in assumed debt, $1.4 million of transaction expenses and the assumption of a $0.7 million liability related to payments due to certain key employees of PDSHeart on March 8, 2008. Approximately $1.5 million of the assumed debt was satisfied through the issuance of 1,456 shares of our mandatorily redeemable convertible preferred stock at an original issue price per share of $1,000. In addition to the $51.6 million of consideration, the Company agreed to pay PDSHeart shareholders $5.0 million of contingent consideration in the event of a qualifying liquidation event, including a public offering or acquisition. Due to the contingent nature of this payment, no liability has been recorded in the historical financial statements. The acquisition has been included in our consolidated results of operations since March 8, 2007. PDSHeart, now a wholly-owned subsidiary of CardioNet, provides event, Holter and pacemaker monitoring services to patients in 48 states, with a concentration of sales in the Southeast. The acquisition has broadened our geographic coverage and expanded our service offerings to include the complete range of cardiac monitoring services.

        For our event, Holter and pacemaker monitoring services we have established Medicare reimbursement and we have 106 direct contracts with commercial payors, together representing 135 million covered lives.

        In March 2007, we raised $110 million in mandatorily redeemable convertible preferred stock, in part, to fund the acquisition of PDSHeart.

Critical Accounting Policy and Estimates

        The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses and related disclosures. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances; however actual results may differ from these estimates. We review our estimates and judgments on an ongoing basis.

        We believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this prospectus.

        We recognize patient service revenues from four different services: CardioNet System services and event, Holter and pacemaker monitoring services. Our largest source of revenue is CardioNet System services. For the services that we provide, revenues are recognized over the monitoring period on a daily basis.

        Our monitor and event monitors are shipped to the patient from the service center after the patient agrees to be monitored. Included in this shipment is a prepaid return shipment mailer so when the patient monitoring is complete, the monitor can be returned to us and ultimately sent to another patient. Holtor monitors are provided by the physician's office and returned by the patient to the physician's office. There is no fee or charge associated with providing the monitors. The provision of monitors is included in the fee we charge for our services.

        Revenues are reported at the estimated net realizable amounts from commercial payors, physicians, patients and Medicare for services rendered. Payment arrangements for the CardioNet

45



System include per diem (per day) and case rate payments which is a fixed payment amount for the patient monitoring period. Payment arrangements for event, Holter and pacemaker services are generally reimbursed on a per test basis. Revenues from commercial payors are recognized based on the negotiated contractual rate or upon historical or estimated payment patterns. Our estimates for the amount of revenues to be received from each claim filed are derived from our historical experience. Our estimates are subjective and require management to exercise judgment because of our limited historical results and fluctuating reimbursement rates.

        Payments from the Medicare and Medicaid program are based on reimbursement rates set by governmental authorities. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

        Other revenues, consisting mainly of information technology services provided to an affiliate of a stockholder, are recognized as the services are provided.

        Accounts receivable consists of amounts due to us from commercial payors, physicians, patients and Medicare as a result of our normal business activities. Accounts receivable are reported in the balance sheets at their estimated net realizable value, which approximates outstanding amounts, less an allowance for bad debt. We provide an allowance for bad debt for estimated losses resulting from unwillingness of commercial payors, physicians or patients to make payment for services. We estimate the allowance for bad debt based upon historical collections experience, write-offs and an allowance percentage of our accounts receivable by aging category. Uncollectible account balances are written off against the allowance after all means of collections have been exhausted and the potential for recovery is considered remote. The provision for bad debt is included in general and administrative expense and the allowance for bad debt is presented as a contra account to accounts receivable. Due to the subjective nature, our estimates of the net realizable value of accounts receivable and the related allowance for bad debt require considerable judgement.

        Prior to 2006, we accounted for stock based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and the related interpretations. Under APB 25, no compensation expense was recognized if the exercise price of our stock options equaled or exceeded the fair value of the underlying common stock at the date of grant. We provided pro forma disclosures in our financial statements as required by SFAS No. 123, Accounting for Stock Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock Based Compensation- Transition and Disclosure, related to fiscal periods prior to January 1, 2006.

        The fair value of our common stock during the years ended December 31, 2004 and December 31, 2005 was determined by our board of directors with the assistance of management. We did not prepare contemporaneous valuations during this period because we were focused on market development and our financial and managerial resources were limited. The board of directors and management considered numerous objective and subjective factors in the assessment of fair value including the prices of our preferred stock that was sold to investors and the rights, preferences and privileges of the preferred stock and the common stock, our financial condition and financial results during the relevant periods, and the status of strategic initiatives to increase the market acceptance of our service. These estimates involved a significant level of judgment.

        In December 2004, The Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Stock Based Payment, (SFAS 123R), which replaced SFAS 123, and supersedes APB 25. SFAS 123R 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 123R requires that an entity measure the fair value of equity based

46



service awards at the grant date 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).

        We adopted SFAS 123R on January 1, 2006 using the modified prospective method which requires that all new stock based awards granted subsequent to December 31, 2005 be recognized in the financial statements at fair value. The impact of recognizing stock based awards was dependent upon the level of stock based awards issued, the market price which was determined by our board of directors with the assistance of management and other judgmental assumptions used such as forfeiture rates.

        The per share weighted average fair value of the options granted during 2006 was estimated at $0.44 on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions, which are based on company history or industry comparative information:

        Since our stock is not publicly traded, the expected volatility was calculated for each date of grant based on an alternative method. We identified similar public entities for which share price information is available and have considered the historical volatility of these entities' share price in estimated expected volatility.

        The estimated fair value of our common stock utilized the probability weighted expected returns ("PWER") method described in the AICPA Technical Practice Aid, Valuation of Privately-Held-Company Securities Issued as Compensation ("Practice Aid"). Under the PWER method, the value of our common stock was estimated based upon an analysis of future values for us assuming various future outcomes. In our situation, the future outcomes included three alternatives: (1) we become a public company ("public company" alternative), (2) we are acquired ("M&A" alternative) and (3) we remain a private company ("remains private" alternative). We used a low probability assumption for the public company alternative for our grants from July 2006 to early January 2007, and this percentage increased after we signed an agreement to acquire PDSHeart, Inc. and as discussions with our investment bankers increased as we prepared for the initial public offering process. An increase in the probability assessment for an initial public offering increased the value ascribed to our common stock. In general, the closer a company gets to an initial public offering, the higher the probability assessment weighting is for the "public company" alternative.

        Under the "public company" alternative, fair value per share of common stock was calculated using our expected pre-initial offering valuation and a risk-adjusted discount rate ranging from 25.5% to 27.5% based on the estimated timing of our potential initial public offering.

        In the "public company" alternative, our estimates of the pre-initial public offering valuation were based upon a combination of the income approach and the market approach. Under the income approach, our enterprise value was based on the discounted cash flow method or present value of our forecasted operating results. The assumptions underlying the estimates were consistent with the forecast used by our management. Under the market approach, our pre-initial public offering valuation was developed based on input supplied by our investment bankers and revenue and EBITDA multiples of comparable companies. We applied a weight of 50% to the income approach and 50% to the market approach. If different weights were applied to the income and market approach, the valuations would have been different.

        Under the "public company" alternative, the risk adjusted discount rate was based on the inherent risk of a hypothetical investment in our common stock. An appropriate rate of return required by a hypothetical investor was determined based on: (1) well established venture capital rates of return published in the Practice Aid and (2) our weighted average cost of capital. Based on this data we used a risk-adjusted discount rate of 27.5% for the 2006 valuation dates and lowered the rate to 25.5% for

47



the subsequent valuation dates based on the decreased risk of investing in our common stock as we continue to expand our business and ultimately reach profitability. If different discount rates had been used, the valuations would have been different.

        The "M&A" alternative assumes the same enterprise valuation as the "public company" alternative, i.e., we would be sold for the same value as the IPO transaction. Unlike the "public company" alternative where all of our preferred stock is assumed to convert to common stock, the preferred stock under the "M&A" alternative, with the exception of our Series A preferred, is not assumed to convert due to preferential participation rights. The preferred shareholders first receive their liquidation preferences, including accrued dividends. Thereafter, the residual is shared between the preferred shareholders and common shareholders on a pro rata basis. The common stock value is then discounted by the risk-adjusted discount rate ranging from 25.5% to 27.5% based on the estimated timing of an M&A transaction. If different discount rates had been used, the valuations would be different. We lowered the probability of an M&A transaction in our June 30, 2007 valuation due to the current liquidity issues being experienced in the debt markets.

        Determining the fair value of the common stock of a private enterprise requires complex and subjective judgments. As such, under the "remains private" alternative, our estimates of enterprise value were based upon the income approach. Under the income approach, our enterprise value was based on the discounted cash flow method or present value of our forecasted operating results. The assumptions underlying the estimates were consistent with the forecast used by our management. Similar to the "public company" and "M&A" alternatives, a risk adjusted discount rate ranging from 25.5% to 27.5% was used based on the inherent risk of an investment in our common stock. If different discount rates had been used, the valuations would have been different.

        The fair value of our common stock under the "remains private" alternative was determined by reducing the total estimated "remains private" enterprise value by the liquidation preferences held by our preferred stockholders including accrued dividends as well as a discount for the lack of marketability of 20% assuming we remained a private company. The discount for lack of marketability was analyzed in light of the many factors to be considered under Revenue Ruling 77-287. For our determination of an appropriate discount for a lack of marketability, we used a protective put option model that considers such variables as time to liquidity, volatility, and yield of the underlying stock and the risk free rate. Based on this analysis as well as the fact that our stock has certain restrictions, the 20% discount for lack of marketability was considered appropriate for our valuation. If a different discount for a lack of marketability was used, the valuations would have been different.

        Valuation models require the input of highly subjective assumptions. Prior to our initial public offering, our common stock had characteristics significantly different from that of publicly traded common stock. Because changes in the subjective input assumptions could have materially affected the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our common stock.

        The fair value of our common stock underlying 980,000 options granted to employees in October 2006 was determined to be $0.81 per share based on a contemporaneous valuation using the PWER method. The probability of the "public company" alternative was 20% in this valuation because our growth had stalled. The probability of the "M&A" alternative was 0%, as we had not initiated discussions regarding an M&A transaction. Prior to this valuation our board of directors, with the assistance of management, determined the valuation considering numerous objective and subjective factors in the assessment of fair value including the prices of our preferred stock sold to investors, the rights, preferences and privileges of the preferred and common stock, our financial condition and the financial results during the relevant periods, and the status of strategic initiatives to increase the market acceptance of our service. These estimates involved a significant level of judgment.

        The fair value of our common stock underlying 413,700 options granted to employees in February 2007 was determined to be $2.52 per share. As of February 16, 2007, we had entered into an agreement providing for our acquisition of PDSHeart contingent upon our ability to raise at least $80 million in a

48



financing transaction. The acquisition was expected to result in significantly higher revenues as well as a significant increase in our cash balance. We viewed the PDSHeart acquisition positively in terms of increasing the probability that we would be able to complete an initial public offering, in part because the acquisition was expected to give our product line and operations greater public exposure. We had also achieved a significant increase in revenue in the fourth quarter of 2006 and expected a further increase in the first quarter of 2007 due to planned geographic expansion and increased patient service revenues. Based on the foregoing, we held the probability of the "public offering" alternative at 20% and increased the probability of the "M&A" alternative to 10%, and the estimated fair value of our common stock was determined using the PWER method to be $2.52 per share.

        The fair value of our common stock underlying 1,338,000 options granted to employees on April 19, 2007 and May 31, 2007 was determined to be $3.05 per share. The increase in the fair value as compared to the October 2006 value was primarily due to the following:

        The intrinsic value of the options outstanding as of June 30, 2007 was $            based on the midpoint of the estimated initial public offering price range, of which $            related to vested options and $            related to unvested options.

Valuation of Goodwill and Other Intangible Assets

        On March 8, 2007, we acquired PDSHeart for an aggregate purchase price of $51.6 million. The $51.6 million purchase price was comprised of $44.3 million in cash at the closing, $5.2 million in assumed debt, $1.4 million of transaction expenses, and the assumption of a $0.7 million liability related to payments due to certain key employees of PDSHeart on March 8, 2008. Approximately $1.5 million of the assumed debt was satisfied through the issuance of 1,456 shares of our mandatorily redeemable convertible preferred stock at an original issue price per share of $1,000. In addition to the $51.6 million of consideration, the Company agreed to pay PDSHeart shareholders $5.0 million of contingent consideration in the event of a qualifying liquidation event, including a public offering or acquisition. The acquisition was accounted for as a purchase in accordance with SFAS No. 141, Business Combinations (SFAS 141). See Note 3 to our consolidated financial statements for additional information regarding the allocation of the purchase price we paid for PDSHeart.

        In accordance with SFAS 141, Business Combinations, we identify and value intangible assets that we acquire in business combinations, such as customer arrangements, customer relationships, trademarks and non-compete agreements, that arise from contractual or other legal rights or that are capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. Management is responsible for the valuation of the net assets acquired, and considered a number of factors including valuations and appraisals when estimating the fair market values and estimated useful lives of the acquired assets and liabilities. The fair value of identified intangible assets is based upon an estimate of the future economic benefits expected to result from ownership, which represents the amount at which the assets could be bought or sold in a current transaction between willing parties, that is other than a forced or liquidation sale.

        The three identifiable intangible assets included in the SFAS 141 analysis include trademarks and trade names, noncompetition agreements and noncontractual customer relationships. The trademarks and trade names were valued using a relief from royalty method. The noncompetition agreements were valued using a discounted earnings method. The noncontractual customer relationships were valued using an excess earnings method.

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        The relief from royalty method is based upon the premise that the recognition of intellectual assets by potential customers and competitors is a valuable asset to the owner. The premise behind the valuation of these assets is that a buyer would be willing to pay a royalty for the right to use an established asset. Accordingly, this method values an asset based on the relief from the royalty on that asset that a willing buyer would typically pay.

        The discounted earnings method is based upon converting expected earnings to present value. Annual estimates of earnings are projected for each year of a defined multiyear period. These estimates are then discounted to present value. If appropriate, the value of the expected earnings thereafter is calculated using an appropriate capitalization technique and then discounted. The present value of the expected earnings indicates the value of the subject asset.

        Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets including debt-free net working capital, tangible and intangible assets. The excess earnings are thereby calculated for each year of a multiyear projection period discounted to a present value. Accordingly, the primary components of this method consist of the determination of excess earnings and an appropriate rate of return.

        To arrive at the excess earnings attributable to an intangible asset, earnings after taxes derived from that asset are projected. Thereafter, the returns on contributory debt-free net working capital, tangible and intangible assets are deducted from the earnings projections. After deducting returns on these contributory assets, the remaining earnings are attributable to the subject asset. These remaining, or "excess," earnings are then discounted to a present value utilizing an appropriate discount rate for the subject asset.

        In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we intend to test our goodwill for impairment annually or more frequently if events or circumstances indicate impairment may exist. We plan to apply a two step fair value based test to assess goodwill for impairment. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit with the carrying amount of the reporting unit's goodwill. Any excess of the carrying value of the reporting unit's goodwill over the implied fair value of the reporting unit's goodwill will be recorded as an impairment loss.

        Management will make certain estimates and assumptions in order to determine the fair value of net assets and liabilities including but not limited to, an assessment of market conditions, projected cash flows, cost of capital and growth rates which could significantly impact the reporting value of goodwill. Estimating future cash flows require significant judgment and our projections may vary from cash flows eventually realized.

        We cannot predict the occurrence of future events that might adversely affect the reported value of goodwill. Such events include strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base or material negative changes in our relationships with material customers.

Statement of Operations Overview

        Our principal source of revenues is patient revenue from cardiac monitoring services. The amount of revenue generated is based on the number of patients enrolled through physician prescriptions and the rates reimbursed to us by commercial payors, physicians, patients and Medicare. Reimbursement rates are set by CMS on a case rate basis for the Medicare program and through negotiations with commercial payors who typically pay a daily monitoring rate. From 2002 through 2007, our average case rate for monitoring Medicare patients has remained relatively stable. We expect pricing to decline over time in a manner consistent with the introduction and penetration of a premium priced service, due to competition, introduction of new technologies and the potential addition of larger commercial payors. Since our CardioNet System services are relatively new and the reimbursement status is evolving, our

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revenues are subject to fluctuations due to increases or decreases in rates and decisions by payors regarding reimbursement.

        For the event, Holter and pacemaker monitoring market we expect the price to be flat or declining as the new generation technology gains wider acceptance in the market. In addition, the established 2007 Medicate rates compared to 2006 for our event monitoring services declined by 3% to 8%, depending on the type of service, and our Holter monitoring services declined 8%. Based on current proposed Medicare rates for 2008 through 2010, we expect this downward reimbursement trend to continue for these services.

        We believe the CardioNet System monitoring system revenues will increase as a percentage of revenues going forward as we emphasize this service, continue our geographic expansion and achieve greater market penetration in existing markets. We expect that the event, Holter and pacemaker monitoring services revenues will be flat or declining in absolute terms as the old technology is replaced and therefore decrease as a percentage of revenues going forward. Other revenue consists mainly of web hosting services provided to an affiliate of a stockholder. We believe that other revenues will be flat or declining in absolute terms and therefore decrease as a percentage of revenues going forward. Our revenues are seasonal, as the volume of prescriptions tends to slow down in the summer months due to the more limited use of our monitoring solutions as physicians and patients vacation.

        Gross profit consists of revenues less the cost of revenues which includes:

        Our gross profit margins have increased significantly from 24% in 2004 to 45% in 2005 to 63% in 2006. The major reasons for the growth in our gross profit margins from 2004 to 2006 are as follows:

        For the six months ended June 30, 2007, our gross profit margin was 66%. In general, we expect gross profit margins on the CardioNet System services to remain flat or increase, assuming no changes in reimbursement rates. For our event and Holter monitoring services, we expect gross profit margins to decrease as reimbursement rates decline as currently proposed by CMS.

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        Sales and marketing expense consists primarily of salaries, benefits and stock-based compensation related to account executives, marketing personnel and contracting personnel, account executive commissions, travel and other reimbursable expenses, and marketing programs such as trade shows and marketing campaigns.

        We did not expand geographically in 2005 or 2006 while awaiting the results of our randomized clinical trial. Our sales force had 20 account executives at year-end 2005 and 27 account executives at December 31 2006. Following the completion of our randomized clinical trial and the PDSHeart acquisition we made a significant investment in sales and marketing by increasing the number of account executives in new geographies. We had 77 account executives as of June 30, 2007 and expect to have 88 account executives by December 31, 2007. We currently have account executives covering 48 states. We also plan to increase our marketing activities. As a result, we expect that sales and marketing expenses will increase in absolute terms, but will decrease as a percentage of revenues going forward.

        Research and development expense consists primarily of salaries, benefits and stock-based compensation of personnel and the cost of subcontractors who work on the development of the hardware and software for our next generation monitors, enhance the hardware and software of our existing monitors and provide quality control and testing. The expenses related to the randomized clinical trial are also included in research and development expenses. We expect that research and development expenses will increase in absolute terms but decrease as a percentage of revenues going forward.

        General and administrative expense consists primarily of salaries, benefits and stock based compensation related to general and administrative personnel, professional fees primarily related to legal and audit fees, facilities expenses and the related overhead, and bad debt expense. We expect that general and administrative expenses will increase in absolute terms due to the significant planned investment in infrastructure to support our growth and the additional expenses related to becoming a publicly traded company, including the increased cost of compliance and increased audit fees resulting from the Sarbanes-Oxley Act. As a percentage of revenues, we expect general and administrative expenses to decrease as we grow.

        We have net deferred income tax assets totaling approximately $30.0 million at the end of 2006 consisting primarily of federal and state net operating loss and credit carryforwards. The federal and state net operating loss carryforwards, if unused, will begin to expire in 2010. The federal and state credit carryforwards, if unused, will expire in 2022. Due to uncertainty regarding the ultimate realization of these net operating loss and credit carryforwards and other deferred income tax assets, we have established a full valuation allowance for these assets and will recognize the benefits only as reassessment indicates the benefits are realizable.

        A competitor initiated a patent infringement lawsuit against us in November 2004, which we defended and ultimately settled in March 2006. Included in general and administrative expenses are legal expenses related to this lawsuit of $0.1 million in 2004, $1.2 million in 2005 and $0.6 million in 2006.

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Results of Operations

        Revenues.    Total revenues for the six months ended June 30, 2007 increased to $28.5 million from $16.1 million for the six months ended June 30, 2006, an increase of $12.4 million, or 76%. This increase of $12.4 million included an increase of $12.7 million in patient revenues, of which $7.2 million was from the event and Holter monitoring business and $5.5 million was from CardioNet System revenues. These increases in patient revenues were offset by a decrease of $0.3 million in special project revenues. Of the $5.5 million increase in CardioNet System revenues, $1.7 million was attributed to increased patient revenues from physicians within the geographies that we historically served, $1.3 million was due to geographic expansion and $2.5 million was due to the acquisition of the PDSHeart sales force. Special projects revenues decreased due to lower contractual rates.

        Cost of Revenues.    Cost of revenues for the six months ended June 30, 2007 were $9.7 million compared to $6.9 million for the six months ended June 30, 2006. This increase of $2.8 million, or 42%, is due to the acquisition of PDSHeart. Cost of sales was 34% of revenues in June 2007 versus 43% in June 2006. This decline is due mainly to the full period effect of our telephonic hook-up process in 2007, which was still in transition during the first 6 months of 2006.

        Gross Profit.    Gross profit increased to $18.8 million for the six months ended June 30, 2007, or 66% of revenues, from $9.3 million for the six months ended June 30, 2006, or 57% of revenues.

        Sales and Marketing Expense.    Sales and marketing expenses were $7.7 million for the six months ended June 30, 2007 compared to $3.0 million for the six months ended June 30, 2006. The increase of $4.7 million is due to increased costs from a larger sales force which is mainly a result of the PDSHeart acquisition and the introduction of a marketing campaign aimed at promoting our positive clinical trial results. As a percent of total revenues, sales and marketing expenses were 27% for the six months ended June 30, 2007 compared to 19% for the six months ended June 30, 2006.

        Research and Development Expense.    Research and development expenses remained flat at $2.0 million for the six months ended June 30, 2007 and for the six months ended June 30, 2006. As a percent of total revenues, research and development expenses declined to 7% for the six months ended June 30, 2007 compared to 12% for the six months ended June 30, 2006.

        General and Administrative Expense.    General and administrative expenses (including amortization) increased to $12.3 million for the six months ended June 30, 2007 from $7.5 million for the six months ended June 30, 2006. This increase of $4.8 million, or 64%, was primarily due to an increase in the provision for bad debt ($1.9 million), stock based compensation ($0.2 million), executive separation costs ($0.4 million) and amortization of intangible assets in connection with our acquisition of PDSHeart ($0.3 million). In addition $1.4 million of this increase was related to the PDSHeart general and administrative expenses. Our provision for bad debt increased from $1.9 million to $3.8 million, an increase of $1.9 million. Of this increase, $0.5 million related to provisions for bad debt related to revenues from our acquisition of PDSHeart. The remaining $1.4 million increase relates to an increase in CardioNet System revenue and additional provisions for uncollectible accounts. Our overall bad debt provision as a percent of patient revenue was 13.5% and 12.2% for the six months ended June 30, 2007 and 2006, respectively. As a percent of total revenues, general and administrative expenses declined to 43% for the six months ended June 30, 2007 compared to 46% for the six months ended June 30, 2006.

        Total Interest Expense, Net.    Interest expense, net decreased to $0.7 million for the six months ended June 30, 2007 from $1.2 million for the six months ended June 30, 2006. This net decrease is due to an increase in interest income received from the excess funds generated from our private placement in March 2007, offset by an increase in interest expense related to additional borrowings, including the value of additional warrants issued to debtholders.

        Income Taxes.    We had no income tax benefit or expense for the six months ended June 30, 2007 or for the six months ended June 30, 2006.

        Net Loss.    Net loss decreased to $3.9 million for the six months ended June 30, 2007 from $4.4 million for the six months ended June 30, 2006. As a percent of total revenues, net loss was 14% for the six months ended June 30, 2007 compared to 27% for the six months ended June 30, 2006.

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        Revenues.    Total revenues for 2006 increased to $33.9 million from $30.9 million in 2005, an increase of $3.0 million, or 10%. This increase of $3.0 million included an increase of $3.6 million in patient revenues offset by a decrease of $0.6 million in special project revenues. Patient revenues increased due to successful implementation of a new sales strategy and increased penetration in existing markets, which translated to an increase in the total patients serviced. Special project revenues decreased due to a change in the negotiated contract rate.

        Cost of Revenues.    Cost of revenues for 2006 were $12.7 million compared to $17.0 million in 2005. This decrease of $4.3 million, or 25%, is attributable to a shift in our patient hook-up model from in-home to telephonic, lower device transportation costs and cellular airtime costs following contract renegotiation, and a decrease in the number of employees providing services and customer support as we transitioned from in-home to telephonic hookups. We decreased headcount in our service operation responsible for monitoring patients, providing logistical and customer support and supporting product distribution from 155 people at year-end 2005 to 129 people at year-end 2006. As a percent of total revenues, cost of revenues decreased to 37% in 2006 compared to 55% in 2005.

        Gross Profit.    Gross profit increased to $21.2 million in 2006, or 63% of revenues, from $14.0 million in 2005, or 45% of revenues.

        Sales and Marketing Expense.    Sales and marketing expenses were $6.4 million in 2006 compared to $6.5 million in 2005. Expenses remained relatively flat since we did not expand the sales force in 2006 as we awaited completion of the randomized clinical trial. As a percent of total revenues, sales and marketing expenses decreased to 19% in 2006 compared to 21% in 2005.

        Research and Development Expense.    Research and development expenses increased to $3.6 million in 2006 from $3.4 million in 2005. This increase of $0.2 million, or 7%, was due to continued development of the third generation device, C3. As a percent of total revenues, research and development expenses remained consistent at 11% in 2006 and 2005.

        General and Administrative Expense.    General and administrative expenses increased to $15.6 million in 2006 from $13.9 million in 2005. This increase of $1.7 million, or 12%, was primarily due to relocation expenses, consulting services related to reimbursement and increased provision for bad debt. Headcount was held relatively flat in 2006 versus 2005. As a percent of total revenues, general and administrative expenses increased to 46% in 2006 compared to 45% in 2005.

        Total Interest Expense, Net.    Interest expense, net increased to $3.1 million in 2006 from $1.8 million in 2005. This increase of $1.3 million was due to an increase in borrowings in order to fund our operations of $0.8 million and increased accretion in debt discount of $0.6 million.

        Income Taxes.    We had no income tax benefit or expense for the years ended December 31, 2006 or 2005. As of December 31, 2006 and 2005, we had net deferred income tax assets totaling approximately $30.0 and $27.5 million, respectively, consisting primarily of federal and state net operating loss carryforwards.

        Net Loss.    Net loss decreased to $7.6 million in 2006 from $11.5 million in 2005. As a percent of total revenues, net loss was 23% in 2006 compared to 37% in 2005.

        Revenues.    Total revenues for 2005 increased to $30.9 million from $22.2 million in 2004, an increase of $8.7 million, or 39%. This increase of $8.7 million included an increase of $8.5 million in patient revenues and a $0.2 million increase in special project revenues. Patient revenues increased due to a 33% increase in patient enrollment with no geographic expansion. Special project revenues remained relatively flat due to negotiated contract pricing.

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        Cost of Revenues.    Cost of revenues for both 2005 and 2004 were $17.0 million. Expenses remained flat as increasing monitoring expenses were offset by decreases in patient service delivery as we began to implement the switch from in-home to telephonic hook-ups. We had 155 people in our service operation at December 31, 2005 monitoring patients, providing logistical and customer support and supporting product distribution compared to 162 people at December 31, 2004. As a percent of total revenues, cost of revenues decreased to 55% in 2005 compared to 76% in 2004.

        Gross Profit.    Gross profit increased to $14.0 million in 2005, or 45% of revenues, from $5.3 million in 2004, or 24% of revenues.

        Sales and Marketing Expense.    Sales and marketing expenses were $6.5 million in 2005 compared to $7.7 million in 2004. This decrease of $1.2 million, or 16%, was due to restructuring activities which reduced sales and marketing personnel by 27%. This reduction of headcount was achieved in markets which had limited reimbursement and were not providing a sufficient level of business. As a percent of total revenues, sales and marketing expenses decreased to 21% in 2005 compared to 35% in 2004.

        Research and Development Expense.    Research and development expenses increased to $3.4 million in 2005 from $2.4 million in 2004. This increase of $1.0 million, or 40%, was due to the development expenses related to our C3 device. As a percent of total revenues, research and development expenses were 11% in both 2005 and 2004.

        General and Administrative Expense.    General and administrative expenses decreased to $13.9 million in 2005 from $15.3 million in 2004. This decrease of $1.4 million, or 9%, was primarily due to restructuring activities which reduced support personnel by 19%. As a percent of total revenues, general and administrative expenses decreased from 45% in 2005 compared to 69% in 2004.

        Total Interest Expense, Net.    Interest expense, net increased to $1.8 million in 2005 from $0.8 million in 2004. Of the increase of $1.0 million, $0.6 million was due to an increase in our borrowings to fund our operations and $0.3 million from increased accretion in debt discount.

        Income Taxes.    We had no income tax benefit or expense for the years ended December 31, 2006 or 2005. As of December 31, 2005 and 2004, we had net deferred income tax assets totaling approximately $27.5 million and $22.2 million, respectively consisting primarily of federal and state net operating loss carryforwards.

        Net loss.    Net loss decreased to $11.5 million in 2005 as compared to $20.9 million in 2004. As a percent of total revenues, net loss was 37% in 2005 compared to 94% in 2004.

Liquidity and Capital Resources

        From our inception in 1999 through June 30, 2007, we did not generate sufficient cash flows to fund our operations and the growth in our business. As a result, our operations have been financed primarily through the private placement of equity securities and both long-term and short term debt financings. Through June 30, 2007, we funded our business primarily through the following:

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        On July 3, 2006, we entered into a loan and security agreement with Silicon Valley Bank that provides us with a revolving line of credit and a term loan. The revolving line of credit is available in an amount up to $2.0 million less the amount of any letters of credit issued by Silicon Valley Bank on our behalf. We may receive advances under the revolving line of credit through July 1, 2008, which is the maturity date of the line of credit. Any amounts we borrow under the revolving line of credit may be repaid and reborrowed by us at any time until the maturity date. At the maturity date, all principal and interest accrued under the revolving line of credit shall become due and payable. The interest rate on amounts outstanding pursuant to the revolving line of credit is equal to Silicon Valley Bank's prime rate plus 0.5%. As of December 31, 2006, the amount outstanding pursuant to the revolving line of credit was approximately $1.9 million. As of June 30, 2007, no amounts were outstanding pursuant to the revolving line of credit.

        Pursuant to the term loan we were permitted to make a one-time draw down of $3.0 million on July 3, 2006. We are required to repay the term loan in 36 equal installments of principal, plus monthly payments of accrued interest. The interest rate became fixed at the time we drew down the term loan and is equal to 8.63%. As of December 31, 2006, the amount outstanding pursuant to the term loan was approximately $3.0 million. We intend to repay in full this term loan with the proceeds of this offering.

        Our financing arrangements with Silicon Valley Bank are secured by substantially all of our assets and require us to adhere to various financial covenants, including minimum tangible net worth and minimum liquidity. As of June 30, 2006, we were in compliance with such covenants.

        Our financing arrangements with Silicon Valley Bank are subject to events of default, including if a material adverse change occurs in our financial condition, if there is a material impairment of the prospect of repayment of any portion of the indebtedness or if Silicon Valley Bank determines, based upon information available to it and in its reasonable judgement, that there is a reasonable likelihood that we will fail to comply with one or more of the financial covenants. If an event of default occurs, all amounts due under the term loan agreement, at Silicon Valley Bank's option, would become due and payable.

        As of June 30, 2007, our principal sources of liquidity were cash totaling $50.3 million and net accounts receivable of $16.8 million.

        Net cash (used in) provided by operating activities during the six months ended June 30, 2007 and the years ended December 31, 2006, 2005 and 2004 was $0.2 million, $(2.9) million, $(5.5) million and $(15.3) million, respectively. For the year ended December 31, 2006, cash was provided by operations primarily by:


        These cash uses were partially offset by:

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        For the six months ended June 30, 2007, cash was provided by operations primarily by:

        The cash provided was partially offset by:

        Net cash used in investing activities during the six months ended June 30, 2007 and the years ended December 30, 2006, 2005 and 2004 was $50.5 million, $0.9 million, $0.6 million and $9.4 million, respectively. For the year ended December 31, 2006, cash was used in investing activities primarily by:

        For the six months ended June 30, 2007, cash was used in investing activities primarily by:

        Net cash provided by financing activities during the six months ended June 30, 2007, and the years ended December 30, 2006, 2005 and 2004 was $96.7 million, $5.0 million, $3.2 million and $20.3 million, respectively. For the year ended December 31, 2006, cash was provided by financing activities primarily by:

        For the six months ended June 30, 2007, cash was provided by financing activities primarily by:

        In the short term, we anticipate that we will continue to experience losses from operations. However, we believe that the net proceeds from this offering, together with our existing cash and cash equivalent balances and revenues from our operations, will be sufficient to meet our anticipated cash requirements for the foreseeable future.

        Our future funding requirements will depend on many factors, including:

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        To the extent that we raise additional capital by issuing equity securities, our stockholders' ownership will be diluted. In addition, if we determine that we need to raise additional capital, such capital may not be available on reasonable terms, or at all. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring additional debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Contractual Obligations and Commitments

        The following table describes our long-term contractual obligations and commitments as of December 31, 2006:

 
  Payments due by period
Contractual obligations

  Total
  2007
  2008
  2009
  2010
  2011
  Beyond
 
   
   
  (in thousands)

   
   
   
Interest and principal payable under loan agreements   $ 29,031   $ 26,146   $ 1,187   $ 1,098   $ 600   $   $
Operating lease obligations     9,823     1,259     1,825     1,577     1,594     1,437     2,131
Capital lease obligations     210     56     52     52     50        
   
 
 
 
 
 
 
Total   $ 39,064   $ 27,461   $ 3,064   $ 2,727   $ 2,244   $ 1,437   $ 2,131
   
 
 
 
 
 
 

        In connection with our acquisition of PDSHeart, we assumed the obligations under three facility leases which are included in the table above. In addition, in connection with our acquisition of PDSHeart, we agreed to pay PDSHeart shareholders $5.0 million of contingent consideration in the event of a qualifying liquidation event, including a public offering or acquistion. Due to the contingent nature of this payment, no liability has been recorded in the Company's financial statements as of June 30, 2007.

        From time to time we may enter into contracts or purchase orders with third parties under which we may be required to make payments. Our payment obligations under certain agreements will depend on, among other things, the progress of our development programs. Therefore, we are unable at this time to estimate with certainty the future costs we will incur under these agreements or purchase orders.

Recent Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to other

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accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the requirements of SFAS 157; however, we do not believe that its adoption will have a material effect on our consolidated financial statements.

        In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which prescribes detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective January 1, 2007 for the Company, and the provisions of FIN 48 will be applied to all tax positions accounted for under Statement No. 109 upon initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company does not expect FIN 48 to have a material impact on its financial statements.

        In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose fair value measurement for many financial instruments and certain other items as of specified election dates. Business entities will thereafter report in earnings the unrealized gains and losses on items for which the fair value option has been chosen. The fair value option may be applied instrument by instrument but may not be applied to portions of instruments and is irrevocable unless a new elections date occurs. SFAS 159 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the potential impact of adoption of SFAS 159, but does not expect that it will have a material effect on the consolidated financial statements.

Off-Balance Sheet Arrangements

        As of June 30, 2007 and as of December 31, 2006, 2005 and 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Related Party Transactions

        For a description of our related party transactions, see the "Related Party Transactions" section of this prospectus.

Quantitative and Qualitative Disclosures about Market Risk

        The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective our investment policy allows us to maintain a portfolio of cash equivalents and short term investments in a variety of securities including money market funds and corporate debt securities. Due to the short term nature of our investments, we believe we have no material exposure to interest rate risk.

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BUSINESS

Overview

        We are the leading provider of ambulatory, continuous, real-time outpatient management solutions for monitoring relevant and timely clinical information regarding an individual's health. We have raised over $200 million of capital and spent seven years developing a proprietary integrated patient monitoring platform that incorporates a wireless data transmission network, internally developed software, FDA-cleared algorithms and medical devices, and a 24-hour digital monitoring service center. Our initial efforts are focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders, with a solution that we market as the CardioNet System.

        We believe that the CardioNet System's continuous, heartbeat-by-heartbeat monitoring is a fundamental advancement in arrhythmia monitoring, with the potential to transform an industry that has historically relied on memory-constrained, intermittent digital or tape recorders, such as event monitors and Holter monitors. Existing technologies have one or more drawbacks including failure to provide real-time data, memory constraints, frequent inaccurate diagnoses and an inability to monitor patient compliance and interaction. We believe these drawbacks lead to suboptimal diagnostic yields, adversely impacting clinical outcomes and health care costs. In a recently completed randomized clinical trial, the CardioNet System detected clinically significant arrhythmias nearly three times as often as traditional loop event monitors in patients who had previously experienced negative or inconclusive Holter monitoring.

        The CardioNet System incorporates a lightweight patient-worn sensor attached to electrodes that capture two-lead electrocardiogram, or ECG, data measuring electrical activity of the heart and communicates wirelessly with a compact, handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat information from the sensor on a real-time basis by applying proprietary algorithms designed to detect arrhythmias. When the monitor detects an arrhythmic event, it automatically transmits the ECG to the CardioNet Monitoring Center, even in the absence of symptoms noticed by the patient and without patient involvement. At the CardioNet Monitoring Center, which operates 24 hours a day and 7 days per week, experienced certified cardiac monitoring specialists analyze the sent data, respond to urgent events and report results in the manner prescribed by the physician. The CardioNet System currently stores 96 hours of ECG data, in contrast to 10 minutes for a typical event monitor. We are in the process of upgrading our monitors to provide expanded storage of 21 days of ECG data. The CardioNet System employs two-way wireless communications, enabling continuous transmission of patient data to the CardioNet Monitoring Center and permitting physicians to remotely adjust monitoring parameters and request previous ECG data from the memory stored in the monitor.

        Since our commercial introduction of the CardioNet System in January 2003, physicians have enrolled over 80,000 patients in the CardioNet System. Through the end of 2006, we marketed our solution in select territories, principally in 23 states in the Mid-Atlantic, Northeast and Midwest. In addition, we have achieved reimbursement at payment levels that we believe reflects the clinical efficacy of the CardioNet System relative to existing technologies. We have secured direct contracts with 154 commercial payors, which, combined with Medicare, represent more than 154 million covered lives as of June 30, 2007.

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        We believe that our integrated patient monitoring platform can be utilized for future applications in multiple markets beyond arrhythmia monitoring. We believe that we have growth opportunities in clinical trial monitoring, where we have developed additional FDA-cleared algorithms for specific cardiac data required in clinical trials, and in comprehensive disease management for congestive heart failure, diabetes and other diseases. We believe that our technology could also be used to create "instant telemetry beds" in hospitals, particularly in rural hospitals, step-down units or skilled nursing facilities to help cope with acute nursing shortages by reducing the number of nurses needed to oversee ECG monitoring. In addition, the significant capital equipment costs associated with in-facility based ECG telemetry could be avoided through the use of the CardioNet System.

Industry Overview

        An arrhythmia is categorized as a temporary or sustained abnormal heart rhythm that is caused by a disturbance in the electrical signals in the chambers of the heart. Proper transmission of electrical signals to the heart is necessary to ensure effective heart function. There are two main categories of arrhythmia: tachycardia, meaning too fast a heartbeat, and bradycardia, meaning too slow a heartbeat.

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        Arrhythmias affect more than four million people in the United States. According to the American Heart Association, arrhythmias result in more than 780,000 hospitalizations and contribute to approximately 480,000 deaths each year. A number of factors can contribute to arrhythmias including cardiovascular disease, high blood pressure, diabetes, smoking, excessive consumption of alcohol or caffeine, illicit drug abuse or stress. An arrhythmia may be a symptom of serious cardiovascular disease and, if left undiagnosed and untreated, can lead to stroke, other serious complications or even death. Examples of arrhythmias and their consequences include:

        The ability to diagnose or rule out an arrhythmia as a symptom of a cardiac condition is important both to treat those patients with serious cardiovascular diseases as well as to identify those patients that may not require further medical attention.

        Arrhythmias may be diagnosed either in a physician's office or other health care facility or remotely by monitoring a patient's heart rhythm. Typically, physicians will initially administer a resting ECG that monitors the electrical impulses in a patient's heart. If a physician determines that a patient needs to be monitored for a longer period of time to produce a diagnosis, the physician will typically prescribe an ambulatory cardiac monitoring device, such as a Holter monitor or an event monitor.

        Some physicians own their own ambulatory cardiac monitoring devices and provide ambulatory monitoring services directly to their patients, while other physicians outsource the services to third party providers. In the wake of increasing legal and compliance requirements surrounding ambulatory cardiac monitoring, including a 2003 Medicare decision requiring 24 hour per day monitoring stations, the increasing trend is for physicians and hospitals to outsource their monitoring needs to independent providers.

        If either the Holter monitor or event monitor are negative or inconclusive and the physician still suspects an arrhythmia as the cause of the symptom, the physician may decide to prescribe additional, more expensive testing or hospitalize the patient in a telemetry unit (continuously attended ECG monitoring). In-hospital telemetry is expensive and therefore is only utilized selectively and for short time periods, and the monitored data is often not reflective of real-life cardiac activity.

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        A Holter monitor is an ambulatory cardiac monitoring device, first used in 1961, that is generally worn by a patient for a one or, in rare instances, two day period in order to record continuous ECG data. After the one or two day period, the magnetic or digital storage, or other medium containing the data recorded by this device, is delivered by hand, mail or internet for processing and analysis by the physician or a third party service provider. Despite the advent of newer technologies, Holter monitoring continues to be used today for patients whose suspected arrhythmia is believed to occur many times during the course of a day, in which case a Holter is often effective or adequate. However, for a patient that has an unpredictable or intermittent arrhythmia, a Holter may not provide clinically useful information due to the insufficient duration of the monitoring period. In addition, as a result of the typical one to three day reporting delay and the lack of real-time physician notification, patients may not receive timely diagnosis of their condition. Any artifact, or noise, in the data will not be discovered until the test is analyzed. A 2005 Frost & Sullivan study reported that Holters have been found to be effective in diagnosing arrhythmias only 10% of the time.

        Beginning in the 1980s, a new category of ambulatory cardiac monitoring devices called event monitors emerged, with the most common type referred to as manual-trigger loop event monitors. An event monitor records several minutes of ECG activity at a time and then begins overwriting the memory, a process referred to as memory loop recording. When a patient feels the symptoms of an event, he or she pushes a button to activate the recording, which typically freezes 45 seconds of ECG data before symptom onset and records 15 seconds live following the symptom. Event monitors have limited memory, usually less than 10 minutes, and can generally store data concerning between one and six cardiac events. The patient must transmit the event data to the monitoring center, typically by phone, and then erase the memory. To the extent that the patient does not call in and transmit data concerning an event, the device will become unable to store future event data once the device event storage is full.

        Event monitors offer certain advantages over Holters given that they are worn over a period of up to 30 days, instead of the one to two day Holter period. However, event monitors have significant shortcomings. Manual-trigger loop event monitors capture only cardiac events associated with symptoms detectable by the patient and not asymptomatic cardiac events. In our experience, only 15% to 20% of clinically significant cardiac events are symptomatic, meaning that the patient can feel them as they occur. Other drawbacks of manual-trigger loop event monitors include the limited data storage, the lack of trend data, and poor patient compliance relating to the requirement that the patient must both trigger and transmit events.

        A newer version of event monitoring devices was introduced in 1999 called the auto-detect loop event monitor. The auto-detect loop event monitor also records using a very short memory loop and event storage capability, capturing several minutes of heart activity at a time before starting over, but incorporates basic algorithms that look at fast, slow or irregular heart rates and, in some instances, pauses to automatically detect certain asymptomatic arrhythmias. Similar to manual-trigger loop event monitors, the auto-detect loop event monitor requires the patient to call in and transmit the event by reaching the physician or a technician at a physician's office or a monitoring center and holding the cardiac event monitor up to a telephone to transmit the event data. The latest development in auto-detect loop event monitoring, not yet widely adopted by physicians, is referred to as auto-detect/auto-send. Auto-detect/auto-send loop event monitors have the ability to send captured event data to a monitoring center via cell phone, instead of requiring patients to manually transmit event data. Patients do not have the ability to correlate symptoms to the event via the monitor and are required to carry a diary and make contact with the monitoring center to report symptoms. We believe the algorithms in these monitors were not subject to the same level of FDA scrutiny prior to marketing as the CardioNet

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System algorithm and therefore have not received the same FDA clearance. These monitors still continue to suffer from limited data storage and limited algorithm capabilities. To our knowledge, randomized prospective peer reviewed clinical trials have not yet been conducted to demonstrate any improvement in diagnostic yield between the standard loop monitors and the newer auto-trigger or auto-trigger/auto-send monitors.

        Despite major advances in cardiology with new therapeutic drugs, such as beta blockers and statins, and new therapeutic devices and procedures over the last several decades, there have been few advances in ambulatory monitoring. We believe that there is a significant opportunity for new arrhythmia monitoring solutions that exploit the convergence of wireless, low power microelectronic and software technologies to address the shortcomings of traditional Holter and event monitors. Existing technologies have one or more drawbacks including inability to detect asymptomatic events, failure to provide real-time data, memory constraints, frequent inaccurate diagnoses and an inability to monitor patient compliance and interaction. These drawbacks often lead to suboptimal diagnostic yields, adversely impacting clinical outcomes and health care costs.

Our Solution

        We have developed an ambulatory, continuous and real-time arrhythmia monitoring solution that we believe represents a significant advancement over event and Holter monitoring. The CardioNet System incorporates a patient-worn sensor attached to leads that captures ECG data and communicates wirelessly with a compact monitor that analyzes incoming information by applying proprietary algorithms designed to detect arrhythmias and eliminate data noise. When the monitor detects an arrhythmic event, it automatically transmits the ECG data to the CardioNet Monitoring Center, where experienced certified cardiac monitoring specialists analyze the sent data, respond to urgent events and report results in the manner prescribed by the physician. The CardioNet System, on average, is worn by the patient for a period of approximately 14 days.

        The CardioNet System results in a high diagnostic yield of clinically significant arrhythmias, allowing for real-time detection and analysis as well as timely intervention and treatment. In a recently completed randomized 300-patient clinical study, the CardioNet System detected clinically significant arrhythmias nearly three times as often as traditional loop event monitors in patients who have previously experienced negative or nondiagnostic Holter monitoring.

        We believe that the CardioNet System offers the following advantages to physicians, payors and patients:

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        Following our acquisition of PDSHeart, we also offer traditional event and Holter monitoring services, positioning us as a "one stop shop" for arrhythmia monitoring solutions. We provide cardiologists and electrophysiologists who prefer to use a single source of arrhythmia monitoring solutions with a full spectrum of those solutions, ranging from our differentiated CardioNet System to traditional event and Holter monitoring.

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Our Business Strategy

        Our goal is to maintain our position as the leading provider of ambulatory, continuous and real-time outpatient monitoring services by establishing our proprietary integrated technology and service offering as the standard of care for multiple health care markets. The key elements of the business strategy by which we intend to achieve these goals include:

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Monitoring with the CardioNet System

        A physician prescribing the CardioNet System for his patient completes an enrollment form that describes the length of time during which the patient should be monitored, together with patient-specific monitoring thresholds and response parameters. Once the patient has been enrolled, a CardioNet representative contacts the patient to coordinate delivery and schedule a telephonic patient-education session on the use of the CardioNet System. Prior to January 2006, our standard practice was to provide in-home patient education and service initiation. By transitioning to telephonic patient education, which now accounts for approximately 91% of new patient starts, we were able to substantially lower our cost of sales, contributing to an improvement in gross profit margins from 55% for the three months ended December 2005 to 69% in the comparable period in 2006.

        A lightweight sensor (worn as a pendant or on a belt clip) attached to leads records two channels of ECG. The sensor constantly communicates wirelessly with the monitor, a compact handheld unit which can be tucked into a pocket or purse. The monitor analyzes incoming information from the sensor on a real-time basis by applying proprietary algorithms designed to detect arrhythmias.

        When the monitor detects an arrhythmic event (defined by the values prescribed by the patient's physician), it transmits the ECG to the CardioNet Monitoring Center, even in the absence of symptoms noticed by the patient and without patient interaction. When patients experience a symptom, they select their symptom and the contemporaneous activity level through the monitor's touch-screen. Once completed, the monitor automatically transmits the event to the CardioNet monitoring center for review. When at home, the patient can place the monitor in a base station, which allows recharging and enables automated data transmission through the standard telephone line in the patient's home. Historically, our monitors stored 96 hours of ECG data. We are upgrading our monitor inventory to enable 21 days of ECG data storage.

        The monitor allows two-way wireless communications, enabling the CardioNet Monitoring Center to adjust device parameters, "check in" on the patient and pull previous ECG data, over standard telephone lines and through cellular coverage. The current monitor allows for text messaging and our plans are that future monitors will also have voice capabilities. Other ambulatory devices on the market, such as most event monitors, only support one-way transmissions.

        At the CardioNet Monitoring Center, an Independent Diagnostic Testing Facility certified by Medicare, experienced certified cardiac monitoring specialists analyze the sent data, respond to urgent events, and report results in the manner prescribed by the physician and monitor patient compliance. The CardioNet Monitoring Center is a Medicare-certified Independent Diagnostic Testing Facility which operates 24 hours a day, 7 days per week. The data transmission is accomplished through (i) a

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wireless cell phone modem in the monitor or (ii) through the telephone line modem in the base station.

        When prescribing the CardioNet System, the physician selects the events to be monitored and the level and timing of response by the CardioNet Monitoring Center — from routine daily reporting to urgent "stat" reports. Physicians can review the data in the media they prefer — fax or internet. Reports have been designed to allow rapid review of results, graphing related data and trends. The following is a summary of the types of reports we provide:

Other Arrhythmia Monitoring Services

        In addition to the CardioNet System, we also offer Holter and event monitoring services that are marketed and serviced by PDSHeart.

        The Holter monitor is a small portable ECG recorder designed to record a continuous ECG signal for one to, in rare instances, two days. The Holter monitor has five to seven leads that are attached to electrodes, which are typically placed on the patient in the physician's office. Patients are instructed to wear the monitor continuously while they go about normal daily routine, including sleeping. During the monitoring period, the Holter monitor stores an image of the electrical impulses of every heartbeat or irregularity in either digital format on an internal compact flashcard or in analog format on a standard cassette tape located inside the monitor. Approximately 13% of our Holters are analog tape and the remaining 87% use digital flashcard technology. At the conclusion of the monitoring period, the patient returns to the physician office to have the monitor disconnect. After the patient returns home, the

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stored data is mailed or sent electronically through a secure web transfer to our Holter lab where our trained cardiac technicians analyze the data, generate a report of the findings and return the results back to the physician in less than 24 hours. The physician then interprets the results and determines the next step for the patient. Our Holter lab is distinct from the CardioNet Monitoring Center which is used for the CardioNet System. We estimate that PDSHeart provided Holter monitoring services to approximately 42,000 patients in 2006.

        The event monitor is a small portable ECG recorder about the size of a pager designed to record and store up to 540 seconds of ECG signal. Event monitors are placed on the patient in the physician's office and worn typically for 30 days. Our event monitoring services provides physicians with the flexibility to prescribe both memory loop event monitors and non-loop event monitors. In 2006, approximately 85% of our event monitors prescribed by physicians were memory loop event monitors and the remaining 15% prescribed were non-loop event monitors. The memory loop event monitor has two to four leads that are attached to electrodes, which are placed on the patient's chest. The memory loop event monitor continuously records and stores the previous 60 seconds of ECG signal in internal loop memory. When a patient becomes symptomatic, he or she activates the monitor by pressing the record button which stores the 60 seconds of existing loop memory and an additional 30 seconds of ECG signal following patient activation. The stored data is considered one cardiac event and provides physicians a snapshot of the ECG signal recorded immediately before and during a patient's symptoms. Some of our memory loop event monitors have an internal algorithm that can automatically activate the monitor based on rate thresholds and irregular rhythms. Our non-loop event monitors are kept with the patient at all times. When a patient experiences symptoms, our non-loop event monitors will typically record and store 30 seconds of ECG signal immediately following activation and placement in direct contact with the patient's chest. Our event monitors have a capacity to store one to six cardiac events before the patient must transmit the data telephonically to one of three event monitoring centers where our trained cardiac technicians analyze the data, generate a report of the findings and return the results back to the physician in less than 24 hours. The physician then interprets the results and determines the next step for the patient. Once transmitted, the internal memory in the monitor is erased and the patient can resume activating the monitor to record further cardiac events. Our three event monitoring centers are distinct from the CardioNet Monitoring Center which is used for the CardioNet System. We estimate that PDSHeart provided event monitoring service to approximately 76,000 patients in 2006.

        Following the implantation of a pacemaker, certain physicians refer patients to us for periodic monitoring and evaluation of the device based on a pre-determined frequency set by the referring physician. The patient is provided a transmitter device that we use to telephonically transmit data that we use to monitor the life and function of the pacemakers. For the year ended December 31, 2006, PDSHeart preformed approximately 26,000 pacemaker tests.

CardioNet Patient Monitoring Platform

        The CardioNet System is a patient monitoring platform that we believe can be leveraged for applications in multiple markets. We designed the CardioNet System to connect sensors and analysis devices on the patient's body (which could include ECG, weight, blood pressure, glucose and others) to a monitoring center through the use of a wireless data transmission network. Our advanced technology allows the patient system to be housed in a small, portable, non-invasive package that requires limited patient involvement and compliance. The extended monitoring period and portability of the CardioNet

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System enables the capture and analysis of real-life patient activity through sophisticated patient information management systems and the transmission of such data.

        We have made a significant investment in infrastructure and technology over a six year period. We have raised over $200 million in capital and spent seven years developing and deploying a proprietary integrated patient monitoring platform that incorporates a wireless data transmission network, internally developed software, FDA-cleared algorithms and medical devices, and a 24-hour digital monitoring service center. Our investment includes designing and implementing an integrated technology and service network, establishing a sophisticated data services architecture in conjunction with our data partner QUALCOMM, creating a dedicated central monitoring service center, and internally developing advanced algorithms which sense, analyze and process data.

        We have been marketing our second generation CardioNet System, referred to as C2, since 2004. We have developed a third generation system called C3 which features several technology enhancements including:

        The cost of manufacturing C3 will be approximately 34% less than the cost of manufacturing the older generation device. We received FDA 510(k) clearance for the C3 system, including the new algorithm, and expect to begin commercializing the C3 system in the second half of 2007 to replace our existing inventory of our C2 systems. In addition, we are in the process of upgrading our inventory of C2 systems in order to increase their memory storage from 96 hours of ECG data to 21 days of ECG data.

        The CardioNet System makes use of multiple communication networks to transmit ECG data to the technicians in the CardioNet Monitoring Center in real time. When an event meeting pre-prescribed physician notification criteria is detected by our monitor, the monitor transmits data to the CardioNet Monitoring Center over a telephone line if the monitor is in its base, or wirelessly over a cellular data network if the monitor is being used outside the base. Pursuant to our agreement, all data is sent from the monitor directly to QUALCOMM. QUALCOMM has both a primary and backup data center for high availability. QUALCOMM immediately forwards the transmission to our CardioNet Monitoring Center. The CardioNet Monitoring Center is equipped with primary and backup data centers that are fully integrated with QUALCOMM's primary and backup datacenters so that data can be easily routed through a number of paths in the event of an emergency. When data is received by the CardioNet Monitoring Center, it is processed by our technicians in order of severity and time received. Our agreement with QUALCOMM expires in September 2010 and automatically renews for successive periods for one year each, unless terminated by either party with at least 90 days advance notice to the other party. Pursuant to the agreement, we are required to indemnify QUALCOMM for all claims resulting from the provision of our services.

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        We have developed a proprietary software platform which is at the core of the CardioNet System. In the last six years, we have had more than 25 major software releases. Key software includes:

Sales and Marketing

        We market our arrhythmia monitoring solutions, including the CardioNet System, primarily to cardiologists and electrophysiologists, who are the physician specialists who most commonly diagnose and manage patients with arrhythmias. We have grown our sales force from 27 account executives at December 31, 2006 to 77 account executives as of June 30, 2007, principally as a result of our acquisition of PDSHeart. In 2006, we derived approximately 75% of our revenues from sales of our CardioNet System in the Northeast states, while PDSHeart derived approximately 80% of its revenues in states outside the Northeast. Today, we market our arrhythmia monitoring solutions in 48 states.

        We attend trade shows and medical conferences such as the Heart Rhythm Society, American College of Cardiology, American Heart Association, Syncope Symposium, and the annual Atrial Fibrillation Conference in Boston to promote the CardioNet System and to meet medical professionals with an interest in performing research and reporting their results in peer-reviewed medical journals and at major medical conferences. We also sponsor peer-to-peer educational opportunities and participate in targeted public relations opportunities. In 2007, we launched a new campaign for our CardioNet System entitled "Without Peer" aimed at building brand awareness and customer preference

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over other monitoring solutions. The "Without Peer" campaign reflects our belief that the CardioNet System is superior to other arrhythmia monitoring solutions.

Reimbursement

        Arrhythmia monitoring with the CardioNet System involves two different types of reimbursement — technical services and professional services.

        We recently completed a 300-patient randomized clinical trial that found that the CardioNet System provided a significantly higher diagnostic yield compared to traditional loop event monitoring, including technology incorporating a feature designed to automatically detect certain arrhythmias. We are using the clinical evidence from this trial to attempt to secure contracts with 21 additional commercial payors, representing 95 million covered lives, who had previously required proof of product superiority evidenced by a published randomized clinical trial. Since publication of the trial, we have secured contracts with three of these 21 payors, representing over 11 million covered lives. Several of

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the remaining payors have indicated that they do not believe that the data from the clinical trial is sufficient. We continue to work with these and other payors to secure reimbursement contracts.

        The following charts demonstrates the growth in payors who covered the CardioNet System on a quarterly basis during the time period beginning in the third quarter of 2003 through the fourth quarter of 2006:

            Covered Lives — Commercial               Direct Contracts — Commercial

CHART

 

CHART

        Our other arrhythmia monitoring services, including event, Holter and pacemaker monitoring services, are reimbursed by commercial payors and government programs including Medicare. We also have direct arrangements with physicians who purchase our services and then submit claims for them directly to commercial and government payors. In some cases, patients may pay out-of-pocket on a fee for service basis. Generally our other arrhythmia monitoring services are billed using specific codes describing those services. Those codes are part of the CPT coding system which was established by the American Medical Association to describe services provided by physicians and other suppliers such as PDSHeart. The rate at which we are reimbursed by commercial payors and physicians (in those cases where physicians purchase our services) for our event, Holter and pacemaker monitoring services are negotiated between PDSHeart and the individual commercial payor or physician. Medicare pays for our services through the Physician Fee Schedule. These reimbursement rates are determined annually by CMS and are made available to the public through publication in the Federal Register and the CMS website. Reimbursement made by physicians for purchased services is made at fair market value. The determination of fair market value is subject to interpretation under federal and state anti-kickback laws. At this time, we are not aware of any government challenge or investigations involving the arrangements between PDSHeart and its physician customers.

Clinical Development

        We intend to continue to develop proof of superiority of our technology through clinical data. The three primary sources of clinical data that we have used to date to illustrate the clinical value of the CardioNet System include: (1) a randomized 300-patient clinical study; (2) our cumulative actual monitoring experience from our databases; and (3) other published studies.

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        We recently completed a 17 center, 300-patient randomized clinical trial that CardioNet sponsored. We believe this study represents the largest randomized study comparing two noninvasive arrhythmia monitoring methods.

        The study was designed to evaluate patients who were suspected to have an arrhythmic cause underlying their symptoms, but who were a diagnostic challenge given that they had already had a nondiagnostic 24-hour Holter monitoring session or four hours of telemetry within 45 days prior to enrollment. Patients were randomized to either the CardioNet System or to a loop event monitor for up to 30 days. Of the 300 patients who were randomized, 266 patients who completed a minimum of 25 days of monitoring were analyzed (134 patients using CardioNet System and 132 patients using loop event monitors).

        Inclusion criteria included a high clinical suspicion of a malignant arrhythmia and symptoms of syncope, presyncope or severe palpitations occurring less frequently than once per 24 hours. Exclusion criteria included severe heart failure (as denoted by New York Heart Association Class IV), myocardial infarction (heart attack) within the prior three months, candidacy for or recent heart valve surgery, and a history of certain sustained tachycardias called ventricular tachycardia or ventricular fibrillation.

        The primary endpoint was the confirmation or exclusion of a probable arrhythmic cause of the patient's symptoms, defined as "diagnosis." Study investigators classified any arrhythmias during the monitoring period as being either "clinically significant" or "clinically insignificant." "Confirmation" was based on investigators' assessment of the likelihood that a clinically significant arrhythmia caused the patient's presenting symptoms. "Exclusion" of a probable arrhythmic cause was determined if any reported symptoms were not associated with an arrhythmia. Monitoring was considered "nondiagnostic," or nonconclusive, if patients remained asymptomatic during the monitoring period with either no arrhythmia or only a clinically insignificant arrhythmia document. The study concluded that the primary endpoint was met.

        Eric Prystowsky, a member of our board of directors and medical advisory board, is the chief editor of the journal in which the study was published. Dr. Prystowsky recused himself from the journal's review of the study and a guest editor was chosen who selected the reviewers and oversaw the entire review process, which was blinded to Dr. Prystowsky.

        The following chart depicts data from the trial, indicating that the CardioNet System is nearly three times more successful in detecting clinically significant arrhythmias in patients than loop event monitors:

CHART

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        In a subgroup of patients experiencing syncope and/or presyncope, the CardioNet System was more than three times more effective than loop event monitors in diagnosing clinically significant arrhythmias, as demonstrated in the following chart:

CHART

        The study specifically compared the success of the CardioNet System against loop event monitors in detecting patients afflicted with atrial fibrillation because of the prevalence of asymptomatic episodes that occur in cases of atrial fibrillation and the difficulty of diagnosis. Diagnosis and treatment of atrial fibrillation is important because it can lead to many other medical problems, including stroke. The following chart depicts data from the trial indicating that the CardioNet System demonstrated greater success in detecting atrial fibrillation than loop event monitors, especially in patients who were experiencing asymptomatic atrial fibrillation.

CHART

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        The following chart depicts data from the trial indicating the success of the CardioNet System compared to loop event monitors in diagnosing atrial fibrillation in patients experiencing syncope and/or presyncope and who also experience asymptomatic episodes of atrial fibrillation:

CHART

        In January 2005, we completed a study of the first 100 patients who used the CardioNet System. 51% of such patients were diagnosed with clinically significant arrhythmias. 53% of patients who had previously been tested without successful diagnosis using Holter or event monitors were diagnosed with clinically significant arrhythmias by the CardioNet System. 34% of patients experienced a change of management by their physician as a result of their diagnosis using the CardioNet System. Of those, 15% were implanted with pacemakers, 6% were implanted with cardioverter-defibrillators and 12% were prescribed ablations.

        Several other studies produced data indicating the usefulness and efficiency of the CardioNet System including:

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Competition

        Although we believe that we have a leading market share in the mobile cardiac arrhythmia monitoring industry, the market in which we operate is fragmented and characterized by a large number of smaller regional service providers. According to Frost & Sullivan, the combined market share of CardioNet and PDSHeart in the mobile cardiac arrhythmia monitoring industry in 2006, exclusive of Holter monitoring, was approximately 24%, and the market shares of LifeWatch Corp. and Raytel Medical Corporation, the next largest participants in that market, were approximately 20% and 12%, respectively. To our knowledge, none of our competitors, including LifeWatch and Raytel, provide a monitoring solution directly competitive to our CardioNet System. A number of companies, however, provide Holter and event monitors that indirectly compete with the CardioNet System, including LifeWatch Corp. and Raytel Medical Corporation.

        We believe that the principal competitive factors that impact the success of our cardiac monitoring solutions include some or all of the following:

        We believe that we compete favorably based on the factors described above. However, our industry is evolving rapidly and is becoming increasingly competitive and there are no guarantees that we will continue to compete favorably on these or any other factors.

Intellectual Property

        To protect our proprietary rights, we rely on a combination of trademark, copyright, patent, trade secret and other intellectual property laws, employment, confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements and protective contractual provisions with our partners and other third parties.

        Patents.    As of June 30, 2007, we had 14 issued U.S. patents and seven issued foreign patents relating to functionality of individual components of the CardioNet System, operation of the total monitoring system, communication methodologies, control of data in the system, algorithms for ECG detection and analysis, and monitoring methods. We are in the process of applying for additional patents relating to various aspects of our technology, including our proprietary ECG detection

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algorithm. As of June 30, 2007, we had 42 U.S., foreign and international patent applications on file relating to various aspects of our technology.

        Trademarks and Copyrights.    As of June 30, 2007, we had eight trademark registrations and four pending trademark applications in the United States for a variety of word marks and slogans. Our trademarks are an integral part of our business and include, among others, CardioNet® and PDSHeart®. We also have a significant amount of copyright-protected materials, including among other things, software textual material.

        In addition, we also seek to maintain certain intellectual property and proprietary know-how as trade secrets, and generally require our partners to execute non-disclosure agreements prior to any substantive discussions or disclosures of our technology or business plans.

Government Regulation

        The health care industry is highly regulated, and there can be no guarantee that the regulatory environment in which we operate will not change significantly and adversely to us in the future. We believe that health care legislation, rules, regulations and interpretations will change, and we expect to modify our agreements and operations from time to time in response to changes in the health care regulatory environment.

        U.S. Food and Drug Administration.    The monitors and sensors that comprise part of the CardioNet System are regulated by the FDA as a medical device under the Federal Food, Drug, and Cosmetic Act. The basic regulatory requirements that manufacturers of medical devices distributed in the U.S. must comply with are:

        Medical devices are classified into Class I, II, and III. Regulatory control increases from Class I to Class III. The device classification regulation defines the regulatory requirements for a general device type. Most Class I devices are exempt from 510(k) requirements. Most Class II devices, including the monitors and sensors that comprise part of the CardioNet System, require 510(k) clearance from the FDA to be marketed in the U.S. A 510(k) submission must demonstrate that the device is substantially equivalent to a device legally in commercial distribution in the United States: (1) before May 28, 1976; or (2) to a device that has been determined by FDA to be substantially equivalent. In some instances, data from human clinical trials must also be submitted in support of a 510(k) submission. If so, these data must be collected in a manner that conforms with specific requirements in accordance with federal regulations. Changes to existing devices covered by a 510(k) which do not significantly affect safety or effectiveness can generally be made without additional 510(k) submissions. Most Class III devices are high risk devices that pose a significant risk of illness or injury or devices found not substantially equivalent to Class I and II predicate devices through the 510(k) process and require PMA. The PMA process is more involved and includes the submission of clinical data to support claims made for the device. The PMA is an actual approval of the device by the FDA.

        The CardioNet System and our algorithms maintain FDA 510(k) clearance as a Class II device. On October 28, 2003, the FDA issued a draft guidance document entitled: "Class II Special Controls Guidance Document: Arrhythmia Detector and Alarm." In addition to conforming to the general requirements of the Federal Food, Drug, and Cosmetic Act, including the premarket notification requirements described above, all of our 510(k) submissions address the specific issues covered in this special controls guidance document.

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        Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

        Health Care Fraud and Abuse.    In the United States, there are state and federal anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration in exchange for the referral of patients or other health care-related business. For example, the Federal Healthcare Programs' Anti-Kickback Law prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an individual for an item or service, or the ordering, furnishing or arranging for an item or service, for which payment may be made under federal health care programs, such as the Medicare and Medicaid programs. Some states have anti-kickback laws which establish similar prohibitions, although these state laws may apply regardless of whether federal health care program payment is involved. Anti-kickback laws constrain our sales, marketing and promotional activities by limiting the kinds of financial arrangements we may have with physicians, medical centers, and others in a position to purchase, recommend or refer patients for our cardiac monitoring services or other products or services we may develop and commercialize. Due to the breadth of some of these laws, it is possible that some of our current or future practices might be challenged under one or more of these laws. Furthermore, federal and state false claims laws prohibit anyone from presenting, or causing to be presented, claims for payment to third party payers that are false or fraudulent. For example, we may be subject to the federal False Claims Act if we knowingly "cause" the filing of false claims for payment by a federal health care program (including Medicaid and Medicare). Violations may result in substantial civil penalties, including treble damages, and criminal penalties, including imprisonment, fines and exclusion from participation in federal health care programs. The federal False Claims Act also contains "whistleblower" or "qui tam" provisions that allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the government. Various states have enacted laws modeled after the federal False Claims Act, including "qui tam" provisions, and some of these laws apply to claims filed with commercial insurers. Any violations of anti-kickback and false claims laws could have a material adverse effect on our business, financial condition and results of operations.

        Health Insurance Portability and Accountability Act of 1996 (HIPAA).    The Health Insurance Portability and Accountability Act was enacted by the United States Congress in 1996. Numerous state and federal laws govern the collection, dissemination, use and confidentiality of patient and other health information, including the administrative simplification provisions of HIPAA. Historically, state law has governed confidentiality issues and HIPAA preserves these laws to the extent they are more protective of a patient's privacy or provide the patient with more access to his or her health information. As a result of the implementation of the HIPAA regulations, many states are considering revisions to their existing laws and regulations that may or may not be more stringent or burdensome than the federal HIPAA provisions. HIPAA applies directly to covered entities, which include health plans, health care clearinghouses and many health care providers. The rules promulgated pursuant to HIPAA include the Standards for Privacy of Individually Identifiable Health Information, for which compliance by most entities was required by April 16, 2003, Security Standards, for which compliance by most entities was required by April 21, 2005, and the Standards for Electronic Transactions, for

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which compliance by most entities was required by October 16, 2003. The privacy rule, security rule, and electronic transactions and code sets rule each establish certain standards regarding health information. These rules' standards concern, respectively, the privacy of information when it is used and/or disclosed; the confidentiality, integrity and availability of electronic health information; and the content and format of certain identified electronic health care transactions. The laws governing health care information impose civil and criminal penalties for their violation and can require substantial expenditures of financial and other resources for information technology system modifications and for implementation of operational compliance.

        Medicare and Medicaid.    Medicare is a federal program administered by CMS through fiscal intermediaries and carriers. Available to individuals age 65 or over, and certain other individuals, the Medicare program provides, among other things, health care benefits that cover, within prescribed limits, the major costs of most medically necessary care for such individuals, subject to certain deductibles and co-payments. The Medicare program has established guidelines for the coverage and reimbursement of certain equipment, supplies and services. In general, in order to be reimbursed by Medicare, a health care item or service furnished to a Medicare beneficiary must be reasonable and necessary for the diagnosis or treatment of an illness or injury, or to improve the functioning of a malformed body part. The methodology for determining coverage status and the amount of Medicare reimbursement varies based upon, among other factors, the setting in which a Medicare beneficiary received health care items and services. Any changes in federal legislation, regulations and policy affecting Medicare coverage and reimbursement relative to our cardiac monitoring services could have a material effect on our performance.

        The Medicaid program is a cooperative federal/state program that provides medical assistance benefits to qualifying low income and medically needy persons. State participation in Medicaid is optional, and each state is given discretion in developing and administering its own Medicaid program, subject to certain federal requirements pertaining to payment levels, eligibility criteria and minimum categories of services. The coverage, method and level of reimbursement varies from state to state and is subject to each state's budget restraints. Changes to the coverage, method or level of reimbursement for our services may affect future revenues negatively if reimbursement amounts are decreased or discontinued.

        Both the Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, interpretations of policy, intermediary determinations, and government funding restrictions, all of which may materially increase or decrease the rate of program payments to health care facilities and other health care suppliers and practitioners, including those paid for our cardiac monitoring services.

        Our facilities in Pennsylvania, Georgia and Florida are enrolled as IDTFs, which is defined by CMS as an entity independent of a hospital or physician's office in which diagnostic tests are performed by licensed or certified nonphysician personnel under appropriate physician supervision. Medicare has set certain performance standards that every IDTF must meet in order to obtain or maintain their billing privileges. Specifically, an IDTF is required to: (i) operate its business in compliance with all applicable federal and state licensure and regulatory requirements for the health and safety of patients; (ii) provide complete and accurate information on its enrollment application, and report any changes, within 30 calendar days, to the designated fee-for-service contractor on the Medicare enrollment application; (iii) maintain a physical facility on an appropriate site, that is not an office box or a commercial mail box that contains space for equipment appropriate for the services designated on the enrollment application, hand washing facilities, adequate patient privacy accommodations, and both business and current medical records storage within the office setting of the IDTF; (iv) have all applicable diagnostic testing equipment, with the physical site maintaining a catalog of portable diagnostic testing equipment, including the equipments' serial numbers; (v) maintain a primary business phone under the name of the designated business, which is located at the designated

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site of the business, or within the home office of the mobile IDTF units; (vi) have a comprehensive liability insurance policy of at least $0.3 million per location, covering both the place of business and all customers and employees of the IDTF, and carried by a non-relative owned company; (vii) agree not to directly solicit patients and to accept only those patients referred for diagnostic testing by an attending physician, who is furnishing a consultation or treating a beneficiary for a specific medical problem and who uses the results in the management of the beneficiary's specific medical problem; (viii) answer beneficiaries' questions and respond to their complaints; (ix) openly post the Medicare standards for review by patients and the public; (x) disclose to the government any person having ownership, financial, or control interest or any other legal interest in the supplier at the time of enrollment or within 30 days of a change; (xi) have its testing equipment calibrated and maintained per equipment instructions and in compliance with applicable manufacturers suggested maintenance and calibration standards; (xii) have technical staff on duty with the appropriate credentials to perform tests and produce the applicable federal or state licenses or certifications of the individuals performing these services; (xiii) have proper medical record storage and be able to retrieve medical records upon request from CMS or its fee-for-service contractor within two business days; and (xiv) permit CMS, including its agents, or its designated fee-for-service contractors, to conduct unannounced, on-site inspections to confirm the IDTFs compliance with these standards.

        We believe that our IDTFs are all in compliance with these regulations and any additional standards imposed by local Medicare contractors and other payers and are not aware of any investigations or allegations that such is not the case. Medicare has proposed to make changes in the regulations governing IDTF enrollment that, if finalized, would take effect on January 1, 2009. If necessary, we will take any steps required to comply with those changes.

        Environmental Regulation.    We use substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify, we believe the ongoing impact of compliance with environmental protection laws and regulations will not have a material impact on our business, financial position or results of operations.

Product Liability and Insurance

        The design, manufacture and marketing of medical devices and services of the types we produce entail an inherent risk of product liability claims. In addition, we provide information to health care providers and payors upon which determinations affecting medical care are made, and claims may be made against us resulting from adverse medical consequences to patients resulting from the information we provide. To protect ourselves from product liability claims, we maintain professional liability and general liability insurance on a "claims made" basis. Insurance coverage under such policies is contingent upon a policy being in effect when a claim is made, regardless of when the events which caused the claim occurred. While a product liability claim has never been made against us and we believe our insurance policies are adequate in amount and coverage for our current operations, there can be no assurance that the coverage maintained by us is sufficient to cover all future claims. In addition, there can be no assurance that we will be able to obtain such insurance on commercially reasonable terms in the future.

Manufacturing

        Our San Diego facility provides space for our production and field service operations, packaging, storage and shipping. We believe that our manufacturing facilities will be sufficient to meet our manufacturing needs for the foreseeable future.

        Manufacturers (both domestic and foreign) and initial distributors of medical devices must register their facilities with the FDA. We believe our manufacturing operations are in compliance with regulations mandated by the FDA. We have been FDA-registered since December 2001 and a

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California-licensed medical device manufacturer since March 2002. We are subject to unannounced inspections by the FDA and we successfully completed a routine audit by the FDA in April 2006 with no findings noted or warnings issued.

        Manufacturing of components of our monitors and sensors is provided by an electronics manufacturing service provider, Jabil Circuit, Inc., in its facilities near San Diego, California. This facility is scheduled to close in the third quarter of 2007, and Jabil Circuit, Inc. will move its operations to its existing facility in Tempe, Arizona. We intend to expand our manufacturing capacity for our CardioNet System monitors and sensors as necessary to meet market demand, and plan to do so initially by hiring and training additional skilled employees for our production group and by working with Jabil Circuit, Inc. on available capacity opportunities such as increases to the personnel assigned to its CardioNet manufacturing team, adding additional manufacturing lines and expanding to a second and third shift, as necessary. Our production group provides system test and product release activities.

        There are a number of critical components and sub-assemblies in the monitors and sensors that compose part of the CardioNet System. The vendors for these materials are qualified through stringent evaluation and testing of their performance. We implement a strict no change policy with our contract manufacturer to ensure that no components are changed without our approval.

        We are currently in the process of developing the next generation of the CardioNet System, called C3, which will feature several technology enhancements. We expect that we will begin commercialization of the C3 in the second half of 2007. In order to produce sufficient quantities of the C3 that we believe will be required to meet anticipated market demand, we will need to increase, or "scale up," our production processes by a significant factor over the current level of production. There are technical challenges to scaling up manufacturing capacity, including the investment of substantial additional funds and hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. In order to meet demand, we may determine to engage replacement or additional manufacturers for components of our monitors or sensors. Although alternate manufacturers are readily available, engaging a new manufacturer would take time and would be costly.

Employees

        As of June 30, 2007, we employed 509 full-time employees, of which 92 were in sales and marketing. We consider our relationship with our employees to be good.

Facilities

        We lease approximately 20,000 square feet of space for our headquarters in San Diego, California under an agreement that expires in August 2011, of which approximately 4,000 square feet is dedicated to manufacturing and the balance is dedicated to office space. We also lease approximately 35,000 square feet of space for our service center in Philadelphia, Pennsylvania under an agreement that expires in December 2013. We believe that our existing facilities are adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

        Our wholly-owned subsidiary PDSHeart leases approximately 6,000 square feet of space in West Palm Beach, Florida under a pair of agreements that expire in September 2009, approximately 10,300 square feet of space in Conyers, Georgia under an agreement that expires in January 2008 and approximately 2,030 square feet of space in Edina, Minnesota under an agreement that expires in April 2012. We believe that their existing facilities will be adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

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Legal Proceedings

        We are currently not a party to any material legal proceedings.

Medical Advisory Board

        We seek advice from a number of leading physicians and scientists on scientific, technical and medical matters. These advisors are leading physicians and scientists in the areas of electrophysiology and cardiology. Our medical advisors are consulted regularly to assess, among other things:


        Our medical advisors and their primary affiliations are listed below:

Name

  Primary Affiliation
David G. Benditt, M.D.    University of Minnesota Medical School — Cardiovascular Division

David S. Cannom, M.D.

 

L.A. Cardiology Associates

Anthony N. DeMaria, M.D. 

 

UCSD Medical Center — Division of Cardiology

Peter R. Kowey, M.D. 

 

Main Line Health Heart Center

Craig M. Pratt, M.D. 

 

The Methodist Hospital

Eric N. Prystowsky, M.D. 

 

The Care Group, LLC

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MANAGEMENT

Executive Officers, Directors and Key Employees

        The following table sets forth information regarding our executive officers, directors and key employees as of June 30, 2007:

Name

  Age
  Position
Executive Officers and Directors:        
James M. Sweeney   64   CEO and Chairman of the Board of Directors
Gregory A. Marsh   47   Chief Financial Officer; Chief Operating Officer, PDSHeart
Fred Middleton(1)   58   Director
Woodrow A. Myers Jr., M.D.(1)   53   Director
Eric N. Prystowsky, M.D.(2)   60   Director
Harry T. Rein(1)(2)   62   Director
Robert J. Rubin, M.D.(2)   61   Director

Key Employees:

 

 

 

 
Charlie Alvarez   40   Executive Vice President, PDSHeart
Larry Dubé   41   Vice President, San Diego Operations
JR Finkelmeier   33   Vice President, Marketing
Michael Forese   50   Vice President, Finance and Administration
Philip Leone   43   Vice President, Managed Care and Reimbursement Services
Anna McNamara, RN   59   Senior Vice President, Clinical Operations
Chris Strasinski   39   Vice President, Sales

(1)
Member of the audit committee.

(2)
Member of the compensation, nominating and corporate governance committee.

Executive Officers and Directors

        James M. Sweeney.    Mr. Sweeney has served as our Chief Executive Officer and Chairman of the Board since April 2000. From 1997 to 1999, Mr. Sweeney served as the founder, Chairman and CEO for Cerner Bridge Medical, a company specializing in medication error prevention. From 1994 to 1996, Mr. Sweeney served as the founder, Chairman and CEO of Coram, Inc. a home intravenous, or IV, therapy company. From 1990 to 1993, Mr. Sweeney served as Chairman and CEO of McGaw, Inc. (acquired by IVAX Corp. in 1994) an IV solution manufacturer. From 1989 to 1990, Mr. Sweeney served as the founder, Chairman and CEO of Central Admixture Pharmacy Services (CAPS), a subsidiary of B. Braun Medical Inc., an IV solution manufacturer. From 1989 to 1990, he served as the founder, Chairman and CEO of CareGivers, a high tech home care partnership. From 1988 to 1989, he served as the founder, Chairman and CEO of CarePartners, a 24/7/365 nursing call center and from 1979 to 1987 he served as the founder, Chairman and CEO of Caremark, Inc., a health infusion services and prescription management company. Mr. Sweeney received an undergraduate degree in Business Administration from San Diego State University.

        Gregory A. Marsh.    Mr. Marsh has served as our Chief Financial Officer since March 2007. Mr. Marsh joined us following our acquisition of PDSHeart, where he served as the COO beginning in October 2005 and as the CFO beginning in November 2003. Following our acquisition of PDSHeart, Mr. Marsh has continued to serve as the Chief Operating Officer of PDSHeart. From February 2001 until the company was sold in April 2003, Mr. Marsh was the Vice President, Chief Financial Officer

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and Secretary of AmeriPath, Inc., a provider of anatomic pathology and molecular diagnostics. From August 1996 to February 2001, he served as Vice President, Corporate Controller of AmeriPath. From November 1991 to July 1996, Mr. Marsh was the Director of Budgeting and Financial Analysis for Sensormatic Electronics Corporation, an electronic article surveillance provider (acquired by Tyco International in 2001). From 1983 to October 1991, Mr. Marsh worked for Coopers & Lybrand, an accounting firm. Mr. Marsh is a Certified Public Accountant in the State of Florida. Mr. Marsh received an undergraduate degree in Business Administration from Slippery Rock State College.

        Fred Middleton.    Mr. Middleton has been a member of our board of directors since April 2000. Since 1987, he has been a General Partner/Managing Director of Sanderling Ventures, a firm specializing in biomedical venture capital. From 1984 through 1986, he was the Managing General Partner of Morgan Stanley Ventures, an affiliate of Morgan Stanley & Co. Earlier in his career, Mr. Middleton was part of the original management team at Genentech, Inc., a biotechnology company, serving there from 1978 through 1984 as Vice President of Finance and Corporate Development, and Chief Financial Officer. He has played active management roles in many biomedical companies, including as Chairman, CEO or director of a number of Sanderling portfolio companies, currently including Stereotaxis, Inc., a medical device company where he serves as Chairman, and Favrille, Inc., a biotechnology company where he serves as director, as well as serving as board member of several private held biomedical companies. Mr. Middleton received an undergraduate degree in Chemistry from the Massachusetts Institute of Technology and an M.B.A. with distinction from Harvard Business School.

        Woodrow A. Myers Jr., M.D.    Dr. Myers has been a member of our board of directors since August 2007. Since December 2005, he has served as the Managing Director of Myers Ventures LLC, an investment firm with interests in health care consulting and international health. From October 2000 to January 2005, Dr. Myers served as Executive Vice President and Chief Medical Officer of WellPoint, Inc., a health benefits company. From 1996 to 2000, Dr. Myers served as Director of Health Care Management for Ford Motor Company, an automobile company. From 1991 to 1995, Dr. Myers served as the Corporate Medical Director for Anthem Blue Cross Blue Shield (then known as the Associated Group), a health care company. Dr. Myers currently serves on the board of directors of Thermogenesis Corp., a health care products company, Genomic Health, Inc., a life science company, Express Scripts, Inc., a pharmacy benefit management company, and the Stanford University Hospitals and Clinics. He is a Visiting Professor of Medicine at the UCLA School of Medicine. Dr. Myers received an undergraduate degree in Biological Sciences and an M.B.A. from Stanford University and an M.D. from Harvard Medical School.

        Eric N. Prystowsky, M.D.    Dr. Prystowsky has been a member of our board of directors since March 2001. Since 1988, Dr. Prystowsky has served as the Director, Clinical Elecrophysiology Laboratory at St. Vincent Hospital, Indianapolis Indiana. Since 1988, Dr. Prystowsky has served as Consulting Professor of Medicine at Duke University. Since 2004, he has served as the associate editor of Hurst Textbook of Cardiology and, since January 2004, he has served as editor-in-chief of the Journal of Cardiovascular Electrophysiology. From 1992 to 1994, he served as the Chairman of the American Heart Association's Committee on Electrocardiography and Electrophysiology and, from May 2001 to May 2002, as President of the Heart Rhythm Society. Dr. Prystowsky currently serves as the Chairman of the ABIM test writing committee for the Electrophysiology Boards. Dr. Prystowsky currently serves on the board of directors of Stereotaxis, Inc., a biotechnology company. Dr. Prystowsky received an undergraduate degree from the Pennsylvania State University and an M.D. from the Mount Sinai School of Medicine.

        Harry T. Rein.    Mr. Rein has been a member of our board of directors since January 2006. He has served as a General Partner with Foundation Medical Partners, a venture capital firm, since March 2003. From 1987 to 2002, Mr. Rein served as the founder and Managing General Partner of Canaan Partners, a venture capital fund focused on health care companies. In addition to his role as the

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Managing General Partner at Canaan Partners, Mr. Rein was responsible for Canaan's Life Sciences Investment Practice. From 1983 to 1987, he was President and CEO of GE Venture Capital Corporation, a venture capital firm. Mr. Rein joined the General Electric Company, or GE, in 1979 and directed several of GE's lighting businesses as general manager before joining the venture capital subsidiary. Mr. Rein currently serves on the board of directors of Anadigics, Inc., a semiconductor solutions provider, and one or more privately held companies. Mr. Rein received an undergraduate degree in Political Science from Oglethorpe College and an M.B.A. from the Darden School at the University of Virginia.

        Robert J. Rubin, M.D.    Dr. Rubin has been a member of our board of directors since July 2007. He has been a clinical professor of medicine at Georgetown University since 1995. From 1987 to 2001, he was president of the Lewin Group (purchased by Quintiles Transnational Corp. in 1996), a national health policy and management consulting firm. From 1994 to 1996, Dr. Rubin served as Medical Director of ValueRx, a pharmaceutical benefits company. From 1992 to 1996, Dr. Rubin served as President of Lewin-VHI, a health care consulting company. From 1987 to 1992, he served as President of Lewin-ICF, a health care consulting company. From 1984 to 1987, Dr. Rubin served as a principal for ICF, Inc., a health care consulting company. From 1981 to 1984, Dr. Rubin served as the Assistant Secretary for Planning and Evaluation at the Department of Health and Human Services and as an Assistant Surgeon General in the United States Public Health Service. Dr. Rubin is a board certified nephrologist and internist. Dr. Rubin received an undergraduate degree in political science from Williams College and an M.D. from Cornell University.

Key Employees

        Charlie Alvarez.    Mr. Alvarez has served as our Executive Vice President since March 2007. Mr. Alvarez joined us following our acquisition of PDSHeart, where he served as Executive Vice President, Sales from March 2003 to March 2007. From 1999 to 2003, Mr. Alvarez served as President of U.S. Imaging Solutions, LLC, a Konica-Minolta business services company. From 1990 to 1999, Mr. Alvarez served in numerous sales, sales management and regional management roles for PSS/World Medical, Inc., a marketer and distributor of medical products to physicians, long-term care providers and imaging consumers. Mr. Alvarez received an undergraduate degree in Communications from Florida State University.

        Larry Dubé.    Mr. Dubé has served as our Vice President, San Diego Operations since August 2006. From February 2003 to August 2006, he served as Senior Director Technical Operations for ZOLL Medical Corporation, a health care products provider. From 2001 to 2002, Mr. Dubé served as Vice President of Northeast Operations for Suntron Corporation, an electronic manufacturing services company, and, from 1996 to 2001, as a General Manager at Sanmina-SCI Corporation, an electronics manufacturing services company. Mr. Dubé received an undergraduate degree in Electrical Engineering from the University of Notre Dame and an M.B.A. from Bentley College.

        JR Finkelmeier.    Mr. Finkelmeier has served as our Vice President of Marketing since May 2007. Mr. Finkelmeier joined us following our acquisition of PDSHeart, where he served as Regional Sales Director from December 2005 to May 2007 and as Regional Accounts Manager from March 2003 to November 2005. From 2000 to February 2003, Mr. Finkelmeier served as General Manager of Veritas Partners, a Midwest-based venture capital and management company. Mr. Finkelmeier received an undergraduate degree in Pre-Professional Studies from the University of Notre Dame.

        Michael Forese.    Mr. Forese has served as our Vice President, Finance and Administration since April 2004. From February 2003 to March 2004, he was employed by CRT Pharmaceuticals, a pharmaceutical company, where he served as Chief Operating and Chief Financial Officer. From 1998 to 2002, Mr. Forese served as CFO of Research Pharmaceutical Services, Inc., a start-up contract research organization. From 1997 to 1998, he served in senior financial and operating roles in companies such as IBAH Pharmaceutical Services, Inc. (acquired by Omnicare in 1998), a

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pharmaceutical care company, and PARAXEL International Corporation, a biopharmaceutical service provider. From 1981 to 1992, Mr. Forese served in several positions with Imperial Chemical Industries PLC (Zeneca) in Brussels, Belgium, a chemical producing company, including as controller for international operations and most recently as Manager of Internal Audit for North America. Mr. Forese received an undergraduate degree in Accounting from Villanova University and an M.B.A. from Drexel University.

        Philip Leone.    Mr. Leone has served as our Vice President, Managed Care and Reimbursement Services since December 2002. From 1990 to April 2002, Mr. Leone successfully served in numerous sales and executive sales management positions within Legend Healthcare, a health care company, where he most recently served as Executive Vice President/Chief Operating Officer. Mr. Leone received an undergraduate degree in Business Administration from Western New England College.

        Anna McNamara.    Ms. McNamara has served as our Senior Vice President, Clinical Operations since September 2002. From February 2001 to September 2002, Ms. McNamara served as Executive Vice President of Clinical Operations for LifeWatch Corp., a health care services company. From July 1998 to February 2001, Ms. McNamara served as Vice President of Clinical Operations for Quality Diagnostic Services at Matria Healthcare, Inc., a health care company. From January 1997 to July 1998, Ms. McNamara served as Vice President of Clinical Operations for WebMD Health Corp., a web-based health information provider. Ms. McNamara received an undergraduate degree from Marymount College and an RN at Mercy Hospital in Scranton, PA.

        Chris Strasinski.    Mr. Strasinski has served as our Vice President, Sales in addition to several other positions since December 2002. From 2000 to December 2002, Mr. Strasinski served as a Regional Sales Director for Digirad Imagining Solutions, a leader in mobile nuclear imaging services. Mr. Strasinski received an undergraduate degree in Business Administration from Lynn University.

Board Composition

        Our board of directors currently consists of eight members, with two vacancies. Effective upon the completion of this offering, we will divide our board of directors into three classes, as follows:

        Our board of directors has determined that five of our eight directors, Messrs. Middleton and Rein and Drs. Myers, Prystowsky and Rubin, are independent directors, as defined by Rule 4200(a)(15) of the National Association of Securities Dealers, or NASD.

        At each annual meeting of stockholders to be held after the initial classification, the successors to directors whose terms then expire will serve until the third annual meeting following their election and until their successors are duly elected and qualified. The authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. Our directors may be removed for cause by the affirmative vote of the holders of at least 662/3% of our voting stock.

        Pursuant to a voting agreement between us and certain of our investors, which will expire concurrently with the closing of this offering, investors holding a substantial majority of our shares agreed to appoint as directors individuals nominated by certain of our existing investors. Specifically,

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Fred Middleton was nominated to serve as a director by Sanderling Ventures and Harry Rein was nominated to serve as a director by Foundation Medical Partners.

Board Committees

        Our board of directors has an audit committee and a compensation, nominating and corporate governance committee.

        Our audit committee consists of Mr. Middleton, Mr. Rein and Mr. Myers, each of whom is a non-employee director of our board of directors. Mr. Middleton is the chairman of our audit committee. Our board of directors has determined that Mr. Middleton is a financial expert. Our board of directors has also determined that each of the directors serving on our audit committee is independent within the meaning of the rules of the SEC and the Nasdaq Marketplace Rules. The functions of this committee include, among other things:

        Both our independent registered public accounting firm and management periodically meet privately with our audit committee.

        Our compensation, nominating and corporate governance committee consists of Mr. Rein and Drs. Rubin and Prystowsky, each of whom is a non-employee director of our board of directors. Mr. Rein is the chairman of the compensation, nominating and corporate governance committee. Our board of directors has determined that each of the directors serving on our compensation, nominating and corporate governance committee is independent within the meaning of the rules of the SEC and the Nasdaq Marketplace Rules. The functions of this committee include, among other things:

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Compensation Committee Interlocks and Insider Participation

        No member of our compensation, nominating and corporate governance committee has ever been an executive officer or employee of ours. None of our officers currently serves, or has served during the last completed year, on the compensation, nominating and corporate governance committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors or compensation, nominating and corporate governance committee. Prior to establishing the compensation, nominating and corporate governance committee, our full board of directors made decisions relating to compensation of our officers.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

        We have formed a compensation, nominating and corporate governance committee of our board of directors, which is composed entirely of independent directors, administers our executive compensation program. One of the roles of the compensation, nominating and corporate governance committee is to oversee our compensation and benefit plans and policies, to administer our equity incentive plans and to review and recommend to the board of directors all compensation decisions relating to all executive officers.

Compensation Philosophy

        Our executive compensation programs are designed to:

        Our compensation, nominating and corporate governance committee believes that our executive compensation programs should include both short- and long-term components, including cash and equity-based compensation, and should reward consistent performance that meets or exceeds expectations. Historically, we have not tied compensation to the achievement of specific corporate or individual goals. Instead, determinations about corporate or individual performance have been based on the judgments made in the discretion of our chief executive officer, our compensation committee or board.

Setting Executive Compensation

        Currently, the compensation, nominating and corporate governance committee is chartered to review and make recommendations to our board regarding the compensation to be paid to our chief executive officer and other executive officers. Historically, our compensation committee negotiated compensation with our chief executive officer, and our chief executive officer consulted with our board of directors regarding the compensation of our other executive officers. As a private company, our directors and chief executive officer based compensation decisions primarily on their extensive background and experience with the compensation practices and policies of other comparable companies in the medical device and services industries. We have not benchmarked compensation against any company or specific group of peer companies, although we plan to do so following this offering. Generally, salaries and initial stock grants for our executive officers have been negotiated at the time of hire. Thereafter, salaries have generally been subject to annual review, and the adequacy of option grants has been reviewed from time to time.

        Our compensation, nominating and corporate governance committee may in the future retain the services of third party executive compensation specialists and consultants from time to time, as it sees fit, in connection with the establishment of cash and equity compensation and related policies.

        For our executive officers other than himself, our chief executive officer has historically determined salary amounts independently in consultation with our board of directors and recommended option award amounts to our compensation committee and board for approval. These recommendations, after consultation with the board, have generally been approved by our board as presented.

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        Our chief executive officer's compensation for 2006 was determined as part of a re-negotiation of his employment agreement in November 2005. The employment agreement, including his salary, was negotiated on our behalf and approved by our compensation committee.

        In the future, we expect that our chief executive officer will evaluate the performance of other executive officers on an annual basis and make recommendations to the compensation, nominating and corporate governance committee with respect to annual salary adjustments, bonuses and annual stock option grants. The compensation, nominating and corporate governance committee will exercise its own discretion in determining salary adjustments and discretionary cash and equity-based awards to recommend to the board of directors for all executive officers.

Elements of Executive Compensation

        The compensation program for our executive officers consists principally of base salary, long-term compensation in the form of stock options and severance/termination protection. As a private company, our compensation program has been weighted toward long-term compensation as opposed to cash-based compensation. In 2005, 2006 and 2007 we did not pay cash bonuses, except in limited instances to facilitate the exercise of stock options. If we are successful, we expect the equity awards held by our executives to be the major component of overall compensation. The amount of each element of compensation paid to our executives is not typically considered when determining the levels of each other element.

        Base salaries for our executives are established based on the scope of their responsibilities and individual experience, taking into account our informal understanding of competitive market compensation paid by other companies for similar positions within our industry. Base salaries are typically reviewed annually taking into account individual responsibilities, performance and achievement. We have not set specific performance related objectives or goals, but instead we have based salary determinations on our overall evaluation of performance. We have not applied specific formulas to determine increases.

        For 2006, Mr. Sweeney's base salary was $460,000. This salary was determined as part of a re-negotiation of his employment agreement in November 2005, was negotiated on our behalf by our compensation committee and reflected an increase over his prior salary of $400,000. In determining the amount of his salary, the committee made a subjective judgment about Mr. Sweeney's performance, his contributions to our success and changes in the cost of living. We did not formally compare his salary to those of executives at other companies. No specific performance criteria were used to evaluate Mr. Sweeney's performance.

        Mr. Forese's base salary in 2006 was $200,000. This base salary was determined by Mr. Sweeney and was based on Mr. Sweeney's subjective judgment about Mr. Forese's performance and position as our Vice President, Finance and Administration. No specific performance criteria were used to evaluate Mr. Forese's performance. Mr. Wood's base salary in 2006 was $350,000. This base salary was determined in negotiations between Mr. Sweeney, members of our compensation committee and Mr. Wood in connection with the commencement of his employment in April 2006. We did not compare the base salary amounts for Mssrs. Forese or Wood to those of executives at other companies.

        We believe, based on our recruiting efforts and general experience in our industry, that the base salary levels of our executives are commensurate with the general salary levels for similar positions in medical device and services companies of similar size and stage of development and operations. However, we have not conducted a review of salary levels at any specific company or group of companies to verify the size of base salaries relative to the market.

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        We believe that by providing our executives the opportunity to increase their ownership of our stock, the best interests of stockholders and executives will be more aligned and we will encourage long-term performance. Stock awards enable our executive officers to participate in any increase in stockholder value and personally participate in the risks of business setbacks. We have not adopted stock ownership guidelines and, with the exception of the shares acquired by our chief executive officer early in our corporate history, our equity benefit plans have provided our executive officers the only means to acquire equity or equity-linked interests in CardioNet.

        Neither Mr. Sweeney nor Mr. Forese were granted any stock awards in 2006. Mr. Wood was granted a stock option in connection with the commencement of his employment in April 2006. The number of shares issuable upon exercise of his option was determined as part of the negotiation of his overall employment package and approved by our board of directors.

        Prior to this offering, we have granted equity awards primarily through our 2003 plan, which was adopted by our board of directors and stockholders to permit the grant of stock options, stock bonuses and restricted stock to our officers, directors, employees and consultants. The material terms of our 2003 plan are further described under "— Equity Benefit Plans."

        In the absence of a public trading market for our common stock, our board of directors and compensation committee has determined the fair market value of our common stock in good faith based upon consideration of a number of relevant factors including the status of our development efforts, financial status and market conditions.

        All equity awards to our employees and directors were granted at no less than the fair market value of our common stock on the date of each award. All option grants typically vest over four years, with one quarter of the shares subject to the stock option vesting on the one year anniversary of the vesting commencement date and the remaining shares vesting in equal months installments thereafter over three years. All options have a ten year term. Additional information regarding accelerated vesting upon or following a change in control is discussed below under "— post employment compensation". We do not have any program, plan or obligation that requires us to grant equity compensation to executive officers on specified dates and, because we have not been a public company, we have not made equity grants in connection with the release or withholding of material non-public information. Authority to make equity grants to executive officers rests with our board of directors, based on recommendations from our compensation, nominating and corporate governance committee, although we do consider the recommendations of our chief executive officer for officers other than himself.

        In connection with this offering, our board of directors has adopted new equity benefit plans described under "— Equity Benefit Plans." The 2007 plan will replace our existing 2003 plan immediately following this offering and, as described below, will afford our compensation, nominating and corporate governance committee much greater flexibility in making a wide variety of equity awards. Participation in our 2007 purchase plan that we have adopted and that will become effective immediately upon signing of the underwriting agreement for this offering will also be available to all executive officers thereafter on the same basis as our other employees.

        Following this offering, our 2007 plan will authorize us to grant stock appreciation rights, or SARs, which are more fully described below under "— Equity Benefit Plans." To date, no SARs have been awarded to any of our executive officers. However, we may in the future elect to make such grants to our executive officers if we deem it advisable.

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        Our 2003 plan authorizes us to grant rights to acquire restricted stock and our 2007 plan authorizes us to grant restricted stock or restricted stock awards. We have not granted restricted stock or restricted stock awards to any of our executive officers in the year ended December 31, 2006. However, our compensation, nominating and corporate governance committee, in its discretion, may in the future elect to recommend that the board of directors make such grants to our executive officers if it deems it advisable.

        Our chief executive officer is entitled to certain severance and change in control benefits, the terms of which are described below under "— Post Employment Compensation." We believe this severance and change in control benefit is an essential element of our overall executive compensation package.

        In addition, consistent with our compensation philosophy, we intend to continue to maintain the current benefits for our executive officers, which are also available to all of our other employees; however, our compensation, nominating and corporate governance committee, in its discretion, may in the future revise, amend or add to the benefits of any executive officer if it deems it advisable.

        Section 162(m) of the Internal Revenue Code of 1986 limits our deduction for federal income tax purposes to not more than $1 million of compensation paid to certain executive officers in a calendar year. Compensation above $1 million may be deducted if it is "performance-based compensation." The compensation, nominating and corporate governance committee has not yet established a policy for determining which forms of incentive compensation awarded to our executive officers will be designed to qualify as "performance-based compensation." To maintain flexibility in compensating our executive officers in a manner designed to promote our objectives, the compensation, nominating and corporate governance committee has not adopted a policy that requires all compensation to be deductible. However, the compensation, nominating and corporate governance committee intends to evaluate the effects of the compensation limits of Section 162(m) on any compensation it proposes to grant, and the compensation, nominating and corporate governance committee intends to provide future compensation in a manner consistent with our best interests and those of our stockholders.

Summary Compensation Table

        The following table provides information regarding the compensation earned during the year ended December 31, 2006 by each person serving in 2006 as a principal executive officer, principal

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financial and accounting officer or other executive officer, who we collectively refer to as our "named executive officers" in this prospectus.

Name and principal position

  Year
  Salary($)
  Bonus($)
  Stock
Awards(1)($)

  Option
awards(2)($)

  All other
compensation($)

  Total($)
James M. Sweeney
Chairman and Chief Executive Officer(3)
  2006   474,222     25,000     236,673   735,895
Michael Forese
Vice President, Finance and Administration(4)
  2006   200,000     15,288       215,288
David S. Wood
Former President and Chief Operating Officer(5)
  2006   231,538   50,000     9,167   58,336   349,041

(1)
Calculated in accordance with SFAS No. 123R using the modified prospective transition method without consideration of forfeitures. The amount reflects the dollar amount realized by us for financial statement reporting purposes in 2006 in connection with the vesting of shares of common stock that were issued upon exercise of stock options prior to the vesting date of such options.

(2)
Calculated in accordance with SFAS No. 123R using the modified prospective transition method without consideration of forfeitures. The amount reflects the dollar amount realized by us for financial statement reporting purposes in 2006 in connection with the vesting of outstanding options to purchase shares of our common stock.

(3)
All other compensation includes amounts paid as reimbursement in connection with Mr. Sweeney's relocation from Pennsylvania to California. In August 2007, we paid a special bonus in the aggregate of $352,679 to Mr. Sweeney, $210,000 of which he applied to paying off all principal and accrued interest on a loan we made to him in 2004.

(4)
Mr. Forese served as our principal financial and accounting officer during fiscal year 2006, during which time we operated without a Chief Financial Officer.

(5)
Mr. Wood served as our President and Chief Operating Officer since April 2006 and resigned effective June 2007. The bonus amount paid to, or earned by, Mr. Wood includes a signing bonus paid in May 2006 in connection with the hiring of Mr. Wood by us. Option awards represents a stock option granted to Mr. Wood on October 6, 2006 to purchase 400,000 shares of our common stock at an exercise price of $0.81 per share. All other compensation includes amounts paid as reimbursement in connection with Mr. Wood's relocation from Minnesota to Pennsylvania.

        In August 2004, we entered into an employment agreement with Mr. Sweeney, our Chief Executive Officer and Chairman of the Board, which was amended in November 2005. Mr. Sweeney receives a current base salary of $500,000 per year and is eligible to receive an annual performance bonus beginning with the fiscal year ending on December 31, 2006, with the amount of such bonus determined by our board of directors in its sole and absolute discretion. The employment agreement also entitles Mr. Sweeney to receive all customary and usual fringe benefits available to our employees.

        The employment agreement provides that Mr. Sweeney's employment is voluntary and at will. If, during Mr. Sweeney's employment with us, there is a change of control or an initial public offering and Mr. Sweeney voluntarily resigns within 180 days thereafter, he is entitled to payment of accrued base compensation, certain relocation benefits and tax reimbursements, to the extent not previously paid. In the event Mr. Sweeney voluntarily resigns more than 180 days after a change of control or an initial public offering, he is entitled to (i) payments at a rate equal to his base salary then in effect for a period of 12 months following his voluntary termination and (ii) payment of certain relocation benefits and tax reimbursements, to the extent not previously paid. In addition, if Mr. Sweeney is terminated without cause or becomes disabled, he is also entitled to (i) payments at a rate equal to his base salary then in effect for a period of 12 months following his involuntary termination or disability and (ii) payment of certain relocation benefits and tax reimbursements, to the extent not previously paid. All amounts payable to Mr. Sweeney in connection with his resignation or termination, as set forth above, are payable in accordance with our general payroll practices and not as a lump sum.

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Post-Employment Compensation

        The amount of compensation payable to each named executive officer upon voluntary termination, involuntary termination without cause, termination following a change in control or termination in the event of disability or death of the executive is shown below.

        Regardless of the manner in which a named executive officer's employment terminates, the named executive officer is entitled to receive amounts earned during his term of employment, including salary and unused vacation pay.

Potential Payment Under Employment Arrangements

        In August 2004, we entered into an employment agreement with Mr. Sweeney as described in greater detail under the heading "Summary Compensation Table." Assuming that, effective December 31, 2006, Mr. Sweeney voluntarily resigned more than 180 days after a change in control or an initial public offering or was terminated without cause or due to disability, he would be entitled to receive $460,000, reflecting 12 months of his then base salary.

        In June 2007, in connection with the termination of the employment of Mr. Wood, our former President and Chief Operating Officer, we entered into a separation and release agreement entitling Mr. Wood to severance benefits. The separation and release agreement provides that, in exchange for Mr. Wood's full release of claims against us, Mr. Wood was entitled to (i) severance payments at a rate equal to his base salary then in effect for a period of six months following his termination, (ii) in exchange for Mr. Wood's agreement to forfeit 25,027 of his vested stock option shares at the time of his termination, continued exercisability of his remaining 83,306 vested stock option shares for a period of one-year following his termination date and (iii) forgiveness of both principal and accrued interest pursuant to a loan by us to Mr. Wood made in September 2006. Assuming that Mr. Wood's termination had occurred on December 31, 2006 and that the separation and release agreement was in place at such time, Mr. Wood would be entitled to receive (i) a lump sum payment of $115,769, reflecting six months of Mr. Wood's then base salary, (ii) continued exercisability of 83,306 vested stock option shares for a period of one-year from his termination date and (iii) a lump sum of $222,278, reflecting the forgiveness of both principal and accrued interest under the September 2006 loan. In connection with his termination in June 2007, Mr. Wood received (i) a lump sum payment of $182,800, reflecting six months of Mr. Wood's then base salary, (ii) continued exercisability of 83,306 vested stock option shares for a period of one-year from his termination date and (iii) a lump sum of $227,117, reflecting the our forgiveness of both principal and accrued interest under the September 2006 loan.

Grants of Plan-Based Awards

        All stock options granted to our named executive officers are incentive stock options, to the extent permissible under the Code. The exercise price per share of each stock option granted to our named executive officers was equal to the fair market value of our common stock as determined in good faith by our board of directors on the date of the grant. All stock options were granted under our 2003 plan.

        We omitted columns related to non-equity and equity incentive plan awards as none of our named executive officers earned any such awards during 2006. The following table sets forth certain information regarding grants of plan-based awards to our named executive officers for 2006.

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Mr. Sweeney and Mr. Forese were not granted any plan-based awards during 2006 and therefore are not included in the following table.

Name

  Grant date
  All option awards:
number of securities
underlying options (#)

  Exercise or base
price of option
awards
($/share)(1)

  Grant date fair
value of option
awards
($)(2)

David S. Wood(3)   10/6/06   400,000   0.81   176,000

(1)
Represents the per share fair market value of our common stock, as determined in good faith by our board of directors on the grant date.

(2)
Calculated in accordance with SFAS No. 123R using the modified prospective transition method without consideration of forfeitures.

(3)
25% of the total number of shares subject to this named executive officer's options vest on the one-year anniversary of the applicable grant date with the remainder vesting over the following 36 months.

Outstanding Equity Awards at December 31, 2006

        The following table sets forth certain information regarding outstanding equity awards granted to our named executive officers for 2006 that remain outstanding as of December 31, 2006. All of the options in this table are exercisable at any time but, if exercised, are subject to a lapsing right of repurchase until the options are fully vested.

 
  Option awards(1)
  Stock Awards(2)
Name

  Number of
securities
underlying
unexercised
options
(#)
exercisable

  Number of
securities
underlying
unexercised
options
(#)
unexercisable

  Option
exercise
price
($)

  Option
expiration
date

  Number of
Shares
of stock
that have
not vested (#)

  Market Value
of Shares
of stock
that have
not vested
($)(3)

James M. Sweeney           98,958    
Michael Forese.           91,771    
David S. Wood.   400,000     0.81   10/5/16    

(1)
25% of the total number of shares subject to each named executive officer's options vest on the first anniversary of the applicable grant date with the remainder vesting over the following 36 months.

(2)
Represents shares of common stock subject to repurchase by us as of December 31, 2006 that were issued upon exercise of stock options prior to the vesting date of such options.

(3)
The market value is determined assuming an initial public offering price of $            per share, the mid-point of the range set forth on the cover page of this prospectus.

Option Exercises and Stock Vested

        The following table provides information regarding the number of shares of common stock acquired and the value received pursuant to the exercise of stock options and the vesting of stock during the year ended December 31, 2006 by our named executive officers for 2006.

 
  Stock Awards(1)
Name

  Number of shares
acquired on
vesting

  Value Realized
on vesting(2)

James M. Sweeney   62,500    
Michael Forese   37,500    

(1)
Represents the number of shares of common stock that vested during 2006 which were originally acquired upon the exercise of stock options prior to the vesting date of such options.

(2)
The value realized on vesting is determined assuming an initial public offering price of $            per share, the mid-point of the range set forth on the cover page of this prospectus, multiplied by the number of shares that vested, without taking into account any taxes that may be payable in connection with the transaction.

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Option Repricings

        We did not engage in any repricings or other modifications to any of our named executive officers' outstanding equity awards during the year ended December 31, 2006.

Pension Benefits

        None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our compensation, nominating and corporate governance committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our best interests.

Nonqualified Deferred Compensation

        None of our named executive officers participate in or have account balances in nonqualified defined contribution plans or other nonqualified deferred compensation plans maintained by us. Our compensation, nominating and corporate governance committee may elect to provide our officers and other employees with non-qualified defined contribution or other nonqualified deferred compensation benefits in the future if it determines that doing so is in our best interests.

Employee Benefit Plans

        We adopted our 2003 equity incentive plan (the "2003 plan") in July 2003. The 2003 plan will terminate in July 2013, unless our board of directors terminates it earlier. The 2003 plan provides for the grant of the following:

        Share Reserve.    As of the date hereof, an aggregate of 5,100,000 shares of our common stock are authorized for issuance under our 2003 plan.

        Shares of our common stock subject to options and other stock awards that have expired or otherwise terminate under the 2003 plan without having been exercised in full again will become available for grant under the plan. Shares of our common stock issued under the 2003 plan may include previously unissued shares or reacquired shares bought on the market or otherwise.

        Administration.    The 2003 plan is administered by our board of directors, which may in turn delegate authority to administer the plan to a committee. Subject to the terms of the 2003 plan, our board of directors or its authorized committee determines recipients, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, our board of directors or its authorized committee will also determine the exercise price of options granted under the 2003 plan.

        Stock Options.    Stock options will be granted pursuant to stock option agreements. Generally, the exercise price for an ISO cannot be less than 100% of the fair market value of the common stock subject to the option on the date of grant, and the exercise price for an NSO cannot be less than 85% of the fair market value of the common stock subject to the option on the date of grant. Options granted under the 2003 plan will vest at the rate specified in the option agreement. A stock option agreement may provide for early exercise, prior to vesting. Unvested shares of our common stock issued in connection with an early exercise may be repurchased by us.

        In general, the term of stock options granted under the 2003 plan may not exceed ten years. Unless the terms of an optionholder's stock option agreement provide for earlier or later termination,

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if an optionholder's service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder, or his or her beneficiary, may exercise any vested options up for to 12 months, or 18 months in the event of death, after the date the service relationship ends, unless the terms of the stock option agreement provide for earlier termination. If an optionholder's service relationship with us, or any affiliate of ours, ceases without cause for any reason other than disability or death, the optionholder may exercise any vested options for up to three months after the date the service relationship ends, unless the terms of the stock option agreement provide for a longer or shorter period to exercise the option. If an optionholder's relationship with us, or any affiliate of ours, ceases with cause, the option will terminate at the time the optionholder's relationship with us ceases. In no event may an option be exercised after its expiration date.

        Acceptable forms of consideration for the purchase of our common stock under the 2003 plan include (i) cash and (ii) at the discretion of our board of directors at the time of grant, common stock previously owned by the optionholder, deferred payment arrangements, or other legal consideration approved by our board of directors.

        Generally, an optionholder may not transfer a stock option other than by will or the laws of descent and distribution or a domestic relations order. However, an optionholder may designate a beneficiary who may exercise the option following the optionholder's death.

        Limitations.    The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. The options or portions of options that exceed this limit are treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any affiliate unless the following conditions are satisfied:

        Restricted Stock Awards.    Restricted stock awards will be granted pursuant to restricted stock purchase agreements. The purchase price of restricted stock awards shall not be less than 85% of the common stock's fair market value on the date the award is made or at the time the purchase is consummated. The purchase price for a restricted stock award may be payable in (i) cash, (ii) at the discretion of our board of directors, according to a deferred payment or other similar arrangement, or (iii) any other form of legal consideration approved by our board of directors. Shares of our common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option in our favor in accordance with a vesting schedule to be determined by our board of directors. Rights to acquire shares of our common stock under a restricted stock award are not transferable other than by will or the laws of descent and distribution.

        Stock Bonus Awards.    Stock bonus awards will be granted pursuant to stock bonus award agreements. A stock bonus award may be granted in consideration for the recipient's past services performed for us or an affiliate of ours. Shares of our common stock acquired under a stock bonus award may, but need not, be subject to forfeiture to us in accordance with a vesting schedule to be determined by our board of directors. Rights to acquire shares of our common stock under a stock bonus award are not transferable other than by will or the laws of descent and distribution.

        Changes to Capital Structure.    In the event that there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split or stock dividend, the number of shares reserved under the 2003 plan and the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards will be appropriately adjusted.

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        Corporate Transactions.    Unless otherwise provided in the stock award agreement, in the event of certain corporate transactions, any or all outstanding stock awards under the 2003 plan may be assumed, continued or substituted for by any surviving entity. If the surviving entity elects not to assume, continue or substitute for such awards, the vesting provisions of such stock awards generally will be accelerated in full and such stock awards will be terminated if and to the extent not exercised at or prior to the effective time of the corporate transaction and our repurchase rights will generally lapse.

        Plan Amendments.    Our board of directors will have the authority to amend or terminate the 2003 plan. However, no amendment or termination of the plan will adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. We will obtain stockholder approval of any amendment to the 2003 plan as required by applicable law.

        Our board of directors adopted the 2007 equity incentive plan (the "2007 plan") in August 2007, and we expect our stockholders will approve the 2007 plan prior to the closing of this offering. The 2007 plan will become effective immediately upon the signing of the underwriting agreement related to this offering. The 2007 plan will terminate in             2017, unless sooner terminated by our board of directors.

        Stock Awards.    The 2007 plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards. In addition, the 2007 plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, non-employee directors and consultants.

        Share Reserve.    Following this offering, the aggregate number of shares of our common stock that may be issued initially pursuant to stock awards under the 2007 plan is            shares. In addition, the number of shares of our common stock reserved for issuance will automatically increase (i) on January 1 of each calendar year, from January 1, 2008 through January 1, 2017, by the least of (a)         percent of the total number of shares of our common stock outstanding on December 31st of the preceding calendar year, (b)             shares, or (c) a number determined by our board of directors that is less than (a) or (b). The reserve will also include any shares reserved under the 2003 plan that are not subject to outstanding options at the effective date of the 2007 plan (            shares as of July 31, 2007) plus any shares that are issuable pursuant to options under the 2003 plan that are forfeited or expire from time to time. The maximum number of shares that may be issued pursuant to the exercise of incentive stock options under the 2007 plan is equal to            shares, as increased from time to time pursuant to annual increases.

        No person may be granted stock awards covering more than            shares of our common stock under the 2007 plan during any calendar year pursuant to stock options or stock appreciation rights. In addition, no person may be granted a performance stock award covering more than            shares or a performance cash award covering $            in any calendar year. Such limitations are designed to help assure that any deductions to which we would otherwise be entitled with respect to such stock awards will not be subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code.

        If a stock award granted under the 2007 plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of our common stock not acquired pursuant to the stock award again become available for subsequent issuance under the 2007 plan. In addition, the following types of shares under the 2007 plan may become available for the grant of new stock awards under the 2007 plan: (a) shares that are forfeited to or repurchased by us prior to becoming fully vested; (b) shares withheld to satisfy income or employment withholding taxes; (c) shares used to pay

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the exercise price of an option in a net exercise arrangement; and (d) shares tendered to us to pay the exercise price of an option. Shares issued under the 2007 plan may be previously unissued shares or reacquired shares bought on the open market. As of the date hereof, no shares of our common stock have been issued under the 2007 plan.

        Administration.    Our board of directors has delegated its authority to administer the 2007 plan to our compensation, nominating and corporate governance committee. Subject to the terms of the 2007 plan, our board of directors or an authorized committee, referred to as the plan administrator, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price of options granted, the consideration to be paid for restricted stock awards and the strike price of stock appreciation rights.

        The plan administrator has the authority to reprice any outstanding stock award under the 2007 plan without the approval of our stockholders.

        Stock Options.    Incentive and nonstatutory stock options are granted pursuant to incentive and nonstatutory stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and conditions of the 2007 plan, provided that the exercise price of a stock option cannot be less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2007 plan vest at the rate specified by the plan administrator.

        The plan administrator determines the term of stock options granted under the 2007 plan, up to a maximum of ten years, except in the case of certain incentive stock options, as described below. Unless the terms of an optionholder's stock option agreement provide otherwise, if an optionholder's relationship with us, or any of our affiliates, ceases for any reason other than for cause, disability or death, the optionholder may exercise any vested options for a period of three months following the cessation of service. If an optionholder's service relationship with us is terminated for cause, then the option terminates immediately. If an optionholder's service relationship with us, or any of our affiliates, ceases due to disability or death, or an optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may exercise any vested options for a period of 12 months in the event of disability and 18 months in the event of death. The option term may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its term.

        Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (a) cash, check, bank draft or money order, (b) a broker-assisted cashless exercise, (c) the tender of common stock previously owned by the optionholder, (d) a net exercise of the option and (e) other legal consideration approved by the plan administrator.

        Unless the plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionholder may designate a beneficiary, however, who may exercise the option following the optionholder's death.

        Tax Limitations on Incentive Stock Options.    Incentive stock options may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to incentive stock options that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (a) the option exercise price is at least 110% of the fair market value of the stock subject to the option

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on the date of grant, and (b) the term of the incentive stock option does not exceed five years from the date of grant.

        Restricted Stock Awards.    Restricted stock awards are granted pursuant to restricted stock award agreements adopted by the plan administrator. Restricted stock awards may be granted in consideration for (a) cash, check, bank draft or money order, (b) past or future services rendered to us or our affiliates, or (c) any other form of legal consideration. Shares of common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option in our favor in accordance with a vesting schedule to be determined by the plan administrator. Rights to acquire shares under a restricted stock award may be transferred only upon such terms and conditions as set by the plan administrator.

        Restricted Stock Unit Awards.    Restricted stock unit awards are granted pursuant to restricted stock unit award agreements adopted by the plan administrator. Restricted stock unit awards may be granted in consideration for any form of legal consideration. A restricted stock unit award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the plan administrator, or in any other form of consideration set forth in the restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a restricted stock unit award. Except as otherwise provided in the applicable award agreement, restricted stock units that have not vested will be forfeited upon the participant's cessation of continuous service for any reason.

        Stock Appreciation Rights.    Stock appreciation rights are granted pursuant to stock appreciation rights agreements adopted by the plan administrator. The plan administrator determines the strike price for a stock appreciation right which cannot be less than 100% of the fair market value of our common stock on the date of grant. Upon the exercise of a stock appreciation right, we will pay the participant an amount equal to the product of (a) the excess of the per share fair market value of our common stock on the date of exercise over the strike price, multiplied by (b) the number of shares of common stock with respect to which the stock appreciation right is exercised. A stock appreciation right granted under the 2007 plan vests at the rate specified in the stock appreciation right agreement as determined by the plan administrator.

        The plan administrator determines the term of stock appreciation rights granted under the 2007 plan, up to a maximum of ten years. If a participant's service relationship with us, or any of our affiliates, ceases, then the participant, or the participant's beneficiary, may exercise any vested stock appreciation right for three months (or such longer or shorter period specified in the stock appreciation right agreement) after the date such service relationship ends. In no event, however, may a stock appreciation right be exercised beyond the expiration of its term.

        Performance Awards.    The 2007 plan permits the grant of performance stock awards and performance cash awards that may qualify as performance-based compensation that is not subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code. To assure that the compensation attributable to performance-based awards will so qualify, our compensation, nominating and corporate governance committee can structure such awards so that stock will be issued or paid pursuant to such award only upon the achievement of certain pre-established performance goals during a designated performance period. The maximum benefit number of shares that may be granted to a participant in any calendar year attributable to performance stock awards may not exceed            shares of common stock and the maximum value that may be granted to a participant in any calendar year attributable to performance cash awards may not exceed $            .

        Other Stock Awards.    The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the award and all other terms and conditions of such awards.

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        Changes to Capital Structure.    In the event that there is a specified type of change in our capital structure, such as a stock split, appropriate adjustments will be made to (a) the number of shares reserved under the 2007 plan, (b) the maximum number of shares by which the share reserve may increase automatically each year, (c) the maximum number of options, stock appreciation rights and performance stock awards and performance cash awards that can be granted in a calendar year, (d) the number of shares for which options are subsequently to be made as initial and annual grants to new and continuing non-employee directors and (e) the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards.

        Corporate Transactions.    In the event of certain significant corporate transactions, awards under the 2007 plan may be assumed, continued or substituted for by any surviving or acquiring entity or its parent company. If the surviving or acquiring entity or its parent company elects not to assume, continue or substitute for such stock awards, then (a) with respect to any such stock awards that are held by individuals whose service with us or our affiliates has not terminated prior to the effective date of the corporate transaction, the vesting and exercisability provisions of such stock awards will be accelerated in full and such awards will be terminated if not exercised prior to the effective date of the corporate transaction, and (b) all other outstanding stock awards will terminate if not exercised prior to the effective date of the corporate transaction. Our board of directors has the discretion to:

        Changes in Control.    Our board of directors has the discretion to provide that a stock award under the 2007 plan will immediately vest as to all or any portion of the shares subject to the stock award (a) immediately upon the occurrence of certain specified change in control transactions, whether or not such stock award is assumed, continued or substituted by a surviving or acquiring entity in the transaction or (b) in the event a participant's service with us or a successor entity is terminated actually or constructively within a designated period following the occurrence of certain specified change in control transactions. Stock awards held by participants under the 2007 plan will not vest automatically on such an accelerated basis unless specifically provided by the participant's applicable award agreement.

2007 Non-Employee Directors' Stock Option Plan

        Our board of directors adopted the 2007 non-employee directors' stock option plan (the "directors' plan") in August 2007 and we expect our stockholders will approve our directors' plan prior to the closing of this offering. The directors' plan will become effective immediately upon the signing of the underwriting agreement for this offering. The directors' plan will terminate at the discretion of our board of directors. The directors' plan provides for the automatic grant of nonstatutory stock options to purchase shares of our common stock to our non-employee directors.

        Share Reserve.    An aggregate of            shares of our common stock are reserved for issuance under the directors' plan. This amount will be increased annually on January 1 of each calendar year, from January 1, 2008 through January 1, 2017, by the aggregate number of shares of our common stock subject to options granted as initial grants and annual grants under the directors' plan during the immediately preceding year. However, our board of directors will have the authority to designate a lesser number of shares by which the authorized number of shares of our common stock will be increased.

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        Shares of our common stock subject to stock options that have expired or otherwise terminated under the directors' plan without having been exercised in full shall again become available for grant under the directors' plan. Shares of our common stock issued under the directors' plan may be previously unissued shares or reacquired shares bought on the market or otherwise. If the exercise of any stock option granted under the directors' plan is satisfied by tendering shares of our common stock held by the participant, then the number of shares tendered shall again become available for the grant of awards under the directors' plan.

        Administration.    Our board of directors has delegated its authority to administer the directors' plan to our compensation, nominating and corporate governance committee.

        Stock Options.    Stock options will be granted pursuant to stock option agreements. The exercise price of the options granted under the directors' plan will be equal to 100% of the fair market value of our common stock on the date of grant. Initial grants vest in equal monthly installments over three years after the date of grant and annual grants vest in equal monthly installments over 12 months after the date of grant.

        In general, the term of stock options granted under the directors' plan may not exceed ten years. If an optionholder's service relationship with us, or any affiliate of ours, ceases, then the optionholder or his or her beneficiary may exercise any vested options for such period as provided under the terms of the stock option agreement.

        Acceptable consideration for the purchase of our common stock issued under the directors' plan may include cash, a "net" exercise, common stock previously owned by the optionholder or a program developed under Regulation T as promulgated by the Federal Reserve Board.

        Generally, an optionholder may not transfer a stock option other than by will or the laws of descent and distribution. However, an optionholder may transfer an option under certain circumstances with our written consent if a Form S-8 registration statement is available for the exercise of the option and the subsequent resale of the shares. In addition, an optionholder may designate a beneficiary who may exercise the option following the optionholder's death.

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        Changes to Capital Structure.    In the event there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split or stock dividend, the number of shares reserved under the directors' plan and the number of shares and exercise price of all outstanding stock options will be appropriately adjusted.

        Corporate Transactions.    In the event of certain corporate transactions, including change in control transactions, the vesting of options held by non-employee directors whose service has not been terminated prior to the effective time of the corporate transaction generally will be accelerated in full and all options outstanding under the directors' plan will be terminated if not exercised prior to the effective date of the corporate transaction.

        Plan Amendments.    Our board of directors will have the authority to amend or terminate the directors' plan. However, no amendment or termination of the directors' plan will adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. We will obtain stockholder approval of any amendment to the directors' plan as required by applicable law.

2007 Employee Stock Purchase Plan

        Our board of directors adopted our 2007 employee stock purchase plan (the "2007 purchase plan") in August 2007, and we expect our stockholders will approve the 2007 purchase plan prior to the completion of this offering. The 2007 purchase plan will become effective immediately upon the signing of the underwriting agreement related to this offering.

        Share Reserve.    Following this offering, the 2007 purchase plan authorizes the issuance of             shares of our common stock pursuant to purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2008 through January 1, 2017, by the least of (a)     percent of the total number of shares of our common stock outstanding on December 31st of the preceding calendar year, (b)             shares, or (c) a number determined by our board of directors that is less than (a) or (b). The 2007 purchase plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. As of the date hereof, no shares of our common stock have been purchased under the 2007 purchase plan.

        Administration.    Our board of directors has delegated its authority to administer the 2007 purchase plan to our compensation, nominating and corporate governance committee. The 2007 purchase plan is implemented through a series of offerings of purchase rights to eligible employees. Under the 2007 purchase plan, we may specify offerings with a duration of not more than 24 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances.

        Payroll Deductions.    Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, may participate in the 2007 purchase plan and may contribute, normally through payroll deductions, up to 15% of their earnings for the purchase of our common stock under the 2007 purchase plan. Unless otherwise determined by our board of directors, common stock will be purchased for accounts of employees participating in the 2007 purchase plan at a price per share equal to the lower of (a) 85% of the fair market value of a share of our common stock on the first date of an offering or (b) 85% of the fair market value of a share of our common stock on the date of purchase.

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        Limitations.    Employees may have to satisfy one or more of the following service requirements before participating in the 2007 purchase plan, as determined by our board of directors: (a) customarily employed for more than 20 hours per week, (b) customarily employed for more than five months per calendar year or (c) continuous employment with us or one of our affiliates for a period of time not to exceed two years. No employee may purchase shares under the 2007 purchase plan at a rate in excess of $25,000 worth of our common stock based on the fair market value per share of our common stock at the beginning of an offering for each year such a purchase right is outstanding. Finally, no employee will be eligible for the grant of any purchase rights under the 2007 purchase plan if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value.

        Changes to Capital Structure.    In the event that there is a specified type of change in our capital structure, such as a stock split, appropriate adjustments will be made to (a) the number of shares reserved under the 2007 purchase plan, (b) the maximum number of shares by which the share reserve may increase automatically each year and (c) the number of shares and purchase price of all outstanding purchase rights.

        Corporate Transactions.    In the event of certain significant corporate transactions, any then-outstanding rights to purchase our stock under the 2007 purchase plan will be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such purchase rights, then the participants' accumulated payroll contributions will be used to purchase shares of our common stock within ten business days prior to such corporate transaction, and such purchase rights will terminate immediately.

        We maintain a defined contribution employee retirement plan for our employees. The plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan. The 401(k) plan provides that each participant may contribute up to 100% of his or her pre-tax compensation, up to a statutory limit, which is $15,500 for 2007. Participants who are at least 50 years old can also make "catch-up" contributions, which in 2007 may be up to an additional $5,000 above the statutory limit. Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan's trustee. The 401(k) plan also permits us to make discretionary contributions and matching contributions, subject to established limits and a vesting schedule. To date, we have not made any discretionary or matching contributions to the plan on behalf of participating employees.

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Non-Employee Director Compensation

        The following table sets forth in summary form information concerning the compensation that we paid or awarded during the year ended December 31, 2006 to each of our non-employee directors:

Name

  Fees Earned or Paid in
Cash ($)

  Option Awards
($)

  All Other
Compensation ($)

  Total ($)
Bruce H. KenKnight, Ph.D.(1)              
Lawrence S. Lewin(2)              
Fred A. Middleton              
Timothy Mills, Ph.D.(3)              
Eric N. Prystowsky, M.D.   $ 8,000 (4)   $ 36,000 (5) $ 44,000
Harry T. Rein              
Robert J. Rubin, M.D.(6)         $ 40,084 (7) $ 40,084
Daniel C. Wood              

(1)
Dr. KenKnight resigned from our board in August 2007.

(2)
Mr. Lewin resigned from our board in July 2007.

(3)
Dr. Mills resigned from our board in July 2007.

(4)
Represents board meeting fees in the amount of $8,000 in connection with four meetings attended.

(5)
Represents fees paid to a consulting firm affiliated with Dr. Prystowsky for services provided by Dr. Prystowsky.

(6)
Dr. Rubin was elected to our board in August 2007.

(7)
Represents fees paid to Dr. Rubin for consulting services provided by him.

        We have reimbursed and will continue to reimburse our non-employee directors for their travel, lodging and other reasonable expenses incurred in attending meetings of our board of directors and committees of the board of directors.

        In July, 2007, our board of directors adopted a compensation program for our non-employee directors, or the Non-Employee Director Compensation Policy. The Non-Employee Director Compensation Policy will be effective for all of our non-employee directors on the effective date of this offering. Pursuant to the Non-Employee Director Compensation Policy, each member of our board of directors who is not our employee will receive the following cash compensation for board services, as applicable:

        In addition, our non-employee directors will receive initial and annual, automatic, non-discretionary grants of nonqualified stock options under the terms and provisions of our directors' plan, which will become effective as of the effective date of this offering.

        Each non-employee director joining our board after the closing of this Offering will automatically be granted a non-statutory stock option to purchase 30,000 shares of common stock with an exercise price equal to the then fair market value of our common stock under our directors' plan. Each director assuming the role of a chairperson of the compensation, nominating and corporate governance or audit committees shall be granted an additional non-statutory option to purchase 15,000 shares of common stock with an exercise price equal to the then fair market of our common stock under our directors' plan. Each of these initial grants will vest over a three year period, 331/3% of which will vest upon the first anniversary of the date of grant and the remainder will vest in a series of 24 successive equal monthly installments thereafter. On the date of each annual meeting of our stockholders beginning in

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2008, each non-employee director will automatically be granted a non-statutory stock option to purchase 10,000 shares of common stock on that date with an exercise price equal to the then fair market value of our common stock under our directors' plan. The annual grants will vest in equal monthly installments over 12 months following the date of grant. All stock options granted will have a maximum term of ten years and will vest in full upon the closing of a change in control transaction.

        In addition to the foregoing, each non-employee director serving on our board as of July 27, 2007 was granted a non-statutory stock option to purchase 30,000 shares of common stock under our 2003 plan with an exercise price equal to the then fair market value of our common stock and each non-employee director serving as a chairperson of the compensation or audit committee on July 27, 2007 was granted an additional non-statutory option to purchase 15,000 shares of common stock under our 2003 plan with an exercise price equal to the then fair market of our common stock on the date of grant. Each of these grants vest over a three year period, 331/3% of which will vest upon the first anniversary of the date of grant and the remainder will vest in a series of 24 successive equal monthly installments thereafter. All stock options granted will have a maximum term of ten years and will vest in full upon the closing of a change in control transaction.

        In addition to the foregoing, each non-employee director joining our board prior to the closing of this offering will automatically be granted a non-statutory stock option to purchase 30,000 shares of common stock under our 2003 plan with an exercise price equal to the then fair market value of our common stock and each non-employee director assuming the role of a chairperson of the compensation, nominating and corporate governance or audit committees prior to the closing of this offering will automatically be granted an additional non-statutory option to purchase 15,000 shares of common stock under our 2003 plan with an exercise price equal to the then fair market of our common stock on the date of grant. Each of these grants vest over a three year period, 331/3% of which will vest upon the first anniversary of the date of grant and the remainder will vest in a series of 24 successive equal monthly installments thereafter. All stock options granted will have a maximum term of ten years and will vest in full upon the closing of a change in control transaction.

        For a more detailed description of our directors' plan and 2003 plan, see "—Equity Benefit Plans" above.

Limitation of Liability and Indemnification

        Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:


        These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.

        Our amended and restated bylaws, which will become effective upon the completion of this offering, provide that we will indemnify our directors and executive officers, and may indemnify other officers, employees and other agents, to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of

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whether our amended and restated bylaws permit such indemnification. We have obtained a policy of directors' and officers' liability insurance.

        We have entered, and intend to continue to enter, into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our amended and restated bylaws. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.

        At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling us, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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RELATED PARTY TRANSACTIONS

        The following is a description of transactions since January 1, 2004 to which we have been a party, in which the amount involved in the transaction exceeds $120,000, and in which any of our directors, executive officers or to our knowledge, beneficial owners of more than 5% of our capital stock had or will have a direct or indirect material interest, other than compensation, termination and change-in-control arrangements, which are described under "Executive Compensation." We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm's-length transactions.

Policies and Procedures for Transactions with Related Persons

        We have adopted a written Related-Person Transactions Policy that sets forth our policies and procedures regarding the identification, review, consideration and oversight of "related-persons transactions." For purposes of our policy only, a "related-person transaction" is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any "related person" are participants involving an amount that exceeds $120,000. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person are not covered by this policy. A related person is any executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons.

        Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the proposed related-person transaction to our audit committee (or, where review by our audit committee would be inappropriate, to another independent body of our board of directors) for review. The presentation must include a description of, among other things, the material facts, the direct and indirect interests of the related persons, the benefits of the transaction to us and whether any alternative transactions are available. To identify related-person transactions in advance, we rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our audit committee takes into account the relevant available facts and circumstances including, but not limited to:

        In the event a director has an interest in the proposed transaction, the director must recuse himself or herself from the deliberations and approval. Our policy requires that, in reviewing a related-person transaction, our audit committee must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, the best interests of us and our stockholders, as our audit committee determines in the good faith exercise of its discretion. We did not previously have a formal policy concerning transactions with related persons.

Preferred Stock Financings

        In March 2004, we issued and sold to investors an aggregate of 1,000,000 shares of Series D preferred stock at a purchase price of $10.00 per share, for aggregate consideration of $10 million. Upon completion of this offering, these shares will convert into 1,000,000 shares of common stock.

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        In March 2007, we issued and sold to investors an aggregate of 114,839 shares of mandatorily redeemable convertible preferred stock at a purchase price of $1,000 per share, for aggregate consideration of $114.8 million Upon completion of this offering, these shares will convert into            shares of common stock, assuming an initial public offering price of $                              per share, the mid-point of the price range set forth on the cover page of this prospectus.

        The participants in these preferred stock financings included the following directors, officers and holders of more than 5% of our capital stock or entities affiliated with them. The following table presents the number of shares issued to these related parties in these financings:

Participants(1)

  Series D Preferred
Stock

  Mandatorily Redeemable
Convertible Preferred
Stock(2)

Guidant Investment Corporation(3)   500,000  
Sanderling Venture Partners V Co-Investment Fund, L.P. and its affiliates(4)   150,000   7,256
H&Q Healthcare Investors and its affiliates(5)     1,563
BioFrontier Global Investment Partnership   84,637  
Inglewood Ventures, L.P.(6)   65,631  

(1)
Additional detail regarding these stockholders and their equity holdings is provided in "Principal and Selling Stockholders."

(2)
Each share of the mandatorily redeemable convertible preferred stock will convert into shares of common stock in connection with the offering at a conversion ratio of $1,000 divided by 90% of the initial public offering price, subject to a maximum denominator of $12.00 per share and a minimum denominator of $8.05 per share.

(3)
Bruce H. KenKnight, one of our former directors, was the Director of Business Development of Guidant Corporation as of the date we issued to Guidant Corporation shares of our Series D preferred stock.

(4)
Represents shares held by Sanderling V. Limited Partnership; Sanderling V Beteilingungs GmbH & Co KG; Sanderling V Biomedical Co-Investment Fund, L.P.; Sanderling Venture Partners V Co-Investment Fund, L.P.; Sanderling V Venture Management, Sanderling Venture Partners VI Co-Investment, L.P.; Sanderling VI Beteilingungs GmbH & Co KG; Sanderling VI Limited Partnership; and Sanderling Ventures Management VI. Fred A. Middleton, one of our directors, is a General Partner/Managing Director of Sanderling Ventures, and as such he shares voting and investment control of the shares held by these entities. Upon completion of this offering, these shares will convert into            shares of common stock, assuming in initial public offering price of $                              per share, the mid-point of the price range set forth on the cover page of this prospectus.

(5)
Represents shares held by H&Q Healthcare Investors and H&Q Life Science Investors. Upon completion of this offering, these shares will convert into            shares of common stock, assuming in initial public offering price of $                              per share, the mid-point of the price range set forth on the cover page of this prospectus.

(6)
Daniel Wood, one of our former directors, is a General Partner of Inglewood Ventures, L.P., and as such he shares voting and investment control of the shares held by Inglewood Ventures, L.P.

        In connection with our various preferred stock financings, we entered into amended and restated investor rights, voting, and right of first refusal and co-sale agreements containing voting rights, information rights, rights of first refusal and registration rights, among other things, with certain holders of our preferred stock and certain holders of our common stock, which agreements were most recently amended in connection with our mandatorily redeemable convertible preferred stock financing in March 2007. Moreover, in connection with our mandatorily redeemable convertible preferred stock financing in March 2007, we entered into a registration rights agreement with the holders of our mandatorily redeemable convertible preferred stock which provided certain registration rights to such holders.

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Convertible Note and Warrant Issuances

Bridge Financings

        2005 Bridge Financing.    In August 2005, we issued secured subordinated convertible promissory notes in an aggregate amount of $2.0 million to affiliates of Sanderling Ventures, $500,000 to H&Q Healthcare Investors and its affiliates and $500,000 to Foundation Medical Partners, each with a maturity date of the first to occur of February 15, 2006 or certain events as set forth in the promissory notes. In connection therewith, we also issued warrants to purchase 171,427 shares of our preferred stock to affiliates of Sanderling Ventures, warrants to purchase 42,856 shares of our preferred stock to H&Q Healthcare Investors and its affiliates and warrants to purchase 42,857 shares of our preferred stock to Foundation Medical Partners.

        May 2006 Bridge Financings.    In May 2006 we issued secured subordinated convertible promissory notes in an aggregate amount of $2,113,534 to affiliates of Sanderling Ventures, $528,274 to H&Q Investors and its affiliates and $528,383 to Foundation Medical Partners, each with a maturity date of the first to occur of August 15, 2006 or certain events as set forth in the promissory notes. In connection therewith, we also issued warrants to purchase 181,159 shares of our Series D-1 preferred stock to affiliates of Sanderling Ventures, warrants to purchase 45,280 shares of our Series D-1 preferred stock to H&Q Healthcare Investors and its affiliates and warrants to purchase 45,290 shares of our Series D-1 preferred stock to Foundation Medical Partners. These notes and warrants superseded and restated in their entirety the notes and warrants issued in August 2005.

        August 2006 Bridge Financing.    In August 2006 we issued secured subordinated convertible promissory notes in an aggregate amount of $49,103 to affiliates of Sanderling Ventures, $12,273 to H&Q Investors and its affiliates and $12,276 to Foundation Medical Partners, each with a maturity date of the first to occur of February 15, 2007 or certain events as set forth in the promissory notes. In connection therewith, we also issued warrants to purchase 13,939 shares of our Series D-1 preferred stock to affiliates of Sanderling Ventures, warrants to purchase 3,475 shares of our Series D-1 preferred stock to H&Q Healthcare Investors and its affiliates and warrants to purchase 3,485 shares of our Series D-1 preferred stock to Foundation Medical Partners.

        The notes issued the May 2006 and August 2006 bridge financings were converted into $3.4 million of our mandatorily redeemable convertible preferred stock in March 2007. The exercise price of the warrants issued in the May 2006 and August 2006 bridge financings on a per share basis is $3.50. Unless previously exercised, these warrants will be automatically net exercised immediately prior to the completion of this offering in accordance with the terms thereof.

Guidant Financings

        In May 2006, we issued a subordinated promissory note with a principal amount of $21,400,958 to Guidant Investment Corporation, with a maturity date of November 12, 2007, which amended, restated and superseded in full those certain promissory notes dated November 12, 2003 and March 18, 2004, each with a principal amount of $10.0 million. These notes were repaid in full in August 2007.

        In May 2006, we issued a warrant to purchase 200,136 shares of our Series D-1 preferred stock to Guidant Investment Corporation. In August 2007 we issued a warrant to purchase 214,285 shares of our Series D-1 preferred stock to Guidant Investment Corporation. The exercise price of the warrants issued to Guidant Investment Corporation on a per share basis is $3.50. Unless previously exercised, these warrants will be automatically net exercised immediately prior to the completion of this offering in accordance with the terms thereof.

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Loan Program

        From July 2003 to February 2006, we have maintained a program whereby, from time to time, we have allowed certain of our employees, including James M. Sweeney and Michael Forese, to exercise options to purchase shares of our common stock by issuing to us a full recourse promissory note. The promissory notes generally have a four year term and accrue interest at a rate of approximately the treasury rate. Principal and interest payments are due annually and the notes are secured by the Company's common stock issued under the arrangement.

        Under this program, in 2004, we made a loan of $187,500 to James M. Sweeney, bearing interest at an annual rate of 4.00% pursuant to a full recourse promissory note. The loan was payable in monthly payments of principal and interest through 2008. In August 2007, we paid a special bonus in the aggregate of $352,679 to Mr. Sweeney and, subsequently, the remaining outstanding principal and interest balance of the loan of approximately $210,000 was repaid in its entirety.

        In 2007, we made a loan of $112,500 to Michael Forese, bearing interest at an annual rate of 4.58% pursuant to a full recourse promissory note. In August 2007, we paid a special bonus in the aggregate of $165,696 to Mr. Forese and, subsequently, the remaining outstanding principal and interest balance of the loan of approximately $115,000 was repaid in its entirety.

Loan To David Wood

        In September 2006, we made a loan of $230,000 to David S. Wood, bearing interest at an annual rate of 5.13% pursuant to a loan agreement. Pursuant to the terms of a separation and release agreement we entered into with Mr. Wood in connection with the termination of his employment in June 2007, we forgave all principal and accrued interest under the loan.

Information Technology Services Agreement

        In July 2004, we entered into a two year information technology services agreement with an affiliate of a shareholder. In June 2006, the agreement was extended for an additional two year period. In connection with this agreement we earned revenue of $1.3 million, $1.5 million, $0.9 million and $0.3 million for the years ended December 31, 2004, 2005, 2006 and the six months ended June 30, 2007, respectively.

Stock Options Granted to Executive Officers and Directors

        From January 1, 2004 to August 31, 2007, we granted options to purchase an aggregate of 610,000 shares of common stock to our current directors and executive officers, with exercise prices ranging from $0.75 to $3.05.

Indemnification Agreements

        We have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.

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PRINCIPAL AND SELLING STOCKHOLDERS

        The following table sets forth information regarding beneficial ownership of our capital stock outstanding as of July 31, 2007 by:

        The percentage ownership information shown in the table is based upon: (1) 6,400,312 shares of common stock outstanding as of July 31, 2007, (2) the conversion of all outstanding shares of our preferred stock into    shares of common stock upon the completion of this offering, assuming an initial public offering price of $                       per share, the mid-point of the price range set forth on the cover page of this prospectus, (3) the automatic cashless exercise of warrants to purchase shares of our Series D-1 preferred stock upon the completion of this offering pursuant to the terms thereof, resulting in the issuance of            shares of our common stock, assuming an initial public offering price of $                      per share, the mid-point of the price range set forth on the cover page of this prospectus and (4) the issuance by us of                        shares of common stock in this offering. The percentage ownership information assumes no exercise of the underwriters' over-allotment option.

        Each individual or entity shown in the table has furnished information with respect to beneficial ownership. We have determined beneficial ownership in accordance with the SEC's rules. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options, warrants or other rights that are either immediately exercisable or exercisable on September 29, 2007, which is 60 days after July 31, 2007. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

        Except as otherwise noted below, the address for each person or entity listed in the table is c/o CardioNet, Inc., 1010 Second Avenue, San Diego, California 92101.

 
   
   
   
  Percentage of shares
beneficially owned

Name and address of beneficial owner

  Number of shares
beneficially owned
before offering

  Number of shares
beneficially owned
after the offering

  Number of shares
to be sold in the
offering(1)

  Before
offering

  After
offering

5% Stockholders                    
Guidant Investment Corporation/Boston Scientific Corporation and its affiliates                    
Sanderling Ventures and its affiliates(1)                    
H&Q Healthcare Investors and its affiliates                    
                     

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BioFrontier Global Investment Partnership and its affiliates                    
IngleWood Ventures, L.P.                    

Directors and executive officers:

 

 

 

 

 

 

 

 

 

 
James M. Sweeney(2)                    
Fred Middleton(3)                    
Eric N. Prystowsky, M.D.(4)                    
Harry T. Rein(5)                    
Robert J. Rubin, M.D.                     
Michael Forese(6)                    
David Wood(7)                    
All directors and executive officers as a group (8 persons)(8)                    
Selling Stockholders:                    
                     
                     

*
Represents beneficial ownership of less than 1%.

(1)
Includes the following shares held by the following related entities:

116,579 shares of capital stock held by Sanderling [Feri Trust] Venture Partners IV;

409,926 shares of capital stock held by Sanderling IV Limited Partnership;

124,365 shares of capital stock held by Sanderling Ventures Management IV;

1,050,747 shares of capital stock held by Sanderling Venture Partners IV, L.P.;

327,596 shares of capital stock held by Sanderling Venture Partners IV Co-Investment Fund, L.P.

409,051 shares of capital stock held by Sanderling IV Biomedical, L.P.;

655,261 shares of capital stock held by Sanderling IV Biomedical Co-Investment Fund, L.P.;

shares of capital stock held by Sanderling V Beteiligungs GmbH & Co. KG;

shares of capital stock held by Sanderling V Limited Partnership;

shares of capital stock held by Sanderling V Ventures Management;

shares of capital stock held by Sanderling Venture Partners V Co-Investment Fund, L.P.;

shares of capital stock held by Sanderling V Biomedical Co-Investment Fund, L.P.;

shares of capital stock held by Sanderling VI Beteiligungs GmbH & Co KG; and

shares of capital stock held by Sanderling VI Limited Partnership.

shares of capital stock held by Sanderling Ventures Management VI;

shares of capital stock held by Sanderling Venture Partners VI Co-Investment Fund, L.P.;


Robert G. McNeil and Fred A. Middleton share voting and investment control of the shares held by the Sanderling IV entities, and may be deemed a beneficial owner of these shares under the securities laws. Fred A. Middleton, one of our directors, and Robert G. McNeil, Timothy C. Mills and Timothy J. Wollaeger share voting and investment control of the shares held by the Sanderling V entities, and may be deemed a beneficial owner of these shares under the securities laws. Robert G. McNeil, Fred A. Middleton, Timothy C. Mills, Timothy J. Wollaeger and Paul A. Grayson share voting and investment control of the shares held by the Sanderling VI entities, and may be deemed a beneficial owner of these shares under the securities laws. The address of these Sanderling entities is 400 South El Camino Real, Suite 1200, San Mateo, CA 94402.

(2)
Includes 1,198,000 shares of capital stock held by the James M. Sweeney Trust established May 24, 1999, of which James M. Sweeney is trustee. Includes an option to purchase 100,000 shares of capital stock. Of these 2,559,690 shares, 141,666 shares of capital stock will be unvested as of September 29, 2007.

(3)
Includes the shares of capital stock held by Sanderling entities referred to in footnote (1) above. Fred Middleton disclaims any beneficial ownership of the shares owned by these entities except to the extent of his pecuniary interest in these entities.

(4)
Includes 20,408 shares of capital stock held by McDonald Investments, Inc. for the benefit of Eric N. Prystowsky IRA. Includes an option to purchase 20,000 shares of capital stock.

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(5)
Includes    shares of capital stock held by Foundation Medical Partners, L.P. The address of Foundation Medical Partners, L.P. is 105 Rowayton Avenue, Rowayton, CT, 06853.

(6)
Of these 150,000 shares of capital stock, 63,646 will be unvested as of September 29, 2007.

(7)
Includes an option to purchase 83,306 shares of capital stock.

(8)
Includes the shares of capital stock referred to in footnotes (1), (2), (3), (4), (5) and (6) above. Also includes            shares of common stock, of which                         will be subject to a right of repurchase by us as of September 29, 2007, and options to purchase 300,000 shares of common stock, of which                        will be unvested as of September 29, 2007.

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DESCRIPTION OF CAPITAL STOCK

        Upon completion of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.

        The following is a summary of the rights of our common stock and preferred stock. This summary is not complete. For more detailed information, please see our amended and restated certificate of incorporation and bylaws, which will be filed as exhibits to the registration statement of which this prospectus is a part.

Common Stock

        Outstanding Shares.    Based on 6,392,203 shares of common stock outstanding as of June 30, 2007, the conversion of preferred stock outstanding as of June 30, 2007 into                        shares of common stock upon the completion of this offering, the issuance by us of                        shares of common stock in this offering, the automatic cashless exercise of warrants in connection with this offering for                        shares of our common stock pursuant to the terms thereof and no other exercise of options or warrants, there will be                        shares of common stock outstanding upon completion of this offering, assuming an assuming an initial public offering price of $                       per share, the mid-point of the price range set forth on the cover page of this prospectus. The number of shares of our common stock outstanding after this offering would be             shares assuming an initial public offering price of $                      per share, the low point of the price range set forth on the cover page of this prospectus or                         shares assuming an initial public offering price of $                              per share, the high point of the price range set forth on the cover page of this prospectus. See the "Capitalization" section in this prospectus for more information.

        As of June 30, 2007, there were 1,921,791 shares of common stock subject to outstanding options under our 2003 Equity Incentive Plan.

        As of June 30, 2007, we had approximately 193 record holders of our common stock.

        Voting Rights.    Each holder of common stock is entitled to one vote for each share of common stock on all matters submitted to a vote of the stockholders, including the election of directors. Our amended and restated certificate of incorporation and amended and restated bylaws do not provide for cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they should so choose.

        Dividends.    Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.

        Liquidation.    In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of the liquidation preferences granted to the holders of any outstanding shares of preferred stock.

        Rights and Preferences.    Holders of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

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        Fully Paid and Nonassessable.    All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, fully paid and nonassessable.

Preferred Stock

        On June 30, 2007, there were 114,839 shares of mandatorily redeemable convertible preferred stock held of record by 35 stockholders and 17,682,606 shares of other preferred stock outstanding held of record by 79 stockholders.

        Upon the completion of this offering, all shares of preferred stock will be converted into shares of our common stock. The number of shares of common stock into which the mandatorily redeemable convertible preferred stock will be converted depends on the public offering price per share of common stock in this offering. The conversion price of each share of mandatorily redeemable convertible preferred stock shall be equal to the lesser of (a) $12.00 and (b) the greater of (i) $8.05 and (ii) 90% of the public offering price per share of common stock in this offering.

        Upon the completion of this offering, there will be no shares of preferred stock issued and outstanding. Upon the closing of this offering, our board of directors will have the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding).

        Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change of control and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

        As of June 30, 2007, Silicon Valley Bank held a warrant to purchase an aggregate of 12,500 shares of our Series B preferred stock, having a weighted average exercise price of $1.47 per share. Upon completion of this offering, the Series B warrant will convert into a warrant to purchase an aggregate of 12,500 shares of our common stock (less any portion of the warrant that may be exercised between June 30, 2007 and the completion of the offering). As of June 30, 2007, warrants to purchase an aggregate of 964,189 shares of Series D-1 preferred stock, having a per share exercise price of $3.50, were outstanding. Unless previously exercised, these warrants will be automatically net exercised immediately prior to the completion of the offering.

        Silicon Valley Bank Warrant.    In August 2000, we issued a warrant to purchase an aggregate of 12,500 shares of our Series B preferred stock to Silicon Valley Bank with an exercise price of $1.47 per share. This warrant contains a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. The warrant also provides for the same registration rights that holders of our Series B preferred stock are entitled to receive pursuant to our amended and restated investor rights agreement, as amended, as described in greater detail under the heading "Registration Rights." The warrant also contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations, reclassifications and consolidations. The warrant will terminate in August 2010.

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        Warrants Issued in Connection with Bridge Financings, Guidant Debt and Extension of Term of Bridge Financing.    In May 2006 and August 2006, we issued warrants to purchase an aggregate of 964,189 shares of our Series D-1 preferred stock to the participants in certain bridge financing transactions and to Guidant Investment Corporation in connection with the extension of the term of its debt. The exercise price of the warrants on a per share basis is equal to $3.50. Each of these warrants contain a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. Unless previously exercised, these warrants will be automatically net exercised immediately prior to the completion of the offering. The number of shares of our Common Stock issuable upon any automatic net exercise of the warrants varies according to a formula that depends on the initial public offering price. The following table shows how the number of shares issuable upon the automatic net exercise of these warrants varies over a range of initial public offering prices:

 
  Initial public offering price
    $     $     $     $  
   
 
 
 
Number of shares of common stock issued upon automatic net exercise of warrants                        

        The holders of the shares issuable upon exercise of the warrants are entitled to the same registration rights with respect to such shares that holders of our preferred stock are entitled to receive pursuant to our amended and restated investor rights agreement, as amended, as described in greater detail under the heading "Registration Rights."

        Each of our warrants also contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations, reclassifications and consolidations.

Registration Rights

        Under our amended and restated investor rights agreement, as amended, the holders of                        shares of common stock outstanding or issuable upon conversion of our preferred stock other than mandatorily redeemable convertible preferred stock will have certain rights to require us to register their shares (without taking into account shares issuable upon exercise of warrants) with the Securities and Exchange Commission so that those shares may be publicly resold.

        Demand Registration Rights.    At any time beginning on the earlier of (a) March 18, 2008 and (b) six months after the completion of our initial public offering, the holders of at least 30% of the shares having demand registration rights have the right to make up to two demands that we file a registration statement so long as the aggregate number of securities requested to be sold under such registration statement is at least $5,000,000, subject to specified exceptions. We are not required to effect a registration pursuant to these demand registration rights during the period from the date of filing of, and ending 180 days following the effective date of a registration statement relating to a public offering.

        Form S-3 Registration Rights.    If we are eligible to file a registration statement on Form S-3, one or more holders of registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of securities to be sold under the registration statement on Form S-3 is at least $1,000,000, subject to specified exceptions.

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        "Piggyback" Registration Rights.    If we register any securities for public sale, holders of registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 20% of the total number of shares included in the registration statement, unless such offering is our initial public offering and such registration does not include shares of any other selling stockholders, in which case any and all shares held by selling stockholders may be excluded from the offering. The piggyback registration rights have been waived in connection with this offering and the filing of the registration statement of which this prospectus is a part.

        Expenses of Registration.    Generally, we are required to bear all registration and selling expenses incurred in connection with the demand, piggyback and Form S-3 registrations described above, other than underwriting discounts and commissions.

        Expiration of Registration Rights.    The demand, piggyback and Form S-3 registration rights discussed above will terminate three years following the closing of our initial public offering. In addition, the registration rights discussed above will terminate with respect to any stockholder or warrant holder entitled to these registration rights on the date when such stockholder or warrant holder is able to sell all of their registrable common stock in a single 90-day period under Rule 144 of the Securities Act.

        We entered into a registration rights agreement with the holders of all of our mandatorily redeemable convertible preferred stock pursuant to which we will, at our expense, for the benefit of the holders of our mandatorily redeemable convertible preferred stock, file with the SEC a registration statement covering resale of the shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering within 90 days after the completion of this offering. We will use commercially reasonable best efforts to cause the registration statement to become effective within 180 days after the completion of this offering, and to keep a registration statement effective until the earlier of (i) the sale of all the shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering pursuant to Rule 144 under the Securities Act or a shelf registration statement and (ii) the date on which all shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering not theretofore sold pursuant to Rule 144 or such shelf registration statement can be sold without restrictions pursuant to Rule 144(k) other than any shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering held by affiliates of us. We are permitted to suspend the use of a prospectus that is part of a shelf registration statement under certain circumstances relating to corporate developments, public filings with the SEC and similar events for a period not to exceed 30 days in any three-month period and not to exceed an aggregate of 90 days in any 12-month period. We have agreed to pay liquidated damages as described herein, which we refer to as "Registration Default Damages" to holders of the shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering, if a shelf registration statement is not timely filed or made effective or if the prospectus is unavailable for periods in excess of those permitted above. Such Registration Default Damages shall be paid upon the designated schedule until such failure to file or become effective or unavailability is cured, at a rate of 0.5% of the original issue price of the mandatorily redeemable convertible preferred stock (plus any accrued or declared and unpaid dividends thereon) for the initial occurrence of such event and 1.0% of the mandatorily redeemable convertible preferred stock (plus any accrued or declared and unpaid dividends thereon) for each 30-day period thereafter that the occurrence shall go uncured. We will pay Registration Default Damages in cash on

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the earlier of (i) the last day of the calendar month during which such registration default occurred and (ii) the third business day after the event or failure giving rise to the registration default is cured. When such registration default is cured, the time periods for calculation of Registration Default Damages shall cease to accrue as of the date of such cure.

        In addition to the rights discussed in the above paragraph, the registration rights agreement also provides that if subsequent to completion of this offering we file with the SEC a registration statement contemplating the underwritten public offering of common stock, the holders of the shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering will have the right to participate in such underwritten public offering with respect to their shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering, subject to customary requirements and conditions.

        We have agreed in the registration rights agreement to give notice to all holders of our mandatorily redeemable convertible preferred stock of the filing and effectiveness of a shelf registration statement by release made to Bloomberg Financial Markets or other reasonable means of distribution.

        Transferees of the mandatorily redeemable convertible preferred stock and the shares of common stock into which the shares of mandatorily redeemable convertible preferred stock will convert upon the completion of this offering will, under certain circumstances, be entitled to the benefits of the registration rights agreement.

Delaware Anti-Takeover Law and Provisions of Our Amended and Restated Certificate of Incorporation and Bylaws

        Delaware Anti-Takeover Law.    We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

        Section 203 defines a business combination to include:

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        In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

        Amended and Restated Certificate of Incorporation and Bylaws.    Provisions of our amended and restated certificate of incorporation and bylaws, which will become effective upon the completion of this offering, may delay or discourage transactions involving an actual or potential change of control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our amended and restated certificate of incorporation and bylaws:

        The amendment of any of these provisions would require approval by the holders of at least 662/3% of our then outstanding common stock.

Listing on the Nasdaq Global Market

        We have applied for listing on the Nasdaq Global Market under the symbol "BEAT," subject to official notice of issuance.

Transfer Agent and Registrar

        The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. The transfer agent and registrar's address is 59 Maiden Lane, Plaza level, New York, New York 10038.

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MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO NON-U.S. HOLDERS

        The following is a general discussion of the material U.S. federal income tax consequences of the ownership and disposition of our common stock to a non-U.S. holder that acquires our common stock pursuant to this offering. For the purpose of this discussion, a non-U.S. holder is any beneficial owner of our common stock that, for U.S. federal income tax purposes, is not a partnership or U.S. person. For purposes of this discussion, the term U.S. person means:

        If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Accordingly, we urge partnerships that hold our common stock and partners in such partnerships to consult their tax advisors.

        This discussion assumes that a non-U.S. holder will hold our common stock issued pursuant to this offering as a capital asset (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of a non-U.S. holder's special tax status or special tax situations. Certain former citizens or residents of the U.S., life insurance companies, tax-exempt organizations, dealers in securities or currency, banks or other financial institutions and investors that hold common stock as part of a hedge, straddle, conversion transaction, synthetic security or other integrated investment are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code") and Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. Accordingly, we urge each non-U.S. holder to consult a tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

Dividends

        We have not paid any dividends on our common stock and we do not plan to pay any dividends in the foreseeable future. However, if we do pay dividends on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those dividends exceed our current and accumulated earnings and profits, the dividends will constitute a return of capital and will first reduce a holder's adjusted tax basis in the common stock, but not below zero, and then will be treated as gain from the sale of the common stock.

        Dividends paid (out of earnings and profits) to a non-U.S. holder of our common stock generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividends or such lower rate as may be specified by an applicable tax treaty, unless the dividends are effectively connected with the conduct of a trade or business of the non-U.S. holder within the U.S. To receive a

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reduced rate of withholding under a tax treaty, a non-U.S. holder must provide us with an IRS Form W-8BEN or other appropriate version of Form W-8 certifying qualification for the reduced rate.

        Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder generally are not subject to withholding tax, provided certain certification requirements are met. Such effectively connected dividends, net of certain deductions and credits, are taxed at the graduated U.S. federal income tax rates applicable to U.S. persons, unless an applicable tax treaty provides otherwise. To claim an exemption from withholding because the income is effectively connected within a U.S. trade or business of the non-U.S. holder, the non-U.S. holder must provide a properly executed IRS Form W-8BEN or IRS Form W-8ECI, as applicable, or such successor form as the IRS designated prior to the payment of dividends. In addition to the graduated tax described above, dividends that are effectively connected with a U.S. trade or business of a corporate non-U.S. holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.

        A non-U.S. holder of our common stock may obtain a refund or credit of any excess amounts withheld if an appropriate claim for refund is timely filed with the IRS.

Gain on Disposition of Common Stock

        Subject to the discussion below under "Backup Withholding and Information Reporting," a non-U.S. holder generally will not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale or other disposition of our common stock unless:

        Unless an applicable tax treaty provides otherwise, gain described in the first bullet point above will be subject to U.S. federal income tax on a net basis at the graduated U.S. federal income tax rates applicable to U.S. persons and, in the case of corporate holders, the "branch profits tax" may also apply. Gain described in the second bullet point above (which may be offset by certain U.S. source capital losses) will be subject to a flat 30% U.S. federal income tax or such lower rate as may be specified by an applicable tax treaty.

        If we were to become a U.S. real property holding corporation at any time during the applicable period described in the third bullet point above, any gain recognized on a disposition of our common stock by a non-U.S. holder would be subject to U.S. federal income tax at the graduated U.S. federal income tax rates applicable to U.S. persons if the non-U.S. holder owned (directly, indirectly or constructively) more than 5% of our common stock during the applicable period or our common stock were not "regularly traded on an established securities market" (within the meaning of Section 897(c)(3) of the Code). If our common stock is not so traded, the person to whom a non-U.S. holder sells our common stock may be required to withhold an amount equal to 10% of the purchase price, which amount would be creditable against the non-U.S. holder's income tax liability. We believe that our common stock will be treated as so traded.

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Backup Withholding and Information Reporting

        Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence.

        Payments of dividends or proceeds on the disposition of our common stock made to a non-U.S. holder may be subject to additional information reporting and backup withholding (currently at a rate of 28%) unless the non-U.S. holder establishes an exemption, for example, by properly certifying its non-U.S. status on a Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the beneficial owner is a U.S. person.

        Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is timely furnished to the IRS.

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SHARES ELIGIBLE FOR FUTURE SALE

        Immediately prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could adversely affect the prevailing market price for our common stock as well as our ability to raise equity capital in the future.

        Based on the number of shares of common stock outstanding as of July 31, 2007, upon completion of this offering,    shares of common stock will be outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of options or warrants. All of the shares sold in this offering will be freely tradable unless held by an affiliate of ours. Except as set forth below, the remaining    shares of common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as follows:


Rule 144

        In general, under Rule 144 under the Securities Act of 1933, as in effect on the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

        Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

        In July 2007, the SEC announced proposed revisions to Rule 144. If the proposed changes to Rule 144 are approved, the holding period for restricted shares of our common stock after the completion of this offering may be reduced to six months under specified circumstances, the restrictions on the sale of restricted shares of our common stock held by our affiliates may be reduced and certain other restrictions on resale of the shares of our common stock under Rule 144 may be modified to make it easier for our stockholders under specified circumstances to sell their shares upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus. We do not know whether these proposed revisions to Rule 144 will be adopted as proposed or in a modified form, or at all.

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Rule 144(k)

        Under Rule 144(k) under the Securities Act as in effect on the date of this prospectus, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Rule 701

        Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers, directors or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described and under "Underwriting" and will become eligible for sale at the expiration of those agreements.

Lock-up Agreements

        Our officers and directors, the selling stockholders and substantially all of our other stockholders have agreed that, for a period of 180 days from the date of this prospectus (the "Lock-Up Period"), they will not, without the prior written consent of Citigroup Global Markets Inc., dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. The lock-up agreement does not prohibit selling stockholders from selling shares of our common stock in this offering. The lock-up agreements signed by our security holders generally permit them to transfer shares of our common stock (i) acquired in open market transactions after the completion of this offering contemplated by the Underwriting Agreement, (ii) to a family member or trust, (iii) by bona fide gift, will or intestacy, and (iv) if the security holder is a partnership, limited liability company or corporation, to its partners, members, stockholders or affiliates of the undersigned; provided that, in each case, no filing by any party (donor, donee, transferor or transferee) under the Exchange Act shall be required or shall be voluntarily made in connection with such transfer (other than a filing made after the expiration of the Lock-Up Period) and provided further that in connection with the transactions listed in (ii)-(iv) above, the transferee agrees to be bound in writing by the terms of this agreement prior to such transfer. In addition, security holders may establish a written plan for trading securities in accordance with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended, provided that such plan does not provide for the disposition, during the Lock-Up Period, of any shares of our common stock or any securities convertible into, or exercisable or exchangeable for our common stock. Furthermore, security holders may exercise or exchange any option or warrant to acquire shares of our common stock, or securities exchangeable or exercisable for or convertible into our common stock, provided that the security holders do not transfer the Common Stock acquired on such exercise or exchange during the Lock-Up Period.

        The Lock-Up Period will be extended if

in which case the restrictions described in the preceding paragraph shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of

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the material news or material event, unless Citigroup Global Markets Inc. waives, in writing, such extension.

        Citigroup Global Markets Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

Registration Rights

        Upon completion of this offering, the holders of            shares of our common stock (or    shares, if the underwriters exercise their over-allotment option in full) and warrants to purchase up to 12,500 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement of which this prospectus is a part. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See "Description of Capital Stock — Registration Rights."

Equity Incentive Plans

        We intend to file with the SEC a registration statement under the Securities Act covering the shares of common stock reserved for issuance under our 2003 Equity Incentive Plan, and our 2007 Equity Incentive Plan, 2007 Non-Employee Directors' Stock Option Plan and 2007 Employee Stock Purchase Plan. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market following its effective date, subject to Rule 144 volume limitations and the lock-up arrangement described above, if applicable.

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UNDERWRITING

        Citigroup Global Markets Inc. is acting as sole bookrunning manager of the offering, and, together with CIBC World Markets Corp. and SunTrust Robinson Humphrey, Inc., is acting as a representative of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has agreed to purchase, and we and the selling stockholders have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter's name.

Underwriter

  Number
of shares

Citigroup Global Markets Inc.    
CIBC World Markets Corp.    
SunTrust Robinson Humphrey, Inc.    
   
  Total    
   

        The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.

        The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $                      per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $                      per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. The representatives have advised us and the selling stockholders that the underwriters do not intend sales to discretionary accounts to exceed five percent of the total number of shares of our common stock offered by them.

        We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to            additional shares of common stock at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter's initial purchase commitment.

        We, our officers and directors, and the selling stockholders and our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citi, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to certain exceptions. Citi in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

        At our request, the underwriters have reserved up to    % of the shares of common stock for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares.

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        Each underwriter has represented, warranted and agreed that:

        Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares was determined by negotiations among us, the selling stockholders and the representatives. Among the factors considered in determining the initial public offering price were our record of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our common stock will develop and continue after this offering

        We have applied to have our common stock listed on the Nasdaq Global Market under the symbol "BEAT."

        The following table shows the underwriting discounts and commissions that we and the selling stockholders are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.

 
  Paid by CardioNet, Inc.
  Paid by selling stockholders
 
  No Exercise
  Full Exercise
  No Exercise
  Full Exercise
Per share   $     $     $     $  
Total   $     $     $     $  

        In connection with the offering,            on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. "Covered" short sales are sales of shares made in an amount up to the number of shares represented by the underwriters' over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other

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things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make "naked" short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress.

        The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Citi repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

        Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the Nasdaq Global Market or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

        We and the selling stockholders estimate that our respective portions of the total expenses of this offering will be $                              and $                  .

        Citi and SunTrust have performed investment banking and advisory services for us from time to time for which they have received customary fees and expenses. The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business.

        A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representatives will allocate shares to underwriters that may make internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

        We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

Notice to Prospective Investors in the European Economic Area

        In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a relevant member state), with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state (the relevant implementation date), an offer of common stock described in this prospectus may not be made to the public in that relevant member state prior to the publication of a prospectus in relation to the common stock that has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive, except that, with effect from and including the relevant implementation date, an offer of securities may be offered to the public in that relevant member state at any time:

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        Each purchaser of common stock described in this prospectus located within a relevant member state will be deemed to have represented, acknowledged and agreed that it is a "qualified investor" within the meaning of Article 2(1)(e) of the Prospectus Directive.

        For purposes of this provision, the expression an "offer to the public" in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state, and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.

        The sellers of the common stock have not authorized and do not authorize the making of any offer of common stock through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the common stock as contemplated in this prospectus. Accordingly, no purchaser of the common stock, other than the underwriters, is authorized to make any further offer of the common stock on behalf of the sellers or the underwriters.

Notice to Prospective Investors in the United Kingdom

        This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive ("Qualified Investors") that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant persons should not act or rely on this document or any of its contents.

Notice to Prospective Investors in France

        Neither this prospectus nor any other offering material relating to the common stock described in this prospectus has been submitted to the clearance procedures of the Autorité des Marchés Financiers or by the competent authority of another member state of the European Economic Area and notified to the Autorité des Marchés Financiers. The common stock have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to the common stock has been or will be

        Such offers, sales and distributions will be made in France only

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The common stock may be resold directly or indirectly, only in compliance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French Code monétaire et financier.


LEGAL MATTERS

        The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, San Diego, California. Dewey Ballantine LLP, New York, New York, is counsel for the underwriters in connection with this offering.


EXPERTS

        Ernst & Young LLP, independent registered public accounting firm, has audited our financial statements at December 31, 2004, 2005 and 2006, and for each of the three years in the period ended December 31, 2006, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing.

        Ernst & Young LLP, independent certified public accountants has audited PDSHeart, Inc.'s financial statements at December 31, 2004, 2005 and 2006, and for each of the three years in the period ended December 31, 2006, as set forth in their report. The Company has included these financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young's report, given on their authority as experts in accounting and auditing.

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WHERE YOU CAN FIND MORE INFORMATION

        We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the shares of common stock being offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, you should refer to the registration statement and the exhibits filed as part of that document. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

        You can read our SEC filings, including the registration statement, over the internet at the SEC's website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You may also request a copy of these filings, at no cost, by writing or telephoning us at: 1010 Second Avenue, San Diego, California 92101, (619) 243-7500.

        Upon completion of this offering, we will be subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and we will file periodic reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above. We also maintain a website at http://www.cardionet.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.

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CARDIONET, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CardioNet, Inc.    

Report of Independent Registered Public Accounting Firm

 

F-2
Consolidated Balance Sheets as of December 31, 2005 and 2006 and June 30, 2007 (unaudited)   F-3
Consolidated Statements of Operations for the years ended December 31, 2004, 2005, and 2006 and for the six months ended June 30, 2006 and 2007 (unaudited)   F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007 (unaudited)   F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006 and for the six months ended June 30, 2006 and 2007 (unaudited)   F-6
Notes to Consolidated Financial Statements   F-7

PDSHeart, Inc.

 

 

Report of Independent Certified Public Accountants

 

F-29
Consolidated Balance Sheets as of December 31, 2005 and 2006   F-30
Consolidated Statements of Operations for the years ended December 31, 2004, 2005, and 2006   F-31
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2004, 2005 and 2006   F-32
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006   F-33
Notes to Consolidated Financial Statements   F-34

F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
CardioNet, Inc.

        We have audited the accompanying balance sheets of CardioNet, Inc. (the "Company") as of December 31, 2005 and 2006, and the related statements of operations, redeemable preferred stock and shareholders' deficit, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CardioNet, Inc. at December 31, 2005 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States.

        As discussed in Note 2 to the financial statements, the Company changed its method of accounting for stock-based compensation effective January 1, 2006.

        As discussed in Note 3, the Company has restated its financial statements for the years ended December 31, 2005 and 2006 to correct an error in accounting for the warrants to purchase preferred stock.


 

 

/s/  
ERNST & YOUNG LLP    

Philadelphia, Pennsylvania
September 19, 2007

F-2



CARDIONET, INC.

CONSOLIDATED BALANCE SHEETS

 
  December 31,
  June 30,
 
 
  2005
  2006
  2007
 
 
  (restated)

  (restated)

  (restated)

 
 
   
   
  (unaudited)

 
Assets                    
Current assets:                    
  Cash and cash equivalents   $ 2,757,556   $ 3,909,150   $ 50,333,590  
  Accounts receivable, net of allowance for doubtful accounts of $2,973,000, $6,263,000, and $12,501,000 at December 31, 2005 and 2006, and at June 30, 2007, respectively     9,136,870     10,496,607     16,767,049  
  Due from related parties     101,549     90,628     90,270  
  Prepaid expenses and other current assets     489,311     294,913     754,775  
   
 
 
 
Total current assets     12,485,286     14,791,298     67,945,684  

Property and equipment, net

 

 

3,536,139

 

 

1,779,043

 

 

9,165,974

 
Due from related parties         207,278      
Other assets     429,717     392,450     509,756  
Intangible assets, net             3,299,142  
Goodwill             40,652,522  
   
 
 
 

Total assets

 

$

16,451,142

 

$

17,170,069

 

$

121,573,078

 
   
 
 
 
Liabilities and shareholders' deficit                    
Current liabilities:                    
  Accounts payable   $ 1,338,619   $ 1,642,132   $ 3,318,901  
  Accrued liabilities     4,258,380     5,285,412     6,780,452  
  Bridge loan payable to certain shareholders     2,891,358     3,229,247      
  Note payable to shareholder         21,001,719     23,204,367  
  Current portion of debt     349,191     2,346,186     1,042,548  
  Current portion of capital leases             48,695  
  Deferred revenue             687,571  
   
 
 
 
Total current liabilities     8,837,548     33,504,696     35,082,534  

Note payable to shareholder

 

 

20,000,000

 

 


 

 


 
Long-term debt, net of current portion     365,061     2,911,115     2,200,759  
Deferred rent     620,367     428,534     638,553  
Other noncurrent liabilities     288,657     182,490     176,588  
   
 
 
 
Total liabilities     30,111,633     37,026,835     38,098,434  

Redeemable convertible preferred stock

 

 

 

 

 

 

 

 

 

 
  Convertible preferred stock — no par value:                    
    Mandatorily redeemable convertible preferred stock 114,883 shares authorized, 114,839 shares issued and outstanding; liquidation preference of $128,323,013             109,802,477  

Shareholders' deficit

 

 

 

 

 

 

 

 

 

 
  Series A — 1,563,248 shares authorized, issued, and outstanding; liquidation preference of $390,812     390,812     390,812     390,812  
  Series B — 4,720,347 shares authorized; 4,707,847 shares issued and outstanding; liquidation preference of $10,873,044     6,903,969     6,903,969     6,903,969  
  Series C — 10,399,011 shares authorized, issued, and outstanding; liquidation preference of $52,036,579     36,195,991     36,195,991     36,195,991  
  Series D — 1,000,000 shares authorized, issued, and outstanding; liquidation preference of $12,400,000     9,964,933     9,964,933     9,964,933  
  Series D1 — 964,075 shares authorized, none issued and outstanding as of June 30, 2007              
  Series D1 preferred stock warrants     434,567     1,664,623     1,664,623  
  Common stock — no par value; 36,000,000 shares authorized; 5,710,031, 5,942,108, and 6,392,203 shares issued and outstanding at December 31, 2005, 2006, and June 30, 2007, respectively     1,031,809     1,186,463     1,567,286  
  Paid-in capital         21,746      
  Notes receivable from shareholders     (266,251 )   (224,250 )   (501,151 )
  Accumulated deficit     (68,316,321 )   (75,961,053 )   (82,514,296 )
   
 
 
 
Total shareholders' deficit     (13,660,491 )   (19,856,766 )   (26,327,833 )
   
 
 
 
Total liabilities and shareholders' deficit   $ 16,451,142   $ 17,170,069   $ 121,573,078  
   
 
 
 

See accompanying notes.

F-3



CARDIONET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Year Ended December 31,
  Six Months Ended June 30,
 
 
  2004
  2005
  2006
  2006
  2007
 
 
   
  (restated)

  (restated)

  (restated)

  (restated)

 
 
   
   
   
  (unaudited)

  (unaudited)

 
Revenues:                                
  Net patient service revenues   $ 20,956,152   $ 29,466,653   $ 33,019,175   $ 15,516,359   $ 28,220,584  
  Other revenues     1,274,630     1,471,075     903,626     632,032     298,926  
   
 
 
 
 
 
Total revenues     22,230,782     30,937,728     33,922,801     16,148,391     28,519,510  

Cost of revenues

 

 

16,970,591

 

 

16,963,107

 

 

12,700,998

 

 

6,865,822

 

 

9,743,109

 
   
 
 
 
 
 

Gross profit

 

 

5,260,191

 

 

13,974,621

 

 

21,221,803

 

 

9,282,569

 

 

18,776,401

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development     2,412,015     3,360,753     3,630,819     1,980,236     2,009,637  
  General and administrative     15,252,286     13,853,089     15,630,610     7,461,853     12,281,257  
  Sales and marketing     7,694,447     6,455,686     6,448,290     2,979,449     7,696,343  
   
 
 
 
 
 
Total operating expenses     25,358,748     23,669,528     25,709,719     12,421,538     21,987,237  
   
 
 
 
 
 
Loss from operations     (20,098,557 )   (9,694,907 )   (4,487,916 )   (3,138,969 )   (3,210,836 )

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Interest income     141,063     96,463     114,295     42,224     904,664  
  Interest expense     (989,890 )   (1,864,813 )   (3,271,111 )   (1,253,543 )   (1,625,151 )
   
 
 
 
 
 
Total other income (expense)     (848,827 )   (1,768,350 )   (3,156,816 )   (1,211,319 )   (720,487 )
   
 
 
 
 
 
Net loss     (20,947,384 )   (11,463,257 )   (7,644,732 )   (4,350,288 )   (3,931,323 )
   
 
 
 
 
 
  Dividends on and accretion of mandatorily redeemable convertible preferred stock                     (2,844,336 )

Net loss available to common shareholders

 

$

(20,947,384

)

$

(11,463,257

)

$

(7,644,732

)

$

(4,350,288

)

$

(6,775,659

)
   
 
 
 
 
 
Net loss per common share:                                
  Basic and diluted   $ (3.67 ) $ (2.02 ) $ (1.31 ) $ (0.76 ) $ (1.09 )
   
 
 
 
 
 
  Pro forma (unaudited)               $ (0.32 )       $ (0.20 )
               
       
 
Weighted average number of common shares outstanding:                                
  Basic and diluted     5,712,114     5,675,544     5,816,719     5,751,700     6,214,067  
   
 
 
 
 
 
  Pro forma (unaudited)                 23,619,018           33,673,580  
               
       
 

See accompanying notes.

F-4



CARDIONET, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)

 
  Redeemable Convertible
Preferred Stock

  Shareholders' Equity (Deficit)
 
 
  Mandatorily Redeemable
Convertible Preferred
Stock

  Convertible Preferred
Stock

   
   
   
   
   
   
 
 
  Common Stock
   
  Notes
Receivable
From
Shareholders

   
   
 
 
  Paid-in
Capital

  Accumulated
Deficit

  Total
Shareholders'
Equity (Deficit)

 
 
  Shares
  Amount
  Shares
  Amount
  Shares
  Amount
 
Balance, December 31, 2003         16,670,106   $ 43,490,772   5,783,233   $ 975,330       $ (560,000 ) $ (35,905,680 ) $ 8,000,422  
  Issuance of Series D convertible preferred stock (net of issuance costs of $35,067)         1,000,000     9,964,933                       9,964,933  
  Issuance of common stock and stock options               433,422     105,662                 105,662  
  Exercise of stock options under note receivable arrangements               250,000     187,500         (187,500 )        
  Stock repurchased               (825,598 )   (286,334 )       269,354         (16,980 )
  Repayment of shareholder notes receivable                           130,740         130,740  
  Net loss                               (20,947,384 )   (20,947,384 )
   
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2004         17,670,106     53,455,705   5,641,057     982,158         (347,406 )   (56,853,064 )   (2,762,607 )
  Series D1 preferred stock warrants                 434,567                                 434,567  
  Issuance of common stock and stock options               165,501     63,648                 63,648  
  Exercise of stock options under note receivable arrangements               260,000     178,750         (178,750 )        
  Stock repurchased               (356,527 )   (192,747 )       188,307         (4,440 )
  Repayment of shareholder notes receivable                           71,598         71,598  
  Net loss                               (11,463,257 )   (11,463,257 )
   
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2005 (restated)         17,670,106     53,890,272   5,710,031     1,031,809         (266,251 )   (68,316,321 )   (13,660,491 )
  Series D1 preferred stock warrants                 1,230,056                                 1,230,056  
  Issuance of common stock and stock options               270,052     167,960                 167,960  
  Stock repurchased               (37,975 )   (13,306 )       13,126         (180 )
  Repayment of shareholder notes receivable                           28,875         28,875  
  Compensatory stock options earned                       21,746             21,746  
  Net loss                               (7,644,732 )   (7,644,732 )
   
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2006 (restated)