Message from the President

May 1, 2010

Dear Shareholders,

2009 was a critically important year, as the potential for long-term business growth of SPY® Imaging in the operating room became far more substantive and quantifiable in terms of market opportunity. We managed this development and successfully navigated current economic challenges by focusing primarily on SPY recurring revenue growth and achieving a far lower cash burn as compared to 2008. It is in recognition of these achievements and the tireless commitment of our team, that I am honored to share the
highlights of the last twelve months, and offer a glimpse into a promising future.

Our vision remains steadfast - to be the imaging company for the operating room. In August 2009, the United States Centers for Medicare and Medicaid Services published, in the Federal Register, an independent study comparing the costs of cardiac surgery procedures performed with and without SPY. The analysis confirmed that the use of SPY reduced hospital costs by $2000 to $4000 per procedure. These cost savings were attributed to reduced postoperative complications and shorter hospital stays. Similarly, the momentum for SPY in plastic reconstructive surgery continued to build. This was particularly true following the first podium presentation featuring SPY at the American Society of Plastic Surgeon’s Meeting in October 2009. In this meeting, Dr. Glyn E. Jones reported that the use of SPY in 115 breast reconstruction procedures resulted in lowering complication rates from the national averages of 15% to virtually zero. In 2009, five new plastic surgery journal articles were added to the extensive list of publications featuring SPY, but the most impressive achievement was a chapter dedicated to SPY in the leading textbook on breast reconstruction, which was published in December. All in all, during the second half of the year, it became quantifiably clear that SPY imaging helps patients and the entire healthcare system by reducing complications and costs. So, it is not surprising that at a recent gathering of thought-leading plastic reconstructive surgeons, SPY was pronounced, “the most significant advancement in plastic reconstructive surgery in the past 10 years.”

Our focus on recurring SPY revenues yielded a year over year overall increase of 13% and a comparison of Q4 2008 versus Q4 2009 showed an increase of 36%, signifying the building momentum for SPY in the second half of the year. Additionally, we maintained cost containment efforts, reducing our cash burn by almost half compared to 2008. At the same time, we steadily invested resources into research and development, which resulted in obtaining FDA clearance and initiating market development clinical studies for our first generation SPY Endoscopic Imaging System for minimally invasive surgery.

In January 2009, we secured our first strategic alliance by signing a License and Development and a Supply Agreement with Intuitive Surgical®, the world leader in minimally invasive robotic surgery. Since signing, we have made great progress in integrating SPY Imaging into the da Vinci® Robot. To date, we have achieved two of the three key development milestones, and look forward to the future, when Intuitive will commercialize the integrated System. Certainly, the credibility gained by achieving these project milestones on time, serves to provide future partners with confidence in our ability to deliver.

Given the rapidly growing momentum for SPY Imaging in plastic reconstructive surgery, we believe the major barrier to achieving significant revenue growth is strictly related to the small size of our sales team. Therefore, we have begun negotiations with market leading companies with the potential to meet our growing needs, and we anticipate securing the right partner in the near future. Since these partnerships are integral to business growth, you will see in the coming pages that we have added a fifth element to our formula for success – Awareness, Acceptance, Adoption, Acceleration and now…Alliances.

Our focus going forward remains clear. We will continue to drive the momentum for SPY Imaging in complex operating procedures where we can quantifiably demonstrate patient and economic values; we will complete the development of the integrated SPY Imaging System for Intuitive and we will secure the additional alliances required to achieve our business growth objectives. I look forward to updating you on our continuing progress and thank you for your support.

Arun Menawat, Ph.D, MBA, Chief Executive Officer