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NORTHSTAR NEUROSCIENCE, S-1/A Filing

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                                       As filed with the Securities and Exchange Commission on March 29, 2006
                                                                                                                                       Registration No. 333-132135


                                        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




                                                    Northstar Neuroscience, Inc.
                                                           (Exact Name of Registrant as Specified in Its Charter)

                    Washington                                                      3845                                                  91-1976637
              (State or Other Jurisdiction of                           (Primary Standard Industrial                                    (I.R.S. Employer
             Incorporation or Organization)                              Classification Code Number)                                 Identification Number)




                                                                 2401 Fourth Avenue, Suite 300
                                                                       Seattle, WA 98121
                                                                         (206) 728-1477
                           (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)




                                                                      Alan J. Levy, Ph.D.
                                                             President and Chief Executive Officer
                                                                 Northstar Neuroscience, Inc.
                                                                2401 Fourth Avenue, Suite 300
                                                                       Seattle, WA 98121
                                                                         (206) 728-1477
                                   (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)




                                                                               Copies to:

                         John M. Steel, Esq.                                                                          Donald J. Murray, Esq.
                       Mark F. Hoffman, Esq.                                                                           Dewey Ballantine LLP
                DLA Piper Rudnick Gray Cary US LLP                                                                  1301 Avenue of the Americas
                    701 Fifth Avenue, Suite 7000                                                                     New York, NY 10019-6092
                      Seattle, WA 98104-7044                                                                              (212) 259-8000
                           (206) 839-4800
                                   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, check the following box. 

     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. 

     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. 

     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 statement number of the earlier effective registration statement for the same offering. 

      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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not
permitted.

                                        SUBJECT TO COMPLETION, DATED MARCH 29, 2006

PROSPECTUS




                                                                         Shares
                                                          Common Stock
                                                      $                per share

      We are selling        shares of our common stock. We have granted the underwriters an option to purchase up to          additional
shares of common stock to cover over-allotments.

    This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $ and
$       per share. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol
―NSTR.‖

        Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 9.
     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.



                                                                                                 Per Share                   Total
Public Offering Price                                                                   $                          $
Underwriting Discounts                                                                  $                          $
Proceeds to Northstar Neuroscience, Inc. (before expenses)                              $                          $

      The underwriters expect to deliver the shares to purchasers on or about          , 2006.

Citigroup                                                                                               Cowen & Company

First Albany Capital                                                                                 Leerink Swann & Company
              , 2006
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                                                            TABLE OF CONTENTS
                                                                                                                                               Page
Summary                                                                                                                                             1
Risk Factors                                                                                                                                        9
Forward-Looking Statements                                                                                                                          23
Use of Proceeds                                                                                                                                     24
Dividend Policy                                                                                                                                     24
Capitalization                                                                                                                                      25
Dilution                                                                                                                                            27
Selected Financial Data                                                                                                                             29
Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                               31
Business                                                                                                                                            42
Management                                                                                                                                          65
Certain Relationships and Related Transactions                                                                                                      77
Principal Shareholders                                                                                                                              78
Description of Capital Stock                                                                                                                        81
Material United States Federal Tax Consequences to Non-United States Holders                                                                        84
Shares Eligible for Future Sale                                                                                                                     87
Underwriting                                                                                                                                        89
Legal Matters                                                                                                                                       93
Experts                                                                                                                                             93
Where You Can Find Additional Information                                                                                                           93
Index to Financial Statements                                                                                                                  F-1



      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information
different from that contained in this prospectus. We are offering to sell, and are seeking offers to buy, shares of 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 of the common stock.

      For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or
possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You
are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
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                                                                    SUMMARY

     After you read the following summary, you should read and consider carefully the more detailed information and financial statements
and related notes that we include in this prospectus. If you invest in our common stock, you are assuming a high degree of risk. See “Risk
Factors.”

                                                          Northstar Neuroscience, Inc.

Overview

      We are a medical device company focused on developing and commercializing novel neurostimulation therapies for a broad range of
neurological diseases and disorders. Our proprietary technology is designed to deliver targeted electrical stimulation to the outermost layer of
the brain, called the cortex, in a process referred to as cortical stimulation. Because the cortex can be surgically accessed relatively easily, our
cortical stimulation therapy system can be implanted in approximately two and one-half hours by a single neurosurgeon. Our initial product
candidate, the Northstar Stroke Recovery System, is designed to enhance recovery of hand and arm motor function in patients who have
suffered a stroke, which we refer to as stroke motor recovery. According to the American Stroke Association, there are over 5.5 million stroke
survivors in the United States, approximately half of whom suffer from hand or arm motor impairment. We are also studying therapeutic
applications of our cortical stimulation therapy for other neurological conditions including: stroke-related aphasia, which is an impaired ability
to speak; tinnitus, which is a chronic, often intense, ringing in the ears that can be severely disabling; and essential tremor, which is a
movement disorder that causes patients to experience uncontrollable shaking or quivering in the hands and other parts of the body. Because the
cortex controls many neurological functions, we believe our cortical stimulation therapy system will enable the treatment of these and other
neurological diseases and disorders.

       We believe our cortical stimulation therapy for stroke motor recovery enhances neuroplasticity, which is a natural process by which
existing neurons and alternate neural pathways in remaining healthy brain tissue assume some of the capabilities previously controlled by the
parts of the brain damaged by a stroke. Following a stroke, the human brain naturally begins to change the function of neural pathways in areas
of the cortex not impacted by the stroke, which can help restore motor function. The parts of the brain that change vary from patient to patient.
Even with the help of traditional rehabilitative therapy, however, gains in motor function generally plateau within approximately three months
after a stroke, and many stroke survivors achieve only limited recovery of motor function. Our initial research has shown that cortical
stimulation of the patient-specific neuroplastic area of the cortex, in conjunction with intensive rehabilitative therapy, may meaningfully
enhance motor function beyond the natural recovery, even in stroke survivors who receive our cortical stimulation therapy several years after
their strokes.

      We are currently conducting a pivotal trial for stroke motor recovery, called EVEREST, using our Northstar Stroke Recovery System. If
the EVEREST trial is successful, we intend to seek approval from the U.S. Food and Drug Administration, or FDA, to market our Northstar
Stroke Recovery System. As of January 31, 2006, 39 out of a targeted 151 patients were randomized in the EVEREST trial, and we expect to
complete the four-week primary endpoint follow-up on the last EVEREST patient by the first quarter of 2008. In our two prior feasibility trials,
75% of the total patients who received our cortical stimulation therapy delivered in conjunction with intensive rehabilitative therapy showed
clinically meaningful improvement, as defined in those trials, in measurements of motor function compared to their initial baseline
measurements. The average improvement of motor function for these patients in our first and second feasibility trials was 29% and 17%,
respectively. In addition, the investigational patients also showed improvement in their ability to perform activities of daily living. We believe
our feasibility trials also indicate that our cortical stimulation therapy is safe and that the results were sustained over time.

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       We believe we are the only company pursuing cortical stimulation therapy for stroke motor recovery. We are developing a significant
intellectual property position relating to key aspects of our cortical stimulation therapy, which includes identifying the patient-specific site of
stimulation, stimulating at a subthreshold level, using appropriate stimulation parameters for different diseases and disorders and conducting
adjunctive therapy delivered in conjunction with cortical stimulation therapy. We believe our intellectual property portfolio will provide a
significant competitive advantage.

      As of December 31, 2005, we had a deficit accumulated during the development stage of $69.3 million. We currently have no revenue
and have not received any revenue to date from our products currently under development. If the EVEREST trial is successful, we intend to
seek FDA approval in the first quarter of 2008 to market our Northstar Stroke Recovery System and, subject to such approval, we do not expect
to generate revenue from the sale of our Northstar Stroke Recovery System until the first half of 2009.

Market Opportunity

   Neurostimulation Market

      The field of neurostimulation—a form of therapy in which a low-voltage electrical current is used to treat medical conditions affecting
different parts of the central nervous system—has grown dramatically in recent years. According to industry sources, the worldwide market for
neurostimulation devices grew from approximately $500 million in 2001 to approximately $1.2 billion in 2005, representing a compound
annual growth rate in excess of 20%. FDA-approved neurostimulation devices are currently utilized to treat a range of indications, including
chronic pain, epilepsy, essential tremor, Parkinson’s disease, hearing loss and depression. These devices are implanted in the body and are used
to stimulate different parts of the central nervous system, including the spinal cord, sacral nerves, vagus nerve and deeper structures of the
brain. To date, the market for neurostimulation therapies has been comprised of devices that stimulate areas of the central nervous system other
than the cortex. We believe that targeting specific areas of the cortex, which controls many neurological functions, will allow the successful
treatment of a variety of neurological diseases and disorders.

   Stroke Market Opportunity

      According to the American Stroke Association, or ASA, stroke is the leading cause of serious, long-term disability in the United States
and, in the U.S. alone, the annual healthcare burden of stroke-related care is expected to exceed $57.9 billion in 2006. The ASA estimates that
in the U.S. there currently are more than 5.5 million stroke survivors, and each year approximately 540,000 additional people in the U.S.
survive a stroke. Many of these stroke survivors are left significantly and permanently disabled. In an ischemic stroke, which accounts for
approximately 88% of all strokes in the U.S., a blood clot within an artery leading to or within the brain stops blood flow, often resulting in
damage to the brain. Hemiparesis, which is weakness or partial paralysis of one side of the body, is the most common disability caused by
stroke. Approximately one-half of stroke survivors in the U.S. suffer from hand or arm motor impairment, called upper-extremity hemiparesis.
Approximately 20% of stroke survivors in the U.S. suffer from aphasia. We expect the incidence and prevalence of stroke, and stroke-related
physical impairments, to grow as life expectancies and the population over the age of 65 increase.

   Conventional Treatments for Stroke and Stroke Recovery

      After an ischemic stroke, an attempt may be made to restore blood flow by using a drug to dissolve the clot that is obstructing the blocked
vessel. However, there is a short window of time—approximately three hours after onset of the stroke—in which clot-dissolving drugs can be
safely and effectively administered. Unfortunately, because stroke symptoms may not be immediately debilitating or may be initially attributed
to other less serious

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conditions, many stroke victims do not seek medical attention until several hours after the onset of these symptoms and are ultimately
hospitalized on average more than 12 hours after their stroke. The ASA estimates that less than 5% of people who suffer ischemic strokes
receive clot-dissolving drugs. Most stroke survivors end up with some form of permanent impairment, including upper-extremity hemiparesis
or aphasia.

       Patients who are assessed to have a disability resulting from a stroke are typically referred to an inpatient or outpatient rehabilitation
facility to undergo rehabilitative therapy. Rehabilitative therapy for stroke patients involves exercises and tasks designed to increase strength,
mobility, range of motion, and overall function of disabled limbs. The patient also learns to compensate with the unimpaired limb. Within
several months after a stroke, improvement in motor function typically reaches a plateau and patients must learn to live with and adapt to
disabilities that impact their quality of life and ability to perform many of the activities of daily living. The limitations of current rehabilitative
therapies have produced a large and growing population of motor-impaired stroke survivors who could benefit from improved therapies to
assist in their recovery.

Our Solution

      We are developing a cortical stimulation therapy system that delivers targeted electrical stimulation to the cortex. Our initial product, the
Northstar Stroke Recovery System, is intended to facilitate stroke motor recovery by enhancing neuroplasticity, in which other areas of the
brain take over the function of stroke-damaged areas. The cortex, with its extensive network of interconnected neurons, is an important site for
neuroplasticity to occur. Our cortical stimulation therapy system can be implanted by one neurosurgeon in a relatively simple surgical
procedure.

      We use functional magnetic resonance imaging, or f MRI, to target the specific neuroplastic region of an individual patient’s cortex that
has taken over motor control of the stroke-impaired limb. After identifying the primary site of neuroplasticity using f MRI, a small electrode
grid attached to a lead wire is placed on the tough membrane covering the brain, called the dura, immediately above the targeted area of the
motor cortex. To power the electrode grid, an implantable pulse generator, or IPG, is also implanted and connected to the lead. Cortical
stimulation is then provided while the patient is undergoing intensive rehabilitative therapy. The stimulation is subthreshold, meaning that it
does not evoke movement and cannot be felt by the patient. Following completion of the cortical stimulation therapy, the Northstar Stroke
Recovery System is surgically removed from the patient.

      We believe our Northstar Stroke Recovery System will offer the following advantages to stroke patients and practitioners:

      •    Broad treatment window. In our two feasibility trials, cortical stimulation therapy improved motor function measurably in
           ischemic stroke survivors with chronic upper-extremity hemiparesis, even when administered months and years after their strokes.
           In our first feasibility trial, patients were treated an average of 28 months post-stroke, and in our second feasibility trial, patients
           were treated an average of 33 months post-stroke, with patients ranging from four months to eight years post-stroke.

      •    Enhanced motor function. In our two feasibility trials, 75% of the total patients who were treated with our cortical stimulation
           therapy in conjunction with rehabilitative therapy showed clinically meaningful improvement, as defined in those trials, in hand and
           arm motor function, compared to less than 40% of the total patients in the group that received only rehabilitative therapy. The
           average improvement of motor function in investigational patients in our first and second feasibility trials was 29% and 17%,
           respectively. Patients achieving functional gains in these trials also reported improvements in their ability to perform activities of
           daily living.

      •    Sustained outcomes. In both our human and animal trials, improvements in motor function that resulted from cortical stimulation
           in conjunction with rehabilitative therapy were retained several months after the end of therapy, suggesting a sustained effect of our
           stroke motor recovery therapy.

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      •    Ease of implantation. We believe the surgery for implanting the Northstar Stroke Recovery System, which does not require
           penetration into the brain, can be performed by most neurosurgeons.

      •    Short surgical procedure. Our Northstar Stroke Recovery System can be surgically implanted in approximately two and one-half
           hours, and the procedure can be completed by one neurosurgeon.

      •    Favorable safety profile. We believe that the surgical approach for implanting our Northstar Stroke Recovery System contributes
           to a favorable safety profile of our device.

      •    Temporary implant. For our stroke motor recovery application, stimulation is administered only during the course of
           rehabilitative therapy. Afterwards, the system is removed and no components of the system remain in the body.

      •    Patient-specific treatment. Our cortical stimulation therapy uses f MRI to determine the primary location of a specific patient’s
           motor cortex that has taken over control of hand or arm movement, which enables the neurosurgeon to place the electrode grid on
           the dura over that patient-specific site. We own allowed patent application claims that relate to the use of electrical stimulation to
           treat neurological diseases and disorders of the brain by using imaging methods, such as f MRI, to target patient-specific stimulation
           sites of the cortex.

      Beyond stroke motor recovery, we are also evaluating our cortical stimulation therapy system for use in treating stroke-related aphasia, as
well as tinnitus and essential tremor, which are other disabling neurological disorders that afflict large numbers of patients. We believe that
cortical stimulation therapy may be useful in treating these and other neurological diseases and disorders.

Our Business Strategy

      Our goal is to become the leading provider of neurostimulation solutions for patients who suffer from stroke and other neurological
diseases and disorders, by establishing our proprietary cortical stimulation therapy as the treatment of choice for multiple neurological
applications. Key elements of our strategy include:

      •    commercializing our Northstar Stroke Recovery System for stroke motor recovery;

      •    communicating the benefits of cortical stimulation therapy by publicizing clinical results obtained by leading clinicians;

      •    establishing third party reimbursement for cortical stimulation therapy;

      •    leveraging our technology platform to pursue additional neurological applications, including the treatment of aphasia, tinnitus,
           essential tremor and other movement disorders, other brain injuries, neuropsychiatric disorders and pain management; and

      •    expanding and strengthening our intellectual property position.

                                                                  Risk Factors

      Our business is subject to numerous risks, as more fully described in the section entitled ―Risk Factors‖ immediately following this
prospectus summary. We have a history of operating losses and we may never achieve profitability. We do not have, and may never have, any
products approved for marketing. Our cortical stimulation therapy system is novel. While our clinical trials to date have yielded results that we
believe to be favorable, these data are not necessarily indicative of data we will obtain in our EVEREST or other trials and are not predictive of
regulatory approval or commercial success. We rely on third parties with whom we have long-term, exclusive relationships to supply the
components of, and to manufacture, our Northstar Stroke Recovery System. We compete against companies that have longer operating
histories, more established products and greater resources than we do.

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                                                         Our Corporate Information

       We were incorporated in 1999 in Washington. Our principal executive offices are located at 2401 Fourth Avenue, Suite 300, Seattle, WA
98121, and our telephone number is (206) 728-1477. Our website address is http://www.northstarneuro.com. The information contained in, or
that can be accessed through, our website is not part of this prospectus. Unless the context indicates otherwise, as used in this prospectus, the
terms ―Northstar,‖ ―we,‖ ―us‖ and ―our‖ refer to Northstar Neuroscience, Inc., a Washington corporation. We use Northstar Neuroscience ,    ™


Northstar and the Northstar Neuroscience logo as trademarks in the U.S. and other countries. All other trademarks and tradenames mentioned
           ™


in this prospectus are the property of their respective owners.

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                                                                  The Offering

Common stock offered                                               shares

Common stock to be outstanding after this                          shares
 offering

Use of proceeds                                      To complete our pivotal stroke motor recovery trial and continue the development of our
                                                     cortical stimulation therapy, including other clinical trials and research programs, to build
                                                     sales and marketing capabilities, and for working capital and other general corporate
                                                     purposes. See ―Use of Proceeds.‖

Proposed Nasdaq National Market symbol               NSTR

      The number of shares of common stock to be outstanding immediately after this offering, assuming conversion of 22,413,765 shares of
redeemable convertible preferred stock, as shown above is based on 25,593,721 shares of common stock outstanding as of January 31, 2006.
This number excludes:

      •    2,339,958 shares of common stock issuable upon the exercise of options outstanding as of January 31, 2006, having a
           weighted-average exercise price of $0.67 per share;

      •    339,645 shares of common stock issuable upon the exercise of warrants outstanding as of January 31, 2006, having a
           weighted-average exercise price of $4.24 per share, of which warrants for 25,000 shares of common stock will terminate if not
           exercised prior to the closing of this offering;

      •    253,003 shares of common stock reserved for future grants under our Amended and Restated 1999 Stock Option Plan as of
           January 31, 2006; and

      •    3,000,000 shares of common stock reserved for future issuance under our 2006 Performance Incentive Plan, which will become
           effective immediately upon the signing of the underwriting agreement for this offering, subject to automatic annual increases and
           increases resulting from the rollover of terminated and expired options originally granted under our Amended and Restated 1999
           Stock Option Plan.

      Except as otherwise indicated, all information in this prospectus assumes:

      •    the conversion of all our outstanding shares of redeemable convertible preferred stock into 22,413,765 shares of common stock upon
           the closing of this offering;

      •    that each outstanding warrant to purchase shares of redeemable convertible preferred stock has become a warrant to purchase shares
           of common stock;

      •    a        -for-         reverse stock split that was effected on              , 2006;

      •    the filing of our amended and restated articles of incorporation upon completion of this offering; and

      •    no exercise of the underwriters’ over-allotment option.

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                                                           Summary Financial Data

      The following table sets forth summary financial data from our financial statements as described below. We have derived the statements
of operations data for the years ended December 31, 2003, 2004 and 2005 and the period from May 18, 1999 (inception) to December 31, 2005
and the balance sheet data as of December 31, 2005 from our audited financial statements, which are included elsewhere in this prospectus.
You should read these data together with our financial statements and related notes included elsewhere in this prospectus and the information
under ―Selected Financial Data‖ and ―Management’s Discussion and Analysis of Financial Condition and Results of Operations.‖
                                                                                                                                               Period from
                                                                                                                                                Inception
                                                                                                                                              (May 18, 1999)
                                                                                                                                             to December 31,
                                                                                     Year Ended December 31,                                      2005
                                                                  2003                         2004                       2005
                                                                                       (in thousands, except share and per share data)
Statements of Operations Data:
Revenue (1)                                                  $            316            $           —            $              —       $               463
Cost of goods sold (1)                                                    366                        —                           —                       956
Gross margin                                                                 (50 )                   —                           —                      (493 )
Operating expenses:
    Research and development                                          8,703                      12,367                      11,763                   47,064
    Selling, general and administrative                               6,128                       3,127                       3,257                   25,626
    Severance                                                           650                         —                           —                        650
    Loss on subleases                                                   —                           —                           794                    1,638
Total operating expenses                                            15,481                       15,494                      15,814                   74,978
Operating loss                                                      (15,531 )                   (15,494 )                   (15,814 )                (75,471 )
Interest income                                                         398                         446                         558                    2,877
Amortization of gain on sale of PNT assets                              954                       1,637                         682                    3,272
Net loss                                                            (14,179 )                   (13,411 )                   (14,574 )                (69,322 )
Preferred stock accretion                                            (3,749 )                    (4,979 )                    (5,653 )                (19,345 )
Net loss applicable to common shareholders                   $      (17,928 )            $      (18,390 )         $         (20,227 )    $           (88,667 )

Basic and diluted net loss per share applicable to
  common shareholders                                        $           (7.50 )         $          (6.91 )       $            (7.02 )

Shares used in computation of basic and diluted net loss
  applicable to common shareholders                              2,390,232                    2,662,964                  2,881,755

Pro forma basic and diluted net loss per share
  (unaudited) (2)                                                                                                 $            (0.58 )

Pro forma shares used in computation of basic and
  diluted net loss per share (unaudited) (2)                                                                            25,295,520


(1)   Represents revenue and cost of goods sold from the sale of PNT product to customers.
(2)   Please see Note 10 to our financial statements for an explanation of the method used to compute pro forma basic and diluted net loss per
      share and the number of shares used in computing per share amounts.

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      The following table sets forth our summary balance sheet data as of December 31, 2005:

      •    on an actual basis;

      •    on a pro forma basis after giving effect to:

             •      the conversion of all outstanding shares of our redeemable convertible preferred stock into 22,413,765 shares of common
                    stock and

             •      the conversion of a warrant to purchase up to 209,645 shares of our redeemable convertible preferred stock to a warrant to
                    purchase an equal number of shares of our common stock, resulting in the reclassification of $1,090,000 from current
                    liabilities to shareholders’ equity (deficit); and

      •    on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from our sale of      shares of common
           stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and
           the filing of our amended and restated articles of incorporation.

                                                                                                                December 31, 2005
                                                                                                                                       Pro Forma
                                                                                                   Actual             Pro Forma        as Adjusted
                                                                                                                  (in thousands)
Balance Sheet Data:
Cash, cash equivalents and securities available-for-sale (short-term)                          $    20,187          $ 20,187
Working capital                                                                                     16,321            17,410
Total assets                                                                                        21,745            21,745
Long-term liabilities                                                                                5,425             5,425
Redeemable convertible preferred stock                                                              99,860               —
Shareholders’ equity (deficit)                                                                     (87,733 )          13,216

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                                                               RISK FACTORS

      Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock. If any of the following risks were to occur, our business,
financial condition or results of operations could be materially and adversely affected. In these circumstances, the market price of our common
stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business and Industry

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

      We are a development stage company with a limited operating history and no current revenue. As of December 31, 2005, we had a deficit
accumulated during the development stage of $69.3 million. We have incurred losses in each year since our formation in 1999. Our net losses
applicable to common shareholders for the fiscal years ended December 31, 2005, 2004 and 2003 were $20.2 million, $18.4 million and $17.9
million, respectively. Development of a new medical device, including conducting clinical trials and seeking regulatory approvals, is a long,
expensive and uncertain process. We expect to continue to incur significant and increasing operating losses for the next several years. These
losses, among other things, have had and will continue to have an adverse effect on our shareholders’ equity and working capital.

       We expect our clinical and regulatory expenses to increase in connection with our current pivotal clinical trial, other ongoing clinical
trials and trials that we may initiate in the future. We also expect our product development expenses to increase in connection with our ongoing
and future product development initiatives. In addition, we expect to incur significant sales and marketing expenses, prior to recording
sufficient revenue to offset these expenses, if our Northstar Stroke Recovery System is approved for marketing by the U.S. Food and Drug
Administration, or FDA. Because of the numerous risks and uncertainties associated with developing new medical devices, we are unable to
predict the extent of any future losses or when we will become profitable, if ever.

Our product development programs are based on novel technologies and are inherently risky.

       We are subject to the risks of failure inherent in the development of products based on new technologies. The use of cortical stimulation
therapy for stroke motor recovery is, to our knowledge, a novel application of neurostimulation therapy that has not previously been
investigated to any meaningful extent. The other potential applications of our cortical stimulation therapy involve similarly novel approaches to
the treatment of neurological diseases and disorders. The novel nature of these therapies results in significant challenges in regards to product
development and optimization, government regulation, third party reimbursement and market acceptance. These challenges may prevent us
from developing and commercializing products on a timely and profitable basis or at all.

Our success as a company will depend heavily on the success of the initial application of our cortical stimulation therapy, our Northstar
Stroke Recovery System, for which we are conducting a pivotal clinical trial. If we are unable to commercialize our Northstar Stroke
Recovery System, our ability to generate revenue will be significantly harmed.

      Since June 2003 we have invested substantially all of our financial resources and our research and product development efforts in our
Northstar Stroke Recovery System, which we hope to introduce for commercial sales starting in the first quarter of 2009, subject to FDA
approval. We do not anticipate generating any revenue prior to that time. The commercial success of our Northstar Stroke Recovery System
will depend upon:

      •    successfully completing our ongoing EVEREST trial;

      •    obtaining marketing approval from the FDA;

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      •    manufacturing of our Northstar Stroke Recovery System in commercial quantities;

      •    the successful commercial launch of our Northstar Stroke Recovery System; and

      •    the acceptance of our Northstar Stroke Recovery System by the medical and stroke community and third party payors as clinically
           useful, cost-effective and safe.

      If we are not successful in completing our EVEREST trial, or if the data from our EVEREST trial are not satisfactory, we may not
proceed with our planned filing of an application for regulatory approval or we may be forced to delay our regulatory filings to conduct
additional trials. If we are not successful in securing FDA marketing approval, we may never generate any revenue and may be forced to cease
operations. Although we are investigating the potential applicability of our cortical stimulation therapy system for the treatment of other
neurological diseases and disorders, such as stroke-related aphasia and tinnitus, we do not expect to start pivotal clinical trials for other
applications prior to 2007, and the earliest time at which we might expect to obtain regulatory approval for and begin receiving revenue from
any other application would be 2009, if ever.

If we are unable to complete our EVEREST or other trials, or if we experience significant delays, our ability to commercialize our
Northstar Stroke Recovery System or other products we may develop, and our financial position, will be impaired.

       Our EVEREST trial protocol requires us to treat at least 151 patients to meet our primary safety and efficacy endpoints. Depending on the
attrition level, which is the number of enrolled patients who fail for any reason to complete the trial, we will have to treat more than 151
patients to end up with the full set of patient data required by the FDA. Our clinical plan, as approved by the FDA, assumes that the attrition
level could be as high as 20% of the patients we enroll. We will monitor actual patient attrition during the trial and increase our enrollment
accordingly. If the attrition level is 20%, we will need to enroll and treat 189 patients in the EVEREST trial. Conducting a clinical trial of this
size, which involves screening, assessing, testing, treating and monitoring patients at up to 18 sites across the country, and coordinating with
patients and clinical institutions as well as with neurologists, neurosurgeons, radiologists, physiatrists and physical therapists, is a complex and
uncertain process. To enroll and treat patients at a clinical site, we must first obtain clinical site approvals, finalize contracts at trial sites and
train and validate site personnel. To date, we have not enrolled and treated patients in our EVEREST trial as fast as we originally estimated
because it has taken longer than anticipated to complete these steps. The criteria for inclusion in the EVEREST trial are more restrictive than in
our earlier feasibility trials, which has contributed to the slower than anticipated rate of enrollment. As of January 31, 2006, we had enrolled
and assigned to a treatment group a total of 39 patients, and we currently expect to reach the primary endpoint of the trial by the first quarter of
2008.

      Completion of our EVEREST trial, and our other ongoing or future clinical trials, could also be delayed for several reasons, including:

      •    we may experience difficulties or delays in bringing additional clinical sites on-line;

      •    sites currently participating in the trial may drop out of the trial, which may require us to engage new sites and/or petition the FDA
           for an expansion of the number of sites that are permitted to be involved in the trial;

      •    patients may not enroll in, or complete, clinical trials at the rate we expect;

      •    patients may experience adverse side effects, causing the data safety monitoring board, a clinical site ethics committee, the FDA or
           other regulatory authority to place the clinical trial on hold;

      •    clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and
           good clinical practices; and

      •    regulatory inspections of clinical trials or manufacturing facilities may result in our being required to undertake corrective action or
           suspend or terminate our clinical trials if inspectors find us not to be in compliance with regulatory requirements.

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      In addition, adverse events during a clinical trial could cause us to repeat or terminate a trial, or cancel an entire development program. If
our clinical trials are delayed, it will take us longer to ultimately commercialize a product and achieve revenue. Moreover, our development
costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned.

If our EVEREST trial does not meet our anticipated safety or efficacy endpoints, our ability to commercialize our Northstar Stroke
Recovery System and our financial position will be impaired.

     Before we can market our Northstar Stroke Recovery System, we must successfully complete our ongoing EVEREST trial and
demonstrate the safety and efficacy of the Northstar Stroke Recovery System. For purposes of the EVEREST trial we will consider our
Northstar Stroke Recovery System to be effective if the trial data show that the percentage of patients who undergo cortical stimulation therapy
in combination with intensive rehabilitative therapy and achieve clinically meaningful improvements in a combined endpoint of the Upper
Extremity Fugl-Meyer (UEFM) test, which provides an index of patients’ neurological and motor function, and the Arm Motor Ability Test
(AMAT), a measure of activities of daily living, is 20 percentage points greater than the combined data for patients who undergo intensive
rehabilitative therapy alone. The results of the EVEREST trial are ―blinded,‖ so we do not know how patients treated with the Northstar Stroke
Recovery System to date have responded to treatment. Despite the encouraging results from our two smaller completed feasibility trials, we
may be unable to demonstrate the safety and efficacy of our Northstar Stroke Recovery System in the EVEREST trial.

We may not secure regulatory approval for our Northstar Stroke Recovery System or any other products that we may develop in the future,
even if we believe our clinical trial results demonstrate the efficacy of our cortical stimulation therapy.

      Even if we file an application with clinical data that we believe justifies marketing approval for the Northstar Stroke Recovery System or
any other product we may in the future develop, the FDA or foreign regulatory authorities may not approve our filing, or may request
additional information, including data from additional clinical trials. The FDA or foreign regulatory authorities may also approve our Northstar
Stroke Recovery System or any other product for very limited purposes with many restrictions on its use, may delay approval, or ultimately
may not grant marketing approval for our system. Because our Northstar Stroke Recovery System represents a novel way to treat motor
disabilities caused by stroke, and because there is a large population of stroke patients who might be eligible for treatment, it is possible, if not
likely, that the FDA and other regulatory bodies will review an application for approval of our Northstar Stroke Recovery System with greater
scrutiny, which could cause that process to be lengthier and more involved than that for products without such characteristics. There can be no
assurance that the FDA will approve our Northstar Stroke Recovery System even if the EVEREST trial data demonstrate our anticipated or
greater levels of improvement in motor recovery and activities of daily living. We cannot assure you that we will ever obtain the necessary
regulatory approvals to market our Northstar Stroke Recovery System in the U.S. or abroad.

We have used two different implantable pulse generators, or IPGs, in our EVEREST trial, switching from a third party IPG to our
proprietary IPG after treating 16 investigational patients, which could cause the FDA to require us to treat additional patients in our
EVEREST trial.

      With the FDA’s knowledge and consent, for the first 16 investigational patients in our EVEREST trial we used a third party IPG before
switching to use of our own proprietary IPG for subsequent EVEREST investigational patients. Although our proprietary IPG has the ability to
provide higher levels of stimulation, for purposes of the EVEREST trial, the parameters of stimulation for the third party IPG and our
proprietary IPG are substantially the same. We believe that the FDA will permit us to use the trial data from the patients who received cortical
stimulation therapy using a third party IPG, but there is a risk that the FDA could reject this data and require us to obtain data on an additional
16 or more patients using our proprietary IPG, which would delay the completion of our trial and cause us to incur additional expense.

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Even if our Northstar Stroke Recovery System, or any other product we develop, is approved by regulatory authorities, if we fail to comply
with ongoing regulation, or if we experience unanticipated problems with our products, our products could be subject to restrictions or
withdrawal from the market.

      Any product for which we obtain marketing approval will be subject to ongoing regulation, including inspections by the FDA and other
regulatory agencies of our products’ manufacturing processes, compliance with Quality System Regulations and review of post-market
approval data, as well as review of our promotional activities. Even if regulatory approval of a product is granted, the approval may be subject
to limitations on the indicated uses or populations for which the product may be marketed. For example, because our target patients comprise
only a subset of all stroke survivors who primarily are patients with moderate and moderately-severe impairment of their upper limbs and a
small percentage of patients with mild or severe upper limb impairment without other severe coexistent disabilities, we might be limited to
marketing our Northstar Stroke Recovery System for only a subpopulation of stroke patients, which could significantly affect the size of the
potential market. In addition, if the data from an FDA-mandated post-market approval trial are not obtained, we may have to collect further
data on study patients. This would entail additional clinical costs and continued monitoring by the FDA. Furthermore, later discovery of
previously unknown problems with our products, including unanticipated adverse events, manufacturer or manufacturing problems or failure to
comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from
the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or
criminal penalties.

The manufacturing facilities of our suppliers must comply with applicable regulatory requirements. If these manufacturing facilities do not
receive regulatory approval, our business and our results of operations would be harmed.

       Completion of our clinical trials and commercialization of our Northstar Stroke Recovery System require access to manufacturing
facilities that meet applicable regulatory standards to manufacture a sufficient supply of our products. We rely solely on third parties to
manufacture and assemble our Northstar Stroke Recovery System, and do not currently plan to manufacture or assemble any of our proposed
products. The FDA must approve facilities that manufacture and assemble our products intended for sale in the U.S., as well as the
manufacturing controls and specifications for the product. Suppliers of some components of our products must also comply with FDA and
foreign regulatory requirements, which often requires significant time, money, and record-keeping and quality assurance efforts, and subjects
us and our suppliers to potential regulatory inspections and stoppages. Our suppliers may not satisfy these requirements. If we or our suppliers
do not achieve required regulatory approval for our manufacturing operations, our commercialization efforts could be delayed, which would
harm our business and our results of operations.

Our Northstar Stroke Recovery System may never achieve market acceptance even if we obtain regulatory approvals.

     Market acceptance of our Northstar Stroke Recovery System will depend on successfully communicating the benefits of our cortical
stimulation therapy to each of the four different constituencies involved in deciding whether to treat a particular patient using cortical
stimulation therapy:

      •    the various healthcare providers, such as neurosurgeons, neurologists and physiatrists, who treat stroke patients;

      •    institutions such as hospitals and stroke rehabilitation centers, where the procedure and rehabilitative therapy would be performed,
           as well as opinion leaders in these institutions;

      •    the stroke survivors themselves, and their families; and

      •    third party payors, such as private healthcare insurers and Medicare, which would ultimately bear most of the costs for the various
           providers and medical devices involved in the procedures.

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      Marketing to each of these constituencies requires a different marketing approach, and we must convince each of these groups of the
efficacy and utility of using our Northstar Stroke Recovery System to be successful. Our ability to market our Northstar Stroke Recovery
System successfully to each of these constituencies will depend on a number of factors, including:

      •    the perceived effectiveness and sustainability of the results of therapy provided by our Northstar Stroke Recovery System;

      •    the level of education and awareness among physicians and stroke survivors concerning our Northstar Stroke Recovery System;

      •    acceptance of the measures used to assess the efficacy of our Northstar Stroke Recovery System;

      •    the price of our Northstar Stroke Recovery System and the associated costs of the surgical procedure and treatment;

      •    the availability of sufficient third party coverage or reimbursement for our Northstar Stroke Recovery System and the related
           rehabilitative therapy;

      •    the frequency and severity of any side effects;

      •    the willingness of stroke patients to undergo surgery to implant our Northstar Stroke Recovery System; and

      •    the availability and perceived advantages and disadvantages of alternative treatments.

     If our Northstar Stroke Recovery System, or any other cortical stimulation therapy for other neurological diseases and disorders that we
may develop, does not achieve an adequate level of acceptance by the relevant constituencies, we may not generate significant product revenue
and may not become profitable.

If we fail to obtain adequate levels of reimbursement for our products by the government and other third party payors, there may be no
commercially viable markets for our Northstar Stroke Recovery System or other products we may develop or our target markets may be
much smaller than expected.

      The availability and levels of reimbursement by governmental and other third party payors, such as the Medicare and Medicaid programs
and private healthcare insurers, will substantially affect the markets for cortical stimulation therapy and our ability to commercialize our
Northstar Stroke Recovery System and other products we may develop. The efficacy, safety, ease of use and cost-effectiveness of our Northstar
Stroke Recovery System and of any competing products will in part determine the availability and level of reimbursement. In particular, we
expect that securing reimbursement for our Northstar Stroke Recovery System will be more difficult if our EVEREST trial does not
demonstrate a level of motor function improvement that healthcare providers, stroke institutions and stroke survivors consider clinically
meaningful, whether or not regulatory agencies consider the improvement of patients treated in clinical trials to have been clinically
meaningful. Reimbursement also may be more difficult to obtain if payors view our Northstar Stroke Recovery System only as adding to their
costs because our therapy may be delivered to many stroke survivors who are not otherwise receiving a significant amount of reimbursed
stroke-related treatment or therapy. Moreover, the novelty of cortical stimulation to treat stroke victims will likely complicate the establishment
of a uniform and favorable reimbursement policy.

      In some international markets, pricing of medical devices is subject to government control. In the U.S. and international markets, we
expect that both government and third party payors will continue to attempt to contain or reduce the costs of healthcare by challenging the
prices charged for healthcare products and services. If reimbursement for our Northstar Stroke Recovery System and the related surgery,
hospital stay and rehabilitative therapy is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, market
acceptance of our Northstar Stroke Recovery System would be impaired and our future revenue, if any, would be adversely affected.

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We depend on a limited number of manufacturers and single source suppliers of various critical components for our Northstar Stroke
Recovery System. The loss of any of these manufacturer or supplier relationships could delay our clinical trials or prevent or delay
commercialization of our Northstar Stroke Recovery System.

      We rely entirely on third parties to manufacture our Northstar Stroke Recovery System and to supply us with all of the critical
components of our Northstar Stroke Recovery System, including our IPGs, cortical stimulation leads and handheld programmers. We have
entered into six-year agreements with our manufacturers and primary suppliers that generally require us to fulfill all of our manufacturing needs
and purchase all of our worldwide requirements for components from these parties. These agreements terminate between April 2010 and
August 2010. There is no overlap among these suppliers, insofar as we obtain each of our components from a single supplier. There is a limited
number of alternative suppliers that are capable of manufacturing the components of our Northstar Stroke Recovery System, and the terms of
our agreements significantly limit our ability to work with other suppliers to ensure backup sources of our components. If any of our existing
suppliers was unable or unwilling to meet our demand for product components, or if the components or finished products that they supply do
not meet quality and other specifications, our EVEREST trial could be delayed and the development and commercialization of our Northstar
Stroke Recovery System and other products could be delayed or prevented.

      If we have to switch to a replacement manufacturer or replacement supplier for any of our product components, we may face additional
regulatory delays, and the manufacture and delivery of our Northstar Stroke Recovery System could be interrupted for an extended period of
time, which could delay completion of our clinical trials or commercialization of our Northstar Stroke Recovery System. In addition, we may
be required to obtain regulatory clearance from the FDA to use different suppliers or components. To date, our component requirements have
consisted only of the limited quantities that we need to conduct our clinical trials. If we obtain market approval for our Northstar Stroke
Recovery System, however, we anticipate that we will require substantially larger quantities of various components. Our suppliers may not
provide us with sufficient quantities of necessary components in a timely manner that meet quality and other specifications, and we may not be
able to locate an alternative supplier in a timely manner or on commercially reasonable terms, if at all. Establishing additional or replacement
suppliers for these components may take a substantial amount of time, which could delay or prevent commercial launch of our Northstar Stroke
Recovery System. We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or foreign
regulatory authorities.

We may not be successful in our efforts to utilize our cortical stimulation therapy in various applications.

      A key element of our business strategy is to develop a cortical stimulation technology platform for use in treating many neurological
diseases and disorders. We are conducting research on other potential applications of our cortical stimulation therapy, including some that we
believe are based on a mechanism of action different from that for stroke motor recovery. Research to identify new target applications requires
substantial technical, financial and human resources, whether or not any new applications for our cortical stimulation therapy are ultimately
identified. We may be unable to identify or pursue other applications of our technology for many reasons, including the following:

      •    the research methodology used may not be successful in identifying other potential applications;

      •    competitors may develop alternatives, including nonsurgical alternatives, that render our cortical stimulation therapy obsolete for
           treating a particular neurological disease or disorder;

      •    we may not be able to optimize the delivery of our cortical stimulation therapy in a manner that would effectively treat a particular
           neurological disease or disorder, if such optimization is even possible;

      •    cortical stimulation therapy for certain neurological diseases or disorders may be shown to have harmful side effects or other
           characteristics that indicate it is unlikely to be effective;

      •    cortical stimulation therapy may be ineffective in treating a sufficiently large patient population with a particular disorder to make
           further study cost-effective; and

      •    our cortical stimulation therapy may not be suitable for certain other potential applications.

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      Even if we identify a potential new application for our cortical stimulation therapy, investigating the safety and efficacy of our therapy
requires extensive clinical testing, which is expensive and time-consuming. If we terminate a clinical trial in which we have invested significant
resources, our prospects will suffer, as we will have expended resources on a program that will not provide a return on our investment and
missed the opportunity to allocate those resources to potentially more productive uses. We will also need to obtain regulatory approval for these
new applications, as well as achieve market acceptance and an acceptable level of reimbursement.

Even if we obtain regulatory approval to commercialize our Northstar Stroke Recovery System, we will need to develop an infrastructure, or
contract with a third party, capable of successfully marketing and selling our products.

      Even if we obtain approval to market our Northstar Stroke Recovery System, to generate sales we will need to develop a sales and
marketing infrastructure or contract with a third party to perform that function. We do not currently have extensive marketing capabilities and
have no sales capabilities. Establishing these capabilities would be expensive and time-consuming. We may be unable to develop an effective
sales and marketing organization. If we contract with third parties to perform the sales and marketing function for us, our profit margins would
likely be lower than if we performed these functions ourselves. In addition, we would necessarily be relying on the skills and efforts of others
for the successful marketing of our products. If we are unable to establish and maintain effective sales and marketing capabilities,
independently or with others, we may not be able to generate product revenue and may not become profitable.

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

      We believe that the estimated net proceeds from this offering of $        million, assuming the initial public offering price of
$          per share and after deducting underwriting discounts and commissions and estimated offering expenses, together with our cash
resources and amounts available to us under a loan agreement, will be sufficient to fund our continuing operations and other demands and
commitments until approximately the first quarter of 2009. After, and possibly prior to, such date we may need to raise substantial additional
capital to:

      •    continue our research and development programs;

      •    commercialize our Northstar Stroke Recovery System, if approved by the FDA, for commercial sale; and

      •    fund our operations generally.

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

      •    the scope, rate of progress and cost of our clinical trials and other research and development activities;

      •    clinical trial results;

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

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

      •    the timing of regulatory approvals;

      •    the cost and timing of establishing sales, marketing and distribution capabilities;

      •    the cost of establishing clinical and commercial supplies of our Northstar Stroke Recovery System and any products that we may
           develop;

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      •    the rate of market acceptance of our Northstar Stroke Recovery System and any other product candidates;

      •    the effect of competing products and market developments;

      •    any revenue generated by sales of our future products; and

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

      Until the time, if ever, when we can generate a sufficient amount of product revenue, we expect to finance our future cash needs through
public or private equity offerings, debt financings or corporate collaboration, licensing arrangements, and grants, as well as through interest
income earned on cash balances.

      Additional capital may not be available on terms favorable to us, or at all. If we raise additional funds by issuing equity securities, our
shareholders may experience dilution. Debt financing, if available, may involve restrictive covenants or additional security interests in our
assets. Examples of such restrictive covenants, all of which we are subject to under our current loan agreement, include limitations on our
ability to incur additional debt or liens on any of our assets, dispose of our property, make dividend payments or distributions to our
shareholders or enter into certain transactions that would result in a change in control of us. Any additional debt or equity financing that we
raise may contain terms that are not favorable to us or our shareholders. If we raise additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish some rights to our technologies or products, or grant licenses on terms that
are not favorable to us. If we are unable to raise adequate funds, we may have to delay, reduce the scope of, or eliminate some or all of, our
development programs or liquidate some or all of our assets.

The financial reporting obligations of being a public company place significant demands on our management. In addition, if we are unable
to satisfy regulatory requirements relating to internal control over financial reporting, or if our internal control is not effective, our
business and financial results may suffer.

      Prior to the consummation of this offering, we have never operated as a public company. The obligations of being a public company,
including substantial public reporting and auditing obligations, will require significant additional expenditures, place additional demands on our
management and require the hiring of additional personnel.

      During the audit of our 2005 financial statements, our independent registered public accounting firm issued a letter to our audit committee
noting a deficiency in the design and operation of certain internal controls that they deemed to constitute a reportable condition. This matter
related to our financial statement close process and the lack of sufficient procedures and resources to ensure that all steps within our close
process are performed on a timely basis. A reportable condition means that these were matters that in the auditors’ judgment could adversely
affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial
statements.

      We are devoting significant resources to remediating and improving our internal control, including hiring additional personnel with
relevant experience working with public companies and enhancing the policies and procedures surrounding our financial statement close
process, in order to address the concerns that gave rise to the reportable condition in 2005. We cannot be certain that these measures will ensure
that we implement and maintain adequate control over our financial processes and reporting in the future.

       In addition, Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules and regulations implementing such act will require us to
conduct an annual evaluation of our internal control over financial reporting, and have that evaluation attested to by our independent auditor
starting with our fiscal year ending December 31, 2007. This process will increase our legal and financial compliance costs, and make some
activities more difficult, time-consuming or costly. If we fail to have an effectively designed and operating system of internal control, we may
be unable to comply with the requirements of Section 404 in a timely manner.

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The medical device industry is highly competitive and subject to rapid technological change. If our competitors are able to develop and
market products that are safer or more effective than our products, our commercial opportunities will be reduced or eliminated.

      The medical device industry is highly competitive and subject to rapid technological change. In particular, the neurostimulation industry
in which we operate has grown significantly in recent years, and is expected to continue to expand as technology continues to evolve and
awareness of neurostimulation as an effective or potential therapy for many applications expands. We face potential competition from
competing neurostimulation technologies, off-label use of current technologies, and currently available, and non-invasive, stroke therapies that
are medically accepted for treating large populations of stroke survivors and for which reimbursement levels are or may be established. Many
of our competitors in the field of neurostimulation devices have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals and marketing approved products than we do.
Smaller or early-stage companies may also prove to be significant competitors, particularly if they pursue competing solutions through
collaborative arrangements with large and established companies.

      Our competitors may:

      •    develop and patent processes or products earlier than us;

      •    obtain regulatory approvals for competing products more rapidly than we are able to do so; and

      •    develop more effective, safer, less invasive or less expensive products or technologies.

      We believe that stroke patients suffering from motor function disabilities have few if any effective treatment alternatives to address
long-term motor function disabilities. However, the field of human therapeutics is characterized by large public and private investment in
existing and new technologies, constant evolution and occasional breakthrough products that revolutionize treatment of a particular disease or
disorder. It is possible that, even if we successfully commercialize a product, subsequent pharmaceutical or medical device breakthroughs
would render our product non-competitive or obsolete.

Some of the potential applications of our cortical stimulation therapy system will likely require sustained delivery of electrical stimulation,
which involves additional risks.

      Some of the applications for our cortical stimulation therapy system that we are studying, such as tinnitus, will likely require a long-term
implant and sustained delivery of electrical stimulation to the cortex. Long-term implants and sustained delivery of stimulation may involve
additional challenges and risks, including the following:

      •    the battery in our current IPG is not rechargeable, and replacing the IPG in patients may be necessary to support sustained electrical
           stimulation;

      •    the therapeutic effect on the patient may not be sustained;

      •    the clinical trials necessary to support FDA approval of a long-term implantable device that delivers sustained electrical stimulation
           will likely take longer, and may require longer term follow-up data for such trials; and

      •    the FDA may require additional data.

Some of the potential applications of our cortical stimulation therapy system will likely involve implanting an electrode grid below the dura,
the outermost membrane covering the brain, which involves additional risks.

       To achieve the maximum benefit from our cortical stimulation therapy system, we believe that, for some applications, the electrode grid
through which cortical stimulation is provided will be implanted below the dura. In all of our completed and ongoing clinical trials, the
electrode grid is or has been implanted on the dura. Implanting the electrode grid below the dura may involve additional risks, including the
risk that any infections that might occur could be more serious than if the electrode grid were implanted on the dura, and a risk of a subdural
hemorrhage. These additional risks may adversely affect the safety profile of our products in these potential applications, which could make
regulatory approval and market acceptance less likely.

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We may be unable to attract and retain management and other personnel we need to succeed.

      Our success depends on the services of our senior management and other key research and development and clinical trial employees. The
loss of the services of one or more of these employees could have a material adverse effect on our business. We consider retaining Alan J.
Levy, Ph.D., our president and chief executive officer, to be key to our efforts to complete our EVEREST trial, secure marketing approval for
our Northstar Stroke Recovery System, and commercialize our Northstar Stroke Recovery System. Each of our officers may terminate his or
her employment without notice and without cause or good reason. Other than for Alan J. Levy, Ph.D., we do not carry key person life insurance
on our officers. Our future success will depend in large part on our ability to attract, retain and motivate highly skilled employees. We cannot
be certain that we will be able to do so.

If we do not achieve our projected business goals in the time frames we announce and expect, our stock price may decline.

      From time to time, we estimate and publicly announce, including in this prospectus, the anticipated timing of the accomplishment of
various clinical, regulatory and other product development goals. These statements, which are forward-looking statements, include our
estimates regarding enrolling patients in our clinical trials, when we will complete our EVEREST trial or our other clinical trials, when we will
submit our first premarket approval application, or PMA, to the FDA to seek regulatory clearance to market our Northstar Stroke Recovery
System, and when we will obtain FDA approval for or begin to receive revenue from any of our products. These estimates are and must
necessarily be based on a variety of assumptions. The timing of the actual achievement of these milestones may vary dramatically compared to
our estimates, in some cases for reasons beyond our control. Our failure to meet any publicly-announced goals may be perceived negatively by
the public markets, and, as a result, our stock price may decline. Refer to our discussion under the caption ―Forward-looking Statements.‖

We face the risk of product liability claims and may not be able to obtain adequate insurance.

      Our business exposes us to a risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical
devices. We may be subject to product liability claims if our Northstar Stroke Recovery System, or any other products we sell, causes, or
appears to have caused, an injury. Claims may be made by consumers, healthcare providers, third party strategic collaborators or others selling
our products. We have $10.0 million of product liability insurance, which covers the use of our products in our clinical trials, which amount we
believe is appropriate. Our current product liability 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 product liability claims. If we are unable to obtain insurance at an
acceptable cost and on acceptable terms for an adequate coverage amount or otherwise to protect against potential product liability claims, we
could be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to
uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and
results of operations. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of
merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or
inability to recruit, clinical trial volunteers or result in reduced acceptance of our Northstar Stroke Recovery System in the market.

       We may be subject to product liability claims even if it appears that the claimed injury is due to the actions of others. For example, we
rely on the expertise of surgeons, other physicians, therapists and other associated medical personnel to perform the medical procedure to
implant and remove our Northstar Stroke Recovery System and to perform the related rehabilitative therapy. If these medical personnel are not
properly trained or are negligent, the therapeutic effect of our Northstar Stroke Recovery System may be diminished or the patient may suffer
critical injury, which may subject us to liability. In addition, an injury that is caused by the negligence of one of our suppliers in supplying us
with a defective component that injures a patient could be the basis for a claim against us.

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We may be unable to manage our company’s growth effectively.

      Our business strategy entails significant future growth. For example, we will have to expand existing operations in order to conduct
additional clinical trials, increase our contract manufacturing capabilities, hire and train new personnel to handle the marketing and sales of our
products, assist patients in obtaining reimbursement for the use of our products and create and develop new applications for our technology.
Such growth may place significant strain on our management and financial and operational resources. Successful growth is also dependent
upon our ability to implement appropriate financial and management controls, systems and procedures. Our ability to effectively manage
growth depends on our success in attracting and retaining highly qualified personnel, for which the competition may be intense. If we fail to
manage these challenges effectively, our business could be harmed.

Provisions of federal securities laws and regulations are likely to increase our costs.

      The Sarbanes-Oxley Act of 2002 has required us to adopt new corporate governance, securities disclosure and compliance practices. In
response to the requirements of that act, the Securities Exchange Commission and The Nasdaq Stock Market, Inc. have enacted new rules.
Compliance with these new rules has increased our legal, financial and accounting costs in connection with this offering, and we expect these
increased costs to continue indefinitely. These laws and regulations may also make it more difficult for us to attract and retain qualified
members of our board of directors or members of senior management.

Risks Related to Intellectual Property

If we are unable to obtain or maintain intellectual property rights relating to our technology and cortical stimulation therapy system, the
commercial value of our technology and any future products will be adversely affected and our competitive position will be harmed.

      Our success depends in part on our ability to obtain protection in the U.S. and other countries for our cortical stimulation therapy system
and processes by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. As of
January 31, 2006, we owned two issued patents and 36 patent applications in the U.S. and 16 patent applications in foreign jurisdictions. Our
pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us any competitive
advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to
stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in
patent laws or their interpretation in the U.S. and other countries could also diminish the value of our intellectual property or narrow the scope
of our patent protection. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing
products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make
claims or file lawsuits against third parties. This can entail significant costs to us and divert our management’s attention from developing and
commercializing our products.

If we infringe or are alleged to infringe the intellectual property rights of third parties, our business could be adversely affected.

      Our cortical stimulation therapy may infringe or be claimed to infringe patents that we do not own or license, including patents that may
issue in the future based on patent applications of which we are currently aware, as well as applications of which we are unaware. For example,
we are aware of other companies that are investigating neurostimulation, including cortical stimulation, and of patents and published patent
applications held by these companies in those fields. While the applicability of such patents and patent applications to our products and
technologies under development and validity of these patents and patent applications are uncertain, third parties who own or control these
patents and patent applications in the U.S. and abroad could bring claims against us that would cause us to incur substantial expenses and, if
successfully asserted against us, could cause us to pay substantial damages and would divert management’s attention. Further, if a patent
infringement suit

                                                                        19
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were brought against us, we could be forced to stop our ongoing or planned clinical trials, or delay or abandon commercialization of the
product that is the subject of the suit.

      As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from the third party
and be required to pay license fees or royalties, or both. These licenses may not be available on acceptable terms, or at all. Even if we were able
to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property.
Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims,
we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products
could be adversely affected.

     In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We
generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties.
These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual
property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Risks Related to this Offering

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

     We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have
broad discretion in the application of the net proceeds, including for any of the purposes described in ―Use of Proceeds.‖ The failure of our
management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a
manner that does not produce income or that loses value.

Our principal shareholders and management own a significant percentage of our stock and will be able to exercise significant influence
over our affairs.

      Our executive officers, current directors and holders of five percent or more of our common stock, as of January 31, 2006, beneficially
owned approximately 77.8% of our common stock. We expect that upon the closing of this offering, that same group will continue to hold at
least      % of our outstanding common stock. Consequently, even after this offering, these shareholders will likely be able to determine the
composition of our board of directors, retain the voting power to approve some matters requiring shareholder approval and continue to have
significant influence over our operations. The interests of these shareholders may be different than the interests of other shareholders on these
matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging
a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

      Purchasers of common stock in this offering will pay a price per share that substantially exceeds the per share book value of our tangible
assets after subtracting our liabilities and the per share price paid by our existing shareholders and by persons who exercise currently
outstanding options to acquire our common stock. In addition, purchasers of common stock in this offering will have contributed a
disproportionate amount of our total capital relative to their ownership interests as compared to existing shareholders. See ―Dilution.‖

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An active trading market for our common stock may not develop.

      Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common stock
quoted on the Nasdaq National Market, an active trading market for our shares may never develop or be sustained following this offering.
Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active. The initial public
offering price for our common stock may bear no relation to the market price of our common stock after this offering. Investors may not be
able to sell their common stock at or above the initial public offering price.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

      Our stock price is likely to be volatile. The stock market in general and the market for small healthcare companies in particular have
experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility,
investors may not be able to sell their common stock at or above the initial public offering price. The price for our common stock may be
influenced by many factors, including:

      •    results of our clinical trials;

      •    delays in enrolling or conducting our ongoing clinical trials, or other developments concerning ongoing clinical trials;

      •    delays in obtaining regulatory approvals for clinical trials or commercial marketing efforts;

      •    failure of any of our product candidates, if approved for commercial sale, to achieve commercial success;

      •    regulatory developments in the U.S. and foreign countries;

      •    regulatory issues related to our quality systems;

      •    developments or disputes concerning patents or other proprietary rights;

      •    ability to manufacture our products;

      •    public concern over our products;

      •    introduction of competing products;

      •    litigation or other disputes with third parties;

      •    departure of key personnel;

      •    future sales of our common stock;

      •    variations in our financial results or those of companies that are perceived to be similar to us;

      •    changes in the structure of healthcare payment systems;

      •    investors’ perceptions of us; and

      •    general economic, industry and market conditions.

     A decline in the market price of our common stock could cause investors to lose some or all of their investment and may adversely
impact our ability to attract and retain employees and raise capital. In addition, shareholders may initiate securities class action lawsuits if the
market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our
management.

If there are substantial sales of common stock, our stock price could decline.

       If our existing shareholders sell a large number of shares of common stock or the public market perceives that existing shareholders might
sell shares of common stock, the market price of our common stock could

                                                                          21
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decline significantly. These shareholders may sell their shares of our common stock starting at various times following this offering.

      In addition, existing shareholders holding an aggregate of 22,693,410 shares of common stock, based on shares outstanding as of
January 31, 2006, including 209,645 shares underlying outstanding warrants, have rights with respect to the registration of these shares of
common stock with the SEC. See ―Description of Capital Stock—Registration Rights.‖ If we register their shares of common stock following
the expiration of the lock-up agreements, they will be permitted to sell those shares in the public market.

       Promptly following this offering, we intend to register approximately           shares of common stock that are authorized for issuance
under our equity compensation plans. As of January 31, 2006, 2,339,958 shares were subject to outstanding options, of which 1,625,074 shares
were vested. Once we register these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements and
restrictions on our affiliates. For more information, see the discussion under the caption ―Shares Eligible for Future Sale.‖

Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our direction or management.

     Provisions of our articles of incorporation and bylaws and applicable provisions of Washington law may make it more difficult or
impossible for a third party to acquire control of us without the approval of our board of directors. These provisions:

      •    limit who may call a special meeting of shareholders;

      •    provide for a classified board of directors;

      •    provide that our board of directors may only be removed for cause by the affirmative vote of our shareholders;

      •    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be
           acted on at shareholder meetings;

      •    prohibit cumulative voting in the election of our directors;

      •    prohibit shareholder action by written consent, thereby requiring all shareholder actions to be taken at a meeting of our shareholders;
           and

      •    provide our board of directors the ability to designate the terms of and issue a new series of preferred stock without shareholder
           approval.

      In addition, the Washington Business Corporation Act generally prohibits us from engaging in any business combination with certain
persons who acquire 10% or more of our voting securities without the prior approval of our board of directors for a period of five years
following the date such person acquires the shares. We cannot ―opt out‖ of this statute. These provisions may have the effect of entrenching our
management team and may deprive investors of the opportunity to sell their shares to potential acquirors at a premium over prevailing prices.
This potential inability to obtain a control premium could reduce the price of our common stock.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

      We have never declared or paid any cash dividends on our common stock or other securities, and we currently do not anticipate paying
any cash dividends in the foreseeable future. In addition, our credit agreement limits our ability to pay dividends without the approval of our
lenders and the instruments governing any future indebtedness may also contain various covenants that would limit our ability to pay
dividends. Accordingly, our shareholders will not realize a return on their investment unless the trading price of our common stock appreciates.
Our common stock may not appreciate in value after the offering and may not even maintain the price at which investors purchased shares.

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                                                     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 the sections entitled ―Summary,‖ ―Risk
Factors,‖ ―Management’s Discussion and Analysis of Financial Condition and Results of Operations‖ and ―Business.‖ Forward-looking
statements include, but are not limited to, statements about:

      •    our expectations with respect to regulatory submissions and approvals;

      •    our expectations with respect to our clinical trials, including enrollment in our clinical trials;

      •    our expectations with respect to our intellectual property position;

      •    our ability to commercialize our Northstar Stroke Recovery System;

      •    our ability to develop and commercialize new products; and

      •    our estimates regarding our capital requirements and our need for additional financing.

      In some cases, you can identify forward-looking statements by terms such as ―may,‖ ―will,‖ ―should,‖ ―could,‖ ―would,‖ ―expects,‖
―plans,‖ ―anticipates,‖ ―believes,‖ ―estimates,‖ ―projects,‖ ―predicts,‖ ―potential‖ and similar expressions intended to identify forward-looking
statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not
place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in
this prospectus, particularly in the ―Risk Factors‖ section, that could cause actual results or events to differ materially from the forward-looking
statements that we make.

      You should read this prospectus and the documents that we 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. We do not assume
any obligation to update any forward-looking statements.

                                                                          23
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                                                              USE OF PROCEEDS

     We estimate that we will receive approximately $             million in net proceeds from this offering, or $         million if the
underwriters’ over-allotment option is exercised in full, assuming an initial public offering price of $         per share, the midpoint of the
range on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering
expenses payable by us.

      We estimate that we will use the net proceeds from this offering in the following manner:

      •    approximately $7 million for direct costs to complete the EVEREST trial;

      •    approximately $26 million to continue the development of our cortical stimulation therapy system for applications other than stroke
           motor recovery, including other clinical trials and research programs;

      •    approximately $16 million to build sales and marketing capabilities to support the commercial launch of our Northstar Stroke
           Recovery System; and

      •    the balance for working capital and other general corporate purposes.

      The amounts we actually expend in these areas may vary significantly from our expectations and will depend on a number of factors,
including actual results of our clinical trials, operating costs, capital expenditures and any expenses related to defending claims of intellectual
property infringement. Accordingly, management will retain broad discretion in the allocation of the net proceeds of this offering. A portion of
the net proceeds may also be used to acquire or invest in complementary businesses, technologies, services or products. We have no current
plans, agreements or commitments with respect to any such acquisition or investment, and we are not currently engaged in any negotiations
with respect to any such transaction.

      Pending such uses, the net proceeds of this offering will be invested in interest-bearing, investment-grade securities.

                                                              DIVIDEND POLICY

      We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the
growth and development of our business. In addition, our credit agreement limits our ability to pay dividends without the approval of our
lenders and the instruments governing any future indebtedness may also contain various covenants that would limit our ability to pay
dividends. Accordingly, we do not anticipate paying any cash dividends in the foreseeable future.

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                                                               CAPITALIZATION

      The following table sets forth our capitalization as of December 31, 2005:

      •    on an actual basis;

      •    on a pro forma basis after giving effect to:

             •      the conversion of all outstanding shares of our redeemable convertible preferred stock into 22,413,765 shares of common
                    stock and

             •      the conversion of a warrant to purchase up to 209,645 shares of our redeemable convertible preferred stock to a warrant to
                    purchase an equal number of shares of our common stock, resulting in the reclassification of $1,090,000 from current
                    liabilities to shareholders’ equity (deficit); and

      •    on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from our sale of      shares of common
           stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and
           the filing of our amended and restated articles of incorporation.

     You should read this table together with our financial statements and related notes and ―Management’s Discussion and Analysis of
Financial Condition and Results of Operations‖ appearing elsewhere in this prospectus.
                                                                                                            December 31, 2005
                                                                                                                                      Pro Forma
                                                                                             Actual             Pro Forma             as Adjusted
                                                                                                                 (in thousands)
Long-term debt, less current portion                                                     $       4,581      $         4,581       $            4,581
Redeemable convertible preferred stock; 22,413,765 shares issued and
  outstanding, actual, and no shares issued or outstanding, pro forma and pro
  forma as adjusted                                                                            99,860                   —                           —
Shareholders’ equity (deficit):
     Preferred stock, $0.001 par value; 22,658,409 shares authorized, actual and
       pro forma, and 5,000,000 shares authorized, pro forma as adjusted; no
       shares issued or outstanding, pro forma as adjusted
     Common stock, $0.001 par value; 35,000,000 shares authorized, actual and
       pro forma and 100,000,000 shares authorized, pro forma as adjusted; and
       3,136,662 shares issued and outstanding, actual, 25,550,427 shares
       issued and outstanding, pro forma and            shares issued and
       outstanding, pro forma as adjusted                                                           3                    26
     Additional paid-in capital                                                              (17,738)                83,188
     Deferred stock-based compensation                                                          (653)                 (653)                    (653)
     Deficit accumulated during the development stage                                        (69,322)              (69,322)                 (69,322)
     Accumulated other comprehensive loss                                                        (23)                  (23)                     (23)
           Total shareholders’ equity (deficit)                                              (87,733)                13,216
                 Total capitalization                                                    $     16,708       $        17,797       $


      The pro forma number of shares of common stock shown above excludes, as of December 31, 2005:

      •    2,393,890 shares of common stock issuable upon the exercise of outstanding options, having a weighted-average exercise price of
           $0.67 per share;

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      •    339,645 shares of common stock issuable upon the exercise of outstanding warrants, having a weighted-average exercise price of
           $4.24 per share, of which warrants for 25,000 shares of common stock will terminate if not exercised prior to the closing of this
           offering;

      •    242,365 shares of common stock reserved for future grants under our Amended and Restated 1999 Stock Option Plan as of
           December 31, 2005; and

      •    3,000,000 shares of common stock reserved for future issuance under our 2006 Performance Incentive Plan, which will become
           effective immediately upon the signing of the underwriting agreement for this offering, subject to automatic annual increases and
           increases resulting from the rollover of terminated and expired options originally granted under our Amended and Restated 1999
           Stock Option Plan.

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                                                                     DILUTION

      If you invest in our common stock in this offering, the amount you pay per share will be substantially more than the net tangible book
value per share of the common stock you purchase.

      Our actual net tangible book value as of December 31, 2005 was a deficit of approximately $87.7 million, or approximately $27.97 per
share of common stock. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares
of common stock outstanding as of December 31, 2005. Our pro forma net tangible book value as of December 31, 2005 was approximately
$13.2 million, or approximately $0.52 per share of common stock. Our pro forma net book value gives effect to the automatic conversion of all
shares of our redeemable convertible preferred stock into 22,413,765 shares of common stock, and the conversion of warrants to purchase
209,645 shares of Series E redeemable convertible preferred stock into warrants to purchase common stock upon the effectiveness of this
offering.

      After giving effect to the issuance and sale by us of the          shares of common stock in this offering, at an assumed initial public
offering price of $         per share, the midpoint of the range on the front cover of this prospectus, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2005 would have
been $         , or $        per share of common stock. This represents an immediate increase in net tangible book value per share of
$         to existing shareholders and an immediate dilution of $           per share to new investors purchasing shares of common stock in this
offering at the assumed initial offering price.

      The following table illustrates this dilution on a per share basis:

        Assumed initial public offering price per share                                                                   $
            Actual net tangible book value (deficit) per share as of December 31, 2005                  $ (27.97 )
            Increase per share due to conversion of all shares of redeemable convertible
              preferred stock and redeemable convertible preferred stock warrants into
              common stock and common stock warrants, respectively                                           28.49
             Pro forma net tangible book value per share as of December 31, 2005, before this
               offering                                                                                       0.52
             Increase in pro forma net tangible book value per share attributable to this offering
        Pro forma net tangible book value per share after this offering
        Dilution in pro forma net tangible book value per share to new investors in this offering

                                                                                                                              $

      If the underwriters exercise their over-allotment option to purchase           additional shares from us in this offering, our pro forma net
tangible book value per share will increase to $         per share, representing an immediate increase to existing shareholders (assuming
conversion of all shares of our redeemable convertible preferred stock) of $          per share and an immediate dilution of $            per share
to new investors. If any shares are issued in connection with outstanding options, you will experience further dilution.

                                                                            27
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      The following table summarizes, on the pro forma basis described above, as of December 31, 2005, the differences between the number
of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing shareholders and
new investors purchasing shares of our common stock in this offering, before deducting underwriting discounts and commissions and estimated
expenses at an assumed initial public offering price of $      per share, the midpoint of the range on the front cover of this prospectus.
                                                                                                                                           Average Price
                                                                           Total Shares                  Total Consideration                Per Share
                                                                     Number                %             Amount                 %
Existing shareholders                                               25,550,427                      $    81,004,272                       $         3.17
New investors
     Total                                                                                100.0 %                              100.0 %

      The table above is based on shares outstanding as of December 31, 2005 and excludes:

      •      2,393,890 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2005, having a
             weighted-average exercise price of $0.67 per share;

      •      339,645 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2005, having a
             weighted-average exercise price of $4.24 per share, of which warrants for 25,000 shares of common stock will terminate if not
             exercised prior to the closing of this offering;

      •      242,365 shares of common stock reserved for future grants under our Amended and Restated 1999 Stock Option Plan as of
             December 31, 2005; and

      •      3,000,000 shares of common stock reserved for future issuance under our 2006 Performance Incentive Plan, which will become
             effective immediately upon the signing of the underwriting agreement for this offering, subject to automatic annual increases and
             increases resulting from the rollover of terminated and expired options originally granted under our Amended and Restated 1999
             Stock Option Plan.

      If the underwriters’ over-allotment option is exercised in full, the following will occur:

      •      the percentage of shares of common stock held by existing shareholders will decrease to approximately               % of the total number
             of shares of our common stock outstanding after this offering; and

      •      the number of shares held by new investors will increase to            , or approximately     %, of the total number of shares of our
             common stock outstanding after this offering.

      Assuming the exercise in full of all of our options outstanding as of December 31, 2005 and our issuance of 339,645 shares of common
stock upon exercise of outstanding warrants as of December 31, 2005, pro forma net tangible book value as of December 31, 2005 would be
$0.57 per share and, after giving effect to the sale of         shares of common stock in this offering, there would be an immediate dilution of
$         per share to new investors purchasing shares in this offering. If all outstanding options and warrants as of December 31, 2005 are
exercised in full, new investors would have contributed        % of the total consideration paid but would own only        % of our capital stock
outstanding after the offering and exercise of all such outstanding options and warrants.

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                                                                        SELECTED FINANCIAL DATA

      You should read the following selected financial data in conjunction with our financial statements and the related notes appearing at the
end of this prospectus and the ―Management’s Discussion and Analysis of Financial Condition and Results of Operations‖ section of this
prospectus. We have derived the statements of operations data for the years ended December 31, 2003, 2004 and 2005 and the period from
May 18, 1999 (inception) to December 31, 2005 and the balance sheets data as of December 31, 2004 and 2005 from our audited financial
statements, which are included elsewhere in this prospectus. We have derived the statements of operations data for the years ended
December 31, 2001 and 2002, and the balance sheets data as of December 31, 2001, 2002 and 2003, from our audited financial statements,
which are not included in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected for
any future period.
                                                                                                                                                                    Period from
                                                                                                                                                                     Inception
                                                                                                                                                                 (May 18, 1999) to
                                                                                        Year Ended December 31,                                                  December 31, 2005
Statements of Operations Data:                              2001               2002                2003                2004                 2005
                                                                                          (in thousands, except share and per share data)
Revenue (1)                                             $          —       $          148       $        316       $        —         $             —        $                   463
Cost of goods sold (1)                                             —                  590                366                —                       —                            956

Gross margin                                                       —                  (442 )              (50 )              —                      —                           (493 )
Operating expenses:
      Research and development                                 5,030               4,674                8,703             12,367               11,763                         47,064
      Selling, general and administrative                      3,239               7,705                6,128              3,127                3,257                         25,626
      Severance                                                  —                   —                    650                —                    —                              650
      Loss on subleases                                          —                   844                  —                  —                    794                          1,638

Total operating expenses                                       8,269             13,223               15,481              15,494               15,814                         74,978

Operating loss                                                 (8,269 )          (13,665 )            (15,531 )          (15,494 )             (15,814 )                     (75,471 )
Interest income                                                   465                493                  398                446                   558                         2,877
Amortization of gain on sale of PNT assets                        —                  —                    954              1,637                   682                         3,272

Net loss                                                       (7,804 )          (13,172 )            (14,179 )          (13,411 )             (14,574 )                     (69,322 )
Preferred stock accretion                                      (1,255 )           (3,085 )             (3,749 )           (4,979 )              (5,653 )                     (19,345 )

Net loss applicable to common shareholders              $      (9,059 )    $     (16,257 )      $     (17,928 )    $     (18,390 )    $        (20,227 )     $               (88,667 )


      Basic and diluted net loss per share applicable
         to common shareholders                         $       (5.07 )    $       (7.41 )      $       (7.50 )    $       (6.91 )    $            (7.02 )


      Shares used to compute basic and diluted net
         loss per share applicable to common
         shareholders                                       1,786,187          2,193,470            2,390,232          2,662,964             2,881,755


      Pro forma basic and diluted net loss per share
         (unaudited) (2)                                                                                                              $            (0.58 )


      Pro forma shares used in computation of basic
         and diluted net loss per share
         (unaudited) (2)                                                                                                                    25,295,520



(1)     Represents revenue and cost of goods sold from the sale of PNT product to customers.
(2)     Please see Note 10 to our financial statements for an explanation of the method used to compute pro forma basic and diluted net loss per
        share and the number of shares used in computing per share amounts.

                                                                                           29
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                                                                                           December 31,
Balance Sheets Data:                                           2001            2002                2003           2004            2005
                                                                                           (in thousands)
Cash, cash equivalents and securities available-for-sale
  (short-term)                                             $     6,571     $    29,185       $     18,008     $    22,637     $    20,187
Working capital                                                  6,604          29,282             15,325          20,639          16,321
Securities available-for-sale (long-term)                          —               —                1,028           4,621             —
Total assets                                                     7,505          32,769             20,955          28,948          21,745
Long-term liabilities                                              —               409              1,575             635           5,425
Redeemable convertible preferred stock                          22,697          61,935             66,228          94,207          99,860
Shareholders’ equity (deficit)                                 (15,646 )       (31,732 )          (50,061 )       (68,421 )       (87,733 )

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

      The following discussion and analysis of our financial condition and results of operations should be read together with our financial
statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this prospectus for a discussion of important
factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described
in the following discussion and analysis.

Overview

       We are a medical device company focused on developing and commercializing novel neurostimulation therapies using our proprietary
cortical stimulation system. We incorporated in the state of Washington on May 18, 1999 as Vertis Neuroscience, Inc. Since inception, we have
devoted substantially all of our resources to the development and commercialization of medical technologies utilizing electrical stimulation to
treat neurological diseases and disorders.

      Our initial focus was on developing and commercializing a medical device, which we called PNT, to treat lumbar and cervical spinal
pain. PNT is a minimally invasive therapy in which electrical stimulation is delivered through electrodes placed on the lower back and neck to
alleviate pain. We received 510(k) clearance from the FDA for our back pain product in December 2001 and for our neck pain product in
September 2002. During this time, we also had an active research program investigating applications of cortical stimulation to treat
neurological diseases and disorders. In order to focus on opportunities in cortical stimulation, in May 2003 we sold the PNT assets and
subsequently changed our name to Northstar Neuroscience, Inc.

       The initial application of our cortical stimulation therapy system is our Northstar Stroke Recovery System, which is designed to enhance
the recovery of hand and arm motor function in patients who have suffered an ischemic stroke, which we refer to as stroke motor recovery.
Between November 2002 and October 2004, we conducted two feasibility trials, the ADAMS and BAKER trials, in which we investigated the
safety and efficacy of our stroke motor recovery therapy. In July 2004, we received conditional approval from the FDA to initiate our pivotal
trial, called EVEREST, to evaluate the safety and efficacy of our Northstar Stroke Recovery System, and in June 2005 we received a full
investigational device exemption, or IDE, approval for our EVEREST trial at up to 18 sites throughout the U.S. A pivotal trial is a clinical trial
in which safety and efficacy data are collected in support of an FDA submission to obtain marketing approval, and an IDE is a regulatory
submission that allows an investigational device to be used in a human clinical trial. If the EVEREST trial is successful, we intend to seek FDA
approval in the first quarter of 2008 to market our Northstar Stroke Recovery System. Under this schedule, we anticipate receiving FDA
approval to market our Northstar Stroke Recovery System in 2009; however, FDA approval is not assured.

      Beyond stroke motor recovery, we are also evaluating our cortical stimulation therapy system for use in treating other neurological
diseases and disorders. We are currently enrolling patients in the CHESTNUT trial, which is our initial feasibility trial for stroke-related
Broca’s aphasia, as well as the SAHALE trial, which is our initial feasibility trial for tinnitus. Additionally, in 2003 and 2004 we conducted our
TIGER trial, which was our initial feasibility trial for essential tremor. We are designing another feasibility trial to further evaluate our cortical
stimulation therapy system for this disorder.

      We are a development stage company with a limited operating history and we currently have no products approved for sale. To date, we
have not generated any significant revenue, and we have incurred net losses in each year since our inception. The only revenue we have
generated has been from the commercial sale of PNT product. We expect our losses to continue and to increase as we expand our clinical trial
activities and initiate commercialization activities. We have financed our operations primarily through private placements of our debt and
equity securities.

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Critical Accounting Policies and Significant Judgments and Estimates

      Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. We evaluate our
estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or
conditions.

      While our significant accounting policies are more fully described in Note 1 to our financial statements included elsewhere in this
prospectus, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our
reported financial results.

   Stock-Based Compensation

      Through December 31, 2005, we accounted for employee stock options using the intrinsic-value method in accordance with Accounting
Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees , Financial Accounting Standards Board, or FASB,
Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation , an interpretation of APB No. 25, and related
interpretations. We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based Compensation , as amended.

      Under APB No. 25, we recognize stock-based compensation expense, which is a non-cash charge, when we issue employee stock option
grants at exercise prices that, for financial reporting purposes, are deemed to be below the estimated fair value of the underlying common stock
on the date of grant. Given the absence of an active market for our common stock, our board of directors determined the estimated fair value of
our common stock on the dates of grant based on several factors, including: progress against regulatory, clinical and product development
milestones; sales of redeemable convertible preferred stock and the related liquidation preference associated with such preferred stock; changes
in valuation of comparable publicly-traded companies; overall equity market conditions; and the likelihood of achieving a liquidity event such
as an initial public offering or sale of our company. Based on these factors, we granted stock options during 2005 with exercise prices ranging
from $0.80 to $1.50 per share.

      In connection with the preparation of the financial statements necessary for our initial public offering, we obtained an independent
valuation of our common stock at December 31, 2005. The valuation used a probability-weighted combination of the market approach and
income approach.

      The market approach was based upon the stock prices of companies in the same or similar lines of business as ours and whose stock is
actively traded in the public market. There are no companies directly comparable to us, because we believe we are the only company focusing
on the use of cortical stimulation for the treatment of hand and arm impairment related to stroke. Since the initial public offering market for
pre-revenue medical device companies can be highly volatile and since there are no direct comparables, we considered valuations of companies
in similar stages of development, valuations of other neurostimulation companies and relevant broad-based market indices.

      The income method involves applying appropriate discount rates to estimated future cash flows that are based on forecasts of revenue and
costs. Our revenue forecasts were based on our estimates of expected annual growth rates following the anticipated commercial launch of our
Northstar Stroke Recovery System during 2009, and subsequent commercial launches of additional product candidates. Operating expenses
were based on our internal assumptions, including continuing research and development activities for our Northstar Stroke Recovery System
and other clinical applications, and preparation and ongoing support for the commercialization of our Northstar Stroke Recovery System.


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      Based on consideration of the independent valuation and the guidance set forth in the American Institute of Certified Public Accountants
Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board subsequently reassessed the fair
values of our common stock relating to option grants made during the year ended December 31, 2005. In addition to the factors outlined in the
preceding paragraphs, our board also considered the following factors:

      •    the FDA’s April 2005 full approval of our EVEREST pivotal trial;

      •    the FDA’s June 2005 approval of our IDE for the use of our proprietary implantable pulse generator in the EVEREST pivotal trial;

      •    during the second half of 2005, notices of allowance from the United States Patent and Trademark Office on certain patent
           applications;

      •    the lack of FDA approval of any of our product candidates;

      •    the $80.5 million in liquidation preferences related to our redeemable convertible preferred stock; and

      •    our discussions, commencing during October 2005, with potential underwriters regarding the possibility of pursuing an initial public
           offering.

      Based on the board’s reassessment of the estimated fair value of our common stock, we determined that the fair value of our common
stock for accounting purposes during the year ended December 31, 2005 ranged from $0.80 to $5.79. In accordance with APB Opinion No. 25,
deferred stock-based compensation of $1.2 million was recorded during the year ended December 31, 2005 to reflect the impact of the
subsequently determined fair values of our common stock for accounting purposes. Deferred stock-based compensation equals the difference
between the subsequently determined fair value of our common stock on the date of grant and the exercise price of employee stock option
grants multiplied by the number of shares underlying the grants, and is amortized on an accelerated basis to expense based on the vesting
period of the options.

      The determination of the fair value of our common stock involves significant judgments, assumptions, and estimates made by our board,
in consultation with management, that impact the amount of deferred stock-based compensation recorded and the resulting amortization in
future periods. If we had made different assumptions, the amount of our deferred stock-based compensation, stock-based compensation
expense, net loss and net loss per share amounts could have been materially different. We believe that we have used reasonable methodologies,
approaches and assumptions consistent with the Practice Guide to determine the fair value of our common stock and that deferred stock-based
compensation and related amortization have been recorded properly for accounting purposes.

      Information on stock option grants, employee and non-employee, during the year ended December 31, 2005 is summarized as follows:
                                                                                                                                       Intrinsic
        Date of                                                     Number of             Exercise            Fair value estimate      value per
       Issuance                  Type of equity issuance          options granted          price              per common share         share (1)
  January 2005                  Common Stock Options                     200,000         $    0.80        $                   0.80     $    0.00
   March 2005                   Common Stock Options                      70,061              0.80                            1.10          0.30
   April 2005                   Common Stock Options                       3,000              0.80                            3.61          2.81
    May 2005                    Common Stock Options                     117,596              0.90                            3.57          2.67
    June 2005                   Common Stock Options                      91,000              0.90                            3.93          3.03
    July 2005                   Common Stock Options                       3,000              0.90                            4.20          3.30
    July 2005                   Common Stock Options                     120,500              1.00                            4.20          3.20
 September 2005                 Common Stock Options                      30,500              1.00                            5.05          4.05
  October 2005                  Common Stock Options                      27,500              1.50                            5.55          4.05
 December 2005                  Common Stock Options                      14,000              1.50                            5.79          4.29
                                                                         677,157


(1)   Represents the difference between the exercise price and fair value estimate per common share.

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     From inception through December 31, 2005, we recorded deferred stock-based compensation of $1.4 million and at December 31, 2005,
$653,000 of deferred stock-based compensation remained to be amortized. We expect to record annual stock-based compensation expense of
$414,000, $160,000, $69,000 and $10,000 during the four years ending December 31, 2009 relating to the deferred stock-based compensation
balance at December 31, 2005. The amortization will be allocated between research and development expenses and selling, general and
administrative expenses based upon the job function of the individual employees who received stock option grants.

      While our financial statements account for stock option grants pursuant to APB No. 25, in accordance with SFAS No. 123, we disclose in
the footnotes to our financial statements the pro forma impact on our net loss had we accounted for stock option grants using the fair value
method of accounting. This information is presented as if we had accounted for our employee stock options at fair value using the minimum
value option-pricing model. Our use of the minimum value model was primarily due to our determination as to its appropriateness as well as its
general acceptance as an option valuation technique for private companies.

   Clinical Trial Accounting

      We record accruals for estimated clinical trial expenses, comprised of payments for work performed by participating trial centers. These
costs are a significant component of our research and development expenses. The costs of the trial are contractually determined based on the
nature of the services to be provided. We accrue expenses for clinical trials based on estimates of work performed under our clinical trial
contracts. These estimates are based on information provided by participating clinical trial centers. If the information provided is incomplete or
inaccurate, we may underestimate expenses at a given point in time. To date, our estimates have not differed significantly from actual costs.

   Redeemable Convertible Preferred Stock Warrant Accounting

      In connection with obtaining our $10.0 million debt financing, we issued warrants to the lenders to purchase shares of our Series E
redeemable convertible preferred stock. Under the warrants, the lenders can acquire a number of shares of Series E redeemable convertible
preferred stock determined by dividing $850,000 by the strike price, which is the lower of (i) $4.77 and (ii) the lowest effective price per share
(on a common stock equivalent basis and taking into account any securities issued together with the redeemable convertible preferred stock)
based on the next qualifying financing transaction. At December 31, 2005, based on a strike price of $4.77, the lenders were able to acquire
178,197 shares of Series E redeemable convertible preferred stock. We account for the warrants as a current liability pursuant to SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , and we re-measure the fair value of
the warrants at each balance sheet date and record any changes in fair value as a component of other income (expense). The fair value of the
warrants at December 31, 2005 was $1,090,000. Changes in the value of our stock price could materially change the fair value of the warrants.

Financial Overview

   Revenue

      To date, we have not generated any revenue from the sale of our Northstar Stroke Recovery System. During 2002 and 2003, we recorded
limited revenue from the sale of our PNT product. The PNT assets were sold in May 2003, and we recognized the gain from this sale as other
income. We do not expect to generate revenue from the sale of our Northstar Stroke Recovery System until the first half of 2009, subject to
FDA approval.

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   Research and Development Expenses

       Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses,
including the costs to develop our cortical stimulation therapy system, preclinical and clinical trial costs, and the cost of securing and
manufacturing clinical supplies. Research and development expenses also include employee compensation, including stock-based
compensation, supplies and materials, consultant services, information technology support, travel and facilities. We expense research and
development costs at the earlier of when they are incurred or when they are paid and non-refundable. From our inception through December 31,
2005, we have incurred $47.1 million in research and development expenses. We expect our research and development expenses to increase
significantly as we continue the development of our Northstar Stroke Recovery System, initiate commercialization activities, research the
application of, and develop, our cortical stimulation therapy system for other neurological diseases and disorders, conduct additional clinical
trials and hire additional employees.

   Selling, General and Administrative Expenses

      Our selling, general and administrative expenses consist primarily of compensation for executive, finance, marketing and administrative
personnel, including stock-based compensation, and facilities expenses. Other significant expenses include professional fees for accounting and
legal services, including legal services associated with our efforts to obtain and maintain protection for the intellectual property related to our
cortical stimulation therapy system. We expect our selling, general and administrative expenses to increase substantially due to the costs
associated with operating as a publicly-traded company and the costs associated with the support of the potential commercialization of our
Northstar Stroke Recovery System and other potential products.

   Severance Expenses

      Severance expenses primarily consist of compensation, including stock-based compensation expense, relating to employees whose
positions were eliminated as a result of changes in our business. These expenses were the result of changes in our infrastructure resulting from
the sale of our PNT assets.

   Loss on Subleases

     Under our master lease for our headquarters facilities, we have had under-utilized facilities space for which we executed sublease
agreements. Loss on subleases represents rent and rent-related expenses over the term of the actual facility lease in excess of net sublease
proceeds over the same period. We do not anticipate additional loss on sublease expenses during future periods.

   Amortization of Gain on Sale of PNT Assets

      Amortization of gain on sale of PNT assets, which is presented as a separate line item in the other income section of the statement of
operations, reflects the recognition of the gain on the sale of our PNT assets. In connection with this sale, we entered into a separate, two-year
agreement with an affiliate of the purchaser to provide transition assistance and ongoing consulting services. Due to the long-term nature of the
transition and consulting services and our inability to separately value those services, the $3.3 million gain on sale was deferred and amortized
over the 24-month consulting period that ended May 20, 2005; $1.0 million in 2003, $1.6 million in 2004 and $682,000 in 2005. The deferred
gain has been fully amortized as of December 31, 2005.

Results of Operations

Years Ended December 31, 2005 and 2004

   Research and Development Expenses

     Research and development expenses were $11.8 million for the year ended December 31, 2005, compared to $12.4 million for the year
ended December 31, 2004. The decrease of $604,000, or 4.9%, was primarily due to

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a $2.3 million decrease in tooling, equipment and prototype expenses incurred during 2005 related to development of our cortical stimulation
therapy system. This decrease was partially offset by increases in compensation and consultant expenses of $1.3 million, and clinical trial
related expenses of $441,000. The greater consultant expenses were the result of contract employees engaged to assist with development of our
cortical stimulation therapy system, while increased compensation and clinical trial expenses were primarily due to increased personnel and
third party clinical sites related to the launch and expansion of our EVEREST trial. Included in the increased compensation and consultant
expenses during 2005 is $400,000 of stock-based compensation due to the grant of employee stock options below fair value. Research and
development expenses are expected to increase due to increased enrollment in our EVEREST trial, commencement of additional clinical trials,
ongoing development of our cortical stimulation therapy system for additional applications and related increases to personnel.

   Selling, General and Administrative Expenses

      Selling, general and administrative expenses were $3.3 million for the year ended December 31, 2005, compared to $3.1 million for the
year ended December 31, 2004. The increase of $130,000, or 4.2%, was primarily due to a $230,000 increase in professional service expenses,
principally legal expenses related to patent filings and general corporate matters, in addition to a $263,000 increase in compensation costs due
to increased headcount and general increases in personnel related costs. Included in compensation costs during 2005 was $151,000 of
stock-based compensation expense due to the grant of employee stock options with exercise prices below fair value. The increases noted were
offset by a decrease of $375,000 in facility costs related to the sublease of under-utilized space at our corporate headquarters. Selling costs are
expected to increase as we build our sales and marketing infrastructure to support market launch of our Northstar Stroke Recovery System and
any future products we may develop. General and administrative costs are expected to increase during future periods as a result of increased
compensation costs, as well as higher legal, accounting, insurance and other professional service costs, relating to compliance with rules and
regulations associated with being a publicly traded company.

   Loss on Subleases

      Loss on sublease was $794,000 for the year ended December 31, 2005, compared to no sublease loss for the year ended December 31,
2004. During February 2005, we executed a three-year sublease agreement for approximately 15,000 square feet of under-utilized space in our
corporate headquarters facility. A loss on sublease was recorded to the extent future expected proceeds from the sublease over the term of the
sublease agreement were less than our rental commitment for the facility during the same period. We do not anticipate additional sublease
losses going forward as our current facility commitments are in line with current and projected space requirements.

   Interest Income

      Interest income was $558,000 for the year ended December 31, 2005, compared to $446,000 for the year ended December 31, 2004. The
increase of $112,000, or 25.1%, was due to higher overall interest rates throughout 2005 as compared to 2004. In addition, we completed our
$23.0 million Series E redeemable convertible preferred stock financing in April 2004 and therefore did not have a full year of interest income
on the proceeds from that financing in 2004. The effect of having a full year’s return on the Series E redeemable convertible preferred stock
proceeds was partially offset by declining balances in our cash and investment portfolio in 2005 as compared to 2004.

Years Ended December 31, 2004 and 2003

   Revenue

      No revenue was recognized during the year ended December 31, 2004, compared to $316,000 during 2003. The revenue recognized
during 2003 related to the commercial sale of PNT product. The amount recognized during 2003 reflects revenue earned up to the date of our
sale of the PNT assets.

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   Cost of Goods Sold

      There was no cost of goods sold recognized during the year ended December 31, 2004, as we had no revenue from sale of products in that
year. For the year ended December 31, 2003, we recognized cost of goods sold of $366,000, representing the costs of our PNT product sold
during that year.

   Research and Development Expenses

      Research and development expenses were $12.4 million for the year ended December 31, 2004, compared to $8.7 million for the year
ended December 31, 2003. The increase of $3.7 million, or 42.5%, was primarily due to increased compensation and consultant expenses of
$1.3 million resulting principally from increased product development and engineering personnel, a $1.4 million increase relating to the design
and development of production molds and test systems, and $1.0 million relating to prototype costs, all of which related to the development of
our cortical stimulation therapy system.

   Selling, General and Administrative Expenses

      Selling, general and administrative expenses were $3.1 million for the year ended December 31, 2004, compared to $6.1 million for the
year ended December 31, 2003. The decrease of $3.0 million, or 49.2%, was primarily due to the sale of our PNT assets and the resulting
transition from operating a commercial product to exclusively developing cortical stimulation therapies. Compensation decreased $2.0 million
primarily due to the reduction of sales, marketing and reimbursement personnel associated with the PNT product. In addition, expenses for
sales and marketing consultants decreased $817,000, as these functions were no longer required.

   Severance Expenses

      No severance expenses were recognized for the year ended December 31, 2004, compared to $650,000 for the year ended December 31,
2003. The expenses incurred during 2003 relate to the sale of the PNT assets and were comprised of compensation and benefits provided to
terminated employees of $572,000 and stock-based compensation expense of $78,000 relating to the extension of the originally established
stock option exercise period afforded to certain terminated employees.

   Interest Income

      Interest income was $446,000 for the year ended December 31, 2004, compared to $398,000 for the year ended December 31, 2003. The
increase of $48,000, or 12.1%, was primarily due to higher cash, cash equivalents and securities available-for-sale balances during 2004
primarily relating to the closing of our $23.0 million Series E redeemable convertible preferred stock financing during the second quarter of
2004.

Liquidity and Capital Resources

       We have incurred losses since our inception in May 1999 and, as of December 31, 2005, we had a deficit accumulated during the
development stage of $69.3 million. We have funded our operations to date principally from private placements of equity securities, raising net
proceeds of $80.2 million through December 31, 2005. On December 31, 2005, we entered into a loan and security agreement, pursuant to
which we may borrow up to $10.0 million. As of December 31, 2005, we had borrowed $7.0 million under this facility. The reported amount of
the outstanding obligation reflects original issuance discounts of $1.1 million related to the issuance of detachable warrants and $98,000 of
additional discounts, resulting in a net carrying amount of the obligation of $5.8 million. The discounts are amortized to interest expense using
the effective yield method. The loan facility provides for interest-only payments until June 30, 2006, followed by equal monthly payments of
principal and interest such that the balance will be fully paid on January 1, 2009. The outstanding principal balance accrues interest at an
annual rate of 12.6%. Due to discounts derived from the issuance of detachable warrants and other discounts, the effective annual interest rate
of the debt is 19.5%. Our obligations under the loan agreement are secured by a first priority security interest in all of our assets, other than our
intellectual property. We have

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agreed to refrain from selling, leasing or granting a security interest in our intellectual property to any third party until the loan is repaid. The
agreement also contains additional affirmative and negative covenants. The $3.0 million of additional credit remains available until June 30,
2006. The annual interest rate on any future draws under the facility will be equal to 11.5% plus the excess of the one-month LIBOR rate over
3.3%. In connection with the agreement, we issued warrants to the lenders to purchase shares of our Series E redeemable convertible preferred
stock. See ―Critical Accounting Policies and Significant Judgments and Estimates—Redeemable Convertible Preferred Stock Warrant
Accounting.‖ We also granted the lenders registration rights under our investors’ rights agreement with respect to such shares.

     As of December 31, 2005, we had $20.2 million in cash, cash equivalents and securities available-for-sale. In addition, through June 30,
2006 we have $3.0 million of available debt financing remaining on our $10.0 million credit facility.

   Net Cash Used in Operating Activities

     Net cash used in operating activities was $14.4 million, $13.9 million, and $13.7 million for the years ended December 31, 2003, 2004
and 2005, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by depreciation,
amortization of premiums on securities available-for-sale, stock-based compensation and changes in operating assets and liabilities.

   Net Cash Provided by (Used in) Investing Activities

      Net cash provided by (used in) investing activities was $12.5 million, $(8.2) million and $11.6 million for the years ended December 31,
2003, 2004 and 2005, respectively. Net cash provided by (used in) investing activities primarily reflects the net of purchases and maturities of
securities available-for-sale. During 2003, the net cash provided by investing activities also reflects $4.8 million received from the sale of the
PNT assets.

   Net Cash Provided by Financing Activities

      Net cash provided by financing activities was $58,000, $23.1 million and $7.1 million for the years ended December 31, 2003, 2004 and
2005, respectively. Net cash provided by financing activities was primarily attributable to the $7.0 million draw on our $10.0 million debt
financing we completed in December 2005, $23.0 million from our Series E redeemable convertible preferred stock financing in April 2004,
and $64,000 in proceeds from stock option exercises during 2003.

   Operating Capital and Capital Expenditure Requirements

      To date, we have not commercialized any product based on our cortical stimulation technology and we have not achieved profitability.
We anticipate that we will continue to incur substantial net losses for the next several years as we develop our products, conduct and complete
clinical trials, pursue additional applications for our technology platform, expand our clinical development team and corporate infrastructure,
and prepare for the potential commercial launch of our Northstar Stroke Recovery System.

      We do not expect to generate significant product revenue until at least 2009. We do not anticipate generating any product revenue unless
and until we successfully obtain FDA marketing approval for, and begin selling, our Northstar Stroke Recovery System. We believe that the net
proceeds from this offering, together with our cash, cash equivalents and securities available-for-sale balances and interest income we earn on
these balances, and additional amounts available under our existing credit facility, will be sufficient to meet our anticipated cash requirements
through at least the first quarter of 2009. If our available cash, cash equivalents, securities available-for-sale and net proceeds from this offering
are insufficient to satisfy our liquidity requirements, or if we develop additional products or pursue additional applications for our products, we
may seek to sell additional equity or debt securities or acquire an additional credit facility. The sale of additional equity and debt securities may
result in additional dilution to our shareholders. If we raise additional funds through the issuance of debt securities, these securities could have
rights senior to those of our common stock

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and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts.
Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may
be required to reduce the scope of, delay, or eliminate some or all of, our planned research, development and commercialization activities,
which could materially harm our business.

      We anticipate spending at least $7.0 million over the next two years for direct costs to complete our EVEREST trial. In addition, we will
spend additional funds for regulatory approvals, and for activities to initiate commercialization of our Northstar Stroke Recovery System, if
approved. The development of any new applications of our cortical stimulation therapy system and new product candidates will also require the
expenditure of significant financial resources and take several years to complete, from development to ultimate commercialization. We expect
to fund the development of potential product candidates with the proceeds of this offering, together with our existing cash, cash equivalents and
securities available-for-sale balances and revenue from the sales of our Northstar Stroke Recovery System, if approved.

     Our forecast of the period of time through which our financial resources will be adequate to support our operations and the costs to
complete development of products are forward-looking statements and involve risks and uncertainties, and actual results could vary materially
and negatively as a result of a number of factors, including the factors discussed in the ―Risk Factors‖ section of this prospectus. We have
based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently
expect.

      Because of the numerous risks and uncertainties associated with the development of medical devices, such as our Northstar Stroke
Recovery System, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete ongoing
clinical trials and successfully deliver a commercial product to market. Our future funding requirements will depend on many factors, including
but not limited to:

      •    the scope, rate of progress and cost of our clinical trials and other research and development activities;

      •    clinical trial results;

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

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

      •    the cost of defending other litigation or disputes with third parties;

      •    the timing of regulatory approvals;

      •    the cost and timing of establishing sales, marketing and distribution capabilities;

      •    the cost of establishing clinical and commercial supplies of our Northstar Stroke Recovery System and any products that we may
           develop;

      •    the rate of market acceptance of our Northstar Stroke Recovery System and any other product candidates;

      •    the effect of competing products and market developments; and

      •    any revenue generated by sales of our future products.

      Future capital requirements will also depend on the extent to which we acquire or invest in businesses, products and technologies,
although we currently have no commitments or agreements relating to any of these types of transactions.

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   Contractual Obligations

     The following table summarizes our outstanding contractual obligations as of December 31, 2005 and the effect those obligations are
expected to have on our liquidity and cash flows in future periods:
                                                                                                     Payments Due by Period
                                                                                                         (in thousands)
                                                                                            Less than                                      More than
                                                                               Total         1 Year           1-3 Years       3-5 Years     5 Years
Long-term debt                                                             $     7,000      $   1,230       $   5,770         $     —     $      —
Interest on long-term debt                                                       1,635            849             786               —            —
Operating leases                                                                 7,382          1,154           2,194             2,177        1,857
Total                                                                      $ 16,017         $   3,233       $   8,750         $   2,177   $    1,857


        There has been no material change in these obligations through February 28, 2006.

      The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases primarily relate
to the lease for our corporate headquarters in Seattle, Washington.

   Redeemable Convertible Preferred Stock

      Our redeemable convertible preferred stock is classified on the balance sheet between liabilities and shareholders’ equity (deficit) because
the holders of the redeemable convertible preferred stock have the right to request redemption on or after June 30, 2008 if the holders of
two-thirds of the redeemable convertible preferred shares, voting as a single group, vote in favor of such redemption. Immediately prior to the
effectiveness of this offering all of our outstanding shares of redeemable convertible preferred stock will automatically be converted into shares
of common stock and such redemption right shall terminate.

Recent Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123(R), Share-based Payment . SFAS No. 123(R) revises SFAS No. 123, supersedes
APB No. 25 and amends SFAS No. 95, Cash Flows . SFAS No. 123(R) applies to transactions in which an entity exchanges its equity
instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those
equity instruments. Under SFAS No. 123(R), we will be required to follow a fair value approach using an option valuation model, such as the
Black-Scholes option-pricing model, at the date of stock option grants. The deferred compensation amount calculated under the fair value
method will then be recognized over the respective vesting period of the stock options.

      We will adopt the provisions of SFAS No. 123(R) as of January 1, 2006. Due to our use of the minimum value method for valuing
employees’ stock options during prior periods, we are required to adopt SFAS No. 123(R) using the prospective method. Pursuant to the
prospective method of adoption, we will continue to account for options granted before adoption under the current APB No. 25 accounting. All
grants issued or modified subsequent to adoption will be accounted for pursuant to SFAS No. 123(R). Since the adoption of SFAS No. 123(R)
relates only to future grants or modifications under the prospective method of adoption, the adoption of the new guidance will only impact
future periods to the extent we grant or modify options in the future. As such, the impact of the adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share based payments granted or modified in the future.

     In November 2005, the FASB issued Staff Position No. FAS 115-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (FSP 115-1). FSP 115-1 provides accounting guidance for determining and measuring other-than-temporary
impairments of debt and equity securities, and confirms the disclosure requirements for investments in unrealized loss positions as outlined in
EITF issue 03-01, The

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Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments . The accounting requirements of FSP 115-1 are
effective for us on January 1, 2006 and will not have a material impact on our financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements

       Since inception, we have not engaged in material off-balance sheet activities, including the use of structured finance, special purpose
entities or variable interest entities.

Qualitative and Quantitative 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 these objectives, our investment
policy allows us to maintain a portfolio of cash equivalents and investments in a variety of marketable securities, including commercial paper,
money market funds and corporate debt securities and U.S. government securities. Our cash and cash equivalents as of December 31, 2005
included liquid money market accounts. Due to the short-term nature of our investments, we believe that there is no material exposure to
interest rate risk.

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                                                                    BUSINESS

Overview

      We are a medical device company focused on developing and commercializing novel neurostimulation therapies for a broad range of
neurological diseases and disorders. Our proprietary technology is designed to deliver targeted electrical stimulation to the outermost layer of
the brain, called the cortex, in a process referred to as cortical stimulation. Because the cortex can be surgically accessed relatively easily, our
cortical stimulation therapy system can be implanted in approximately two and one-half hours by a single neurosurgeon. Our initial product
candidate, the Northstar Stroke Recovery System, is designed to enhance recovery of hand and arm motor function in patients who have
suffered a stroke, which we refer to as stroke motor recovery. According to the American Stroke Association, there are over 5.5 million stroke
survivors in the United States, approximately half of whom suffer from hand or arm motor impairment. We are also studying therapeutic
applications of our cortical stimulation therapy for other neurological conditions including: stroke-related aphasia, which is an impaired ability
to speak; tinnitus, which is a chronic, often intense, ringing in the ears that can be severely disabling; and essential tremor, which is a
movement disorder that causes patients to experience uncontrollable shaking or quivering in the hands and other parts of the body. Because the
cortex controls many neurological functions, we believe our cortical stimulation therapy system will enable the treatment of these and other
neurological diseases and disorders.

      We believe cortical stimulation therapy for stroke motor recovery enhances neuroplasticity, which is a natural process by which existing
neurons and alternate neural pathways in remaining healthy brain tissue assume some of the capabilities previously controlled by the parts of
the brain damaged by a stroke. Following a stroke, the human brain naturally begins to change the function of neural pathways in areas of the
cortex not impacted by the stroke, which can help restore motor function. The parts of the brain that change vary from patient to patient. Even
with the help of traditional rehabilitative therapy, however, gains in motor function generally plateau within approximately three months after a
stroke, and many stroke survivors achieve only limited recovery of motor function. Our initial research has shown that cortical stimulation of
the patient-specific neuroplastic area of the cortex, in conjunction with intensive rehabilitative therapy, may meaningfully enhance motor
function beyond the natural recovery, even in stroke survivors who receive our cortical stimulation therapy several years after their strokes.

      We are currently conducting a pivotal trial for stroke motor recovery, called EVEREST, using our Northstar Stroke Recovery System. If
the EVEREST trial is successful, we intend to seek approval from the U.S. Food and Drug Administration, or FDA, to market our Northstar
Stroke Recovery System. As of January 31, 2006, 39 out of a targeted 151 patients were randomized in the EVEREST trial, and we expect to
complete the four-week primary endpoint follow-up on the last EVEREST patient by the first quarter of 2008. In our two prior feasibility trials,
75% of the total patients who received our cortical stimulation therapy delivered in conjunction with intensive rehabilitative therapy showed
clinically meaningful improvement, as defined in those trials, in measurements of motor function compared to their initial baseline
measurements. The average improvement of motor function for these patients was 29% and 17%, respectively. In addition, the investigational
patients also showed improvement in their ability to perform activities of daily living. We believe our feasibility trials also indicate that our
cortical stimulation therapy is safe and that the results were sustained over time.

       We believe we are the only company pursuing cortical stimulation therapy for stroke motor recovery. We are developing a significant
intellectual property position relating to key aspects of our cortical stimulation therapy, including identifying the patient-specific site of
stimulation, stimulating at a subthreshold level, using appropriate stimulation parameters for different diseases and disorders and conducting
adjunctive therapy delivered in conjunction with cortical stimulation therapy. We believe that our intellectual property portfolio will provide a
significant competitive advantage.

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Market Opportunity

   Neurostimulation Market

      The field of neurostimulation—a form of therapy in which a low-voltage electrical current is used to treat medical conditions affecting
different parts of the central nervous system—has grown dramatically in recent years. According to industry sources, the worldwide market for
neurostimulation devices grew from approximately $500 million in 2001 to approximately $1.2 billion in 2005, representing a compound
annual growth rate in excess of 20%.

      FDA-approved neurostimulation devices are currently utilized to treat a range of indications, including chronic pain, epilepsy, essential
tremor, Parkinson’s disease, hearing loss and depression. These devices are implanted in the body and are used to stimulate different parts of
the central nervous system, including the spinal cord, sacral nerves, vagus nerve and deeper structures of the brain. Clinical trials are being
conducted by companies utilizing these and other methods of neurostimulation for additional applications, such as treatment of obesity,
migraine headaches, and obsessive compulsive disorder.

      While some neurostimulation devices are not implanted, such as electroconvulsive therapy devices for depression, and some are
implantable in the deeper structures of the brain, such as deep brain stimulation devices, we believe there are no therapies approved for
neurostimulation of the cortex, which is the outermost layer of the brain. Because the cortex controls or influences many neurological
functions, including movement, hearing and speech, as well as various neuropsychological functions, cortical stimulation therapy has the
potential to treat a variety of neurological diseases and disorders. The cortex can also be surgically accessed more easily than deeper brain
structures.

      The following illustration shows the cortex and some of the neurological functions it controls:




   Stroke Market Opportunity

      Stroke is a medical condition involving the death of brain cells caused by blood clot or rupture of blood vessels leading to or within the
brain. There are two types of stroke: ischemic, caused by a blood clot within an artery; and hemorrhagic, caused by the sudden rupture or
bursting of such an artery. According to the American Stroke Association, or ASA, ischemic strokes account for approximately 88% of all
strokes in the U.S.

      Stroke is the leading cause of serious, long-term disability in the U.S. and, according to the ASA, the annual healthcare burden of
stroke-related care in the U.S. alone is expected to exceed $57.9 billion in 2006. The ASA estimates that in the U.S. there currently are more
than 5.5 million stroke survivors, and each year approximately 540,000 additional people in the U.S. survive a stroke. Many of these stroke
survivors are left significantly and permanently disabled. Worldwide, approximately 15 million people suffer a stroke each year. We expect the
incidence and prevalence of stroke, and stroke-related physical impairments, to grow as life expectancies and the population over the age of 65
increase.

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     Hemiparesis, which is weakness or partial paralysis of one side of the body, is the most common disability caused by stroke.
Approximately one-half of stroke survivors in the U.S. suffer from hand or arm impairment, called upper-extremity hemiparesis. In addition,
approximately 20% of stroke survivors in the U.S. suffer from aphasia.

   Conventional Treatments for Stroke and Stroke Motor Recovery

      Acute Intervention

      When a person suffers a stroke, the initial entry point into the healthcare system is typically an acute care setting, such as a hospital,
where the patient is usually attended to by a neurologist or other physician. After an ischemic stroke, an attempt may be made to restore blood
flow by using a drug to dissolve the blood clot that is obstructing the blocked vessel. However, there is a short window of time—approximately
three hours after onset of the stroke—in which clot-dissolving drugs can be safely and effectively administered. Unfortunately, because stroke
symptoms may not be immediately debilitating or may be initially attributed to other less serious conditions, many stroke victims do not seek
medical attention until several hours after the onset of these symptoms and are ultimately hospitalized on average more than 12 hours after their
stroke, by which time it is too late for clot-dissolving drugs to be used. In addition, many patients also are not good candidates to receive drug
treatment due to medical risks related to such treatment. As a result, the ASA estimates that less than 5% of people who suffer ischemic strokes
receive clot-dissolving drugs.

       Medical devices are also used in a small percentage of acute interventions for ischemic stroke, with the goal of removing the clot that is
obstructing the blocked vessel. These devices include a recently-introduced catheter-based system that feeds a corkscrew-shaped tool to the site
of the clot and attempts to remove the clot. While these approaches may extend the treatment window by several hours, most stroke victims
still do not arrive at the hospital during the treatment window and thus suffer some level of post-stroke impairment.

      Rehabilitative Therapy

      A stroke survivor may spend several days to weeks in the hospital being monitored and treated for conditions associated with the
stroke. After the patient’s condition is stabilized, the patient typically begins rehabilitative therapy in either an inpatient or outpatient
rehabilitation facility. This rehabilitative therapy is typically overseen by a stroke physiatrist or a rehabilitation therapist and is usually
administered by a physical and/or occupational therapist. A stroke survivor may undergo weeks or months of such rehabilitative therapy in an
effort to address stroke-related disabilities.

      Rehabilitative therapy for stroke patients involves exercises and tasks designed to increase strength, mobility, range of motion, and
overall function of disabled limbs. Many patients undergo compensatory rehabilitative therapy designed to teach them how to perform tasks
using their unaffected limbs. Within several months after a stroke, improvement in motor function typically reaches a plateau. With only a
partial restoration of lost motor function, patients must learn to live with and adapt to disabilities that impact their quality of life and ability to
perform many of the activities of daily living. Researchers are also looking at more intensive therapies, in some cases using robotic or other
devices that stimulate muscles locally, to try to improve function of patients suffering from stroke-related disabilities.

      Limitations of Conventional Treatments for Stroke and Stroke Motor Recovery

      The current treatment alternatives for stroke and stroke motor recovery have significant limitations. Most stroke victims do not seek
medical attention until hours after the onset of their strokes, and by the time they reach a hospital it is often too late for clot-dissolving drugs or
other acute interventions to be effective. In addition, clot-dissolving drugs and device interventions typically first require imaging analyses to
determine the type of stroke, and are only administered in hospitals with a catheter laboratory. Furthermore, they require additional time to
administer, and require the immediate availability of physicians with specialized skills. As a result, most

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stroke survivors end up with some form of permanent motor impairment, including upper-extremity hemiparesis or aphasia. Traditional
rehabilitative therapy generally can only partially restore motor function and as a result the typical patient must learn to live with and adapt to
disabilities that impact the patient’s quality of life and ability to perform many activities of daily living. The limitations of current treatments
and rehabilitative therapies have produced a large and growing population of motor-impaired stroke survivors who could benefit from
improved therapies to assist in their recovery.

Our Solution

      We are developing a cortical stimulation therapy system that delivers targeted electrical stimulation to the cortex. Our initial product
candidate, the Northstar Stroke Recovery System, is intended to facilitate stroke motor recovery by enhancing neuroplasticity, in which other
areas of the brain take over the function of stroke-damaged areas. The cortex, with its extensive network of interconnected neurons, is an
important site for neuroplasticity to occur. Our cortical stimulation therapy system can be implanted by one neurosurgeon in a relatively simple
surgical procedure. To our knowledge, we are the only company pursuing electrical stimulation of the cortex for stroke motor recovery.

      We use functional magnetic resonance imaging, or f MRI, to target the specific neuroplastic region of an individual patient’s cortex that
has taken over motor control of the stroke-impaired limb. After identifying the primary site of neuroplasticity using f MRI, a small electrode
grid is placed on the tough membrane covering the brain, called the dura, immediately above the targeted area of the motor cortex. To power
the electrode grid, an implantable pulse generator, or IPG, is also implanted and connected to the lead. Cortical stimulation is then provided
while the patient is undergoing intensive rehabilitative therapy. The stimulation is subthreshold, meaning that it does not evoke movement and
cannot be felt by the patient. Following completion of the cortical stimulation therapy, the Northstar Stroke Recovery System is surgically
removed from the patient.

      We believe that our Northstar Stroke Recovery System will offer the following advantages to stroke patients and practitioners:

      •    Broad treatment window. Stroke survivors with upper-extremity hemiparesis typically receive rehabilitative therapy only during
           the first few weeks or months following their strokes. After this period, recovery of motor function typically reaches a plateau and
           patients must adapt to a life of impaired motor function. In our two feasibility trials, cortical stimulation therapy improved motor
           function measurably in ischemic stroke survivors with chronic upper-extremity hemiparesis, even when administered months and
           years after their strokes. In our first feasibility trial, patients were treated an average of 28 months post-stroke, and in our second
           feasibility trial, patients were treated an average of 33 months post-stroke, with patients ranging from four months to eight years
           post-stroke.

      •    Enhanced motor function. In our two feasibility trials, 75% of the total patients who were treated with our cortical stimulation
           therapy in conjunction with rehabilitative therapy showed clinically meaningful improvement, as defined in those trials, in hand and
           arm motor function compared to less than 40% of the total patients in the group that received only rehabilitative therapy. Patients
           achieving functional gains in these trials also reported improvements in their ability to perform activities of daily living.

      •    Sustained outcomes. In both our human and animal trials, improvements in motor function that resulted from cortical stimulation
           in conjunction with rehabilitative therapy were retained several months after the end of therapy, suggesting a sustained effect of our
           stroke motor recovery therapy.

      •    Ease of implantation. We believe the surgery for implanting the Northstar Stroke Recovery System, which does not require
           penetration into the brain, can be performed by most neurosurgeons.

      •    Short surgical procedure. Our Northstar Stroke Recovery System can be surgically implanted in approximately two and one-half
           hours, and the procedure can be completed by one neurosurgeon.

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      •    Favorable safety profile. We believe that the surgical approach for implanting our Northstar Stroke Recovery System contributes
           to a favorable safety profile of our device. As of January 31, 2006, our cortical stimulation therapy had been safely used in more
           than 30 patients with no device malfunctions, deaths or unanticipated adverse events.

      •    Temporary implant. For our stroke motor recovery application, stimulation is administered only during the course of
           rehabilitative therapy. Afterwards, the system is removed and no components of the system remain in the body.

      •    Patient-specific treatment. Our studies have shown that the region of the brain where neuroplastic activity occurs can vary from
           patient to patient, making patient-specific targeting important for optimizing the overall efficacy of treatment. Our cortical
           stimulation therapy uses f MRI to determine the primary location of a specific patient’s motor cortex that has taken over control of
           hand or arm movement, which enables the neurosurgeon to place the electrode grid on the dura over that patient-specific site. We
           own allowed patent application claims that relate to the use of electrical stimulation to treat neurological diseases and disorders of
           the brain by using imaging methods, such as f MRI, to target patient-specific stimulation sites of the cortex.

      We are currently conducting a pivotal clinical trial for stroke motor recovery, called EVEREST, to evaluate the degree of improvement in
upper-extremity motor function and activities of daily living. We believe our two earlier feasibility trials, our ADAMS and BAKER trials,
indicate that cortical stimulation therapy delivered in conjunction with rehabilitative therapy can enable ischemic stroke survivors who suffer
from chronic upper-extremity hemiparesis to achieve meaningful improvement in measurements of motor function, as well as improvements in
activities of daily living.

      Beyond stroke motor recovery, we are also evaluating our cortical stimulation therapy system for use in treating stroke-related aphasia, as
well as tinnitus and essential tremor, which are other disabling neurological disorders that afflict large numbers of patients. We believe that
cortical stimulation therapy may be useful for treating these and other neurological diseases and disorders.

Our Business Strategy

     Our goal is to become the leading provider of neurostimulation solutions for patients who suffer from ischemic stroke and other
neurological diseases and disorders, by establishing our proprietary cortical stimulation therapy as the treatment of choice for multiple
neurological applications. The key elements of the business strategy by which we intend to achieve these goals include:

      •    Commercializing our Northstar Stroke Recovery System for stroke motor recovery. We intend to introduce our technology into
           commercial markets by focusing initially on gaining regulatory approval of our Northstar Stroke Recovery System. As the
           regulatory process nears completion, we plan to begin building a highly-focused sales team to market the system to medical decision
           makers. We will focus on establishing referral networks among neurologists, stroke physiatrists and neurosurgeons who may be
           directly involved in application of our cortical stimulation therapy, as well as among primary care physicians and other doctors who
           treat stroke survivors in the months and years after a stroke. We believe this approach will enable us to reach the broadest potential
           market of stroke survivors who may be candidates for cortical stimulation therapy.

      •    Communicating the benefits of cortical stimulation therapy by publicizing clinical results obtained by leading clinicians. Even
           though neurostimulation is a widely recognized and approved method for treating various neurological diseases and disorders, the
           field of cortical stimulation is an emerging treatment modality. As a result, we believe it will be important to increase awareness of
           our Northstar Stroke Recovery System, and cortical stimulation therapy in general, by continuing to generate strong clinical and
           scientific data through collaborations with key opinion leaders at leading stroke, academic and medical institutions, and by
           publishing that data. We have formed clinical relationships with key

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           physicians at several leading stroke rehabilitation centers, including Northwestern Memorial Hospital, the Rehabilitation Institute of
           Chicago, the University of Texas at Houston, the University of Pennsylvania, the University of Arizona, Oregon Health Sciences
           University and the University of Illinois Medical Center at Chicago, among others. Several of these researchers have published
           peer-reviewed articles describing the use of our Northstar Stroke Recovery System to treat chronic upper-extremity hemiparesis in
           leading journals such as Stroke, Neurological Research and Neurosurgery , and have presented our feasibility clinical trial data at
           national and international stroke conferences.

      •    Establishing third party reimbursement for cortical stimulation therapy. We believe that insurance billing codes and
           reimbursement rates currently exist for the surgery required to implant and remove our device system and for the related
           rehabilitative therapy and device programming sessions. If we secure FDA marketing approval for our Northstar Stroke Recovery
           System, we plan to seek specific and appropriate coverage for our device from the Centers for Medicare and Medicaid Services, or
           CMS, and private insurers. We plan to assist patients in securing coverage and appropriate reimbursement for our device system
           from insurers through a dedicated reimbursement group and the provision of detailed supporting documentation.

      •    Leveraging our technology platform to pursue additional neurological applications. We believe that cortical stimulation
           therapy has the potential to become an effective treatment for a variety of other neurological diseases and disorders beyond stroke
           motor recovery. We are currently evaluating our cortical stimulation technology platform for the treatment of stroke-related aphasia,
           tinnitus and essential tremor. Based on the results of our feasibility trials, we may initiate additional larger clinical trials for these
           applications. In addition, we intend to continue to conduct research and development for other potential applications such as
           movement disorders other than essential tremor, neuropsychiatric disorders, other types of brain injury and pain management.

      •    Expanding and strengthening our intellectual property position. We believe our cortical stimulation therapy system represents a
           novel, proprietary neurostimulation technology. We believe that our patents and patent applications broadly cover the use of cortical
           stimulation therapy in the treatment of neurological diseases and disorders. We intend to continue to pursue further intellectual
           property protection through U.S. and foreign patent applications.

Our Cortical Stimulation Therapy System

      Our cortical stimulation therapy system delivers low-level electrical stimulation targeted at patient-specific areas of the cortex through an
electrode grid placed on or below the dura. The electrical stimulation delivered is subthreshold, meaning that the patient cannot feel the
stimulation and no movement is evoked. Our system consists of three primary components:


                                              Implantable Pulse Generator. Our implantable pulse generator, or IPG, is a small,
                                              battery-powered electrical stimulator that is surgically implanted in the upper chest area of a
                                              patient. The IPG delivers electricity to the lead. The proprietary software contained in our IPG is
                                              customized for each specific application. When configured for the stroke motor recovery and
                                              aphasia applications, the IPG only provides electrical stimulation during the rehabilitative therapy
                                              sessions. For other clinical applications, the IPG will likely be required to provide sustained
                                              stimulation.

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                                                 Cortical Stimulation Lead. The cortical stimulation lead is powered by the IPG and delivers
                                                 electrical stimulation to the cortex via the lead’s electrode grid, the dimensions of which are
                                                 approximately one inch by one inch. The electrode grid is sutured to the dura, and the lead wire
                                                 is tunneled under the skin and connected to the IPG. The electrode grid used in our pivotal trial
                                                 utilizes two parallel rows of three electrodes each. We have developed other electrode grid
                                                 configurations specific to various clinical applications. The components and materials of the
                                                 cortical stimulation lead are similar to other standard leads currently in commercial distribution.




                                                 Programming System. Our programming system is operated with a commercially available
                                                 handheld computer with our proprietary, internally-developed software, connected to our
                                                 proprietary communications device that we refer to as a wand. The wand allows wireless
                                                 communication between the handheld computer and the implanted IPG. The programmer and
                                                 wand allow the clinician to turn the IPG on and off, and to set and modify electrical stimulation
                                                 parameters, such as amplitude, frequency, pulse width, polarity and duration of stimulation.

   Initial Application: Stroke Motor Recovery

     We are developing the first application of our cortical stimulation therapy system for stroke motor recovery using our Northstar Stroke
Recovery System. The treatment methodology involves three steps:

      •    fMRI and Brain Mapping. The areas of the cortex that correspond to particular motor functions, such as hand and arm
           movement, are generally well known in healthy subjects. However, in stroke patients, the target neuroplastic area, which is the part
           of the brain now controlling a stroke-disabled limb, varies from person to person. Identifying patient-specific brain regions related to
           motor movement in such stroke patients requires some form of mapping of the brain. Using f MRI, which is an imaging technique
           used to study brain activity, we can determine which parts of the brain control different types of physical activity, such as movement
           of the patient’s impaired limb. The increased blood flow to the activated areas of the brain associated with a particular movement
           can be identified on an f MRI scan. In our pivotal trial, patients undergo f MRI scanning of the brain to identify the cortical area that
           exhibits neuroplasticity and is now controlling the impaired limb, so we can target that specific area for cortical stimulation.

      •    IPG and Cortical Stimulation Lead Implantation. The IPG and lead are surgically implanted in a process that typically is
           performed by a single neurosurgeon in approximately two and one-half hours. In the procedure, patients are placed under general
           anesthesia, and then a small opening in the skull, approximately four centimeters in diameter, is made above the previously
           identified targeted cortical site. The neurosurgeon then implants and sutures the electrode grid on the dura, the membrane covering
           the brain. The electrode grid does not actually touch the brain. The lead is then tunneled beneath the scalp and skin and connected to
           the IPG, which is placed in the upper chest area just below the collar bone. In our clinical trials, the patient is hospitalized overnight
           for observation. We believe that this surgical procedure is relatively routine for neurosurgeons, and that this procedure has the
           potential to be performed on an outpatient basis in the future.

      •    Stimulation with Therapy. Our pivotal trial protocol calls for six weeks of intensive hand and arm rehabilitative therapy. For
           investigational patients, our Northstar Stroke Recovery System is activated using our programming system to deliver subthreshold
           electrical stimulation during these therapy sessions. Our Northstar Stroke Recovery System is activated only during the
           rehabilitative therapy sessions because our preclinical trials have shown that the desired neuroplastic effect on hand and arm

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           motor improvement occurs only when cortical stimulation is delivered simultaneously with rehabilitative therapy. The Northstar
           Stroke Recovery System is surgically removed following completion of the rehabilitative therapy program.

Other Potential Applications

      We are investigating the potential application of our cortical stimulation therapy system to treat other neurological diseases and disorders
in addition to stroke motor recovery. For each of these new investigative clinical applications, the surgery to implant the IPG and lead is
substantially the same. However, for neurological diseases and disorders other than stroke and stroke-related aphasia, the location of the
electrode grid, including its placement on or below the dura, the electrode grid length, width and configuration, and the IPG electrical
stimulation parameters, may be different. The mechanism of action for other applications also may vary and will not always be based on the
concept of enhancing neuroplasticity.

      We believe that our cortical stimulation therapy may be used to treat the following neurological diseases and disorders:

      •    Stroke-Related Broca’s Aphasia. Aphasia is difficulty in speaking caused by a stroke or other brain injury. According to the
           National Institutes of Health, there are approximately one million people in the U.S. with aphasia, most due to stroke. The ASA
           reports that almost 20% of stroke survivors in the U.S. suffer from aphasia. Aphasia can be very debilitating because it affects
           patients’ ability to communicate and may isolate them socially. The only existing therapy for aphasia is intensive speech therapy,
           which we believe has limited benefits. We believe that stimulation of the neuroplastic area associated with control of a patient’s
           speech, administered in combination with intensive speech therapy, may be effective in treating some aphasia patients, particularly
           patients suffering from stroke-related Broca’s aphasia, as well as patients suffering from other forms of non-fluent aphasia, which is
           an impaired ability to speak intended words. Broca’s aphasia is one of several forms of non-fluent aphasia. It is associated with
           motor control of speech and afflicts a portion of stroke-related aphasia patients. We are currently conducting a feasibility trial, which
           we call CHESTNUT, for the application of our cortical stimulation therapy system to treat stroke-related Broca’s aphasia. For this
           application, like stroke motor recovery, the system provides stimulation only in conjunction with rehabilitative speech therapy and is
           surgically removed following the therapy regimen.

      •    Tinnitus . Tinnitus is a condition characterized by perceived sound in the absence of an actual external sound, which often is
           described by patients as an abnormal ringing in the ears. According to the American Tinnitus Association, there are 50 million
           people in the U.S. who experience tinnitus, 12 million of whom seek medical attention each year. Of these, two million are
           considered to be severely disabled by this condition, in that it can interfere with sleep, social interaction and work. There are
           currently no effective, widely-used therapies for severe tinnitus. We believe, based on our research and published literature, that
           cortical stimulation may be effective in interfering with neural pathways that cause tinnitus. We are currently conducting a
           feasibility trial, which we call SAHALE, for the application of our cortical stimulation therapy system to treat severe tinnitus. For
           this application the system provides sustained electrical stimulation.

      •    Essential Tremor. Essential tremor is a common movement disorder in which the patient exhibits uncontrollable, exaggerated
           shaking, primarily in the hands and arms. The tremor can be so severe that the patient is unable to perform activities of daily living,
           and can be socially isolating. Essential tremor, which is believed to be largely genetic in origin, afflicts more than 4.5 million people
           in the U.S. We believe, based on knowledge of the pathology of essential tremor, that cortical stimulation may be effective in
           interfering with neural pathways that cause essential tremor. We have conducted an initial feasibility trial in the U.S., which we
           called TIGER, that evaluated cortical stimulation therapy to treat essential tremor. We are currently planning our next feasibility trial
           for essential tremor. For this application the system provides sustained stimulation.

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     Other Neurological Diseases and Disorders.            We also intend to evaluate cortical stimulation therapy as a potential treatment for other
neurological diseases and disorders including:

      •       movement disorders other than essential tremor;

      •       neuropsychiatric disorders;

      •       brain injury other than stroke; and

      •       pain disorders.

Clinical Development Program

      The following table summarizes selected cortical stimulation clinical trials:
                                            Clinical                                                                   Number of
Application                                  Trial          Type                    Description             Sites       Patients            Status
Stroke Motor Recovery                   EVEREST        Pivotal          Pivotal trial focused on             18           151          Enrolling
                                                                        obtaining safety and efficacy                (anticipated)
                                                                        clinical data in support of PMA
                                                                        submission
Stroke Motor Recovery                   ADAMS          Feasibility      Initial trial of cortical            3             8           Completed
                                                                        stimulation therapy for stroke                                 November
                                                                        motor recovery                                                 2003
Stroke Motor Recovery                   BAKER          Feasibility      Second trial of cortical             9             24          Completed
                                                                        stimulation therapy for stroke                                 October 2004
                                                                        motor recovery
Stroke-Related Broca’s Aphasia          CHESTNU Feasibility             Initial trial of cortical            3             8           Enrolling
                                        T                               stimulation therapy to treat                 (anticipated)
                                                                        Broca’s aphasia following
                                                                        stroke
Tinnitus                                SAHALE         Feasibility      Initial trial of cortical            3             8           Enrolling
                                                                        stimulation therapy to treat                 (anticipated)
                                                                        tinnitus
Essential Tremor                        TIGER          Feasibility      Initial trial of cortical            1             2           Completed
                                                                        stimulation therapy to treat                                   December
                                                                        essential tremor                                               2004

   Stroke Motor Recovery:

      We have completed two stroke motor recovery feasibility trials, called ADAMS and BAKER, and are currently conducting a pivotal
stroke motor recovery trial called EVEREST. In our stroke motor recovery feasibility trials, we used a number of validated and clinically
accepted measures to assess the safety and efficacy of our stroke motor recovery therapy, including either or both of the following: the Upper
Extremity Fugl-Meyer (UEFM) test and the Arm Motor Ability Test (AMAT). These tests measure the following:

      •       UEFM: a measure of neurologic and motor function that evaluates the ability of patients to control the movement of their shoulders,
              arms, wrists and hands. The score range is from 0 to 66, with a higher score corresponding to better function.

      •       AMAT: a measure of selected activities of daily living that includes feeding, dressing and other general activities. Patients are
              scored for speed, function and quality of movement. Function and quality scores range from 0 to 5, with a higher score
              corresponding to better performance.

      For our EVEREST pivotal trial, we will use a composite endpoint of the UEFM and AMAT.

EVEREST (Pivotal Trial for Stroke Motor Recovery)

      We are currently conducting a pivotal trial to evaluate the safety and efficacy of our Northstar Stroke Recovery System, in conjunction
with intensive rehabilitative therapy, in improving hand and arm function in ischemic stroke
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survivors with chronic upper-extremity hemiparesis. This pivotal trial, called EVEREST, is a randomized, single-blinded trial that will involve
data from at least 151 patients (100 investigational patients and 51 control patients) at up to 18 sites throughout the U.S. Depending on the
attrition level, which is the number of enrolled patients who fail for any reason to complete the trial, we will have to treat more than 151
patients to end up with the required amount of complete patient data for the FDA. Our clinical plan, as approved by the FDA, assumes that the
attrition level could be as high as 20%. We will monitor actual patient attrition during the trial and increase our enrollment accordingly. If the
attrition level is 20%, we will need to enroll and treat 189 patients in the EVEREST trial, although lower levels of attrition would require fewer
patients to be enrolled. As of January 31, 2006, the attrition rate in the EVEREST trial was approximately 10%.

       To be eligible to participate in the EVEREST trial, at least four months must have elapsed since the patient’s stroke occurred, and the
patient must have moderate to moderate-severe upper-extremity hemiparesis, defined as a UEFM score between 28 and 50. Once a patient has
completed screening to confirm initial eligibility and signed an informed consent, the patient is considered to be enrolled in the trial. Enrolled
patients then undergo additional assessment, an f MRI and a baseline evaluation. Patients who remain eligible for the trial after this additional
evaluation are then randomized to an investigational group or a control group. Patients in the investigational group are implanted with the
Northstar Stroke Recovery System and undergo six weeks of intensive rehabilitative therapy delivered simultaneously with cortical stimulation
therapy. Patients in the control group do not receive an implant but undergo the same six weeks of intensive rehabilitative therapy. Trained and
certified study therapists will conduct the rehabilitative therapy sessions.

      The primary efficacy endpoint for the EVEREST trial is an assessment of the percentage of patients in the investigational group who,
four weeks after completion of the six-week rehabilitative therapy period, achieve clinically meaningful improvement in their UEFM and
AMAT tests, compared to the percentage of patients in the control group who achieve clinically meaningful improvement. We will also be
comparing results of patients in the investigational group to those in the control group using a number of secondary endpoints, including the
Box and Blocks test, which measures manual dexterity by counting the number of blocks a patient can move from one box to another in one
minute. We will also be conducting neuropsychological testing of each patient before and after therapy, and will study changes in brain f MRI
images before and after completion of the therapy.

      In the materials we have submitted to the FDA in connection with our pivotal trial, we have stated that, based on published literature and
clinical experience, we will consider our cortical stimulation therapy to be effective if the percentage of patients in the investigational group
who achieve clinically meaningful improvement in both the UEFM and the AMAT tests is at least 20 percentage points greater than the
percentage of patients in the control group who achieve clinically meaningful improvement. Our trial analysis will consider a 4.5 point gain,
from the patient’s initial baseline score, to be clinically meaningful for the UEFM test, and a 0.21 point gain, from the patient’s initial baseline
score, to be clinically meaningful for the AMAT.

      Raters, who are trained and licensed physical and occupational therapists, assess improvements in hand and arm function at baseline and
one, four, eight, 12 and 24 weeks after completion of the six weeks of rehabilitative therapy. When conducting their assessments, the raters are
blinded to whether the patients are in the investigational or the control group. The raters in the EVEREST trial are trained in a standardized
manner by a core lab, the Rehabilitation Institute of Chicago, or RIC, to increase the likelihood that all raters across all sites will evaluate
patients in the trial the same way. The acceptability of their performance is certified by RIC before they can assess trial patients. Raters are not
Northstar employees and are re-certified every six months to ensure that they continue to perform their assessments in a standardized manner.

       The safety endpoint for the trial is an assessment of the patients who are classified as having any of the following outcomes between the
time of enrollment and the time that the rehabilitative therapy program is complete: death; incidence of disease; seizure; or decline in
neurological status. The trial is being monitored by an independent group of physicians comprising a data safety monitoring board, which
meets approximately every six months to review trial safety data. To date, there have been no unanticipated adverse events in the EVEREST
trial.

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       We received conditional FDA approval for the EVEREST trial in July 2004, which allowed us to initiate the trial at three sites. We
randomized the first patient in the EVEREST trial in September 2004. We received full IDE approval for the use of our stroke motor recovery
system in the trial at up to 18 sites in June 2005, and as of January 31, 2006, 10 of the 18 trial sites were enrolling patients. We expect all 18
sites to be enrolling patients by the second quarter of 2006. As of January 31, 2006, 39 patients had been randomized in the EVEREST trial, 28
of which had completed the four-week follow-up evaluation, which is the time at which we assess the primary efficacy endpoint. We believe
that we will complete the four-week primary endpoint follow-up on the last EVEREST patient by the first quarter of 2008.

ADAMS (First Feasibility Trial for Stroke Motor Recovery)

       The ADAMS trial was our initial clinical trial and was designed to evaluate the safety of delivering cortical stimulation to stroke
survivors with chronic upper-extremity hemiparesis. The trial, conducted in 2002 and 2003, included ten randomized patients at three sites in
the U.S. All of the patients were more than four months past their strokes, with an average of 28 months post-stroke. The four patients in the
investigational group who completed the trial underwent three weeks of cortical stimulation therapy in conjunction with intensive rehabilitative
therapy, compared to three weeks of equivalent rehabilitative therapy only for the four patients in the control group. At the time of the ADAMS
trial, we did not have access to an implantable pulse generator so stimulation was provided by an external pulse generator connected through an
externalized lead. Two patients experienced complications with infections related to the externalized lead, both of which were resolved with
administration of antibiotics, and did not complete the trial. The electrode grid was placed above the neuroplastic area of the cortex in
substantially the same manner as for the BAKER and EVEREST trials, but after the lead was tunneled to the chest area, it was externalized
from the patient and connected to the external pulse generator during rehabilitative therapy sessions.

       The primary efficacy measures were assessed using the UEFM score at one, four, eight and 12 weeks after completion of the three weeks
of rehabilitative therapy. The primary safety endpoint was measured after removal of the investigational device, and was an assessment of the
patients who suffered death, incidence of disease, seizure, or decline in neurological status. We completed a 12-week follow-up of patients in
the trial in November 2003. We believe the results from the ADAMS trial indicate the safety of our cortical stimulation therapy, with no deaths,
or unanticipated adverse events related to the therapy.

       We believe the ADAMS trial also indicates the efficacy of our therapy. The table below shows the average percentage improvement in
UEFM score from the baseline measurement at follow-up weeks one, four, eight and 12. At each follow-up period the investigational group
showed greater improvement than the control group. Our trial plan called for statistical analysis at follow-up weeks one and 12. Despite the
small size of the trial the efficacy data were statistically significant at follow-up week 12, with a p-value of 0.047. A p-value measures the
likelihood that a difference between the investigational and control groups is due to random chance. A p-value of less than or equal to 0.05
means the chance that the difference is due to random chance is less than 5.0%, and is a commonly accepted threshold for denoting a
meaningful difference between investigational and control groups. The average improvement in UEFM scores was 28.6% for the
investigational group and 5.7% for the control group.

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                                            Average Improvement in UEFM Score from Baseline
                                                                                          Follow-up week
                                                              1                       4                       8                     12              Average (1)
                                                     Points       %        Points           %        Points       %        Points         %        Points     %
Investigational Group                                  10.3       28.8 %        9.5        27.2 %      10.3       29.6 %    10.0          28.8 %    10.0    28.6 %
Control Group                                           3.9        8.8          2.0         5.0         1.9        4.4       1.9            4.7      2.4     5.7
p-value (2)                                                       0.12                                                                   0.047

(1)   Average improvement assessed at one, four, eight and 12 weeks following therapy.
(2)   Pursuant to the investigation plan for ADAMS, statistical analysis was performed on UEFM percentage changes from baseline at
      follow-up weeks one and 12. Our investigational plan did not call for statistical analysis of point changes or of percentage changes at
      follow-up weeks four or eight, or for the average across all follow-up weeks.

      The ADAMS clinical investigators conducted f MRI imaging studies of the patients’ brains before and after completion of therapy. The
results of the imaging studies were published in the May 2005 issue of Stroke . In the control group they saw essentially no change from the
patients’ baseline f MRI images. In the investigational group, however, the investigators observed that the patients’ brains showed a reduced
cortical activation volume associated with more centralized neural activity in connection with hand and arm movement following treatment
compared to their baseline f MRI images. We believe that the f MRI imaging studies indicate that the more centralized neural activity correlates
with the patients’ improved performance in motor function. The ADAMS trial data have been presented at several prominent medical
congresses, and have been published in Neurosurgery , the official journal of the Congress of Neurological Surgeons.

BAKER (Second Feasibility Trial for Stroke Motor Recovery)

      The BAKER trial was our second feasibility trial, and was designed to assess both the safety and efficacy of our Northstar Stroke
Recovery System in stroke survivors with chronic upper-extremity hemiparesis. The trial, conducted in 2003 and 2004, included 24
randomized patients at nine sites in the U.S. All of the patients were more than four months past their strokes, with an average of 33 months
post-stroke. The 12 patients in the investigational group underwent up to six weeks of cortical stimulation therapy in conjunction with intensive
rehabilitative therapy, compared to up to six weeks of equivalent rehabilitative therapy only in the control group. Unlike the ADAMS trial, we
used a fully-implanted system for the BAKER trial, with an IPG and programming wand that were obtained under license from a third party
manufacturer. All implanted components of the system were removed after the last rehabilitative therapy session.

      The primary efficacy measures were assessed using the UEFM and AMAT scores at one, four, eight, 12 and 24 weeks after completion of
the therapy. A number of additional measurements of stroke impairment and disability were also assessed. The primary safety endpoint was
measured after removal of the investigational device, and was an assessment of the proportion of patients who suffered death, incidence of
disease, seizure, or decline in neurological status. We completed a 24-week follow-up of patients in October 2004.

      The results from the BAKER trial indicate the safety of our cortical stimulation device therapy, with no deaths, device malfunctions or
serious or unanticipated adverse events related to the device or stimulation. After the implant surgery but before the device system was
activated, one subject experienced a seizure. This investigational patient was treated and completed the trial with no further complications.

       We believe the BAKER trial further indicates the efficacy of our cortical stimulation therapy for stroke motor recovery. The table below
shows the average percentage improvement in UEFM score from the baseline measurements at follow-up weeks one, four, eight, 12 and 24. At
each follow-up week the investigational group showed greater improvement than the control group. Our trial plan called for statistical analysis
at follow-up

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weeks four and 24. Despite the small size of the trial, the efficacy data were statistically significant at both follow-up weeks four and 24. The
average improvement in UEFM scores was 16.6% for the investigational group and 7.2% for the control group.

                                             Average Improvement in UEFM Score from Baseline
                                                                                     Follow-up week
                                                       1                  4                     8                 12                  24             Average (1)
                                                 Points    %        Points     %         Points    %        Points     %        Points     %        Points     %
Investigational Group                                6.7   19.0 %       5.5    15.1 %        7.0   19.5 %       6.2    17.5 %       4.5    11.5 %       6.0   16.6 %
Control Group                                        2.8    9.7         1.9     6.7          3.7   11.8         2.5     8.3         0.0    -0.5         2.2     7.2
p-value (2)                                                            0.03                                                        0.03

(1)    Average improvement assessed at one, four, eight, 12 and 24 weeks following therapy.
(2)    Pursuant to the investigational plan for BAKER, statistical analysis was performed on UEFM score changes from baseline at follow-up
       weeks four and 24. Our investigational plan did not call for statistical analysis of percentage changes or of point changes at follow-up
       weeks one, eight or 12, or for the average across all follow-up weeks.

      The chart below summarizes the percentage of patients in the BAKER trial that achieved clinically meaningful improvements in both the
UEFM and AMAT efficacy measures. Fifty percent of the investigational patients achieved clinically meaningful improvements in both the
UEFM and AMAT efficiency measures at follow-up weeks four and 24. Despite the small size of the trial, at follow-up week four the
composite endpoint for the investigational group was greater at a statistically significant level than the composite endpoint for the control
group. At follow-up week four the percentage of patients in the investigational group who achieved clinically meaningful improvements in both
the UEFM and AMAT efficacy measures was more than 40 percentage points greater than the percentage of patients in the control group who
achieved such clinically meaningful improvements. Our trial analysis considered a 3.5 point gain, from the patient’s initial baseline score, to be
clinically meaningful for the UEFM test and a 0.21 point gain, from the patient’s initial baseline score, to be clinically meaningful for the
AMAT.

                                          BAKER: Patients with Clinically Meaningful Improvement




       The patients in the BAKER study also underwent a battery of neuropsychological tests selected to assess improvements in cognitive
abilities. The tests measured aspects of language formation, the ability to reason, general intellectual ability, spatial relationships and the ability
to accurately perceive one’s environment. We believe that the test results suggest that cortical stimulation in stroke survivors may improve
neurocognitive function in addition to its effect on motor function.

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   Combined ADAMS and BAKER Data

      The charts below summarize the combined data from the ADAMS and BAKER feasibility trials. The chart immediately below
summarizes the change in UEFM scores for the investigational and control groups through follow-up week 12 (the last endpoint common to
both trials) and shows statistically significant improvements in function at follow-up weeks four and 12. The investigational groups together
showed an average 6.4 point increase at follow-up week four and an average 7.0 point increase at follow-up week 12, from an average baseline
of 34.6 points.

                                        ADAMS and BAKER: Change from Baseline in UEFM Score




      The chart below shows the percentage of patients achieving a clinically meaningful improvement in UEFM, defined for purposes of the
ADAMS and BAKER trials as a 3.5 point improvement, showing statistically significant benefits of cortical stimulation at both time points.
We believe the combined data from our two feasibility trials indicate the efficacy of our Northstar Stroke Recovery System, in conjunction with
rehabilitative therapy, in treating upper-extremity hemiparesis. Seventy-five percent of the investigational patients had a clinically meaningful
improvement in their UEFM scores at follow-up week four compared to 31% of the control patients, and 81% of the investigational patients
had a clinically meaningful improvement in their UEFM scores at follow-up week 12 compared to 38% of the control patients.

                         ADAMS and BAKER: Patients with Clinically Meaningful Improvement in UEFM Score




      While our clinical trials to date have yielded results that we believe to be favorable, these data are not necessarily indicative of data we
will obtain in our trials and are not predictive of regulatory approval or commercial success.

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   Stroke Motor Recovery: Preclinical Development Program

     Prior to beginning clinical trials for stroke motor recovery, we conducted an extensive series of preclinical animal trials. For stroke motor
recovery, there are a number of well-documented and validated animal models. Building on the concept of neuroplasticity, we conducted
numerous preclinical trials in rats and monkeys designed to explore and optimize the effect of cortical stimulation therapy to enhance motor
recovery following stroke-like brain lesions.

      In our rat studies, we demonstrated that, after delivering subthreshold cortical stimulation in conjunction with training, rats returned to
near their pre-lesion levels of performance on food retrieval tasks, while rats that received only training improved to a lesser degree. The
difference between the groups was statistically significant. We were able to reproduce the rat data at different labs using different brain injury
models and food retrieval tasks. Through histologic examination, which is the study of cells and tissue at a microscopic level, we were also able
to identify anatomical changes in the rats’ brains that we believe correlated with the observed behavioral changes. We also conducted
optimization studies with rats to evaluate the effects of delivering electrical stimulation for different periods of time and with different
stimulation parameters.

      In monkeys, after inducing a brain injury mimicking stroke and delaying therapy for approximately four months, we observed an
approximate 50% improvement in the monkeys’ motor function after delivering subthreshold cortical stimulation in conjunction with training
on food retrieval tasks for 10 to 12 days. Further evaluation of these monkeys six months after the end of their therapy showed that they had
retained their post-therapy levels of improvement, suggesting a sustained effect of our stroke motor recovery therapy. Cortical mapping of the
monkeys’ brains also showed significant anatomical changes that we believe correlated with the observed behavioral changes.

       In September 2005, our preclinical collaborators at leading academic research centers received a $3.9 million grant from the National
Institute of Neurological Diseases and Disorders of the National Institutes of Health, or NIH. This is a four-year grant to conduct preclinical
animal research designed to further optimize our cortical stimulation therapy to enhance stroke motor recovery. We participate in the planning
of the animal research and will be reimbursed for the device and engineering costs associated with this study.

CHESTNUT (Initial Feasibility Trial for Stroke-Related Broca’s Aphasia)

      The CHESTNUT trial is designed to evaluate the safety and efficacy of our cortical stimulation therapy in the treatment of stroke-related
Broca’s aphasia. The CHESTNUT trial will assess eight patients at up to three sites in the U.S., and is a randomized trial with four
investigational patients receiving cortical stimulation in conjunction with intensive speech therapy, and four control patients receiving the same
speech therapy without cortical stimulation. Patient improvement in speech function is assessed after completion of the six weeks of therapy
using clinically-accepted measures of speech function. The primary safety and efficacy endpoints are assessed after completion of the
rehabilitation protocol. The protocol for identifying the patient-specific area of the motor cortex to be targeted is similar to the protocol being
used in the EVEREST trial, except that f MRI is used during speech and language tasks as opposed to motor tasks.

       As of January 31, 2006, we had completed randomization of five of the eight patients in the trial. We expect to complete randomization
for all patients in mid-2006, and expect to reach the primary endpoint for the last patient by the second half of 2006. If the data from the
CHESTNUT trial suggest that our cortical stimulation therapy, delivered in conjunction with rehabilitative speech therapy, is effective in
treating Broca’s aphasia, we will consider conducting an expanded feasibility trial or a pivotal trial.

SAHALE (Initial Feasibility Trial for Tinnitus)

   The SAHALE trial is designed to evaluate the safety and efficacy of our cortical stimulation therapy in the treatment of tinnitus. The
SAHALE trial will assess eight patients at up to three sites in the U.S., and is a

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randomized, single-blinded trial. The therapy protocol involves a crossover period in which patients receive active stimulation or sham
stimulation in a blinded manner. Patient improvement is assessed using clinically-accepted measures of tinnitus and other neurological
functions. Similar to our other trials, the patient-specific target for cortical stimulation of the auditory cortex is identified using audible sounds
during f MRI.

       As of January 31, 2006, we had completed randomization of two of the eight patients in the trial. We expect to complete randomization
for all patients in mid-2006, and expect to reach the primary endpoint for the last patient by the second half of 2006. If the data from the
SAHALE trial suggest that our device system is effective in treating tinnitus, we will consider conducting an expanded feasibility trial or a
pivotal trial.

TIGER (Initial Feasibility Trial for Essential Tremor)

      In December 2003, we initiated a three patient feasibility trial, called TIGER, at a single clinical site to evaluate cortical stimulation
therapy to treat essential tremor. We used a third party IPG because our proprietary device had not yet been completed, and a
Northstar-designed electrode grid placed on the dura. We treated two patients, observed no tremor symptom-control benefit and ended the trial.
There were no significant adverse events.

     Upon analysis of the TIGER trial data, we concluded that insufficient energy was being delivered to the cortex with the third party IPG.
Using our proprietary cortical stimulation therapy system and stimulation algorithms, we believe we can deliver more energy with optimized
stimulation parameters, which could result in improved efficacy of cortical stimulation for essential tremor. We are currently designing our
second feasibility trial based on these and other changes from our initial trial.

Sales and Marketing

      Commercializing our Northstar Stroke Recovery System will involve marketing to four different constituencies:

      •    healthcare providers to the stroke community, including:

             •      neurosurgeons, who perform the surgical implant of our device systems,

             •      neurologists and physiatrists, who interact with stroke survivors shortly after their strokes and who refer patients to therapy
                    and

             •      primary care physicians and other medical decision makers, who interact with stroke survivors at later stages following a
                    stroke;

      •    key stroke institutions such as hospitals and stroke rehabilitation centers, and the opinion leaders at these institutions;

      •    stroke survivors and their families; and

      •    healthcare payors.

      If we are successful in securing FDA marketing approval, we will initially focus our sales efforts on neurosurgeons, neurologists and
stroke physiatrists because we believe that referrals by these physicians, together with self-referrals by patients, will drive initial adoption of
our Northstar Stroke Recovery System.

      Although the number of stroke survivors in the U.S. is large, the clinicians who care for many of them are largely concentrated in several
hundred hospitals and rehabilitation centers. As a result, we believe a direct sales force will be effective for us to reach our target market. We
intend to build a highly-focused sales and marketing infrastructure to market our Northstar Stroke Recovery System in the U.S.

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      We are currently engaged in efforts within the medical and stroke survivor communities to increase awareness of cortical stimulation
therapy and the benefits of our Northstar Stroke Recovery System in treating upper-extremity hemiparesis. These efforts include the
presentation and publication of scientific data on our clinical trials and preclinical science by key physicians at several leading stroke
rehabilitation centers, including Northwestern Memorial Hospital, the Rehabilitation Institute of Chicago, the University of Cincinnati, the
University of Pennsylvania, the University of Arizona, Oregon Health Sciences University and the University of Illinois Medical Center at
Chicago, among others.

      While we have not performed detailed pricing analyses, we estimate that we will sell our Northstar Stroke Recovery System, and other
cortical stimulation therapy devices we may develop, in the range of $15,000 to $30,000. We believe this pricing is consistent with other
currently available commercial neurostimulation devices.

Reimbursement

       Neurostimulation is currently FDA-approved and reimbursed for several indications. We believe that insurance billing codes and payment
exist for the majority of cortical stimulation activities, including:

      •    imaging;

      •    implantation and removal of leads;

      •    implantation and removal of the implantable pulse generator;

      •    rehabilitation sessions; and

      •    device programming sessions.

      We have engaged a reimbursement consulting firm to advise us on reimbursement strategy and implementation. If we secure FDA
marketing approval for our Northstar Stroke Recovery System, we plan to seek specific and appropriate coverage for the stroke application
from CMS and private insurers. We intend to form a dedicated reimbursement group which will assist patients and healthcare providers in
securing coverage and reimbursement from insurers.

Competition

      The medical device industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary
products, designs and processes. There currently is no FDA-approved cortical stimulation therapy for upper-extremity hemiparesis, and we
believe we are the only company pursuing cortical stimulation therapy for stroke motor recovery, which enhances our competitive position.
However, we face potential competition from:

      •    current stroke rehabilitative therapies, including physical and occupational therapy;

      •    investigational rehabilitation therapies, such as constraint induced therapy;

      •    robotic assist devices;

      •    devices that stimulate peripheral nerves in the hand and arm;

      •    investigational neurostimulation technologies such as transcranial magnetic stimulation and direct current stimulation;

      •    off-label use of current neurostimulation devices, such as off-label use of spinal cord stimulators;

      •    drug therapies that are under development, such as amphetamines delivered in combination with rehabilitative therapy, and
           neuroprotective drugs designed to protect damaged brain tissue during the acute phase of a stroke; and

      •    competitive activities of which we are not aware.

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      Many of our competitors in the field of neurostimulation devices, including: Medtronic, which develops deep brain stimulators and spinal
cord stimulators; St. Jude Medical, through its acquisition of Advanced Neuromodulation Systems, which develops spinal cord stimulators;
Cyberonics, which develops vagus nerve stimulators; Boston Scientific, through its Advanced Bionics division, which develops spinal cord
stimulators and cochlear devices, among others, have significantly greater financial resources and expertise in research and development,
manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals, obtaining reimbursement and marketing approved products
than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements
with large and established companies. These third parties also compete with us in recruiting and retaining qualified scientific and management
personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses
complementary to our programs or advantageous to our business.

Product Development, Manufacturing and Supplier Relationships

     We have designed and developed all of the elements of our cortical stimulation system other than the handheld programmer hardware.
Our development efforts have been focused on using proven technologies and materials for the implantable portions of our system, while
developing custom, proprietary circuitry and integrated circuits that facilitate flexible application of the system, primarily through proprietary
software, to various investigational applications of cortical stimulation.

      All of the elements of our system are produced by outside vendors according to our proprietary specifications. We use third parties to
manufacture our Northstar Stroke Recovery System to minimize our capital investment, help control costs and take advantage of the expertise
these third parties have in the large-scale production of medical devices. We do not currently plan to manufacture our Northstar Stroke
Recovery System ourselves. All of our key manufacturers and suppliers have experience working with commercial implantable device systems,
are FDA registered and are regularly audited by us. Our key manufacturers and suppliers have a demonstrated record of compliance with U.S.
and international regulatory requirements.

     We purchase components, materials and final assemblies from single sources due to quality considerations, costs or constraints resulting
from regulatory requirements. The following are our most important manufacturing and component supply relationships:

      •    Texcel LLC is the exclusive manufacturer of our IPGs under a manufacturing agreement that will terminate in April 2010. Texcel is
           contractually obligated to provide as many IPGs as we order in accordance with our purchase forecasts. The purchase price for these
           devices is re-evaluated annually and may only be increased if associated costs have increased. We can solicit bids for the
           manufacture of our IPGs once annually and are required to notify Texcel of the relevant terms of a superior bid. We can terminate
           the agreement or the exclusivity provisions unless Texcel agrees within 30 days to match the bid. We also can terminate the
           agreement on 60 days’ prior written notice if we cease to distribute all or substantially all of our IPGs or if Texcel fails to cure a
           material breach within 45 days after written notice. The cure period may not be available in some circumstances if Texcel fails to fill
           any of our orders within 10 days after the required delivery date.

      •    CTS Electronics Manufacturing Solutions, Inc. is the exclusive manufacturer of printed circuit board assemblies for our IPGs, and
           for the programming wand, under a manufacturing agreement that will terminate in April 2010. CTS is contractually obligated to
           provide as many of these components as we order in accordance with our purchase forecasts. The pricing and termination provisions
           of the CTS agreement are the same as under the Texcel agreement, except that we cannot terminate the agreement if we cease to
           distribute all or substantially all of the components that CTS manufactures for us.

      •    Oscor, Inc. is the exclusive manufacturer of our cortical stimulation leads under a manufacturing agreement that will terminate in
           April 2010. Oscor is contractually obligated to provide as many of these components as we order in accordance with our purchase
           forecasts. The pricing and termination provisions of the Oscor agreement are the same as under the Texcel agreement.

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        •   Avail Medical Products, Inc. is the exclusive provider of our packaging and labeling, and performs sterilization of certain of our
            product components, under a manufacturing agreement that will terminate in August 2010. Avail is contractually obligated to
            provide us with as many of the products as we order in accordance with our purchase forecasts. The pricing and termination
            provisions of the Avail agreement are the same as under the Texcel agreement, except that Avail has 15 days to cure a supply
            delivery failure, we cannot terminate the agreement if we cease to distribute all or substantially all of our the product components
            packaged by Avail, and we can only solicit annual bids from selected persons.

      Due to the exclusive and long-term nature of these agreements, regulatory requirements and the custom nature of the parts we designed,
we cannot quickly establish additional or replacement manufacturers or suppliers for the components of our cortical stimulation therapy
system. We plan to address potential future supply interruptions by maintaining a sufficient inventory stock to address temporary supply
shortages. Any supply interruption from our vendors or failure to obtain alternate vendors for any components would limit our ability to
manufacture our systems and could have a material adverse effect on our business.

Patents and Proprietary Rights

      Our success depends in part on our ability to develop a competitive advantage over potential competitors for the treatment of neurological
diseases and disorders with our cortical stimulation therapy. Our ability to obtain intellectual property that protects our cortical stimulation
therapy and related processes will be important to our success. Our strategy is to protect our proprietary positions by, among other things, filing
U.S. and foreign patent applications related to our technology, inventions and improvements that are directed to the development of our
business and our competitive advantages. Our strategy also includes developing know-how and trade secrets, and in-licensing technology
related to cortical stimulation therapies.

      As of January 31, 2006, we owned two issued patents and 36 patent applications in the U.S. and 16 patent applications in foreign
jurisdictions.

        The U.S. patents that we own cover certain applications related to stroke motor recovery and movement disorders and expire in 2023 and
2024.

     We have several pending patent claims, including allowed claims that have not yet issued, that cover additional elements of our cortical
stimulation therapy. For example, we have pending claims directed to the following aspects of cortical stimulation:

        •   identifying patient-specific brain locations at which relevant neural activity, such as neuroplasticity, occurs;

        •   effective electrical stimulation parameters;

        •   subthreshold stimulation;

        •   unipolar stimulation to enhance stimulation efficacy and efficiency;

        •   neural stimulation plus behavioral therapy; and

        •   limited duration neural stimulation until functional recovery is achieved.

      We plan to file additional patent applications on inventions that we believe are patentable and important to our business. We accordingly
intend to aggressively pursue and defend patent protection on our proprietary technologies.

     Our ability to operate without infringing the intellectual property rights of others and to prevent others from infringing our intellectual
property rights will also be important to our success. We are aware of other companies

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investigating neurostimulation, including cortical stimulation, and of patents and published patent applications held by these companies in
those fields. To this end, we have reviewed all neurostimulation patents owned by third parties of which we are aware and believe that our
current products do not infringe any valid claims of the third party patents that we have analyzed. There are a large number of patents directed
to stimulation therapies, however, and there may be other patents or pending patent applications of which we are currently unaware that may
impair our ability to operate. We are currently not aware of any third parties infringing our issued claims.

Government Regulation

   United States

    Our Northstar Stroke Recovery System is regulated by the FDA as a medical device under the Federal Food, Drug, and Cosmetic Act.
FDA regulations govern:

      •    product design and development;

      •    product testing;

      •    product manufacturing;

      •    product safety;

      •    product labeling;

      •    product storage;

      •    record keeping;

      •    premarket approval;

      •    advertising and promotion;

      •    distribution;

      •    product sales and post-market activities;

      •    medical device (adverse event) reporting; and

      •    field corrective actions (e.g. recalls).

     Unless an exemption applies, each product that we currently plan to commercially distribute in the U.S. will require prior premarket
approval from the FDA. Because our Northstar Stroke Recovery System is an implanted device, it is deemed to pose a significant risk. To
market the Northstar Stroke Recovery System in the U.S., the FDA must approve the device after submission of a PMA. The FDA can also
impose restrictions on the sale, distribution or use of devices at the time of their clearance or approval, or subsequent to marketing.

      Premarket Approval

      Our Northstar Stroke Recovery System is regulated as a class III medical device. FDA approval of a PMA is required before marketing of
a class III medical device in the U.S. can proceed. The process of obtaining premarket approval is costly, lengthy and uncertain. A PMA must
be supported by extensive data including, but not limited to, technical, preclinical and clinical trials to demonstrate to the FDA’s satisfaction
the safety and effectiveness of the device. Among other information, the PMA must also contain a full description of the device and its
components, a full description of the methods, facilities and controls used for manufacturing, and proposed device labeling.

     After the FDA determines that a PMA is complete, the FDA accepts the application and begins an in-depth review of the submitted
information. The FDA, by statute and regulation, has 180 days to review an accepted premarket approval application, although the review and
response activities generally occurs over a significantly longer period of time, typically one year, and can take up to several years. During this
review period, the FDA

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may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts
from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the
approvability of the device. Because there is no FDA-approved cortical stimulation device on the market, a review panel may be convened as
part of any FDA review of our Northstar Stroke Recovery System. In addition, the FDA will conduct a preapproval inspection of our and our
suppliers’ facilities to ensure compliance with the quality system regulations. Under the Medical Device User Fee and Modernization Act of
2002, the fee to submit a PMA can be up to $259,600 per PMA, but certain companies, like Northstar Neuroscience, may qualify for a small
business exemption. New PMAs or supplemental PMAs are required for significant modifications to the manufacturing process, labeling, use
and design of a device that is approved through the premarket approval process. Premarket approval supplements often require submission of
the same type of information as a PMA except that the supplement is limited to information needed to support any changes from the device
covered by the original PMA, and may not require as extensive clinical data or the convening of an advisory panel.

      Clinical Trials

       A clinical trial is almost always required to support a PMA. Clinical trials for a ―significant risk‖ device such as ours require submission
of an application for an investigational device exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such
as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound.
Clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the institutional review boards
overseeing the clinical trial at the various investigational sites. We have obtained or will obtain all such required approvals for our EVEREST
trial prior to enrolling patients at our investigational sites. Clinical trials require extensive recordkeeping and reporting requirements. Our
clinical trials must be conducted under the oversight of an institutional review board at the relevant clinical trial site and in accordance with
applicable regulations and policies including, but not limited to, the FDA’s good clinical practice, or GCP, requirements. We, the trial data
safety monitoring board, the FDA or the institutional review board at each site at which a clinical trial is being performed may suspend a
clinical trial at any time for various reasons, including a belief that the risks to study patients outweigh the anticipated benefits. The FDA
conducted an inspection of our clinical records for the EVEREST trial in June 2005 and had no observations.

      Pervasive and Continuing FDA Regulation

      After a device is placed on the market, numerous regulatory requirements apply. These include:

      •    quality system regulation, which requires manufacturers to follow design, testing, control, documentation and other quality
           assurance procedures during the design and manufacturing processes;

      •    labeling regulations, which govern product labels and labeling, prohibit the promotion of products for unapproved or ―off-label‖
           uses and impose other restrictions on labeling and promotional activities;

      •    medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or
           contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if
           it were to recur; and

      •    notices of correction or removal and recall regulations.

       Advertising and promotion of medical devices are also regulated by the Federal Trade Commission and by state regulatory and
enforcement authorities. Recently, some promotional activities for FDA-regulated products have resulted in enforcement actions brought under
healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act, competitors and others can initiate
litigation relating to advertising claims.

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      Compliance with regulatory requirements is enforced through periodic, unannounced facility inspections by the FDA. Failure to comply
with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

      •    warning letters or untitled letters;

      •    fines, injunction and civil penalties;

      •    recall or seizure of our products;

      •    customer notification, or orders for repair, replacement or refund;

      •    operating restrictions, partial suspension or total shutdown of production or clinical trials;

      •    refusing our request for premarket approval of new products;

      •    withdrawing premarket approvals that are already granted; and

      •    criminal prosecution.

   International

      International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country.
The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements
may differ.

      The primary regulatory environment in Europe is that of the European Economic Community, or EEC, which consists of 25 countries
encompassing nearly all the major countries in Europe. Other countries that are not part of the EEC, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the EEC with respect to medical devices. The EEC has adopted Directive 90/385/EEC for
implantable medical devices and numerous standards that govern and harmonize the national laws and standards regulating the design,
manufacture, clinical trials, labeling and adverse event reporting for medical devices that are marketed in member states. Medical devices that
comply with the requirements of the national law of the member state in which they are first marketed will be entitled to bear CE marking,
indicating that the device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within EEC states
and other countries that recognize this mark for regulatory purposes.

      We intend to apply for CE marking approval for the stroke recovery indication and expect to have final CE marking approval during
2009. The method of assessing conformity with applicable regulatory requirements varies depending on the class of the device, but for our
Northstar Stroke Recovery System (which falls into class III), the method involves a combination of self-assessment by the manufacturer of the
safety and performance of the device, and a third party assessment by a Notified Body, usually of the design of the device and of the
manufacturer’s quality system. A Notified Body is a private commercial entity that is designated by the national government of a member state
as being competent to make independent judgments about whether a product complies with applicable regulatory requirements. The
manufacturer’s assessment will include a clinical evaluation of the conformity of the device with applicable regulatory requirements. We intend
to use TUV America Inc., of TUV Product Services in Munich, Germany, with whom we have prior experience, as the Notified Body for our
CE marking approval process.

Research and Development

     Our research and development expenses were approximately $8.7 million in 2003, $12.4 million in 2004 and $11.8 million in 2005, none
of which were customer sponsored. We expect our research and development expenditures to increase as we continue to devote resources to
developing our cortical stimulation technology.

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Employees

      As of January 31, 2006, we had 53 employees, nine of whom hold Ph.D., M.D. or comparable degrees. Approximately 39 employees are
engaged in research and development and 14 in marketing, finance and other administrative functions. None of our employees is represented by
a labor union or is covered by a collective bargaining agreement. We believe that we maintain good relations with our employees.

Facilities

     As of January 31, 2006, we leased a 36,066 square foot space in Seattle, Washington for our headquarters and principal research and
development facility. This lease expires on August 31, 2012, with an option to renew for two successive five-year periods. During each option
period the rent will be adjusted to reflect the fair market rate. We also currently sublease approximately 15,000 square feet of our facility to
another company. The sublease is scheduled to expire on March 31, 2008. We believe that our current facilities will be sufficient to meet our
needs through at least the end of 2009.

Legal Proceedings

     From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any
material legal proceedings.

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                                                                 MANAGEMENT

      Our executive officers, directors, proposed directors and other significant employees and their respective ages and positions as of March
1, 2006 are as follows:
Name                                                          Age     Position
Executive Officers
Alan J. Levy, Ph.D.                                            68     President, Chief Executive Officer and Director
John S. Bowers Jr.                                             43     Executive Vice President
Raymond N. Calvert                                             40     Vice President, Finance and Chief Financial Officer
Lori J. Glastetter                                             47     Vice President, Regulatory Affairs and Quality Assurance
Bradford E. Gliner                                             40     Vice President, Research
Nawzer Mehta, Ph.D.                                            47     Vice President, Clinical Affairs
Directors
Susan K. Barnes (1)                                            52     Director
Albert J. Graf (2) (5)                                         58     Director
Wende S. Hutton (2)                                            46     Director
Robert E. McNamara (1) (5)                                     49     Director
Seth A. Rudnick, M.D. (4)                                      57     Director
Dale A. Spencer (2) (3)                                        60     Director
Jesse I. Treu, Ph.D. (3)                                       58     Director
Carol D. Winslow (1) (3)                                       51     Director
Other Significant Employees
Matthew J. Gani                                                44     Director of Product Development
John M. Ray                                                    39     Director of Product Quality and Operations
W. Douglas Sheffield, V.M.D., Ph.D.                            56     Director of New Technology
Allen R. Wyler, M.D.                                           62     Medical Director

(1)    Member of the Audit Committee.
(2)    Member of the Compensation Committee.
(3)    Member of the Nominating and Corporate Governance Committee.
(4)    Dr. Rudnick will resign as a director of Northstar immediately prior to the closing of this offering.
(5)    Messrs. Graf and McNamara will become directors of Northstar upon the closing of this offering.

      Alan J. Levy, Ph.D. Dr. Levy co-founded Northstar in 1999, and has been our President and Chief Executive Officer and a director
since inception. From 1993 to 1998, Dr. Levy served as President and Chief Executive Officer of Heartstream, Inc., a medical device company
that was acquired by Hewlett-Packard in 1998. From 1989 to 1993, Dr. Levy served as President and Chief Operating Officer of Heart
Technology Inc., a medical device company that was acquired by Boston Scientific Corporation. Dr. Levy serves as a director of Intuitive
Surgical, Inc. Dr. Levy holds a B.S. in Chemistry from City University of New York and a Ph.D. in Organic Chemistry from Purdue
University.

     John S. Bowers Jr. Mr. Bowers has been our Executive Vice President since December 2005, and from February 2004 to December
2005 was our Vice President, Marketing and Business Development. From May 2000 to February 2004, Mr. Bowers served first as Director of
Business Development and then as Director of Global Marketing, Drug Eluting Stents for Guidant Corporation, a medical device company.
Mr. Bowers joined

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Guidant Corporation as a Group Product Manager in 1994. Mr. Bowers holds a B.A. in Economics-Accounting from Gonzaga University and
an M.B.A. from Harvard University.

      Raymond N. Calvert. Mr. Calvert has been our Chief Financial Officer since May 2005, and our Vice President, Finance since
February 2003, and from January 2001 to February 2003 was our Director of Finance. Prior to joining Northstar, Mr. Calvert was the Vice
President of Finance at Altrec.com, Inc., an online outdoor products retailer. Mr. Calvert holds a B.A. in Business Administration, Accounting
from the University of Washington.

      Lori J. Glastetter. Ms. Glastetter co-founded Northstar in 1999, and has been our Vice President, Regulatory Affairs and Quality
Assurance, since inception. Prior to co-founding Northstar, Ms. Glastetter served as Vice President of Regulatory Affairs and Quality
Assurance at Heartstream, Inc. Ms. Glastetter holds a B.S. in Microbiology from California State University Long Beach and an M.B.A. from
California State University Fullerton.

     Bradford E. Gliner. Mr. Gliner has been our Vice President, Research, since September 2004, and from June 1999 to September 2004
was our Director of Research. Prior to joining Northstar, Mr. Gliner was a founder and held various research positions at Heartstream, Inc.
Mr. Gliner holds a B.S. in Electrical Engineering from the University of Illinois and an M.S. in Biomedical Engineering from Johns Hopkins
University.

     Nawzer Mehta, Ph.D. Dr. Mehta has been our Vice President, Clinical Affairs, since January 2005. From October 2000 to December
2004, Dr. Mehta served as Director of Clinical Research at Medtronic, Inc., a medical device company. Dr. Mehta holds a B.S. in Human
Biology from the University of Surrey and a Ph.D. in Applied Cardiovascular Physiology from the University of London.

     Susan K. Barnes. Ms. Barnes has been a director since February 2006. From May 1997 to November 2005, Ms. Barnes served as
Chief Financial Officer at Intuitive Surgical, Inc. Ms. Barnes serves as a director of RAE System Inc. Ms. Barnes holds an A.B. from Bryn
Mawr College and an M.B.A. from the Wharton School, University of Pennsylvania.

     Albert J. Graf. Mr. Graf has agreed to join our board of directors upon the closing of this offering. From June 2000 to December 2004,
Mr. Graf served as Group Chairman at Guidant Corporation, a medical device company. Mr. Graf serves as a director of American Medical
Systems Holdings, Inc., CABG Medical, Inc. and Intermagnetics General Corporation. Mr. Graf holds a B.S. in Economics from Boston
University and an M.B.A. from Indiana University.

     Wende S. Hutton. Ms. Hutton has been a director since May 1999. Since 2004, Ms. Hutton has been a venture partner at Canaan
Partners. From 2001 to 2004, Ms. Hutton was a general partner of Spring Ridge Ventures, and from 1993 to 2001, she was a Managing
Director of Mayfield Fund. Ms. Hutton holds a B.A. in Human Biology from Stanford University and an M.B.A. from Harvard University.

      Robert E. McNamara. Mr. McNamara agreed to join our board of directors upon the closing of this offering. Since December 2004,
Mr. McNamara has served as Senior Vice President and Chief Financial Officer at Accuray, Inc., a medical device company. From March 2003
to June 2004, Mr. McNamara served as Chief Executive Officer at InDefense, Inc., a security software company that was acquired by
Microsoft, Inc. From March 2001 to August 2002, Mr. McNamara served as Senior Vice President and Chief Financial Officer at Recourse
Technologies, Inc., a security software company that was acquired by Symantec Corporation. Mr. McNamara holds a B.A. in Accounting from
the University of San Francisco and Pennsylvania and an M.B.A. from the Wharton School, University of Pennsylvania.

      Seth A. Rudnick, M.D. Dr. Rudnick has been a director since December 2000, and will resign as a director immediately prior to the
closing of this offering. Since 2001, Dr. Rudnick has been a general partner at

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Canaan Partners, concentrating on healthcare investments. Dr. Rudnick serves as a director of Immunicon Corporation. Dr. Rudnick holds a
B.A. from the University of Pennsylvania and an M.D. from the University of Virginia.

      Dale A. Spencer. Mr. Spencer has been a director since August 1999. Since 1999, Mr. Spencer has been a private investor, primarily
in the medical device industry. From 1995 to 1999, Mr. Spencer served as a director of Boston Scientific Corporation, a medical device
company. From 1995 to 1997, Mr. Spencer served as Executive Vice President in the Office of the Chairman for Boston Scientific Corporation.
Mr. Spencer serves as a director of ev3 Inc. Mr. Spencer holds a B.S. in Engineering from the University of Maine and an M.B.A. from
University of Illinois.

      Jesse I. Treu, Ph.D. Dr. Treu has been a director since February 2000. Dr. Treu has been a General Partner and Managing Member of
Domain Associates, L.L.C. since its inception 20 years ago. Dr. Treu has been a director of over 30 early-stage healthcare companies. Prior to
the formation of Domain Associates, L.L.C., Dr. Treu had 12 years of experience in the healthcare industry. Dr. Treu serves as a director of
Somaxon Pharmaceuticals, Inc. Dr. Treu holds a B.S. from Rensselaer Polytechnic Institute and an M.A. and Ph.D. in physics from Princeton
University.

    Carol D. Winslow. Ms. Winslow has been a director since March 2002. Since 2001, Ms. Winslow has been a principal of Channel
Medical Partners, L.P., concentrating on medical technology investments. Ms. Winslow holds an A.B. from Mount Holyoke College and an
M.B.A. from the University of Minnesota.

     Matthew J. Gani. Mr. Gani has been our Director of Product Development since June 2005. From September 2003 to May 2005,
Mr. Gani served as Senior Director, Program Management and Software Development at Micro Systems Engineering, Inc., an implantable
medical device company. Mr. Gani joined Micro Systems Engineering, Inc. as a Program Manager in February 1998. Mr. Gani holds a B.S. in
Applied Mathematics and a B.E. in Electrical Engineering from the University of New South Wales.

      John M. Ray. Mr. Ray has been our Director of Product Quality and Operations since January 2004. From January 2002 to January
2004, Mr. Ray served as Director of Quality Engineering at Advanced Digital Information Corporation, a network storage equipment company.
From February 2001 to December 2001, Mr. Ray served as Program and Engineering Director at DataCritical Corp., a medical device company
that was acquired by General Electric Medical Systems in 2001. Mr. Ray holds a B.S. in Electrical Engineering from Montana State University.

     W. Douglas Sheffield, V.M.D., Ph.D. Dr. Sheffield has been our Director of New Technology since February 2001. From 1982 to
February 2001, Dr. Sheffield worked for Johnson & Johnson. His last position at Johnson & Johnson was Director, Oncology Growth
Opportunities at Ethicon Endosurgery. Dr. Sheffield holds a B.A. in Biology from Johns Hopkins University and a V.M.D. and Ph.D. in
Pathology from the University of Pennsylvania.

      Allen R. Wyler, M.D. Dr. Wyler has been our Medical Director since September 2002. From September 1992 to August 2002,
Dr. Wyler served as Executive Medical Director, and was a practicing neurosurgeon, at Swedish Medical Center. Dr. Wyler has published over
200 journal articles, book chapters, and academic texts devoted to both the clinical practice of neurosurgery as well as basic science. Dr. Wyler
holds a B.A. and an M.D. from the University of Washington.

Board Composition

     Our board of directors currently comprises eight members, including six non-employee members, our President and Chief Executive
Officer, Alan J. Levy, and one vacant seat that will be filled upon the closing of this offering. Upon completion of this offering, our bylaws will
be amended and restated to provide that the

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authorized number of directors may be changed only by resolution of the board of directors. Upon the closing of this offering, our board of
directors will be divided into three classes with staggered three-year terms. At each annual meeting of shareholders, the successors to directors
whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election.
Our directors have been divided among the three classes as follows:

      •    the Class I directors will be Dr. Treu and Ms. Winslow, and their terms will expire at the annual meeting of shareholders to be held
           in 2007;

      •    the Class II directors will be Ms. Hutton, Mr. Spencer and Mr. McNamara, and their terms will expire at the annual meeting of
           shareholders to be held in 2008; and

      •    the Class III directors will be Ms. Barnes, Mr. Graf and Dr. Levy, and their terms will expire at the annual meeting of shareholders
           to be held in 2009.

      We entered into a director resignation agreement in March 2006 with Dr. Rudnick, pursuant to which Dr. Rudnick agreed to tender his
resignation from our board of directors effective immediately prior to the closing of this offering.

      This classification of the board of directors, together with the ability of the shareholders to remove our directors only for cause and the
inability of shareholders to call special meetings, may have the effect of delaying or preventing a change in control or management. See
―Description of Capital Stock—Anti-takeover Provisions‖ for a discussion of other anti-takeover provisions found in our articles of
incorporation.

      We believe that the composition of our board of directors meets the requirements for independence under the current requirements of the
Nasdaq National Market. As required by the Nasdaq National Market, we anticipate that our independent directors will meet in regularly
scheduled executive sessions at which only independent directors are present. We intend to comply with future governance requirements to the
extent they become applicable to us.

Committees of the Board of Directors

     As of the closing of this offering, our board of directors will have an audit committee, a compensation committee, and a nominating and
corporate governance committee, each of which will have the composition and responsibilities described below.

   Audit Committee

      Our audit committee is composed of Ms. Barnes, Mr. McNamara and Ms. Winslow, each of whom is a non-employee member of our
board of directors. Ms. Barnes is the chairperson of the audit committee. Our board of directors has determined that each of Ms. Barnes and
Mr. McNamara is an ―audit committee financial expert‖ as defined under SEC rules and regulations. We believe that the composition of our
audit committee meets the requirements for independence and financial sophistication under the current requirements of the Nasdaq National
Market and SEC rules and regulations. In addition, our audit committee has the specific responsibilities and authority necessary to comply with
the current requirements of the Nasdaq National Market and SEC rules and regulations.

      Our audit committee is responsible for, among other things: overseeing the independent auditors; reviewing the financial reporting,
policies and processes; overseeing risk management, related party transactions and legal compliance and ethics; and preparing the audit
committee reports required by SEC rules.

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   Compensation Committee

     Our compensation committee is composed of Mr. Graf, Ms. Hutton and Mr. Spencer, each of whom is a non-employee member of our
board of directors. Ms. Hutton is the chairperson of the compensation committee. Each member of our compensation committee is a
―non-employee director‖ within the meaning of Rule 16b-3 of the rules promulgated under the Securities Exchange Act of 1934, as amended.
We believe that the composition of our compensation committee meets the requirements for independence under the current requirements of
the Nasdaq National Market and SEC rules and regulations.

       Our compensation committee is responsible for, among other things: reviewing and recommending compensation and annual
performance objectives and goals for our chief executive officer; reviewing and making recommendations to the board of directors regarding
incentive-based or equity-based compensation plans, employment agreements, severance arrangements, change in control agreements, and
other benefits, compensations, compensation policies or arrangements; and preparing the compensation committee reports required by SEC
rules.

   Nominating and Corporate Governance Committee

      Our nominating and corporate governance committee is composed of Mr. Spencer, Dr. Treu and Ms. Winslow, each of whom is a
non-employee member of our board of directors. Mr. Spencer is the chairperson of the nominating and corporate governance committee. We
believe that the composition of our nominating and corporate governance committee meets the requirements for independence under the current
requirements of the Nasdaq National Market.

      Our nominating and corporate governance committee is responsible for, among other things: identifying, evaluating and recommending
individuals qualified to become directors; reviewing and making recommendations to the board of directors regarding board of director and
committee compensation and committee composition; and reviewing compliance with corporate governance principles applicable to our
company.

Compensation Committee Interlocks and Insider Participation

      None of our compensation committee members or executive officers has, or had during 2005, a relationship that would constitute an
interlocking relationship with executive officers or directors of another entity.

      Prior to establishing the compensation committee, our full board of directors made decisions relating to compensation of our executive
officers. No member of our compensation committee has ever been an officer or employee of the company.

Director Compensation

      The non-employee members of our board of directors are reimbursed for travel, lodging and other reasonable expenses incurred in
attending board and committee meetings. Prior to this offering, members of our board of directors did not receive cash compensation for
attending board meetings.

      In February 2006, Ms. Barnes received an option to purchase 25,000 shares of our common stock at an exercise price of $6.46 per share
in her capacity as a non-employee director. This option vests in 36 equal monthly installments, beginning on March 1, 2006.

      In July 2005, each of Ms. Hutton and Dr. Treu received an option to purchase 5,000 shares of our common stock at an exercise price of
$1.00 per share for services rendered as chairperson of the compensation committee and audit committee, respectively. These options were
eligible for early exercise and are subject to repurchase by

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us at the original exercise price. The repurchase right lapses with respect to such shares in four equal quarterly installments beginning on
July 15, 2005.

      In January 2005, Mr. Spencer received an option to purchase 10,000 shares of our common stock at an exercise price of $0.80 per share
in his capacity as an non-employee director. This option was eligible for early exercise and is subject to repurchase by us at the original
exercise price. The repurchase right lapses with respect to such shares in eight equal quarterly installments beginning on January 18, 2005.

       Upon completion of this offering, each of our non-employee directors, other than Ms. Barnes, will receive an option to purchase 25,000
shares of our common stock at an exercise price equal to the closing price of our common stock on the closing date of this offering. Ms. Barnes
will receive an option to purchase          shares of our common stock at the same price. Each of these options will vest in 36 equal monthly
installments following the offering. Following this offering, each non-employee director will receive an annual retainer of $10,000. In addition,
each non-employee director will receive $1,500 per meeting of the board of directors attended in person or $500 per meeting attended
telephonically, and each committee member will receive $500 per meeting attended of their respective committees.

      Each non-employee director who serves on the audit committee, other than the chairperson of the audit committee, will receive an
additional annual retainer of $1,000. The chairpersons of the audit committee, the compensation committee and the nominating and corporate
governance committee will also receive additional annual retainers of $7,500, $3,000 and $3,000, respectively.

      Each non-employee director who first becomes a member of our board of directors after the completion of this offering will be granted an
option to purchase 25,000 shares of our common stock, vesting in 36 equal monthly installments. After the completion of this offering, each
non-employee director that continues as a non-employee director will be entitled to receive an annual option grant to purchase 10,000 shares of
our common stock, vesting in 36 equal monthly installments. Each such option will have an exercise price equal to the fair value of our
common stock on the date of grant and will have a ten-year term. In the event of a change in control, each outstanding non-employee director
option will become immediately vested exercisable in full.

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Executive Compensation

      The following table sets forth all compensation paid or accrued during the fiscal year ended December 31, 2005 to our chief executive
officer and to each of our four other most highly compensated executive officers whose salary and bonus exceeded $100,000 for the year ended
December 31, 2005. We refer to these officers collectively as our ―named executive officers.‖ The compensation described in this table does
not include medical, group life insurance or other benefits that are available generally to all of our salaried employees.

                                                        Summary Compensation Table
                                                                                                                  Long-Term
                                                                                  Annual Compensation            Compensation
                                                                                                                  Number of
                                                                                                                   Securities
                                                                                                                  Underlying                    All Other
Name and Principal Position                                     Year             Salary             Bonus           Options                  Compensation (1)
Alan J. Levy, Ph.D.
  President and Chief Executive Officer                         2005           $ 323,181        $        —              20,338           $                —
Lori J. Glastetter
  Vice President, Regulatory Affairs and Quality
  Assurance                                                     2005             218,785                 —              11,399                            —
John S. Bowers Jr.
  Executive Vice President                                      2005             217,396                 —               9,524                            —
Nawzer Mehta, Ph.D.
  Vice President, Clinical Affairs                              2005             216,918            10,000           180,000                            64,658
Bradford E. Gliner
  Vice President, Research                                      2005             171,076                 —              48,072                            —

(1)    In accordance with the rules of the SEC, the other annual compensation described in this table does not include various perquisites and
       other personal benefits received by our named executive officers that do not exceed, in the aggregate, the lesser of $50,000 or 10% of
       any such officer’s combined annual salary and bonus disclosed in this table.
(2)    Represents relocation allowance.

Stock Option Grants in 2005

     The following table provides information concerning stock options granted to each of our named executive officers during the fiscal year
ended December 31, 2005.
                                                               Individual Grants
                                                          Percentage
                                       Number of            of Total
                                       Securities          Options           Exercise                               Potential Realizable Value at
                                       Underlying         Granted to           Price                                  Assumed Annual Rates of
                                        Options           Employees             Per         Expiration           Stock Price Appreciation for Option
Name                                    Granted           in 2005 (1)         Share           Date                             Terms
                                                                                                                   5%                             10%
Alan J. Levy, Ph.D.                       20,338 (2)             3.2 %     $     0.90       05/03/2015       $                       $
Nawzer Mehta, Ph.D.                      125,000 (3)            19.9             0.80       01/17/2015
                                          55,000 (4)             8.8             0.80       01/17/2015
Lori J. Glastetter                        11,399 (2)             1.8             0.90       05/03/2015
John S. Bowers Jr.                         9,524 (2)             1.5             0.90       05/03/2015
Bradford E. Gliner                         8,072 (2)             1.3             0.90       05/03/2015
                                          40,000 (3)             6.4             1.00       07/14/2015

(1)    The figures representing percentages of total options granted to employees in 2005 are based on an aggregate of 628,157 shares of
       common stock subject to stock options granted to our employees during 2005.

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(2)   Fully vested as of the date of grant.
(3)   Immediately exercisable as of the date of grant and vests as to 25% of the shares on the first anniversary of the date of grant with the
      balance vesting ratably over the subsequent 36-month period.
(4)   Fully exercisable, and vests as to 25% of the shares, on the first anniversary of the date of grant with the balance vesting ratably over the
      subsequent 36-month period.

      Each stock option has a ten-year term, subject to earlier termination if the optionee’s service with us ceases. Each stock option may be
exercised prior to vesting, subject to repurchase by us at the original exercise price. The repurchase right lapses over time in accordance with
the vesting schedules described above. Unvested and unexercisable stock options may become fully vested and immediately exercisable under
certain circumstances in connection with a change in control. Our board of directors retains the discretion, under certain circumstances relating
to changes in corporate structure that may affect our common stock, to modify the terms of outstanding options to reflect such changes and
prevent the diminution or enlargement of benefits or potential benefits that were intended to be made available under the applicable stock plan.

      Each stock option was granted with an exercise price equal to the fair value of our common stock on the grant date, as initially
determined by our board of directors. Because there was no public market for our common stock prior to this offering, the board of directors
determined the fair value of our common stock by considering a number of factors, including, but not limited to, the aggregate liquidation
preference of our redeemable convertible preferred stock, our progress against regulatory, clinical and product development milestones, overall
equity market conditions, the likelihood of achieving a liquidity event such as an initial public offering or sale of our company.

      In connection with preparing for our initial public offering, our board of directors obtained an independent valuation of our common
stock as of December 31, 2005. Taking into account the factors outlined above and the independent valuation, our board of directors, with
consultation from management, subsequently determined that the fair value of our common stock on May 3, 2005 and July 14, 2005 was
determined to be $3.57 per share and $4.20 per share, respectively.

      Amounts presented under the caption ―Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option
Terms‖ represent hypothetical gains that could be achieved for the respective stock options if exercised at the end of the tern-year option term.
Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the SEC and does not represent our prediction of our
stock price performance. The potential realizable values at 5% and 10% appreciation are calculated by:

      •    multiplying the number of shares of common stock subject to a given stock option by an assumed initial public offering price of
           $         per share, the midpoint of the range on the front cover of the prospectus;

      •    assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table
           until the expiration of the option; and

      •    subtracting from that result the aggregate option exercise price.

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Aggregated Option Exercises in 2005 and Fiscal Year-End Option Values

    The following table provides information concerning stock options exercised during 2005, and unexercised stock options held as of
December 31, 2005, by each of our named executive officers:
                                             Shares                             Number of Securities                    Value of Unexercised
                                           Acquired on       Value             Underlying Unexercised                      In-the-Money
                                            Exercise        Realized        Options at December 31, 2005           Options at December 31, 2005
Name                                                                      Exercisable        Unexercisable        Exercisable             Unexercisable
Alan J. Levy, Ph.D.                               —        $    —            342,588                   —     $                                      —
Nawzer Mehta, Ph.D.                               —             —            125,000                55,000
Lori J. Glastetter                             16,249                        127,280                   —                                            —
John S. Bowers Jr.                                —             —            249,524                   —                                            —
Bradford E. Gliner                                —             —            164,337                   —                                            —

      There was no public trading market for our common stock as of December 31, 2005. Accordingly, the amounts presented under the
captions ―Value Realized‖ and ―Value of Unexercised In-the-Money Options at December 31, 2005‖ are based on an assumed initial public
offering price of $       per share, the midpoint of the range on the front cover of the prospectus, less the exercise price per share, multiplied
by the number of shares subject to the stock option, without taking into account any taxes that may be payable in connection with the
transaction.

Employment Agreements

   Employment Agreement with Certain Executive Officers

      Upon completion of this offering, we will enter into an employment agreement with each of Messrs. Levy, Bowers, Calvert, Gliner and
Mehta and Ms. Glastetter. Each employment agreement will set forth such officer’s initial base salary, which for Dr. Levy is                ,
Mr. Bowers is              , Mr. Calvert is              , Ms. Glastetter is           , Mr. Gliner is               and Dr. Mehta
is             . The employment agreement will entitle each officer to receive medical benefits, as well as fringe benefits provided to our
senior executives.

      Each officer is an ―at will‖ employee and may terminate employment with us at any time. Similarly, we can terminate such officer’s
employment at any time, with or without cause. In the event that, prior to a change in control, we terminate such officer’s employment other
than for cause or if such officer resigns for good reason, he or she is entitled to receive 12 months of base salary in the case of Dr. Levy, nine
months of base salary in the case of Mr. Bowers or six months of base salary in the case of Messrs. Calvert, Gliner and Mehta and
Ms. Glastetter, and each will also be entitled to 12 months of medical benefits coverage and 12 months of accelerated vesting of all options,
provided he or she executes a waiver and general release. In the event that, within 12 months following a change in control, we terminate such
officer’s employment other than for cause or if such officer resigns for good reason, he or she will be entitled to receive the severance
described above, 12 months of medical benefits coverage and full acceleration of vesting for all options held, subject to the execution of a
waiver and general release. Each officer may also be entitled to a payment equal to 20% of the cash severance payment if certain deferred
compensation tax penalties are imposed by the Internal Revenue Service.

Benefit Plans

   Amended and Restated 1999 Stock Option Plan

     Our Amended and Restated 1999 Stock Option Plan, or 1999 Plan, was adopted by our board of directors and approved by our
shareholders in July 1999, and provides for the grant of awards to our employees, consultants and directors. As of January 31, 2006, options to
purchase 2,339,958 shares of our common stock at a weighted-average exercise price of $0.67 per share were outstanding under our 1999 Plan.
Our 1999 Plan will terminate upon the effective date of our 2006 Performance Incentive Plan. However, any outstanding options

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granted under our 1999 Plan will remain outstanding and subject to the terms of such plan and related stock option agreements until they are
exercised or until they terminate or expire by their terms.

      Our 1999 Plan is administered by the compensation committee of our board of directors, each member of which is an outside director as
defined under applicable federal tax laws. Our compensation committee has the authority to interpret the 1999 Plan and any agreement entered
into under such plan, grant awards and make all other determinations for the administration of the 1999 Plan.

      Our 1999 Plan provides for the grant of both incentive stock options that qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code and nonqualified stock options, both of which have maximum permitted terms of ten years. Incentive stock options may
be granted only to our employees, while nonqualified stock options may be granted to our employees, officers, directors, consultants,
independent contractors and advisors. The exercise price of incentive stock options may not be less than the fair market value of our common
stock on the date of grant. In the case of 10% shareholders, the exercise price of incentive stock options may not be less than 110% of the fair
market value of our common stock on the date of grant. Our 1999 Plan allows for the early exercise of options, in which case the options may
be subject to repurchase by us at the original exercise price for a limited time.

      In the event of a change in control, this plan also provides that options held by current employees, directors and consultants will
immediately vest in full and become exercisable prior to such change in control and those options that remain unexercised shall terminate on
the consummation of the change in control.

   2006 Performance Incentive Plan

     In February 2006, our board of directors adopted, and prior to effectiveness of this offering we will seek shareholder approval for, our
2006 Performance Incentive Plan, or the Incentive Plan. The Incentive Plan will become effective upon the signing of the underwriting
agreement for this offering.

      The Incentive Plan is intended to make available incentives that will assist us to attract, retain and motivate employees, consultants and
members of the board of directors, whose contributions are essential to our success. We may provide these incentives through the grant of stock
options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and units, deferred compensation awards,
other cash-based or stock-based awards and non-employee director awards.

      A total of 3,000,000 shares of our common stock are initially authorized and reserved for issuance under the Incentive Plan, plus up to an
additional 3,092,961 shares that are subject to outstanding options under our 1999 Plan as of the date of the plan’s termination, and for which
such options expire or otherwise terminate without having been exercised in full. This initial authorization will increase automatically on
January 1, 2007 and each subsequent anniversary through January 1, 2015 by an amount equal to the smaller of 2% of the number of shares of
common stock issued and outstanding on December 31 of the prior year, or 1,000,000 shares. Alternatively, our board of directors can act prior
to January 1 each year to increase the share reserve by a lesser amount determined by the compensation committee of the board of directors.
Appropriate adjustments will be made to the number of authorized shares and other numerical limits in the Incentive Plan and in outstanding
awards to prevent dilution or enlargement of participants’ rights in the event of certain changes to our capital structure.

      The administrator of our Incentive Plan will generally be the compensation committee of our board of directors, although the board of
directors or compensation committee may delegate to our officers limited authority to grant awards to service providers who are neither officers
nor directors. The administrator has the sole authority to construe and interpret the terms of the Incentive Plan and awards granted under it.
Subject to the provisions of the Incentive Plan, the administrator has the discretion to determine the persons to whom and the times at which
awards are granted, the types and sizes of such awards, and all of their terms and conditions.

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      Our employees and consultants are eligible to receive grants of nonstatutory stock options, stock appreciation rights, restricted stock
awards, restricted stock units and performance shares or units under the Incentive Plan, while only employees are eligible to receive incentive
stock option awards. For all options granted under the Incentive Plan, the exercise price may not be less than the fair market value of a share of
our common stock on the date of grant. Deferred compensation awards may be granted only to officers, directors or members of a select group
of highly compensated employees. Non-employee director awards may be granted only to members of the board of directors who are not our
employees or any affiliate of ours. These awards may be granted in the form of nonstatutory stock options, stock appreciation rights, restricted
stock or restricted stock units. Non-employee director awards are limited to no more than 75,000 shares in any fiscal year, except that this limit
may be increased on the basis of the attainment of certain milestones, including the individual’s initial appointment or election to the board of
directors, service as the chairman or lead director of the board of directors, service on a committee of the board of directors, and service as
chairman on a committee of the board of directors.

      In the event of certain changes in control of the company, stock options and stock appreciation rights outstanding under the Incentive
Plan may be assumed or substituted by the successor entity. Any stock options or stock appreciation rights that are not assumed in connection
with a change in control or exercised prior to a change in control will terminate without further action by the administrator. However, the
administrator may choose to:

      •    accelerate the vesting and exercisability of any or all outstanding options and stock appreciation rights upon such terms as it
           determines; or

      •    cancel each or any outstanding option or stock appreciation right in exchange for a payment to the holder with respect to each share.

       In the event of a change in control, the administrator may also, in certain cases, choose to accelerate the vesting and/or settlement of any
restricted stock award, restricted stock unit award, performance share or performance unit award, deferred compensation award, or cash-based
or other stock-based award upon such conditions as it determines. In addition, the vesting of all non-employee director awards will
automatically be accelerated in full upon a change in control.

       The Incentive Plan will continue in effect until it is terminated by the administrator, provided, however, that all awards will be granted, if
at all, within ten years of the effective date of the Incentive Plan. The administrator may amend, suspend or terminate the Incentive Plan at any
time, provided, that without shareholder approval, the plan cannot be amended to increase the number of shares authorized, change the class of
persons eligible to receive incentive stock options or effect any other change that would require shareholder approval under any applicable law
or listing rule. Amendment, suspension or termination of the Incentive Plan may not adversely affect any outstanding award without the
consent of the participant, unless such amendment, suspension or termination is necessary to comply with any applicable law, regulation or
rule.

Limitation of Liability and Indemnification

      Our articles of incorporation that will be effective following the completion of this offering provide that we will indemnify our directors
and officers to the fullest extent permitted by the Washington Business Corporation Act, including instances in which indemnification is
otherwise discretionary under the law. Our articles of incorporation provide that we will indemnify our officers and directors against liability
incurred as a result of their performance of services requested by the company, and will advance to them reasonable expenses towards the
defense of any such proceeding brought against them, except in any case in which liability results from:

      •    acts or omissions adjudged to have involved intentional misconduct, a knowing violation of law or an unlawful distribution; or

      •    any transaction in which the director or officer is adjudged to have personally received a benefit in money, property or services to
           which he or she is not legally entitled.

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      Our articles of incorporation also limit our directors’ liability to us and our shareholders for monetary damages incurred in their capacity
as a director to liability resulting from the same acts or omissions or transactions described above.

     Our articles of incorporation also provide that we may purchase and maintain liability insurance on behalf our directors, officer,
employees, and agents. We currently maintain a liability insurance policy pursuant to which our directors and officers may be indemnified
against liability incurred as a result of serving in their capacities as directors and officers.

      Prior to completion of the offering, we intend to enter into shareholder-approved indemnification agreements with each of our directors
and officers, to be effective upon the signing of the underwriting agreement for this offering, to provide additional contractual assurances
regarding the scope of the indemnification provided for in our articles of incorporation and to provide additional procedural protections. We
believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers.

     At present we are not aware of any pending litigation or proceeding involving any of our directors, officers, employees or agents in their
capacity as such, for which indemnification will be required or permitted. In addition, we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification by any director or officer.

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                                     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Since January 1, 2003, we have engaged in the following transactions with our executive officers, directors and holders of 5% or more of
our voting securities, and their affiliates. We believe that all of these transactions were on terms as favorable as could have been obtained from
unrelated third parties.

Sale of Preferred Stock

     In April 2004, we sold an aggregate of 4,821,803 shares of our Series E redeemable convertible preferred stock at $4.77 per share for an
aggregate purchase price of $23.0 million to Boston Scientific Corporation.

      In April and May 2002, we sold an aggregate of 9,191,248 shares of our Series D redeemable convertible preferred stock at $4.00 per
share for an aggregate purchase price of $36.8 million to investors that included one of our directors, several entities affiliated with our
directors and other significant shareholders. The following table sets forth the number of shares of Series D redeemable convertible preferred
stock sold to such persons or entities:
                                                                                                        Number of Shares of
                                                                                                        Series D Redeemable
                                                                                                             Convertible                Aggregate
                                                                                                          Preferred Stock               Purchase
Investor                                                                                                      Acquired                    Price
Entities affiliated with VNI Investors                                                                           2,125,000          $    8,500,000
Johnson & Johnson Development Corporation                                                                        1,250,000               5,000,000
Entities affiliated with Canaan Partners                                                                         1,240,936               4,963,744
Entities affiliated with Domain Associates, LLC                                                                    750,000               3,000,000
Entities affiliated with Mayfield Fund                                                                             750,000               3,000,000
Channel Medical Partners, L.P.                                                                                     500,000               2,000,000
D.A. Spencer Family L.P.                                                                                            10,000                  40,000
Seth A. Rudnick, M.D.                                                                                                7,500                  30,000

      We sold the Series D and Series E redeemable convertible preferred stock pursuant to preferred stock purchase agreements, under which
we made standard representations, warranties, and covenants, and entered into an investors’ rights agreement, under which we provided the
purchasers with certain rights. The only rights that survive beyond this offering are registration rights. These shares of our Series D and
Series E redeemable convertible preferred stock will convert automatically into an aggregate of 9,191,248 and 4,821,803 shares of common
stock, respectively, upon the effectiveness of this offering. See ―Description of Capital Stock—Registration Rights.‖

Insurance Brokerage Agreement

      Woodruff-Sawyer & Co. serves as our insurance broker. In connection with the services rendered in 2005 for the procurement of our
directors’ and officers’, and general and product liability insurance policies, we paid Woodruff-Sawyer & Co. a commission of $19,839.
Stephen R. Sawyer is a partial owner of Woodruff-Sawyer & Co. and the brother of Ms. Hutton, one of our directors. Ms. Hutton has no
financial ownership or interest in Woodruff-Sawyer & Co. and did not participate in the selection of Woodruff-Sawyer & Co. as our insurance
broker.

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                                                          PRINCIPAL SHAREHOLDERS

      The following table sets forth, as of January 31, 2006, information regarding beneficial ownership of our capital stock by the following:

      •     each person, or group of affiliated persons, who is known by us to beneficially own 5% or more of any class of our voting securities;

      •     each of our current directors and proposed directors;

      •     each of our named executive officers; and

      •     all current directors and executive officers as a group.

       Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or
investment power of a security, and includes shares underlying options and warrants that are currently exercisable or exercisable within 60 days
after the measurement date. This table is based on information supplied by officers, directors and principal shareholders. Except as otherwise
indicated, we believe that the beneficial owners of the common stock listed below, based on the information each of them has given to us, have
sole investment and voting power with respect to their shares, except where community property laws may apply.

      Unless otherwise indicated, we deem shares of common stock subject to options and warrants that are exercisable within 60 days of
January 31, 2006 to be outstanding and beneficially owned by the person holding the options and warrants for the purpose of computing
percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the ownership percentage of any
other person.

      The percentage of shares beneficially owned before the offering is based on 25,593,721 shares of our common stock outstanding as of
January 31, 2006, assuming conversion of all outstanding shares of our redeemable convertible preferred stock, but assuming no exercise of
outstanding warrant or options. The percentage of shares beneficially owned after the offering is based on        shares of common stock
outstanding after the closing of the offering.

     Unless otherwise indicated, the address for each of the beneficial owners in the table below is c/o Northstar Neuroscience, Inc., 2401
Fourth Avenue, Suite 300, Seattle, WA 98121.
                                                                                           Shares of Common
                                                                                           Stock Beneficially
Name and Address of Beneficial Owner                                                          Owned (1)                         Percent
                                                                                                                    Before                 After
                                                                                                                   Offering               Offering
5% Shareholders
Entities affiliated with Mayfield Fund (2)
  2800 Sand Hill Road, Suite 250
  Menlo Park, CA 94025                                                                            5,251,585            20.5 %                        %
Boston Scientific Corporation
  One Boston Scientific Place
  Mailstop C-3
  Natick, MA 01760                                                                                4,821,803            18.8
Entities affiliated with Domain Associates, LLC (3)
  One Palmer Square
  Princeton, NJ 08542                                                                             3,164,129            12.4
Entities affiliated with Canaan Partners (4)
  105 Rowayton Drive
  Rowayton, CT 06853                                                                              2,233,686             8.7
Entities affiliated with VNI Investors (5)
  c/o AEA Investors Inc.
  65 East 55th Street
  New York, NY 10022                                                                              2,125,000             8.3

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                                                                                          Shares of Common
                                                                                          Stock Beneficially
Name and Address of Beneficial Owner                                                         Owned (1)                      Percent
                                                                                                                  Before               After
                                                                                                                 Offering             Offering
Directors and Named Executive Officers
Jesse I. Treu, Ph.D. (6)                                                                         3,164,129          12.4
Alan J. Levy, Ph.D. (7)                                                                          1,302,276           5.0
Carol D. Winslow (8)                                                                               500,000           2.0
Lori J. Glastetter (9)                                                                             492,474           1.9
John S. Bowers Jr. (10)                                                                            249,524           1.0
Bradford E. Gliner (11)                                                                            216,962             *
Nawzer Mehta, Ph.D. (12)                                                                           180,000             *
Dale A. Spencer (13)                                                                               111,000             *
Wende S. Hutton (14)                                                                                15,000             *
Seth A. Rudnick, M.D. (15)                                                                          13,500             *
Susan K. Barnes (16)                                                                                     0             *
Albert J. Graf (17)                                                                                      0             *
Robert E. McNamara (17)                                                                                  0             *
All directors and executive officers as a group (16 persons) (18)                                6,526,049          24.2

* Less than one percent (1%).
(1) Includes shares of common stock subject to a right of repurchase within 60 days of January 31, 2006 and shares issuable pursuant to
    options and warrants exercisable within 60 days of January 31, 2006.
(2) Consists of 180,048 shares held by Mayfield Associates Fund IV, L.P., 502,659 shares held by Mayfield Principals Fund, L.L.C.,
    3,916,378 shares held by Mayfield X, L.P. and 652,500 shares held by Mayfield X Annex, L.P. Mayfield X Management, L.L.C. (―X
    Management‖) (whose Managing Directors are: Yogen K. Dalal; Kevin A. Fong; A. Grant Heidrich, III; David J. Ladd; Allen L.
    Morgan; William D. Unger; Wendell G. Van Auken, III and Robert T. Vasan) is the sole general partner of Mayfield X, L.P. and sole
    managing director of Mayfield Principals Fund, L.L.C. Mayfield X Annex Management L.L.C. (―X Annex Management‖) (whose
    Managing Directors are: Yogen K. Dalal; Kevin A. Fong; A. Grant Heidrich, III; David J. Ladd; Allen L. Morgan; William D. Unger;
    Wendell G. Van Auken, III and Robert T. Vasan) is the sole general partner of Mayfield X Annex, L.P. Mayfield IX Management,
    L.L.C. (―IX Management‖) (whose Managing Directors are: Yogen K. Dalal; Kevin A. Fong; A. Grant Heidrich, III; F. Gibson Myers,
    Jr.; William D. Unger and Wendell G. Van Auken, III) is the sole general partner of Mayfield Associates Fund IV, L.P. The individual
    Managing Directors of X Management, X Annex Management and IX Management may be deemed to have shared voting and
    dispositive power over the shares which are or may be deemed to be beneficially owned by X Management, X Annex Management, IX
    Management, Mayfield X, L.P., Mayfield X Annex, L.P., Mayfield Associates Fund IV, L.P. and Mayfield Principals Fund, L.L.C., but
    disclaim such beneficial ownership except to the extent of their pecuniary interest therein.
(3) Consists of 5,000 shares held by Domain Associates, L.L.C., 3,102,750 shares held by Domain Partners IV, L.P. and 56,379 shares held
    by DP IV Associates, L.P. (―Domain‖). With regard to the shares held by Domain Associates, L.L.C., the managing members (who are:
    James Blair; Brian Dovey; Brian Halak; Robert More; Kathleen K. Schoemaker; Jesse I. Treu and Nicole Vitullo) share voting and
    investment discretion with respect to these shares. With regard to the shares held by Domain Partners IV, L.P. and DP IV Associates,
    L.P., the managing members of One Palmer Square Associates IV, L.L.C. (who are: James Blair; Brian Dovey; Kathleen K. Schoemaker
    and Jesse I. Treu), the general partner, possess shared investment discretion.
(4) Consists of 1,463,065 shares held by Canaan Equity II L.P. (―CEII‖), 654,470 shares held by Canaan Equity II L.P. (QP) (―CEIIQP‖)
    and 116,151 shares held by Canaan Equity II Entrepreneurs LLC (―Entre‖). Canaan Equity Partners II LLC (whose managers are: John
    V. Balen; James C. Furnivall; Stephen L. Green; Deepak Kamra; Gregory Kopchinsky; Guy M. Russo and Eric A. Young) is the sole
    general partner of CEII and CEIIQP and the sole manager of Entre and possesses sole investment discretion.

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(5)    Consists of 260,257 shares held by VNI Investors I LLC and 1,864,743 shares held by VNI Investors II LLC (―VNI‖). VNI Investors
       Inc. is the general partner of the managing member of each of the VNI entities and possesses sole investment discretion.
(6)    Includes 3,164,129 shares held by Domain, of which Dr. Treu, as a managing member of the general partner, with regard to Domain
       Partners IV, L.P. and DP IV Associates, L.P., and as a managing member of Domain Associates, L.L.C., has shared voting and
       dispositive power, 2,500 shares of which are subject to repurchase by us within 60 days after January 31, 2006. Dr. Treu disclaims
       beneficial ownership of the shares held by Domain except to the extent of his pecuniary interest in these entities.
(7)    Includes 342,588 shares issuable upon the exercise of stock options, 36,259 of which, if exercised, are subject to repurchase by us within
       60 days after January 31, 2006.
(8)    Includes 500,000 shares held by Channel Medical Partners, L.P., of which Ms. Winslow, as a limited and general partner, possesses
       shared voting and dispositive power. Ms. Winslow disclaims beneficial ownership of the shares held by Channel Medical Partners, L.P.
       except to the extent of her pecuniary interest in this entity.
(9)    Includes 127,820 shares issuable upon the exercise of stock options, 23,330 of which, if exercised, are subject to repurchase by us within
       60 days after January 31, 2006.
(10)    Includes 249,524 shares issuable upon the exercise of stock options, 115,003 of which, if exercised, are subject to repurchase by us
        within 60 days after January 31, 2006.
(11)    Includes 164,337 shares issuable upon the exercise of stock options, 57,457 of which, if exercised, are subject to repurchase by us
        within 60 days after January 31, 2006.
(12)    Includes 180,000 shares issuable upon the exercise of stock options, 123,752 of which, if exercised, are subject to repurchase by us
        within 60 days after January 31, 2006.
(13)    Includes 101,000 shares held by the D.A. Spencer Family L.P., of which Mr. Spencer has sole voting and dispositive power.
        Mr. Spencer disclaims beneficial ownership of the shares held by the D.A. Spencer Family L.P., except to the extent of his pecuniary
        interest in this entity.
(14)    Includes options to purchase 2,500 shares of our common stock, 2,500 of which would, if they had been exercised, be subject to our
        right of repurchase within 60 days after January 31, 2006.
(15)    Includes 7,500 shares held by Dr. Rudnick with his spouse. Dr. Rudnick will resign as a director immediately prior to the closing of this
        offering.
(16)    Ms. Barnes became a director of Northstar on February 2, 2006.
(17)    Messrs. Graf and McNamara will become directors of Northstar upon the closing of this offering.
(18)    Shares beneficially owned by all executive officers and directors as a group, including Messrs. Graf and McNamara, who will become
        directors of Northstar upon the closing of this offering, described in notes (6) through (17) above, and 180,252 shares issuable to
        Raymond N. Calvert upon the exercise of options exercisable within 60 days after January 31, 2006, 50,000 shares issuable to Matthew
        J. Gani upon the exercise of options exercisable within 60 days after January 31, 2006, and 50,932 shares issuable to John M. Ray upon
        the exercise of options exercisable within 60 days after January 31, 2006. Of the 281,184 shares issuable to Mr. Calvert, Mr. Gani and
        Mr. Ray in the aggregate, 124,182 would, if they had been exercised, be subject to our right of repurchase within 60 days after
        January 31, 2006.

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                                                    DESCRIPTION OF CAPITAL STOCK

      Upon the effectiveness of this offering and the filing of our amended and restated articles of incorporation with the Washington Secretary
of State, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of
preferred stock, $0.001 par value per share.

Common Stock

      As of January 31, 2006, 25,593,721 shares of our common stock were outstanding and held of record by 97 shareholders. This amount
assumes the conversion of all outstanding shares of our redeemable convertible preferred stock into common stock, which will occur
immediately prior to the effectiveness of this offering. In addition, as of January 31, 2006, 2,339,958 shares of our common stock were subject
to outstanding options and 339,645 shares of our common stock were subject to outstanding warrants. Upon the closing of this
offering,         shares of our common stock will be outstanding, assuming no exercise of outstanding stock options or warrants or the
underwriters’ over-allotment option.

      Each share of our common stock entitles its holder to one vote on all matters to be voted on by our shareholders and there are no
cumulative voting rights. Subject to preferences to which holders of our outstanding redeemable convertible preferred stock may be entitled,
holders of our common stock will receive ratably any dividends our board of directors declares out of funds legally available for that purpose.
If we liquidate, dissolve or wind up our business, the holders of our common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the satisfaction of any liquidation preference of any of our outstanding redeemable convertible preferred stock.
Holders of our common stock have no preemptive rights, conversion rights or other subscription rights, and there are no redemption or sinking
fund provisions applicable to our common stock. The shares of our common stock to be issued upon the closing of this offering will be fully
paid and non-assessable. The rights, preferences and privileges of holders of our common stock are subject to and may be adversely affected by
the rights of holders of shares of any series of preferred stock that we may designate in the future.

Preferred Stock

      After the offering, our board of directors will have the authority, without further action by our shareholders, to issue up to 5,000,000
shares of our preferred stock in one or more series. Our board of directors may designate the number of shares constituting any series and the
rights, preferences, privileges and restrictions of our preferred stock, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preference, and sinking fund terms. The issuance of our preferred stock could adversely affect the voting power of
holders of our common stock and the likelihood that holders of our common stock will receive dividend payments and payments upon
liquidation. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. Immediately after the closing of this offering,
no shares of our preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock.

Warrants

      As of January 31, 2006, the following warrants were outstanding:

      •    Warrant to purchase an aggregate of 25,000 shares of our common stock at an exercise price of $0.80 per share. This warrant will
           terminate if not exercised prior to the closing of this offering.

      •    Warrant to purchase an aggregate of 105,000 shares of our common stock at an exercise price of $4.00 per share. This warrant may
           be exercised at any time prior to April 7, 2007.

      •    Warrants to purchase an aggregate of up to 209,645 shares of our common stock, assuming full draw down of the credit facility with
           Oxford Finance Corporation and Horizon Technology Funding Company LLC, at an exercise price of $4.77 per share. These
           warrants may be exercised at any time prior to December 30, 2015.

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     Each warrant contains a net exercise provision and provides for the adjustment of the exercise price and the number of shares issuable
upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations, reclassifications and consolidations.

Registration Rights

       We, the holders of our redeemable convertible preferred stock and certain holders of warrants to purchase our common stock entered into
an investors’ rights agreement, which conveys registration rights to each holder, who in the aggregate hold or possess the right to obtain
22,693,410 shares of our common stock. If at any time following the completion of this offering we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other security holders, all holders under the agreement will be entitled
to notice of the registration and, subject to certain exceptions, will be entitled to include their shares of our common stock in the registration. In
addition, at any time after we become eligible to file a registration statement on Form S-3, the holder of these shares may require us, on not
more than two occasions in any twelve-month period, to file a Form S-3 registration statement covering their shares of our common stock.
Commencing six months after the effective date of this offering, all holders under the agreement, with the exception of the warrant holders, will
have the right, subject to certain limitations, to require us to file a registration statement under the Securities Act in order to register shares of
their common stock.

      All of these registration rights are subject to conditions and limitations, including the right of the underwriters to limit the number of
shares of our common stock included in a registration. We are generally required to bear the expenses of all registrations, except underwriting
discounts and commissions. All registration rights terminate on the earlier of seven years after the closing of this offering, or, with respect to an
individual holder, such time as Rule 144 or another similar exemption under the Security Act is available for the sale of all of such holder’s
shares during a three-month period without registration.

Anti-Takeover Provisions

   Washington Anti-Takeover Law

      Washington law imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act generally prohibits a ―target corporation‖ from engaging in specified ―significant business transactions‖
with an ―acquiring person.‖ This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts
with respect to us and, accordingly, may discourage attempts to acquire us. An acquiring person is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the target corporation. The target corporation may not engage in ―significant business
transactions,‖ as defined in Chapter 23B.19, for a period of five years after the date of the transaction in which the person became an acquiring
person, unless the transaction or acquisition of shares is approved by a majority of the disinterested members of the target corporation’s board
of directors prior to the time of acquisition. ―Significant business transactions‖ include, among other things:

      •    a merger or share exchange with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person;

      •    a termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or
           more of the shares; or

      •    a transaction in which the acquiring person is allowed to receive a disproportionate benefit as a shareholder.

      After the five-year period, a ―significant business transaction‖ may occur, as long as it complies with ―fair price‖ provisions specified in
the statute or is approved at a meeting of shareholders by a majority of the votes entitled to be counted within each voting group entitled to vote
separately on the transaction, not counting the votes of shares as to which the acquiring person has beneficial ownership or voting control. A
corporation may not ―opt out‖ of this statute.

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   Articles of Incorporation and Bylaw Provisions

      Upon the completion of this offering, our articles of incorporation and bylaws will include a number of provisions that may have the
effect of deterring takeovers or delaying or preventing changes in control or changes in our management that a shareholder might deem to be in
his or her best interest. These provisions include the following:

      •    our board can issue up to 5,000,000 shares of preferred stock, with any rights or preferences, including the right to approve or not
           approve an acquisition or other change in control;

      •    our articles of incorporation provide for a classified board of directors;

      •    our articles of incorporation and bylaws provide that our board of directors may only be removed for cause by the affirmative vote
           of our shareholders;

      •    our bylaws limit who may call a special meeting of shareholders to our board of directors, chairman of the board, or president;

      •    our bylaws provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for
           election as directors at a meeting of shareholders must provide timely advance written notice to us in writing;

      •    our bylaws specify requirements as to the form and content of a shareholder’s notice;

      •    our bylaws provides that, subject to the rights of the holders of any outstanding series of our preferred stock, all vacancies, including
           newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of our directors
           then in office, even if less than a quorum;

      •    our bylaws provides that our board of directors may fix the number of directors by resolution;

      •    our articles of incorporation provide that all shareholder actions must be effected at a duly called meeting of shareholders and not by
           written consent; and

      •    our articles of incorporation do not provide for cumulative voting for our directors. The absence of cumulative voting may make it
           more difficult for shareholders owning less than a majority of our stock to elect any directors to our board.

Transfer Agent and Registrar

      Registrar and Transfer Company has been appointed as the transfer agent and registrar for our common stock.

Listing

      We have applied for the quotation of our common stock on the Nasdaq National Market under the trading symbol ―NSTR.‖

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                                    MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
                                             TO NON-UNITED STATES HOLDERS

     The following is a summary of material United States federal income and estate tax consequences of the ownership and disposition of our
common stock by a non-United States holder. For purposes of this discussion, a non-United States holder is any beneficial owner that for
United States federal income tax purposes is not a United States person; the term United States person means:

      •    an individual citizen or resident of the United States;

      •    a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States
           or any political subdivision thereof, other than a partnership treated as foreign under the United States treasury regulations;

      •    an estate whose income is subject to United States federal income tax regardless of its source; or

      •    a trust (x) whose administration is subject to the primary supervision of a United States court and which has one or more United
           States persons who have the authority to control all substantial decisions of the trust or (y) which has made an election to be treated
           as a United States person.

     An individual may, in certain cases, be treated as a resident of the United States, rather than a nonresident, among other ways, by virtue of
being present in the United States on at least 31 days in that calendar year and for an aggregate of at least 183 days during the three-year period
ending in that calendar year (counting for such purposes all the days present in the current year, one-third of the days present in the
immediately preceding year and one-sixth of the days present in the second preceding year). Residents are subject to United States federal
income tax as if they were United States citizens.

      If a partnership or other pass-through entity holds common stock, the tax treatment of a partner or member in the partnership or other
entity will generally depend on the status of the partner or member and upon the activities of the partnership or other entity. Accordingly, we
urge partnerships or other pass-through entities which hold our common stock and partners or members in these partnerships or other entities to
consult their tax advisors.

      This discussion assumes that non-United States holders will acquire our common stock pursuant to this offering and will hold our
common stock as a capital asset (generally, property held for investment). This discussion does not address all aspects of United States federal
income taxation that may be relevant in light of a non-United States holder’s special tax status or special tax situations. United States
expatriates, controlled foreign corporations, passive foreign investment companies, corporations that accumulate earnings to avoid federal
income tax, life insurance companies, tax-exempt organizations, dealers in securities or currency, brokers, banks or other financial institutions,
certain trusts, hybrid entities, pension funds and investors that hold common stock as part of a hedge, straddle or conversion transaction are
among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not consider
the tax consequences for partnerships or persons who hold their interests through a partnership or other entity classified as a partnership for
United States federal income tax purposes. This discussion does not address any United States federal gift tax consequences, or state or local or
non-United States tax consequences. Furthermore, the following discussion is based on current provisions of the Internal Revenue 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. We have not sought any ruling from the Internal Revenue Service, or IRS, with respect to statements
made and conclusions reached in this discussion, and there can be no assurance that the IRS will agree with these statements and conclusions.

     This discussion is for general purposes only. Prospective investors are urged to consult their own tax advisors regarding the
application of the United States federal income and estate tax laws to their particular situations and the consequences under United
States federal gift tax laws, as well as foreign, state, and local laws and tax treaties.

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Dividends

      We have not paid any dividends on our common stock and we do not plan to pay any dividends for the foreseeable future. However, if we
do pay dividends on our common stock, those payments will constitute dividends to the extent paid from our current or accumulated earnings
and profits, as determined under United States 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 basis, but not below zero, and then will be
treated as gain from the sale of stock.

     The gross amount of any dividend (out of earnings and profits) paid to a non-United States holder of common stock generally will be
subject to United States withholding tax at a rate of 30% unless the holder is entitled to an exemption from or reduced rate of withholding
under an applicable income tax treaty. In order to receive a reduced treaty rate, prior to the payment of a dividend a non-United States holder
must provide us with a properly completed IRS Form W-8BEN (or successor form) certifying qualification for the reduced rate.

       Dividends received by a non-United States holder that are effectively connected with a United States trade or business conducted by the
non-United States holder (or dividends attributable to a non-United States holder’s permanent establishment in the United States if an income
tax treaty applies) are exempt from this withholding tax. To obtain this exemption, prior to the payment of a dividend a non-United States
holder must provide us with a properly completed IRS Form W-8ECI (or successor form) properly certifying this exemption. Effectively
connected dividends (or dividends attributable to a permanent establishment), although not subject to withholding tax, are subject to United
States federal income tax at the same graduated rates applicable to United States persons, net of certain deductions and credits. In addition,
dividends received by a corporate non-United States holder that are effectively connected with a United States trade or business of the
corporate non-United States holder (or dividends attributable to a corporate non-United States holder’s permanent establishment in the United
States if an income tax treaty applies) may also be subject to a branch profits tax at a rate of 30% (or such lower rate as may be specified in an
income tax treaty).

      A non-United States holder who provides us with an IRS Form W-8BEN or an IRS Form W-8ECI will be required to periodically update
such form.

      A non-United States holder of common stock that is eligible for a reduced rate of withholding tax pursuant to an income tax treaty may
obtain a refund of any excess amounts currently withheld if an appropriate claim for refund is timely filed with the IRS.

Gain on Disposition of Common Stock

      A non-United States holder generally will not be subject to United States federal income or withholding tax on gain realized on the sale or
other disposition of our common stock unless:

      •     the gain is effectively connected with a United States trade or business of the non-United States holder (or attributable to a
            permanent establishment in the United States if an income tax treaty applies), which gain, in the case of a corporate non-United
            States holder, must also be taken into account for branch profits tax purposes;

      •     the non-United States holder is an individual who is present in the United States for a period or periods aggregating 183 days or
            more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or

      •     our common stock constitutes a United States real property interest by reason of our status as a ―United States real property holding
            corporation‖ for United States federal income tax purposes at any time within the shorter of the five-year period preceding the
            disposition or the holder’s holding period for our common stock. We believe that we are not currently, and that we are not likely to
            become, a ―United States real property holding corporation‖ for United States federal income tax purposes.

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      If we were to become a United States real property holding corporation, so long as our common stock is regularly traded on an
established securities market and continues to be traded, a non-United States holder would be subject to United States federal income tax on
any gain from the sale, exchange or other disposition of shares of our common stock, by reason of such United States real property holding
corporation status, only if such non-United States holder actually or constructively owned, more than 5% of our common stock during the
shorter of the five-year period preceding the disposition or the holder’s holding period for our common stock.

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 income tax treaties or other agreements, the IRS may make its reports
available to tax authorities in the non-United States holder’s country of residence.

      Payments of dividends or of proceeds on the disposition of stock made to a non-United States holder may be subject to additional
information reporting and backup withholding (currently at a rate of 28%). Backup withholding will not apply if the non-United States holder
establishes an exemption, for example, by properly certifying its non-United States status on an IRS Form W-8BEN (or successor form).
Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that
the holder is a United States person.

      Backup withholding is not an additional tax. Rather, the United States 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 United States federal income tax, a refund may be
obtained, provided that the required information is furnished to the IRS in a timely manner.

Federal Estate Tax

      If an individual non-United States holder is treated as the owner, or has made certain lifetime transfers, of an interest in our common
stock then the value thereof will be included in his or her gross estate for United States federal estate tax purposes, and such individual’s estate
may be subject to United States federal estate tax unless an applicable estate tax or other treaty provides otherwise.

      The foregoing discussion of United States federal income and estate tax considerations is not tax advice. Accordingly, each
prospective non-United States holder of our common stock should consult that holder’s own tax advisor with respect to the federal,
state, local and non-United States tax consequences of the ownership and disposition of our common stock.

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                                                   SHARES ELIGIBLE FOR FUTURE SALE

      Prior to this offering, no public market existed for our common stock. Future sales of substantial amounts of our common stock, or the
perception that these sales could occur, could adversely affect prevailing market prices for our common stock and could impair our future
ability to obtain capital, especially through an offering of equity securities.

      Based on shares outstanding as of January 31, 2006, upon the closing of this offering,              shares of common stock will be
outstanding, assuming that no outstanding options are exercised prior to the closing of this offering, and that 25,000 shares of common stock
are issued upon the exercise of outstanding warrants that will terminate if not exercised prior to the closing of this offering. Of these
outstanding shares, the           shares sold in this offering, assuming no exercise of the underwriters’ over-allotment option, will be freely
transferable without restriction or further registration under the Securities Act, unless the shares are purchased by our ―affiliates‖ as that term is
defined under Rule 144 under the Securities Act.

      The remaining 25,618,721 shares of common stock that will be outstanding upon the closing of this offering are restricted securities as
defined under Rule 144. Restricted securities may be sold in the U.S. public markets only if registered or if they qualify for an exemption from
registration, including by reason of Rule 144, 144(k) or 701 under the Securities Act, which rules are summarized below. These remaining
shares will be eligible for sale in the public market as follows:

      •    5,529,513 shares of common stock will be immediately eligible for sale in the public market without restriction pursuant to
           Rule 144(k); and

      •    20,089,208 shares of common stock will be eligible for sale in the public market under Rule 144 or Rule 701, beginning 90 days
           after the effective date of the registration statement of which this prospectus is a part, subject to the volume, manner of sale and
           other limitations under those rules.

      The above table does not take into consideration the effect of the lock-up agreements described below.

     Additionally, of the 2,339,958 shares of common stock issuable upon exercise of options outstanding as of January 31, 2006,
approximately             shares will be vested and eligible for sale 180 days after the date of this prospectus.

Rule 144

       In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of this offering, a person who has beneficially
owned restricted securities for at least one year, including the holding period of any prior owner other than one of our affiliates, is entitled to
sell a number of restricted shares within any three-month period that does not exceed the greater of:

      •    one percent of the number of shares of our common stock then outstanding, which will equal approximately                   shares
           immediately after this offering; or

      •    the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding
           the filing of a notice on Form 144 with respect to the sale.

       Sales of restricted shares under Rule 144 are also subject to requirements regarding the manner of sale, notice, and the availability of
current public information about us. Rule 144 also provides that affiliates relying on Rule 144 to sell shares of our common stock that are not
restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

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Rule 144(k)

      Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale and who
has beneficially owned the restricted securities proposed to be sold for at least two years, including the holding period of any prior owner other
than an affiliate of us, may sell those shares without complying with the manner-of-sale, public information, volume limitation or notice
provisions of Rule 144.

Rule 701

     Under Rule 701, shares of our common stock acquired from us in connection with a qualified compensatory plan or other written
agreement may be resold, to the extent not subject to lock-up agreements, by:

      •    persons other than affiliates, beginning 90 days after the effective date of this offering, subject only to the manner-of-sale provisions
           of Rule 144; and

      •    our affiliates, beginning 90 days after the effective date of this offering, subject to the manner-of-sale, current public information,
           and filing requirements of Rule 144, in each case, without compliance with the one-year holding period requirement of Rule 144.

      As of January 31, 2006, options to purchase a total of 2,339,958 shares of common stock were outstanding, of which 1,625,074 were
vested. Of the total number of shares of our common stock issuable under these options, all are subject to contractual lock-up agreements with
us or the underwriters.

Form S-8 Registration Statements

      We intend to file one or more registration statements on Form S-8 under the Securities Act after the closing of this offering to register the
shares of our common stock that are issuable pursuant to our 2006 Performance Incentive Plan and Amended and Restated 1999 Stock Option
Plan. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will then be
eligible for sale in the public markets, subject to any applicable lock-up agreements and to Rule 144 limitations applicable to affiliates.

Lock-up Agreements

       Prior to the effectiveness of the offering, our officers and directors and holders of substantially all of our outstanding securities will have
agreed, subject to customary exceptions, not to, among other things, sell or otherwise transfer the economic benefit of, directly or indirectly,
any shares of our common stock, or any security convertible into or exchangeable or exercisable for our common stock, without the prior
written consent of Citigroup Global Markets Inc. and Cowen & Co., LLC for a period of 180 days after the date of this prospectus. The lock-up
agreements signed by our security holders generally permit them, among other customary exceptions, to make bona fide gifts, to transfer
securities to trusts for their or their immediate family’s benefit, to transfer securities by will or under the laws of descent or to a former spouse,
child or other dependent pursuant to a domestic relations order or settlement agreement and, if the security holder is a partnership, limited
liability company or corporation, to transfer securities to its partners, members or shareholders. However, the recipients of these transfers must
agree to be bound by the lock-up agreement for the remainder of the 180 days. Citigroup Global Markets Inc. and Cowen & Co., LLC, may, in
their sole discretion, at any time and without notice, release for sale in the public market all or any portion of the shares subject to the lock-up
agreements. Substantially all of the shares that are not subject to the underwriters’ lock-up agreements are subject to similar contractual lock-up
restrictions with us.

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                                                                 UNDERWRITING

     Citigroup Global Markets Inc. and Cowen & Co., LLC are acting as joint bookrunning managers of this offering. 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 have agreed to sell to that underwriter, the number of shares of common stock set forth opposite the underwriter’s name.
                                                                                                                                      Number of
        Underwriters                                                                                                                   Shares
        Citigroup Global Markets Inc.
        Cowen & Co., LLC
        First Albany Capital Inc.
        Leerink Swann & Co.
             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 underwriters may change the public offering price and the other selling terms. The underwriters have advised us
that they 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 an aggregate
of          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 holders of substantially all of our shares and options to purchase our shares 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 Citigroup, dispose of or hedge
any shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to customary exceptions.

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

      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 between us and the underwriters. 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.

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      We have applied for the quotation of our common stock on The Nasdaq National Market under the symbol ―NSTR.‖

      The following table shows the underwriting discounts and commissions that we 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 our
common stock.
                                                                                           No exercise               Full exercise
                Per share                                                              $                         $
                     Total                                                             $                         $

      In connection with the offering, Citigroup, 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 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 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 Citigroup 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 our common stock. They may also
cause the price of our 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 National 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 estimate that the total expenses of this offering, paid and payable by us, not including the underwriting discounts and commissions,
will be $       million.

      Other than in connection with this offering, the underwriters have not performed investment banking and advisory services for us.

      A prospectus in electronic format may be made available by one or more of the underwriters. The underwriters may agree to allocate a
number of shares for sale to their online brokerage account holders. The underwriters 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 have agreed to indemnify the underwriters and their controlling persons against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

                                                                        90
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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 the 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 our 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:

      •    to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose
           corporate purpose is solely to invest in securities; or

      •    to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance
           sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated
           accounts; or

      •    in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive.

      Each purchaser of our 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 our common stock have not authorized and do not authorize the making of any offer of our common stock through any
financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of our common stock as
contemplated in this prospectus. Accordingly, no purchaser of our common stock, other than the underwriters, is authorized to make any further
offer of our 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 that are also (i) investment professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005 (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 our common stock described in this prospectus has been submitted to
the clearance procedures of the Autorité des Marchés Financiers or by the

                                                                         91
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competent authority of another member state of the European Economic Area and notified to the Autorité des Marchés Financiers. Our
common stock has 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 our common stock has been or will be:

      •    released, issued, distributed or caused to be released, issued or distributed to the public in France; or

      •    used in connection with any offer for subscription or sale of our common stock to the public in France.

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

      •    to qualified investors ( investisseurs qualifiés ) and/or to a restricted circle of investors ( cercle restreint d’investisseurs ), in each
           case investing for their own account, all as defined in, and in accordance with, Article L.411-2, D.411-1, D.411-2, D.734-1,
           D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier ; or

      •    to investment services providers authorized to engage in portfolio management on behalf of third parties; or

      •    in a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3° of the French Code monétaire et financier and article 211-2
           of the General Regulations ( Règlement Général ) of the Autorité des Marchés Financiers, does not constitute a public offer ( appel
           public à l’épargne ).

     Our 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 .

                                                                           92
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                                                              LEGAL MATTERS

      The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by our counsel, DLA
Piper Rudnick Gray Cary US LLP. Dewey Ballantine LLP, is counsel for the underwriters in connection with this offering. As of the date of
this prospectus, an investment entity affiliated with DLA Piper Rudnick Gray Cary US LLP, in which certain attorneys of DLA Piper Rudnick
Gray Cary US LLP have an interest, owns an aggregate of 12,500 shares of our common stock.

                                                                   EXPERTS

      Ernst & Young LLP, independent registered public accounting firm, has audited our financial statements at December 31, 2005 and 2004,
and for each of the three years in the period ended December 31, 2005 and for the period from inception (May 18, 1999) to December 31, 2005,
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.

                                        WHERE YOU CAN FIND ADDITIONAL INFORMATION

       We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock
to be sold in this offering. The registration statement, including the attached exhibits and schedules, contains additional relevant information
about us and our capital stock. The rules and regulations of the SEC allow us to omit from this prospectus certain information included in the
registration statement. For further information about us and our common stock, you should refer to the registration statement and the exhibits
and schedules filed with the registration statement. With respect to the statements contained in this prospectus regarding the contents of any
agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document,
a copy of which has been filed as an exhibit to the registration statement. In addition, upon the closing of this offering, we will file reports,
proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended. You may obtain copies of this
information by mail from the Public Reference Room of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed
rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet website that contains reports, proxy statements and other information about issuers that file electronically with the SEC.
The address of that site is www.sec.gov.

      We intend to provide our shareholders with annual reports containing financial statements that have been examined and reported on, with
an opinion expressed by an independent registered public accounting firm, and to file with the SEC quarterly reports containing unaudited
financial data for the first three quarters of each year.

                                                                       93
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                                               NORTHSTAR NEUROSCIENCE, INC.
                                                 (A Development Stage Company)


                                               INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm                                   F-2
Audited Financial Statements:
Balance Sheets                                                                            F-3
Statements of Operations                                                                  F-4
Statements of Redeemable Convertible Preferred Stock and Shareholders’ Equity (Deficit)   F-5
Statements of Cash Flows                                                                  F-7
Notes to Financial Statements                                                             F-8

                                                                   F-1
Table of Contents

                              REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Northstar Neuroscience, Inc.

      We have audited the accompanying balance sheets of Northstar Neuroscience, Inc. (a development stage company) as of December 31,
2004 and 2005, and the related statements of operations, redeemable convertible preferred stock and shareholders’ equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2005, and the period from inception (May 18, 1999) to December 31, 2005.
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 the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit 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 include
consideration of internal control over financial reporting on 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 Northstar
Neuroscience, Inc. at December 31, 2004 and 2005, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2005, and the period from inception (May 18, 1999) to December 31, 2005, in conformity with U.S. generally accepted
accounting principles.

                                                                                                                           /s/ Ernst & Young LLP

Seattle, Washington
February 23, 2006

                                                                       F-2
Table of Contents

                                                   NORTHSTAR NEUROSCIENCE, INC.
                                                     (A Development Stage Company)

                                                             BALANCE SHEETS
                                                                                                                              Pro Forma
                                                                                                                             Shareholders’
                                                                                                                               Equity at
                                                                                                                             December 31,
                                                                                          December 31,                           2005
                                                                                   2004                   2005
                                                                                                                              (unaudited)
                                                                                                                                (Note 1)
Assets
Current assets:
    Cash and cash equivalents                                                 $    5,792,604       $     10,765,386
    Securities available-for-sale                                                 16,844,450              9,422,016
    Other current assets                                                             528,699                326,932
          Total current assets                                                    23,165,753             20,514,334
Property and equipment, net                                                        1,068,184                934,997
Securities available-for-sale                                                      4,620,975                    —
Other assets and deferred costs                                                       92,870                295,445
Total assets                                                                  $   28,947,782       $     21,744,776

Liabilities, Redeemable Convertible Preferred Stock and
  Shareholders’ Equity (Deficit)
Current liabilities:
    Accounts payable                                                          $       532,329      $         340,757
    Accrued liabilities                                                             1,091,988              1,199,692
    Deferred rent and sublease loss accrual, current portion                          220,753                332,625
    Deferred gain                                                                     681,932                    —
    Long-term debt, current portion                                                       —                1,230,493
    Warrant to purchase Series E redeemable convertible preferred stock                   —                1,090,000
          Total current liabilities                                                 2,527,002              4,193,567
Deferred rent and sublease loss accrual, less current portion                         634,700                843,988
Long-term debt, less current portion                                                      —                4,581,175
Redeemable convertible preferred stock:
    Issued and outstanding—22,413,765 shares; aggregate liquidation
       preference of $80,514,991 in 2004 and 2005 (none pro forma)                94,207,106             99,859,534      $                  —
Commitments and contingencies
Shareholders’ equity (deficit):
    Preferred stock, $.001 par value;
       Authorized shares—22,658,409 (5,000,000 pro forma)                                 —                      —                          —
    Common stock, $.001 par value;
       Authorized shares—35,000,000 (100,000,000 pro forma)                               —                      —                          —
       Issued and outstanding shares—2,844,527 and 3,136,662 in 2004
          and 2005, respectively (25,550,427 pro forma)                                 2,845                  3,137                25,550
    Additional paid-in capital                                                    (13,546,899 )          (17,737,792 )          83,189,329
    Deferred stock-based compensation                                                 (32,372 )             (653,286 )            (653,286 )
    Deficit accumulated during the development stage                              (54,747,611 )          (69,322,095 )         (69,322,095 )
    Accumulated other comprehensive loss                                              (96,989 )              (23,452 )             (23,452 )
           Total shareholders’ equity (deficit)                                   (68,421,026 )          (87,733,488 )   $      13,216,046

Total liabilities, redeemable convertible preferred stock and shareholders’
  equity (deficit)                                                            $   28,947,782       $     21,744,776
See accompanying notes.

         F-3
Table of Contents

                                                     NORTHSTAR NEUROSCIENCE, INC.
                                                       (A Development Stage Company)

                                                      STATEMENTS OF OPERATIONS
                                                                                                                                         Period from
                                                                                                                                          Inception
                                                                                                                                        (May 18, 1999)
                                                                                                                                       to December 31,
                                                                                  Year Ended December 31,                                   2005
                                                                 2003                       2004                  2005
Revenue                                                  $         315,728           $              —        $            —        $           463,483
Cost of goods sold                                                 366,235                          —                     —                    956,399
Gross margin                                                        (50,507 )                       —                     —                   (492,916 )
Operating expenses:
    Research and development                                      8,703,173                12,367,358            11,763,333                47,064,075
    Selling, general and administrative                           6,127,770                 3,126,591             3,256,954                25,625,511
    Severance                                                       649,929                       —                     —                     649,929
    Loss on subleases                                                   —                         —                 794,305                 1,638,454
Total operating expenses                                        15,480,872                 15,493,949            15,814,592                74,977,969
Operating loss                                                  (15,531,379 )             (15,493,949 )          (15,814,592 )            (75,470,885 )
Interest income                                                     398,406                   446,420                558,176                2,876,428
Amortization of gain on sale of PNT assets                          953,793                 1,636,637                681,932                3,272,362
Net loss                                                        (14,179,180 )             (13,410,892 )          (14,574,484 )            (69,322,095 )
Preferred stock accretion                                        (3,748,740 )              (4,979,363 )           (5,652,428 )            (19,344,543 )
Net loss applicable to common shareholders               $      (17,927,920 )        $    (18,390,255 )      $   (20,226,912 )     $      (88,666,638 )

Basic and diluted net loss per share applicable to
  common shareholders                                    $              (7.50 )      $             (6.91 )   $           (7.02 )

Shares used in computation of basic and diluted net
  loss applicable to common shareholders                          2,390,232                  2,662,964             2,881,755

Pro forma basic and diluted net loss per share
  (unaudited)                                                                                                $           (0.58 )

Pro forma shares used in computation of basic and
  diluted net loss per share (unaudited)                                                                         25,295,520


                                                             See accompanying notes.

                                                                        F-4
Table of Contents

                                                              NORTHSTAR NEUROSCIENCE, INC.
                                                                (A Development Stage Company)

    STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY (DEFICIT)
                                                                                                                                       Deficit
                                                                                                                                    Accumulated        Accumulated            Total
                                     Redeemable                                              Additional          Deferred             During              Other           Shareholders’
                                 Convertible Preferred                                        Paid-In          Stock-Based          Development       Comprehensive          Equity
                                        Stock                   Common Stock                  Capital         Compensation             Stage          Income (Loss)         (Deficit)
                                                                         Amoun
                                 Shares          Amount        Shares        t
 Issuance of common stock
    to founders and
    employees for services,
    technology and cash of
    $0.00 to $0.01 per share          —      $            —    2,218,750     $ 2,219     $        186,117     $    (162,500 )   $             —       $          —    $            25,836
 Exercise of stock options at
    various times during the
    year for cash of $0.01 per
    share                             —                   —       41,000          41                  410               —                     —                  —                    451
 Non-employee stock-based
    compensation                      —                   —          —           —                  1,623               —                     —                  —                  1,623
 Amortization of deferred
    stock-based
    compensation                      —                   —          —           —                    —              27,559                   —                  —                 27,559
 Issuance of Series A
    redeemable convertible
    preferred stock for cash
    of $1.00 per share (June)    3,050,000        3,050,000          —           —                    —                 —                     —                  —                    —
 Preferred stock offering
    costs                             —                 —            —           —                (15,619 )             —                     —                  —                (15,619 )
 Preferred stock accretion            —              94,759          —           —                (94,759 )             —                     —                  —                (94,759 )
 Net loss                             —                 —            —           —                    —                 —              (1,237,385 )              —             (1,237,385 )

 Balance at December 31,
    1999                         3,050,000        3,144,759    2,259,750       2,260               77,772          (134,941 )          (1,237,385 )              —             (1,292,294 )
 Repurchase of common
    stock at various times
    during the year from
    terminated employees for
    cash of $0.01 per share           —                   —     (177,083 )      (177 )            (12,445 )          10,851                   —                  —                 (1,771 )
 Exercise of stock options at
    various times during the
    year for cash of $0.10 to
    $0.28 per share                   —                   —     240,663          240               32,161               —                     —                  —                 32,401
 Non-employee stock-based
    compensation                      —                   —          —           —                  7,962               —                     —                  —                  7,962
 Amortization of deferred
    stock-based
    compensation                      —                   —          —           —                    —              79,928                   —                  —                 79,928
 Issuance of Series B
    redeemable convertible
    preferred stock for cash
    of $2.80 per share
    (February)                   3,085,714        8,639,999          —           —                    —                 —                     —                  —                    —
 Issuance of Series C
    redeemable convertible
    preferred stock for cash
    of $4.00 per share
    (December)                   1,750,000        7,000,000          —           —                    —                 —                     —                  —                    —
 Preferred stock offering
    costs                             —                 —            —           —                (30,549 )             —                     —                  —                (30,549 )
 Preferred stock accretion            —             663,004          —           —               (663,004 )             —                     —                  —               (663,004 )
 Net loss                             —                 —            —           —                    —                 —              (4,930,033 )              —             (4,930,033 )

 Balance at December 31,
    2000                         7,885,714       19,447,762    2,323,330       2,323             (588,103 )         (44,162 )          (6,167,418 )              —             (6,797,360 )
 Repurchase of common
    stock at various times
    during the year from
    terminated employees for
    cash of $0.10 to $0.28
    per share                         —                   —      (40,250 )       (40 )             (3,220 )             —                     —                  —                 (3,260 )
 Exercise of stock options at
    various times during the
    year for cash of $0.10 to         —                   —       23,850          24                2,931               —                     —                  —                  2,955
   $0.40 per share
Non-employee stock-based
   compensation                       —              —           —          —             120,740              —                   —             —           120,740
Amortization of deferred
   stock-based
   compensation                       —              —           —          —                  —           27,214                  —             —             27,214
Issuance of Series C
   redeemable convertible
   preferred stock for cash
   of $4.00 per share (April)     515,000       2,060,000        —          —                  —               —                   —             —                —
Preferred stock offering
   costs                              —               —          —          —               (6,480 )           —                   —             —             (6,480 )
Preferred stock accretion             —         1,249,832        —          —           (1,249,832 )           —                   —             —         (1,249,832 )
Unrealized gain on
   securities
   available-for-sale                 —              —           —          —                  —               —                   —            3,174           3,174
Net loss                              —              —           —          —                  —               —            (7,803,259 )          —        (7,803,259 )

Comprehensive income                                                                                                                                       (7,800,085 )

Balance at December 31,
   2001                          8,400,714     22,757,594   2,306,930     2,307         (1,723,964 )       (16,948 )       (13,970,677 )        3,174     (15,706,108 )
Exercise of stock options at
   various times during the
   year for cash of $0.10 to
   $0.80 per share                    —              —       126,155        126            50,180              —                   —             —             50,306
Non-employee stock-based
   compensation                       —              —           —          —              73,652              —                   —             —             73,652
Amortization of deferred
   stock-based
   compensation                       —              —           —          —                  —           13,368                  —             —             13,368
Issuance of Series D
   redeemable convertible
   preferred stock for cash
   of $4.00 per share
   (April/May)                   9,191,248     36,764,992        —          —                  —               —                   —             —                —
Preferred stock offering
   costs                              —               —          —          —             (611,946 )           —                   —             —           (611,946 )
Preferred stock accretion             —         2,956,417        —          —           (2,956,417 )           —                   —             —         (2,956,417 )
Unrealized gain on
   securities
   available-for-sale                 —              —           —          —                  —               —                   —           33,776          33,776
Net loss                              —              —           —          —                  —               —           (13,186,862 )          —       (13,186,862 )

Comprehensive loss                                                                                                                                        (13,153,086 )

Balance at December 31,
   2002                         17,591,962 $   62,479,003   2,433,085   $ 2,433    $    (5,168,495 )   $    (3,580 )   $   (27,157,539 )   $   36,950 $   (32,290,231 )
                                                                   See accompanying notes.

                                                                                  F-5
Table of Contents

                                                             NORTHSTAR NEUROSCIENCE, INC.
                                                               (A Development Stage Company)

             STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
                                          (DEFICIT)—(Continued)
                                                                                                                                       Deficit
                                                                                                                                    Accumulated        Accumulated               Total
                                     Redeemable                                             Additional          Deferred              During              Other              Shareholders’
                                 Convertible Preferred                                       Paid-In           Stock-Based          Development       Comprehensive             Equity
                                        Stock                  Common Stock                  Capital          Compensation             Stage          Income (Loss)            (Deficit)
                                                                        Amoun
                                 Shares         Amount        Shares        t
 Balance at December 31,
    2002 (continued)             17,591,962 $   62,479,003    2,433,085     $ 2,433     $      (5,168,495 )   $      (3,580 )   $     (27,157,539 )   $       36,950     $       (32,290,2
 Repurchase of common
    stock at various times
    during the year from
    terminated employees for
    cash of $0.28 to $0.80
    per share                          —                 —      (10,730 )       (11 )              (5,940 )             —                     —                  —                    (5,9
 Exercise of stock options at
    various times during the
    year for cash of $0.10 to
    $0.80 per share                    —                 —     152,681          153               64,206                —                     —                  —                   64,3
 Non-employee stock-based
    compensation                       —                 —          —           —                 54,447                —                     —                  —                   54,4
 Employee stock-based
    compensation                       —                 —          —           —                 78,000                —                     —                  —                   78,0
 Deferred stock-based
    compensation                       —                 —          —           —                 35,789            (35,789 )                 —                  —                      —
 Amortization of deferred
    stock-based
    compensation                       —               —            —           —                     —               9,309                   —                  —                     9,3
 Preferred stock accretion             —         3,748,740          —           —              (3,748,740 )             —                     —                  —                (3,748,7
 Unrealized loss on securities
    available-for-sale                 —                 —          —           —                     —                 —                     —              (42,673 )               (42,6
 Net loss                              —                 —          —           —                     —                 —             (14,179,180 )              —               (14,179,1

 Comprehensive loss                                                                                                                                                              (14,221,8

 Balance at December 31,
    2003                         17,591,962     66,227,743    2,575,036       2,575            (8,690,733 )         (30,060 )         (41,336,719 )           (5,723 )           (50,060,6
 Exercise of stock options at
    various times during the
    year for cash of $0.10 to
    $0.80 per share                    —                 —     269,491          270              114,478                —                     —                  —                  114,7
 Non-cash issuance of
    common stock warrants
    at fair value as
    consideration for a
    technology licensing
    agreement                          —                 —          —           —                 15,155                —                     —                  —                   15,1
 Non-employee stock-based
    compensation                       —                 —          —           —                 30,058                —                     —                  —                   30,0
 Deferred stock-based
    compensation                       —                 —          —           —                 24,355            (24,355 )                 —                  —                      —
 Amortization of deferred
    stock-based
    compensation                       —                 —          —           —                     —              22,043                   —                  —                   22,0
 Issuance of Series E
    redeemable convertible
    preferred stock for cash
    of $4.77 per share (April)    4,821,803     23,000,000          —           —                     —                 —                     —                  —                      —
 Preferred stock offering
    costs                              —               —            —           —                 (60,849 )             —                     —                  —                   (60,8
 Preferred stock accretion             —         4,979,363          —           —              (4,979,363 )             —                     —                  —                (4,979,3
 Unrealized loss on securities
    available-for-sale                 —                 —          —           —                     —                 —                     —              (91,266 )               (91,2
 Net loss                              —                 —          —           —                     —                 —             (13,410,892 )              —               (13,410,8

 Comprehensive loss                                                                                                                                                              (13,502,1
Balance at December 31,
   2004                        22,413,765     94,207,106   2,844,527       2,845           (13,546,899 )          (32,372 )       (54,747,611 )       (96,989 )       (68,421,0
Repurchase of common
   stock at various times
   during the year from
   terminated employees for
   cash of $0.60 to $0.80
   per share                         —              —        (10,167 )       (10 )              (6,840 )              —                   —               —                (6,8
Exercise of stock options at
   various times during the
   year for cash of $0.10 to
   $1.50 per share                   —              —       302,302          302              175,321                 —                   —               —              175,6
Non-employee stock-based
   compensation                      —              —            —           —                107,952                 —                   —               —              107,9
Deferred stock-based
   compensation                      —              —            —           —               1,185,102         (1,185,102 )               —               —                  —
Amortization of deferred
   stock-based
   compensation                      —               —           —           —                     —             564,188                  —               —               564,1
Preferred stock accretion            —         5,652,428         —           —              (5,652,428 )             —                    —               —            (5,652,4
Unrealized gain on
   securities
   available-for-sale                —              —            —           —                     —                  —                   —           73,537               73,5
Net loss                             —              —            —           —                     —                  —           (14,574,484 )          —            (14,574,4

Comprehensive loss                                                                                                                                                    (14,500,9

Balance at December 31,
   2005                        22,413,765 $   99,859,534   3,136,662     $ 3,137      $    (17,737,792 )   $    (653,286 )    $   (69,322,095 )   $   (23,452 )   $   (87,733,4



                                                                     See accompanying notes.

                                                                                     F-6
Table of Contents

                                                      NORTHSTAR NEUROSCIENCE, INC.
                                                        (A Development Stage Company)

                                                        STATEMENTS OF CASH FLOWS
                                                                                                                                  Period from
                                                                                                                                   Inception
                                                                                                                                 (May 18, 1999)
                                                                                                                                to December 31,
                                                                              Year Ended December 31,                                2005
                                                               2003                     2004                 2005
Operating activities
Net loss                                                  $   (14,179,180 )      $    (13,410,892 )     $   (14,574,484 )   $       (69,322,095 )
Adjustments to reconcile net loss to net cash used in
  operating activities:
     Depreciation and amortization                                360,223                  303,607              271,642               1,559,049
     Loss on disposal of equipment                                    —                        —                    —                    22,899
     Lease incentive                                                  —                        —                    —                   901,650
     Non-employee stock-based compensation                         54,447                   30,058              107,952                 396,433
     Employee stock-based compensation                             87,309                   22,043              564,188                 821,609
     Amortization of premium on securities                        254,278                  755,387              371,258               1,380,923
     Amortization of gain on sale of PNT assets                  (953,793 )             (1,636,637 )           (681,932 )            (3,272,362 )
     Sale of PNT operating assets                                (824,320 )                    —                    —                  (824,320 )
     Issuance of warrant to non-employee                              —                     15,155                  —                    15,155
     Changes in operating assets and liabilities:
          Accounts receivable                                      75,930                      —                   —                        —
          Inventory                                               645,970                      —                   —                        —
          Other assets                                            961,282                      411                (808 )               (622,377 )
          Accounts payable and accrued liabilities               (405,070 )                185,869             (83,868 )              1,540,449
          Deferred rent and sublease loss accrual                (382,042 )               (175,632 )           321,160                  274,963
          Other liabilities                                      (128,294 )                    —                   —                        —
Net cash used in operating activities                         (14,433,260 )           (13,910,631 )         (13,704,892 )           (67,128,024 )
Investing activities
Purchases of property and equipment                              (226,604 )               (75,163 )            (138,455 )           (3,134,493 )
Proceeds from sale of PNT assets                                4,750,000                     —                     —                4,750,000
Purchases of securities available-for-sale                    (20,788,020 )           (31,298,257 )         (13,940,316 )         (106,640,090 )
Maturities of securities available-for-sale                    28,755,722              23,187,574            25,686,004             95,813,699
Net cash provided by (used in) investing activities           12,491,098                (8,185,846 )        11,607,233               (9,210,884 )
Financing activities
Net proceeds from sale of redeemable convertible
   preferred stock                                                    —                22,939,151                   —                79,789,549
Proceeds from exercise of stock options                            64,359                 114,748               175,623                 466,679
Repurchase of common stock                                         (5,951 )                   —                  (6,850 )               (17,832 )
Proceeds from issuance of debt, net of offering costs                 —                       —               5,811,668               5,811,668
Issuance of warrants                                                  —                       —               1,090,000               1,090,000
Principal payments on capital lease obligations                       —                       —                     —                   (35,770 )
Net cash provided by financing activities                          58,408              23,053,899             7,070,441              87,104,294
Net increase (decrease) in cash and cash equivalents           (1,883,754 )                957,422            4,972,782              10,765,386
Cash and cash equivalents at beginning of period                6,718,936                4,835,182            5,792,604                     —
Cash and cash equivalents at end of period                $     4,835,182        $       5,792,604      $   10,765,386      $        10,765,386

Supplemental schedule of non-cash activities
Preferred stock accretion                                 $     3,748,740        $       4,979,363      $     5,652,428     $        19,344,543
Deferred stock-based compensation                         $        35,789        $          24,355      $     1,185,102     $         1,396,895
Assets acquired under capital leases                      $           —          $             —        $           —       $            35,770
See accompanying notes.

         F-7
Table of Contents

                                                    NORTHSTAR NEUROSCIENCE, INC.
                                                      (A Development Stage Company)

                                                  NOTES TO FINANCIAL STATEMENTS

1.      Organization and Summary of Significant Accounting Policies

Business

      Northstar Neuroscience, Inc. (Company) is a medical device company focused on developing and commercializing novel
neurostimulation therapies for a broad range of neurological diseases and disorders. The Company incorporated in the state of Washington on
May 18, 1999 as Vertis Neuroscience, Inc. Since inception, substantially all resources have been devoted to the development and
commercialization of medical technologies utilizing electrical stimulation to treat neurological diseases and disorders. The Company operates
out of one facility in Seattle, Washington.

     Until May 2003, the Company sold a commercial product, PNT, a minimally invasive therapy for lumbar and cervical spinal pain. In May
2003, the Company sold its PNT assets. In conjunction with the sale of PNT, the Company changed its name from Vertis Neuroscience, Inc. to
Northstar Neuroscience, Inc.

     The Company continues to report as a development stage company, since planned principal operations have not commenced and the
revenue generated from commercialization of PNT did not constitute significant and sustained revenue.

Liquidity

       The Company has incurred significant net losses and negative cash flows from operations since its inception. At December 31, 2005, the
Company had $20.2 million of cash, cash equivalents and securities available-for-sale and a deficit accumulated during the development stage
of $69.3 million. Management believes that currently available cash, cash equivalents and securities available-for-sale, together with existing
financing agreements, would provide sufficient funds to enable the Company to meet its obligations through at least December 31, 2006.
Management plans to continue to finance the Company’s operations with a combination of equity issuances, debt arrangements and, in the
longer term, product sales. If adequate funds are not available, the Company may be required to reduce the scope of, delay or eliminate some or
all of our planned research, development and commercialization activities or obtain funds through collaborative arrangements with others that
may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself.

Cash and Cash Equivalents

      All money market accounts, commercial paper, and investment securities maturing within three months of the date of purchase are
considered cash equivalents. Included in cash and cash equivalents at December 31, 2004 and 2005 is a $10,000 restricted cash balance
securing corporate credit card activity.

Securities Available-for-Sale

      The Company invests in debt securities as part of its cash management program. The primary investment objectives are conservation of
capital and maintenance of liquidity. Classification of debt securities is determined at the time of purchase and is re-evaluated as of each
balance sheet date. Investments in securities that mature or are expected to be liquidated in less than one year are classified as short-term. At
December 31, 2005, all securities available-for-sale mature during 2006.

     Securities available-for-sale are reported at fair value, with the unrealized gains and losses reported as a separate component of
shareholders’ equity (deficit). Amortization, accretion, interest and dividends, and

                                                                        F-8
Table of Contents

                                                    NORTHSTAR NEUROSCIENCE, INC.
                                                      (A Development Stage Company)

                                           NOTES TO FINANCIAL STATEMENTS—(Continued)

realized gains and losses are included in interest income. The cost of securities sold is determined using the specific-identification method.

      Securities available-for-sale are considered impaired when a decline in fair value is deemed to be other than temporary. The Company
periodically reviews its securities held for potential impairment. If cost exceeds fair value, the Company considers, among other factors, the
duration and extent to which cost exceeds fair value, the financial strength of the issuer, and its intent and ability to hold the investment. Once a
decline in value is deemed to be other than temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Concentration of Credit Risk and Certain Other Risks

     The Company is subject to concentration of credit risk, primarily from its investments. Credit risk for investments is managed by
purchase of investment grade securities, A1/P1 or better for money market and debt instruments, and diversification of the investment portfolio
among issuers and maturities.

      Refer to Note 13 for discussion of certain risks regarding manufacturing suppliers.

Fair Value of Financial Instruments

      The carrying amounts reported in the balance sheets for cash and cash equivalents and accounts payable approximate their fair values due
to the short-term maturity of these financial instruments. Based on borrowing rates currently available to the Company, the carrying value of
the Company’s debt obligations approximate fair value.

      In conjunction with entering into a debt agreement, as disclosed in Note 5, the Company has issued warrant instruments to purchase
shares of it Series E redeemable convertible preferred stock that are considered liabilities pursuant to Statement of Financial Accounting
Standards (SFAS) No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity . The warrants are
reported at fair value and any changes in fair value are reflected in the statement of operations during the period of the change in value.

Property and Equipment

      Property and equipment are stated at cost, net of accumulated depreciation. Depreciation on furniture, fixtures, equipment, and software is
calculated using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Leasehold
improvements are amortized over the shorter of the useful life or the underlying lease term. Amortization expense related to leasehold
improvements is included in depreciation expense.

Impairment of Long-Lived Assets

      Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable
market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that
would indicate that the carrying amount of an asset is not recoverable.

                                                                        F-9
Table of Contents

                                                    NORTHSTAR NEUROSCIENCE, INC.
                                                      (A Development Stage Company)

                                           NOTES TO FINANCIAL STATEMENTS—(Continued)

     For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its
undiscounted, probability-weighted cash flows. Impairment losses are measured based on the difference between the carrying amount and
estimated fair value. No impairment losses have been recognized to date.

Financing Costs

      Financing costs are those costs directly incurred in raising funds from investors to finance the Company’s operations. Such costs are
deferred until time of closing of the related financing and are charged to shareholders’ equity (deficit). If fund-raising efforts are not successful,
such costs are expensed. At December 31, 2005, the Company had deferred $202,575 of financing costs relating to its pending initial public
offering (included as other long-term assets).

Revenue Recognition

      The Company recognized revenue from the sale of its commercial product, PNT, once delivery occurred, provided that persuasive
evidence of an arrangement existed, the price was fixed and determinable, and collectibility was reasonably assured. Delivery was considered
to have occurred when title and risk of loss transferred to the customer. The Company recorded revenue from shipping and handling charges as
a component of revenue from product sales, with the corresponding costs included with cost of goods sold.

Research and Development Expenses

      Research and development expenses include payroll, employee benefits, stock-based compensation, clinical studies performed by third
parties, materials and supplies to support ongoing clinical programs, contracted research, product development and related manufacturing of
prototype and trial units, consulting arrangements, and other expenses incurred to sustain the Company’s overall research and development
programs. Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed at the
earlier of when the contracted work has been performed or as nonrefundable upfront payments are made.

Patents

      The Company generally applies for patent protection on processes and products. Patent application costs are expensed as incurred, as
recoverability of such expenditures is uncertain. Patent costs are classified as a component of selling, general and administrative expenses on
the accompanying statements of operations.

Income Taxes

      The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation allowances have been established to reduce deferred tax assets to
the amounts expected to be realized.

Accumulated Other Comprehensive Loss

      Accumulated other comprehensive loss includes certain changes in equity that are excluded from net loss. The Company’s accumulated
other comprehensive loss represents unrealized losses on securities available-for-sale.

                                                                        F-10
Table of Contents

                                                 NORTHSTAR NEUROSCIENCE, INC.
                                                   (A Development Stage Company)

                                         NOTES TO FINANCIAL STATEMENTS—(Continued)

Segments

      The Company operates in only one segment. Management uses one measure of profitability and does not segment its business for internal
reporting.

Stock-Based Compensation

      The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees , and
related interpretations, including Financial Accounting Standards Board (FASB) Interpretation No. 44 Accounting for Certain Transactions
involving Stock Compensation , in accounting for employee stock options, rather than the alternative fair value accounting allowed by SFAS
No. 123, Accounting for Stock-Based Compensation . Under APB No. 25, compensation expense related to employee stock option grants is
recognized using the intrinsic value method. Accordingly, the Company does not recognize compensation expense for stock options granted to
employees with an exercise price equal to or in excess of the estimated fair value of the stock option at the date of grant.

     The Company recognizes compensation expense for options granted to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force (EITF) consensus Issue 96-18, Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services , which requires valuing the stock options using a Black-Scholes
option-pricing model and remeasuring such stock options to the current fair value until the performance date has been reached.

      The fair value of common stock for the options granted through December 31, 2005 was determined by the Company’s board of directors
in consultation with management. During the year ended December 31, 2005, the Company granted stock options with exercise prices ranging
from $0.80 to $1.50. In consideration of the guidance set forth in the American Institute of Certified Public Accountants Practice Guide,
Valuation of Privately-Held-Company Equity Securities Issued as Compensation , and a valuation of the Company’s common stock by an
independent third party, the Company subsequently-determined that the fair value of its common stock during the period ranged from $0.80 to
$5.79. In accordance with APB Opinion No. 25, deferred stock-based compensation of $1,185,102 was recorded during the year ended
December 31, 2005. The deferred stock-based compensation is amortized to expense over the related vesting terms of the options. The
Company recorded employee stock-based compensation expense of $87,309, $22,043 and $564,188 for the years ended December 31, 2003,
2004 and 2005, respectively.

      As of December 31, 2005, the expected future amortization expense for deferred stock compensation is as follows:

                Years ending December 31:
                    2006                                                                                           $ 414,328
                    2007                                                                                             160,290
                    2008                                                                                              68,689
                    2009                                                                                               9,979
                                                                                                                   $ 653,286


                                                                    F-11
Table of Contents

                                                    NORTHSTAR NEUROSCIENCE, INC.
                                                      (A Development Stage Company)

                                           NOTES TO FINANCIAL STATEMENTS—(Continued)

      SFAS No. 123, which has been revised by SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure ,
requires companies that continue to follow APB No. 25 to provide pro forma disclosure of the impact of applying the fair value method of
SFAS No. 123. Certain assumptions were used to calculate the pro forma effect of the application of SFAS No. 123. The fair value of the
Company’s options was estimated at the date of grant using the minimum value option-pricing model with the following assumptions:
                                                                                                                    Year Ended December 31,
                                                                                                         2003            2004               2005
        Risk-free interest rate                                                                      3.50%              3.65%          3.80%–4.36%
        Dividend yield                                                                                  —                  —               —
        Weighted-average expected life (in years)                                                      7.00               7.00            6.21

      For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period
using the multiple option approach (graded vesting). The following table illustrates the Company’s net loss if it had accounted for its stock
options under the provisions of SFAS No. 123.
                                                                                                          Year Ended December 31,
                                                                                        2003                        2004                            2005
Net loss applicable to common shareholders, as reported                          $    (17,927,920 )             $     (18,390,255 )       $        (20,226,912 )
Add: stock-based employee compensation expense included in reported
  net loss                                                                                  87,309                         22,043                     564,188
Less: pro forma employee stock-based compensation expense determined
  under the fair value method                                                             (182,412 )                       (96,665 )                  (652,257 )
Pro forma net loss applicable to common shareholders                             $    (18,023,023 )             $     (18,464,877 )       $        (20,314,981 )

Basic and diluted net loss per share applicable to common shareholders:
As reported                                                                      $             (7.50 )          $            (6.91 )      $                (7.02 )

Pro forma                                                                        $             (7.54 )          $            (6.93 )      $                (7.05 )


Use of Estimates

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Significant estimates include accruals for clinical trial activities, carrying value of warrant instruments reported as liabilities and the
assumptions used in determining stock-based compensation expenses. Actual results could differ from management’s estimates and
assumptions.

Reclassifications

     Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassification did not materially
impact the balance sheets, statements of operations or statements of cash flows.

Unaudited Pro Forma Shareholders’ Equity

      The Company has filed a registration statement with the Securities and Exchange Commission to sell shares of its common stock to the
public. As of December 31, 2005, if the initial public offering is completed under the

                                                                       F-12
Table of Contents

                                                    NORTHSTAR NEUROSCIENCE, INC.
                                                      (A Development Stage Company)

                                           NOTES TO FINANCIAL STATEMENTS—(Continued)

terms presently anticipated, all of the Series A, Series B, Series C, Series D, and Series E redeemable convertible preferred stock outstanding at
the time of the offering will convert into 22,413,765 shares of common stock, assuming a one-for-one conversion ratio. In addition, the Series
E redeemable convertible preferred stock warrant liability of $1,090,000 would be reclassified to additional paid-in-capital. Unaudited pro
forma shareholders’ equity, as adjusted for the assumed conversion of the preferred stock and preferred stock warrants, is set forth on the
accompanying balance sheets.

Recent Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123(R), Share-based Payment (SFAS No. 123(R)). SFAS No. 123(R) revises SFAS
No. 123, supersedes APB No. 25 and amends SFAS No. 95, Cash Flows . SFAS No. 123(R) applies to transactions in which an entity
exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on
the fair value of those equity instruments. Under SFAS No. 123(R), the Company will be required to follow a fair value approach using an
option pricing model, such as the Black-Scholes option-pricing model, at the date of stock option grant. The deferred compensation amount
calculated under the fair value method will then be recognized over the respective vesting period of the stock option.

      The Company will adopt the provisions of SFAS No. 123(R) effective January 1, 2006. Due to the Company’s use of the minimum value
method for valuing employees’ stock options during prior periods, the Company is required to adopt SFAS No. 123(R) using the prospective
method. Pursuant to the prospective method of adoption, the Company will continue to account for options granted before adoption under the
current APB No. 25 accounting. All grants issued or modified subsequent to adoption will be accounted for pursuant to SFAS No. 123(R).
Since the adoption of SFAS No. 123(R) relates only to future grants or modifications under the prospective method of adoption, the adoption of
the new guidance will only impact future periods to the extent the Company grants or modifies options during future periods. As such, the
impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted
or modified in the future.

      In November 2005, the FASB issued Staff Position No. FAS 115-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (FSP 115-1). FSP 115-1 provides accounting guidance for determining and measuring other-than-temporary
impairments of debt and equity securities, and confirms the disclosure requirements for investments in unrealized loss positions as outlined in
EITF issue 03-01, The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments . The accounting
requirements of FSP 115-1 are effective for us on January 1, 2006 and will not have a material impact on our financial position, results of
operations or cash flows.

2.      Securities Available-for-Sale

      Securities available-for-sale consist of the following:
                                                                                           Gross               Gross             Fair
                                                                      Amortized          Unrealized          Unrealized         Market
                                                                        Cost               Gains              Losses            Value
        December 31, 2005:
          U.S. corporate notes and bonds                          $     9,445,468          $ —           $     (23,452 )    $     9,422,016

        December 31, 2004:
          U.S. corporate notes and bonds                          $    21,562,414          $ —           $     (96,989 )    $   21,465,425


                                                                       F-13
Table of Contents

                                                      NORTHSTAR NEUROSCIENCE, INC.
                                                        (A Development Stage Company)

                                           NOTES TO FINANCIAL STATEMENTS—(Continued)

      The unrealized losses on the debt securities held are primarily attributable to changes in interest rates and are considered to be temporary
in nature. No investment losses have been incurred and no impairment losses have been recorded during the periods presented. As of
December 31, 2005, four investments with an aggregate cost basis of $4,776,120, aggregate fair value of $4,755,709, and aggregate unrealized
losses of $20,411 have had unrealized losses for greater than twelve months.

      All debt securities held as of December 31, 2005 mature in less than one year.

3.      Property and Equipment

      Property and equipment consists of the following:
                                                                                                               December 31,
                                                                                                      2004                          2005
        Office and lab equipment                                                                $       827,099            $          905,072
        Furniture, fixtures, and leasehold improvements                                               1,139,933                     1,174,842
        Software                                                                                        210,403                       231,628
                                                                                                      2,177,435                     2,311,542
        Accumulated depreciation and amortization                                                    (1,109,251 )                  (1,376,545 )
                                                                                                $     1,068,184            $         934,997


4.      Accrued Liabilities

      Accrued liabilities consist of the following:
                                                                                                                     December 31,
                                                                                                              2004                    2005
        Clinical trial expenses                                                                         $      720,017         $       766,688
        Professional services                                                                                   49,085                 152,971
        Employee compensation                                                                                  131,873                 162,851
        Other                                                                                                  191,013                 117,182
                                                                                                        $    1,091,988         $     1,199,692


5.      Debt

      On December 31, 2005, the Company entered into a loan and security agreement (Agreement), pursuant to which the Company may
borrow up to $10.0 million. As of December 31, 2005 the Company had borrowed $7.0 million under this facility. The reported amount of the
outstanding obligation reflects original issuance discounts of $1,090,000 related to the issuance of detachable warrants and $98,332 of
additional discounts, resulting in a net carrying amount of the obligation of $5,811,668. The discounts are amortized to interest expense using
the effective yield method. The loan facility provides for an interest-only period ending June 30, 2006, followed by equal monthly payments of
principal and interest such that the balance will be fully paid on January 1, 2009. Outstanding principal balances accrue interest at a rate of
12.6% per annum. Due to discounts derived from the issuance of detachable warrants and other discounts, the effective interest rate of the debt
is 19.5% per annum.

     The Company’s obligations under the Agreement are secured by a first priority security interest in all of the Company’s assets, other than
the Company’s intellectual property. The Company has provided a negative pledge

                                                                       F-14
Table of Contents

                                                    NORTHSTAR NEUROSCIENCE, INC.
                                                      (A Development Stage Company)

                                          NOTES TO FINANCIAL STATEMENTS—(Continued)

against its intellectual property. The Agreement also contains additional affirmative and negative covenants. The $3.0 million of additional
credit remains available until June 30, 2006. The annual interest on any future draws under the facility will be equal to 11.5% plus the excess of
the one-month LIBOR rate over 3.3%.

      Future payments under the Company’s debt arrangements are as follows:

                Years ending December 31:
                    2006                                                                                          $     1,230,493
                    2007                                                                                                2,704,482
                    2008                                                                                                3,065,025
                                                                                                                        7,000,000
                    Less original issue discounts                                                                      (1,188,332 )
                    Less current portion                                                                               (1,230,493 )
                                                                                                                  $     4,581,175


      In connection with the Agreement, the Company issued warrants to the lenders to purchase shares of the Company’s Series E redeemable
convertible preferred stock. Under the warrants, the lenders can acquire two tranches of shares of stock. The first tranche is determined by
dividing $500,000 by the strike price (defined as the lower of (i) $4.77 and (ii) the lowest effective price per share (on a common stock
equivalent basis and taking into account any securities issued together with the preferred stock) based on the next qualifying financing
transaction, as defined by the Agreement). The second tranche, and any future tranches based on additional draws, is determined by dividing
5% of the amount drawn under the Agreement (5% of $7,000,000 at December 31, 2005, or $350,000) by the strike price. At December 31,
2005, this formula would result in the lenders being able to acquire 178,197 shares of Series E redeemable convertible preferred stock, at $4.77
per share, subject to adjustment as outlined above.

      Pursuant to the terms of the warrants, the warrant holders, at their sole discretion, may net exercise the warrants based upon the fair value
of the Series E redeemable convertible preferred stock at the date of exercise. The warrants are classified as liabilities on the balance sheet
pursuant to SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity and related FASB
Staff Position 150-5 Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares
That Are Redeemable . The warrants will be subject to re-measurement at each balance sheet date and any change in fair value will be
recognized as a component of other income (expense).

      The warrants are currently exercisable at a strike price of $4.77 per share, which can be adjusted lower as discussed above. Management
determined that the fair value of the warrants was $1,090,000 at issuance and at December 31, 2005, based upon a number of factors, including
a valuation of the warrant and the capital stock of the Company performed by an independent third party. The fair value of the warrants was
estimated by management using the Black-Scholes option pricing model with the following assumptions: risk-free rate of 4.36%; contract term
of 10 years; volatility of 60%; and a Series E redeemable convertible preferred stock value of $7.70 per share. The fair value of the warrant is
being accounted for as an original issue discount of the debt, and expensed using the effective interest method over the term of the agreement.

6.      Lease Agreements

      The Company entered into a non-cancelable operating lease agreement in July 2000 for office and research facilities, and amended the
lease in July 2002. The amended lease commenced September 1, 2002, continues through August 2012, and includes two five-year renewal
periods (at the Company’s option) at the then-market rate for comparable facilities. In addition, the lease provided for a rent credit of $420,000
to be applied to specified future periods and $901,000 for tenant improvements. In accordance with SFAS No. 13, the rent credit has been
factored into the Company’s straight-line rent expense calculation as a reduction of overall lease

                                                                       F-15
Table of Contents

                                                   NORTHSTAR NEUROSCIENCE, INC.
                                                     (A Development Stage Company)

                                          NOTES TO FINANCIAL STATEMENTS—(Continued)

expense during the term of the lease. The tenant improvement incentive was utilized by the Company prior to occupancy, and has been
reflected on the balance sheets both as a leasehold improvement in property and equipment and as deferred rent. The leasehold improvement is
being depreciated over the term of the lease, while the deferred rent is being amortized into the Company’s straight-line rent expense as a
reduction of overall lease expense during the term of the lease. Rent expense under this lease for the years ended December 31, 2003, 2004, and
2005, was $987,643, $987,643, and $679,527, respectively.

      Future minimum lease payments under the Company’s non-cancelable operating leases are as follows:

                Years ending December 31:
                    2006                                                                                             $    1,153,536
                    2007                                                                                                  1,161,931
                    2008                                                                                                  1,031,697
                    2009                                                                                                  1,124,567
                    2010                                                                                                  1,052,904
                    Thereafter                                                                                            1,857,399
                                                                                                                     $    7,382,034


      During the year ended December 31, 2002, the Company executed a sublease for a portion of the facilities covered by its July 2000 lease,
as amended. The sublease was for a three-year term with sublease payments totaling approximately $636,000. The difference between the
sublease proceeds and the lease expense over the term of the sublease, totaling $844,149, was accrued at the commencement of the sublease
and recorded as a loss on sublease.

     During February 2005, the Company executed an additional sublease for another portion of the facilities covered by its amended lease.
The sublease is for a three-year term with sublease payments to be received of $489,000. A loss of $794,305 was recorded at the
commencement of the sublease, representing the difference between the sublease proceeds and the lease expense over the term of the sublease.
The accrued loss is $526,912 at December 31, 2005 and is reduced monthly as rent is paid.

      Total payments received under subleases during 2003, 2004, and 2005 were $163,388, $255,376, and $268,700, respectively.

      Future minimum payments to be received under the 2005 sublease agreement are as follows:

                Years ending December 31:
                    2006                                                                                                 $ 172,500
                    2007                                                                                                   180,000
                    2008                                                                                                    45,000
                                                                                                                         $ 397,500


7.      Income Taxes

      Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

      At December 31, 2005, the Company had net operating loss carryforwards of approximately $65,400,000 and research and development
tax credits of approximately $1,457,000. These net operating loss carryforwards

                                                                      F-16
Table of Contents

                                                   NORTHSTAR NEUROSCIENCE, INC.
                                                     (A Development Stage Company)

                                            NOTES TO FINANCIAL STATEMENTS—(Continued)

and R&D tax credits will expire from 2019 to 2025. In accordance with Section 382 of the Internal Revenue Code, a change in ownership of
greater than 50% within a three-year period will place an annual limitation on the Company’s ability to utilize its existing net operating loss
carryforwards. Due to redeemable convertible preferred stock issuances, the Company may be subject to these annual limitations and,
therefore, unable to fully utilize the net operating loss carryforwards and research and development tax credits.

      Significant components of the Company’s deferred tax assets and liabilities approximated the following:
                                                                                                                      December 31,
                                                                                                              2004                     2005
Deferred tax assets:
    Net operating loss carryforwards                                                                   $     18,062,100         $     22,238,400
    Research and development tax credits                                                                      1,141,500                1,457,200
    Deferred gain                                                                                               231,900                      —
    Book expense in excess of tax                                                                               144,800                  504,700
Total deferred tax assets                                                                                    19,580,300               24,200,300
Deferred tax liability:
     Tax expense in excess of book                                                                               (57,700 )                (35,600 )
Total deferred tax assets and liabilities                                                                    19,522,600               24,164,700
Less valuation allowance                                                                                    (19,522,600 )            (24,164,700 )
Net deferred tax assets and liabilities                                                                $             —          $             —


      The Company has recognized a valuation allowance equal to the total deferred tax assets and liabilities due to the uncertainty of realizing
the benefits of the assets. The valuation reserve increased by $4,971,600, $4,933,200 and $4,642,100 during the years ended December 31,
2003, 2004 and 2005, respectively, primarily due to the increase in net operating loss carryforwards.

8.      Redeemable Convertible Preferred Stock

      Since inception, the Company has issued Series A through E redeemable convertible preferred stock (Preferred Stock). The terms of each
series of Preferred Stock are substantially the same, except, as more fully described below, liquidation preferences differ in amount and priority
for the different series of Preferred Stock. The holders of Preferred Stock are entitled to receive dividends that are noncumulative, have
preference to dividends on common stock, and are payable only when and if declared by the board of directors. As of December 31, 2005, the
board of directors had not declared any dividends since inception.

        In the event of liquidation, holders of Preferred Stock are entitled to be paid out of the assets of the Company an amount equal to the
original amount paid for their Preferred Stock, and all declared and unpaid dividends on such shares, if any. Remaining net assets shall then be
distributed to holders of all of the Preferred Stock and common stock as if all shares of Preferred Stock had been converted into common stock
at its then-effective conversion price immediately prior to the liquidation. With respect to the order and amount of liquidation preferences to be
paid to each series of Preferred Stock, the Series D and E Preferred Stock have liquidation preferences of $4.00 and $4.77 per share,
respectively, that are to be paid on a pari passu basis and that are in preference to the Series A, B, and C Preferred Stock. After satisfaction of
the Series D and E liquidation preferences, the Series A, B, and C shares have liquidation preferences of $1.00, $2.80, and $4.00 per share,
respectively, that are to be paid on a pari passu basis.

                                                                       F-17
Table of Contents

                                                         NORTHSTAR NEUROSCIENCE, INC.
                                                           (A Development Stage Company)

                                            NOTES TO FINANCIAL STATEMENTS—(Continued)

      The holders of Preferred Stock vote equally with holders of common stock and, at the option of the holder, may be converted at any time
into common stock. In addition, the outstanding Preferred Stock converts automatically upon the occurrence of certain defined events,
including a qualified initial public offering with aggregate proceeds of at least $40.0 million and a price per share equal to or exceeding $7.00.
The conversion ratio at December 31, 2005, was one-for-one. The conversion ratio may be adjusted from time to time, based on antidilution
provisions included in the Articles of Incorporation.

     The holders of 66.67% of the outstanding Preferred Stock, voting as a group, may request redemption at any time, on or after June 30,
2008, at a redemption price equal to the original purchase price per share of Preferred Stock plus a rate of return equal to 6%, compounded
annually, plus any accrued and unpaid dividends. The difference between the original net proceeds and the redemption value of the Preferred
Stock is being accreted over the period from the date of issuance to June 30, 2008.

      In addition, the Company entered into an Investors’ Rights Agreement and Right of First Refusal and Co-Sale Agreement with its
Preferred Stock investors. Under these agreements, the Preferred Stock has provisions that prevent the Company from carrying out certain
actions without the approval of the holders of a majority of the Preferred Stock. The Company is also precluded from taking certain actions
without the approval of the holders of either a majority or 66.67% of the Series D and Series E Preferred Stock voting together as a single
group, and certain other actions without the approval of the holders of a majority or 66.67% of the Series D Preferred Stock.

      A summary of the Preferred Stock activity for the years ended December 31, 2003, 2004 and 2005, is as follows:
                                             Series A           Series B             Series C         Series D        Series E
                                           Redeemable         Redeemable           Redeemable       Redeemable      Redeemable
                                           Convertible        Convertible          Convertible      Convertible     Convertible
                                            Preferred          Preferred            Preferred        Preferred       Preferred
                                              Stock              Stock                Stock            Stock           Stock            Total
Balance at January 1, 2003             $     3,745,458 $       10,220,161 $         10,157,429 $     38,355,955 $             —    $   62,479,003
    Accretion to redemption value              224,727            613,210              609,446        2,301,357               —         3,748,740
Balance at December 31, 2003                 3,970,185         10,833,371           10,766,875       40,657,312               —        66,227,743
    Issuance of Series E Preferred
       Stock                                       —                   —                    —                —       23,000,000        23,000,000
    Accretion to redemption value              238,211             650,002              646,012        2,439,439      1,005,699         4,979,363
Balance at December 31, 2004                 4,208,396         11,483,373           11,412,887       43,096,751      24,005,699        94,207,106
    Accretion to redemption value              252,504            689,002              684,775        2,585,805       1,440,342         5,652,428
Balance at December 31, 2005           $     4,460,900 $       12,172,375 $         12,097,662 $     45,682,556 $    25,446,041 $      99,859,534

As of December 31, 2005:
Designated shares                            3,050,000           3,085,714            2,300,000       9,191,248       5,031,447        22,658,409
Issued and outstanding shares                3,050,000           3,085,714            2,265,000       9,191,248       4,821,803        22,413,765
Aggregated liquidation preference      $     3,050,000 $         8,639,999 $          9,060,000 $    36,764,992 $    23,000,000 $      80,514,991

                                                                            F-18
Table of Contents

                                                   NORTHSTAR NEUROSCIENCE, INC.
                                                     (A Development Stage Company)

                                          NOTES TO FINANCIAL STATEMENTS—(Continued)

9.      Shareholders’ Equity Deficit

Stock Option Plan

      The Company’s Amended and Restated 1999 Stock Option Plan (1999 Plan) authorizes the grant of options to employees, consultants
and directors. At December 31, 2005, the Plan had 3,731,250 shares authorized for issuance. All options granted have either: (a) a five-year
term from the date of grant in the case of incentive stock option grants to shareholders holding more than 10% of our common stock on a fully
diluted basis, or (b) a ten-year term. Options granted under the 1999 Plan may be designated as qualified or nonqualified at the discretion of the
1999 Plan administrator. At December 31, 2005, there were 242,365 shares that were available for future issuance under the 1999 Plan.

       Options granted under the 1999 Plan generally are immediately exercisable, but the underlying shares are then subject to the Company’s
right to repurchase upon exercise. In the event that the optionee’s employment with, or service to, the Company should terminate, the Company
has the option to repurchase the shares at the price originally paid by the optionee at exercise. These repurchase rights generally lapse at a rate
of 25% per year from the optionee’s date of hire, or another date specified at the time the option is granted. At December 31, 2003, 2004 and
2005, there were 40,731, 66,293 and 57,140 shares, respectively, with aggregate proceeds received of $14,211, $29,813 and $43,069,
respectively, exercised under the 1999 Plan that were subject to repurchase.

      The Company granted 57,500, 5,000 and 49,000 options to consultants for services in 2003, 2004, and 2005, respectively. Consultant
stock options are exercisable for ten years at prices per share ranging from $0.10 to $1.50. The estimated fair value of options granted to
consultants, which vested during the years ended December 31, 2003, 2004, and 2005, was $54,447, $30,058, and $107,952, respectively, and
was charged to expense. The estimated fair value was based on the Black-Scholes option-pricing model using the following assumptions:
                                                                                                           Year Ended December 31,
                                                                                           2003                    2004                  2005
Risk-free interest rate                                                                           3.50 %               3.65 %        3.80%-4.36%
Dividend yield                                                                                     —                    —                 —
Average remaining contractual life (in years)                                                     7.23                 6.40              7.92
Volatility                                                                                         100 %                100 %            60%

     In accordance with SFAS No. 123 and EITF 96-18, options granted to non-employees are periodically revalued with a final measurement
upon vesting.

                                                                       F-19
Table of Contents

                                                        NORTHSTAR NEUROSCIENCE, INC.
                                                          (A Development Stage Company)

                                            NOTES TO FINANCIAL STATEMENTS—(Continued)

      A summary of the Company’s stock option activity and related information for the years ended December 31, 2003, 2004 and 2005 is as
follows:
                                                            2003                              2004                                    2005
                                                                   Weighted-                         Weighted-                                 Weighted-
                                                                   Average                           Average                                   Average
                                                                   Exercise                          Exercise                                  Exercise
                                                  Options           Price           Options           Price                 Options             Price
Outstanding at beginning of year                   2,237,472       $    0.53        1,896,170        $     0.55             2,191,600          $    0.58
    Granted at fair value                                —               —                —                 —                 200,000               0.80
    Granted below fair value                         434,325            0.60          600,480              0.63               477,157               0.96
    Granted above fair value                         113,340            0.80              —                 —                     —                  —
    Exercised                                       (152,681 )          0.44         (269,491 )            0.43              (302,302 )             0.58
    Cancelled                                       (736,286 )          0.60          (35,559 )            0.62              (172,565 )             0.63
Outstanding at end of year                         1,896,170       $    0.55        2,191,600        $     0.58             2,393,890          $    0.67

Outstanding options vested and
  exercisable, but not subject to
  repurchase at year-end                               983,795     $    0.43        1,397,782        $     0.52             1,540,047          $    0.67

Weighted-average fair value of
 options granted during the period           $            0.21                  $         0.20                          $         2.08


      Exercise prices for options outstanding at December 31, 2005 are as follows:
                                                                                                         Weighted-
                                                                                                           Average                Outstanding
                                                                                                         Remaining               Options Vested
                                                                                                         Contractual            and Exercisable,
                                                                                     Number of               Life               but Not Subject
                                    Exercises Prices                                  Shares              (in years)             to Repurchase
                     0.10                                                                98,150                  3.58                     98,150
                     0.28                                                               240,000                  4.72                    240,000
                     0.40                                                               122,140                  5.27                    122,140
                     0.60                                                               674,288                  7.73                    461,344
                     0.80                                                               878,917                  7.58                    533,768
                     0.90                                                               193,895                  9.38                     80,395
                     1.00                                                               146,000                  9.57                      1,250
                     1.50                                                                40,500                  9.86                      3,000
                                                                                      2,393,890                  7.36                 1,540,047


10.     Net Loss Per Common Share

       Basic net loss per share applicable to common shareholders is calculated by dividing the net loss applicable to common shareholders by
the weighted-average number of unrestricted common shares outstanding for the period, without consideration of common stock equivalents.
Diluted net loss per share applicable to common shareholders is computed by dividing the net loss applicable to common shareholders by the
weighted-average number of unrestricted common shares and dilutive common share equivalents outstanding for the period, determined using
the treasury-stock method and the as if converted method. For purposes of this calculation, common stock subject to repurchase by the
Company, redeemable convertible preferred stock, stock options and warrants are considered to be common stock equivalents and are only
included in the calculation of diluted net loss per share when their effect is dilutive.

                                                                         F-20
Table of Contents

                                                  NORTHSTAR NEUROSCIENCE, INC.
                                                    (A Development Stage Company)

                                          NOTES TO FINANCIAL STATEMENTS—(Continued)

      The following table presents the computation of basic and diluted net loss per share applicable to common shareholders:
                                                                                                       Year Ended December 31,
                                                                                      2003                       2004                 2005
Historical
Numerator:
Net loss applicable to common shareholders                                      $   (17,927,920 )         $    (18,390,255 )     $   (20,226,912 )

Denominator:
Weighted average shares outstanding                                                   2,463,343                   2,721,293            2,931,220
Weighted average common shares subject to repurchase                                    (73,111 )                   (58,329 )            (49,465 )
Shares used in computation of basic and diluted net loss applicable to
  common shareholders                                                                 2,390,232                   2,662,964            2,881,755

Basic and diluted net loss per share applicable to common shareholders          $            (7.50 )      $            (6.91 )   $           (7.02 )

Antidilutive securities at December 31, 2005 excluded from diluted net
  loss applicable to common shareholders:
     Preferred stock                                                                 17,591,962                 21,026,671           22,413,765
     Warrants and options outstanding                                                 2,459,252                  2,320,823            2,602,921
Pro forma (unaudited)
Pro forma basic and diluted net loss per share                                                                                   $           (0.58 )

Pro forma shares used in computation of basic and diluted net loss per
  share                                                                                                                              25,295,520


       Pro forma basic and diluted net loss per share and shares used in computations of basic and diluted net loss per share assume conversion
of all shares of redeemable convertible preferred stock into common stock as of January 1, 2005.

11.     Warrants

      In connection with the Company’s Series D Preferred Stock financing, the Company issued to a sales agent a warrant to purchase 105,000
shares of common stock of the Company with an exercise price of $4.00 per share. The warrant expires on April 8, 2007. The estimated fair
value of the warrant, calculated using the Black-Scholes option-pricing model, was $44,100. Assumptions used in determining the fair value
include a volatility factor of 100%, contractual life of five years, a common stock value per share at the time of grant of $0.80, an expected
dividend yield of 0%, and a risk-free interest rate of 4.65%.

      During the year ended December 31, 2004, the Company executed a licensing agreement for intellectual property. Consideration for the
license included a warrant for 25,000 shares of the Company’s common stock with an estimated exercise price of $0.80 per share. The warrant
expires on the earlier of November 11, 2009 or an initial public offering. The Company expensed the estimated fair value of the warrant,
$15,155, to research and development expense. The warrant value was determined using the Black-Scholes option-pricing model. Assumptions
used in determining the fair value of this warrant include a volatility factor of 100%, contractual life of five years, a common stock value per
share at the time of grant of $0.80, an expected dividend yield of 0%, and a risk-free interest rate of 3.30%.

                                                                         F-21
Table of Contents

                                                  NORTHSTAR NEUROSCIENCE, INC.
                                                    (A Development Stage Company)

                                          NOTES TO FINANCIAL STATEMENTS—(Continued)

      As discussed in Note 5, in connection with the debt offering during December 2005, the Company issued warrants to purchase shares of
Series E Preferred Stock.

      No warrants have been exercised as of December 31, 2005.

12.     Shares Reserved

      At December 31, 2005, common stock is reserved for the following purposes:

                Conversion of redeemable convertible preferred stock                                                 22,413,765
                Stock options                                                                                         2,636,255
                Warrants to purchase common stock                                                                       130,000
                Warrants to purchase redeemable convertible preferred stock                                             209,645
                                                                                                                     25,389,665


13.     Contractual Agreements

      The Company purchases components, materials and final assemblies from single sources. While alternate suppliers do exist, if any
existing suppliers were unable or unwilling to meet demand for product components, or if these components do not meet quality or other
specifications, or if the Company is required to change to an alternate supplier for any key product components, the Company may face
operational or regulatory delays that may result in delays to clinical trials and development programs. The Company plans to address potential
future supply interruptions by maintaining a sufficient inventory stock to address temporary supply shortages. The following are key
manufacturing and component supply relationships:

Texcel LLC: Texcel LLC (Texcel) is the exclusive manufacturer of the Company’s implantable pulse generators (IPGs) under a
manufacturing agreement that will terminate during April 2010. Texcel is contractually obligated to provide as many IPGs as are ordered in
accordance with purchase forecasts. The purchase price for these devices is re-evaluated annually and may only be increased if associated costs
have increased. The Company can solicit bids for the manufacture of IPGs by alternate suppliers once annually, and is required to notify Texcel
of the relevant terms of a superior bid. The Company can terminate the agreement or the exclusivity provisions unless Texcel agrees within 30
days to match the bid. The Company also can terminate the agreement on 60 days’ prior written notice if distribution ceases for all or
substantially all of the Company’s IPGs, or if Texcel commits and fails to cure a material breach of the agreement.

CTS Electronics Manufacturing Solutions, Inc.: Under a manufacturing agreement that will terminate during April 2010, CTS Electronics
Manufacturing Solutions, Inc. (CTS) is the exclusive manufacturer of printed circuit board assemblies for the Company’s IPGs and
programming wand. CTS is contractually obligated to provide as many of these components as ordered in accordance with purchase forecasts.
The pricing and termination provisions of the CTS agreement are the same as under the Texcel agreement, except that the Company cannot
terminate the agreement if distribution ceases for all or substantially all of the components that CTS manufactures.

Oscor, Inc.: Oscor, Inc. (Oscor) is the exclusive manufacturer of the Company’s cortical stimulation leads under a manufacturing agreement
that will terminate in April 2010. Oscor is contractually obligated to provide as many of these components as ordered in accordance with
purchase forecasts. The pricing and termination provisions of the Oscor agreement are the same as under the Texcel agreement.

                                                                     F-22
Table of Contents

                                                  NORTHSTAR NEUROSCIENCE, INC.
                                                    (A Development Stage Company)

                                         NOTES TO FINANCIAL STATEMENTS—(Continued)

Avail Medical Products, Inc.: Avail Medical Products, Inc. (Avail) is the exclusive provider of the Company’s packaging and labeling, and
provides sterilization services for certain product components, under a manufacturing agreement that will terminate in August 2010. Avail is
contractually obligated to provide as many of the products as ordered in accordance with purchase forecasts. The pricing and termination
provisions of the Avail agreement are the same as under the Texcel agreement, except that Avail has 15 days to cure a supply delivery failure,
the Company cannot terminate the agreement if distribution of all or substantially all of the product components packaged by Avail is ceased,
and the Company can only solicit annual bids from selected persons.

14.     Defined Contribution Plan

      The Company sponsors a defined contribution 401(k) plan (401(k) Plan), which commenced in 2000, in which employees may contribute
pretax earnings, up to the $14,000 maximum allowed by law, or $18,000 for those employees who are over 50 years of age. The 401(k) Plan
permits discretionary contributions by the Company. The Company has made no contributions to date. Administrative expenses of the 401(k)
Plan are paid by the Company and totaled less than $5,000 annually in the years ended December 31, 2003, 2004, and 2005.

15.     Sale of PNT Assets

      On May 20, 2003, the Company sold all of the assets related to its PNT product. The sale included the Company’s trade accounts
receivable, inventory, manufacturing assets, certain other PNT assets, and the intellectual property related to PNT. The carrying value of the
PNT-related assets sold approximated $1.5 million. The sale included a five-year noncompete agreement. In addition, the Company agreed to a
separate, two-year agreement with an affiliate of the purchaser of the PNT assets to provide transition assistance and ongoing consulting.

      Total proceeds from the sale of the PNT assets and the related consulting agreement were $4,750,000, resulting in a gain upon the sale of
approximately $3,273,000; however, because of the long-term nature of the consulting services and the inability of the Company to separately
value those services, the gain was deferred and was amortized into other income over the 24 month consulting period (approximately $136,000
per month). At December 31, 2005, the entire gain has been amortized.

      Immediately prior to the sale of the PNT assets, the Company terminated 29 employees. Impacted employees were provided with
severance benefits including a certain number of months pay dependent upon their period of service with the Company, job placement services,
and payment of Cobra through the end of 2003. The total cost of this severance was $571,929. In addition, certain employees requested and
were granted an extension of the exercise period for their outstanding stock options to the end of 2003. The extension of the exercise period
resulted in a remeasurement of stock compensation expense for options with exercise prices below the estimated fair value at the time the
extension was granted. The Company recorded additional stock-based compensation expense in 2003 of $78,000 related to this remeasurement.
The total costs of the severance and stock option remeasurement of $649,929 was recorded as an operating expense in 2003.

16.     Subsequent Events

      In February 2006, the Company’s board of directors approved the filing of a registration statement with the Securities and Exchange
Commission for an initial public offering of the Company’s common stock. The board of directors approved, subject to shareholder approval,
an increase in the number of authorized shares to

                                                                     F-23
Table of Contents

                                                  NORTHSTAR NEUROSCIENCE, INC.
                                                    (A Development Stage Company)

                                         NOTES TO FINANCIAL STATEMENTS—(Continued)

100,000,000 shares of common stock and 5,000,000 shares of preferred stock. At that time, the board of directors also approved, subject to
shareholder approval, an increase in the number of shares of common stock authorized for issuance under the 1999 Plan by 500,000 shares, for
a total of 4,231,250 shares authorized under the 1999 Plan.

      In addition, the board of directors approved, subject to shareholder approval, the Company’s 2006 Performance Incentive Plan (Incentive
Plan) in February 2006. When the Incentive Plan becomes effective, the 1999 Plan will be terminated, and any shares subject to outstanding
options under the 1999 Plan as of the date of the plan’s termination, and for which such options expire on otherwise terminate without having
been exercised in full, will rollover to the Incentive Plan. The Incentive Plan provides for various forms of awards to Company employees,
including the potential for awards in the form of stock options, stock appreciation rights, restricted stock purchase rights, deferred
compensation awards, cash-based and other stock-based awards, and non-employee director awards. The Incentive Plan provides for up to
3,000,000 shares of common stock to be issued under the plan, with an annual evergreen provision that provides for an automatic annual
increase on January 1 of each year in the aggregate number of shares available equal to the lesser of 2% of the issued and outstanding shares of
common stock or 1,000,000 shares.

      In February 2006, the board of directors also approved a form of employment agreement that the Company expects to enter into with
certain of its executive officers if and when the Company’s registration statement becomes effective. These employment agreements provide
for partial acceleration of vesting of outstanding stock options and other outstanding stock awards upon certain employment terminations in the
absence of a change in control of the Company (as defined in each employment agreement), and full acceleration of vesting of outstanding
stock options and other outstanding stock awards upon certain employment terminations following a change in control of the Company. The
date of such accelerated vesting would represent a new measurement date for such award and could result in an accounting charge at the time
of termination of employment.

                                                                      F-24
Table of Contents
Table of Contents




                                                                            Shares
                                                           Common Stock




                                                               PROSPECTUS

                                                                              , 2006




                                                                 Citigroup
                                                       Cowen & Company
                                                      First Albany Capital
                                              Leerink Swann & Company

     Through and including                  , 2006 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Table of Contents

                                                                        PART II

                                             INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

       The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the registrant in
connection with the sale of the common stock being registered. All the amounts shown are estimates except the registration fee, the NASD
filing fee and the Nasdaq National Market initial listing fee. We intend to pay all expenses of registration, issuance and distribution.

                SEC registration fee                                                                                          $     9,095
                NASD filing fee                                                                                                     9,000
                Nasdaq National Market initial listing fee                                                                        100,000
                Blue sky qualification fees and expenses                                                                            5,000
                Printing and engraving expenses                                                                                         *
                Legal fees and expenses                                                                                                 *
                Accounting fees and expenses                                                                                            *
                Transfer agent and registrar fees and expenses                                                                          *
                Miscellaneous                                                                                                           *
                Total                                                                                                         $          *

* To be provided by amendment.

Item 14. Indemnification of Officers and Directors

      Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act authorize a court to award, or a corporation’s
board of directors to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under various
circumstances for liabilities arising under the Securities Act. As permitted by the Washington Business Corporation Act, the registrant’s articles
of incorporation that will be effective following the offering provide that the registrant will indemnify any individual made a party to a
proceeding because that individual is or was one of the registrant’s directors, officers or certain other employees or agents, and will advance or
reimburse the reasonable expenses incurred by that individual with respect to such proceeding, without regard to the limitations of
Sections 23B.08.510 through 23B.08.550 and 23B.08.560(2) of the Washington Business Corporation Act, or any other limitation that may be
enacted in the future to the extent the limitation may be disregarded if authorized by the registrant’s articles of incorporation, to the fullest
extent and under all circumstances permitted by applicable law. The indemnification rights conferred in the registrant’s articles of incorporation
are not exclusive.

      The registrant maintains a liability insurance policy pursuant to which its directors and officers may be indemnified against liability
incurred for serving in their capacities as directors and officers.

       Prior to the completion of this offering, the registrant intends to enter into shareholder-approved indemnification agreements with each of
its directors and officers. The indemnification agreements set forth certain procedures that will apply in the event of a claim for indemnification
thereunder. At present, no litigation or proceeding is pending that involves a director or officer of the registrant regarding which
indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification.

     The form of underwriting agreement filed as an exhibit to this registration statement provides for indemnification under certain
circumstances by the underwriters of the registrant, its directors, certain of its officers and its controlling persons for certain liabilities arising
under the Securities Act or otherwise.

      The Fourth Amended and Restated Investors’ Rights Agreement, as amended, between the registrant and certain investors provides for
cross-indemnification in connection with registration of the registrant’s common stock on behalf of such investors.

                                                                           II-1
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      See also the undertakings set out in response to Item 17.

      Reference is made to the following documents filed as exhibits to this registration statement regarding relevant indemnification
provisions described above and elsewhere herein:
                                                                                                                              Numbe
                Exhibit Document                                                                                                r
                Form of Underwriting Agreement                                                                                    1.1
                Registrant’s Amended and Restated Articles of Incorporation, to be effective upon closing of this
                  offering                                                                                                       3.4
                Form of Indemnification Agreement                                                                               10.1
                Fourth Amended and Restated Investors’ Rights Agreement, dated April 9, 2004                                    10.2

Item 15. Recent Sales of Unregistered Securities

     From January 1, 2003 through March 27, 2006, the registrant has sold the following securities that were not registered under the
Securities Act:

      •    The registrant sold an aggregate of 794,278 shares of its common stock to certain employees, directors and consultants for cash
           consideration in the aggregate amount of $414,288.16 upon the exercise of stock options granted under its Amended and Restated
           1999 Stock Option Plan, 10,167 shares of which have been repurchased.

      •    The registrant granted stock options to certain employees, directors and consultants under its Amended and Restated 1999 Stock
           Option Plan covering an aggregate of 2,068,132 shares of common stock, at exercise prices ranging from $0.60 to $6.46 per share.
           Of these, options covering an aggregate of 220,460 were canceled without being exercised.

      •    In April 2004, the registrant sold an aggregate of 4,821,803 shares of Series E redeemable convertible preferred stock to Boston
           Scientific Corporation, an accredited investor at the time of the issuance, at $4.77 per share for an aggregate purchase price of $23.0
           million.

      •    In October 2004, the registrant issued a warrant to purchase 25,000 shares of common stock at an exercise price of $0.80 per share
           in connection with the execution of a licensing agreement for intellectual property.

      •    In December 2005, the registrant entered into a loan and security agreement with Horizon Technology Funding Company LLC and
           Oxford Finance Corporation, pursuant to which the registrant may borrow up to $10.0 million from the lenders in consideration for
           certain promissory notes. In connection with the loan financing, the registrant issued two warrants to purchase up to an aggregate of
           209,645 shares of Series E redeemable convertible preferred stock, assuming full draw down of the credit facility, with an exercise
           price of $4.77 per share, subject to certain adjustments, to Horizon Technology Funding Company LLC and Oxford Finance
           Corporation, each of which was an accredited investor at the time of the issuance.

      The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under
Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and
not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and
instruments issued in such transactions. All recipients had adequate access, through their relationship with the registrant, to information about
the registrant.

      No underwriters were involved in the foregoing sales of securities.

                                                                        II-2
Table of Contents

Item 16. Exhibits and Financial Statement Schedules

      (a) Exhibits.
 Exhibit
 Number             Description of Document
    1.1*            Form of Underwriting Agreement
    3.1+            Amended and Restated Articles of Incorporation of the registrant
    3.2+            Amendment to Articles of Incorporation of the registrant
    3.3*            Amendment to Articles of Incorporation of the registrant
      3.4           Form of Amended and Restated Articles of Incorporation of the registrant, to be effective following this offering
    3.5+            Bylaws of the registrant, as amended
    3.6+            Form of Amended and Restated Bylaws of the registrant, to be effective following this offering
    4.1*            Specimen certificate evidencing shares of common stock
    5.1*            Opinion of DLA Piper Rudnick Gray Cary US LLP
   10.1+            Form of Indemnification Agreement entered into between the registrant and each of its directors and officers
   10.2+            Fourth Amended and Restated Investors’ Rights Agreement, dated April 9, 2004, by and among the registrant and the
                    shareholders listed on Exhibit A thereto
   10.3+            First Amendment to Fourth Amended and Restated Investors’ Rights Agreement, dated December 30, 2005, between the
                    registrant and the shareholders named therein
   10.4+            Venture Loan and Security Agreement, dated December 30, 2005, by and among the registrant, Horizon Technology Funding
                    Company II LLC and Oxford Finance Corporation
   10.5+            Amended and Restated 1999 Stock Option Plan and related agreements
    10.6            2006 Performance Incentive Plan and related agreements
   10.7+            Lease Agreement, dated July 5, 2000, between the registrant and Selig Real Estate Holdings Eight
   10.8+            First Amendment to Lease dated July 5, 2000, dated as of July 2, 2002, between the registrant and Selig Real Estate Holdings
                    Eight
   10.9+            Manufacturing Agreement, dated April 9, 2004, between the registrant and Texcel LLC
 10.10+             Manufacturing Agreement, dated April 9, 2004, between the registrant and SMTEK International, Inc., as amended (SMTEK
                    International, Inc. has been acquired by CTS Electronics Manufacturing Solutions, Inc.)
 10.11+             Manufacturing Agreement, dated August 30, 2004, between the registrant and Avail Medical Products, Inc.
 10.12+             Manufacturing Agreement, dated April 8, 2004, between the registrant and Oscor, Inc.
  10.13*            Form of Employment Agreement between the registrant and Alan J. Levy, Ph.D.
  10.14*            Form of Employment Agreement between the registrant and John S. Bowers Jr.
  10.15*            Form of Employment Agreement between the registrant and Raymond N. Calvert
  10.16*            Form of Employment Agreement between the registrant and Lori J. Glastetter

                                                                        II-3
Table of Contents

 Exhibit
 Number             Description of Document

10.17*              Form of Employment Agreement between the registrant and Nawzer Mehta, Ph.D.
10.18*              Form of Employment Agreement between the registrant and Bradford E. Gliner
10.19               Director Resignation Agreement, dated March 7, 2006, between the registrant and Seth A. Rudnick
23.1                Consent of Independent Registered Public Accounting Firm
23.2*               Consent of DLA Piper Rudnick Gray Cary US LLP (included in Exhibit 5.1)
23.3+               Consent of Albert J. Graf
23.4+               Consent of Robert E. McNamara
24.1+               Power of Attorney

* To be filed by amendment.
+ Previously filed.

      All schedules are omitted because they are not required, are not applicable or the information is included in the financial statements or
notes thereto.

Item 17. Undertakings

       The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

      Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

        The undersigned registrant undertakes that:

              (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as
        part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to
        Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was
        declared effective, and

              (2) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of
        prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
        at that time shall be deemed to be the initial bona fide offering thereof.

                                                                          II-4
Table of Contents

                                                                 SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Seattle, in the County of King,
State of Washington, on the 29th day of March, 2006.

                                                                                        NORTHSTAR NEUROSCIENCE, INC.

                                                                                        By:                /s/   Alan J. Levy, Ph.D.
                                                                                                                    Alan J. Levy, Ph.D.
                                                                                                           President and Chief Executive Officer

     Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
                                     Signature                                        Title                                             Date

               /s/         Alan J. Levy, Ph.D.              President, Chief Executive Officer and                               March 29, 2006
                                Alan J. Levy, Ph. D.        Director
                                                            (principal executive officer)
              /s/         Raymond N. Calvert                Chief Financial Officer                                              March 29, 2006
                                Raymond N. Calvert          (principal financial and accounting officer)
                    /s/         Susan K. Barnes*            Director                                                             March 29, 2006
                                 Susan K. Barnes

                   /s/      Wende S. Hutton*                Director                                                             March 29, 2006
                                 Wende S. Hutton

             /s/         Seth A. Rudnick, M.D.*             Director                                                             March 29, 2006
                            Seth A. Rudnick, M.D.

                    /s/         Dale A. Spencer*            Director                                                             March 29, 2006
                                  Dale A. Spencer

               /s/         Jesse I. Treu, Ph.D.*            Director                                                             March 29, 2006
                                Jesse I. Treu, Ph.D.

                   /s/      Carol D. Winslow*               Director                                                             March 29, 2006
                                 Carol D. Winslow


*By:                      /s/     Alan J. Levy, Ph.D.
                                     Alan J. Levy, Ph.D.
                                      Attorney-in-Fact

                                                                       II-5
Table of Contents

                                                            EXHIBIT INDEX
   Exhibit
   Number           Description of Document
     1.1*           Form of Underwriting Agreement
     3.1+           Amended and Restated Articles of Incorporation of the registrant
     3.2+           Amendment to Articles of Incorporation of the registrant
     3.3*           Amendment to Articles of Incorporation of the registrant
     3.4            Form of Amended and Restated Articles of Incorporation of the registrant, to be effective following this offering
     3.5+           Bylaws of the registrant, as amended
     3.6+           Form of Amended and Restated Bylaws of the registrant, to be effective following this offering
     4.1*           Specimen certificate evidencing shares of common stock
     5.1*           Opinion of DLA Piper Rudnick Gray Cary US LLP
   10.1+            Form of Indemnification Agreement entered into between the registrant and each of its directors and officers
   10.2+            Fourth Amended and Restated Investors’ Rights Agreement, dated April 9, 2004, by and among the registrant and the
                    shareholders listed on Exhibit A thereto
   10.3+            First Amendment to Fourth Amended and Restated Investors’ Rights Agreement, dated December 30, 2005, between the
                    registrant and the shareholders named therein
   10.4+            Venture Loan and Security Agreement, dated December 30, 2005, by and among the registrant, Horizon Technology
                    Funding Company II LLC and Oxford Finance Corporation
   10.5+            Amended and Restated 1999 Stock Option Plan and related agreements
   10.6             2006 Performance Incentive Plan and related agreements
   10.7+            Lease Agreement, dated July 5, 2000, between the registrant and Selig Real Estate Holdings Eight
   10.8+            First Amendment to Lease dated July 5, 2000, dated as of July 2, 2002, between the registrant and Selig Real Estate
                    Holdings Eight
   10.9+            Manufacturing Agreement, dated April 9, 2004, between the registrant and Texcel LLC
   10.10+           Manufacturing Agreement, dated April 9, 2004, between the registrant and SMTEK International, Inc., as amended
                    (SMTEK International, Inc. has been acquired by CTS Electronics Manufacturing Solutions, Inc.)
   10.11+           Manufacturing Agreement, dated August 30, 2004, between the registrant and Avail Medical Products, Inc.
   10.12+           Manufacturing Agreement, dated April 8, 2004, between the registrant and Oscor, Inc.
   10.13*           Form of Employment Agreement between the registrant and Alan J. Levy, Ph.D.
   10.14*           Form of Employment Agreement between the registrant and John S. Bowers Jr.
   10.15*           Form of Employment Agreement between the registrant and Raymond N. Calvert
   10.16*           Form of Employment Agreement between the registrant and Lori J. Glastetter
   10.17*           Form of Employment Agreement between the registrant and Nawzer Mehta, Ph.D.
   10.18*           Form of Employment Agreement between the registrant and Bradford E. Gliner
   10.19            Director Resignation Agreement, dated March 7, 2006, between the registrant and Seth A. Rudnick
   23.1             Consent of Independent Registered Public Accounting Firm
   23.2*            Consent of DLA Piper Rudnick Gray Cary US LLP (included in Exhibit 5.1)
   23.3+            Consent of Albert J. Graf
   23.4+            Consent of Robert E. McNamara
   24.1+            Power of Attorney
* To be filed by amendment.
+ Previously filed.
                                                                                                                                      Exhibit 3.4

                                                      AMENDED AND RESTATED
                                                    ARTICLES OF INCORPORATION
                                                                OF
                                                   NORTHSTAR NEUROSCIENCE, INC.

                                                [to be filed upon effectiveness of the offering]

                                                                  ARTICLE 1

                                                                     NAME

     The name of this corporation is Northstar Neuroscience, Inc.

                                                                  ARTICLE 2

                                                                  DURATION

     This corporation is organized under the Washington Business Corporation Act (the ―Act‖) and shall have perpetual existence.

                                                                  ARTICLE 3

                                                          PURPOSE AND POWERS

     The purpose and powers of this corporation are as follows:

     3.1 To engage in any lawful business.

      3.2 To engage in any and all activities that, in the judgment of the Board of Directors, may at any time be incidental or conducive to the
attainment of the foregoing purpose.

      3.3 To exercise any and all powers that a corporation formed under the Act, or any amendment thereto or substitute therefor, is entitled at
the time to exercise.

                                                                  ARTICLE 4

                                                              CAPITAL STOCK

     4.1 Authorized Capital. The corporation shall have authority to issue One Hundred Five Million (105,000,000) shares of capital
stock, of which One Hundred Million (100,000,000) shares will be common stock, $0.001 par value per share (the “Common Stock”),
and Five Million (5,000,000) shares will be preferred stock, par value $0.001 per share (the “Preferred Stock”).

      4.2 Common Stock. Except to the extent rights, preferences, privileges or restrictions are granted to Preferred Stock or any series thereof,
or as provided below, Common Stock has unlimited voting rights and is entitled to receive the net assets of this corporation upon dissolution.
The relative rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the holders thereof are as
follows:
           4.2.1 Dividend Rights. The holders of record of outstanding shares of Common Stock shall be entitled to receive, when, as and if
     declared by the Board of Directors, out of any funds of this corporation legally available therefor, such cash and other dividends as may
     be declared from time to time by the Board of Directors.
            4.2.2 Liquidation Rights. In the event of any liquidation, dissolution or winding up of the affairs of this corporation, whether
     voluntary or involuntary, the holders of issued and outstanding shares of Common Stock shall be entitled to receive ratably, based on the
     total number of shares of Common Stock held by each, all the assets and funds of this corporation available for distribution to its
     shareholders, whether from capital or surplus, subject, however, to any preferential rights granted to any series of Preferred Stock to first
     receive such assets and funds.
           4.2.3 Voting Rights. Each holder of Common Stock shall be entitled to one vote for each share of Common Stock held.

      4.3 Preferred Stock. The authorized shares of Preferred Stock may be divided into and issued in series. Authority is vested in the Board
of Directors, subject to the limitations and procedures set forth herein or as prescribed by law, to divide any part or all of such Preferred Stock
into any number of series, to fix and determine relative rights and preferences of the shares of any series to be established, and to amend the
rights and preferences of the shares of any series that has been established but is wholly unissued. Within any limits stated in these Articles or
in the resolution of the Board of Directors establishing a series, the Board of Directors, after the issuance of shares of a series, may amend the
resolution establishing the series to decrease (but not below the number of shares of such series then outstanding) the number of shares of that
series, and the number of shares constituting the decrease shall thereafter constitute authorized but undesignated shares. The authority herein
granted to the Board of Directors to determine the relative rights and preferences of the Preferred Stock shall be limited to unissued shares, and
no power shall exist to alter or change the rights and preferences of any shares that have been issued. Preferred Stock, or any series thereof,
may have rights that are identical to those of Common Stock. Unless otherwise expressly provided in the designation of the rights and
preferences of a series of Preferred Stock, a distribution in redemption or cancellation of shares of Common Stock or rights to acquire Common
Stock held by a former employee or consultant of the corporation or any of its affiliates may, notwithstanding RCW 23B.06.400(2)(b), be made
without regard to the preferential rights of holders of shares of that series of Preferred Stock.

      4.4 Issuance of Certificates. The Board of Directors shall have the authority to issue shares of the capital stock of this corporation and
the certificates therefor subject to such transfer restrictions and other limitations as it may deem necessary to promote compliance with
applicable federal and state securities laws, and to regulate the transfer thereof in such manner as may be calculated to promote such
compliance or to further any other reasonable purpose.

     4.5 No Cumulative Voting. Shareholders of this corporation shall not have the right to cumulate votes for the election of directors.

     4.6 No Preemptive Rights; Exception. No shareholder of this corporation shall have, solely by reason of being a shareholder, any
preemptive or preferential right or

                                                                         2
subscription right to any stock of this corporation or to any obligations convertible into stock of this corporation, or to any warrant or option for
the purchase thereof, except to the extent provided by resolution or resolutions of the Board of Directors establishing a series of Preferred Stock
or by written agreement with this corporation.

       4.7 Quorum for Meeting of Shareholders. A quorum shall exist at any meeting of shareholders if a majority of the votes entitled to be
cast is represented in person or by proxy. In the case of any meeting of shareholders that is adjourned more than once because of the failure of a
quorum to attend, those who attend the third convening of such meeting, although less than a quorum, shall nevertheless constitute a quorum
for the purpose of electing directors, provided that the percentage of shares represented at the third convening of such meeting shall not be less
than one-third of the shares entitled to vote.

      4.8 Calling of Special Meeting of Shareholders. Special meetings of the shareholders for any purpose or purposes may be called at any
time only by the Board of Directors, the Chairman of the Board (if one be appointed) or the President. Special meeting may not be called by
any other person or persons.

      4.9 Shareholder Voting on Extraordinary Actions. The vote of shareholders of this corporation required in order to approve
amendments to the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange, or other disposition of all or
substantially all of the property of the corporation not in the usual and regular course of business, or dissolution of the corporation, shall be a
majority of all of the votes entitled to be cast by each voting group entitled to vote thereon.

                                                                     ARTICLE 5

                                                                    DIRECTORS

     5.1 Number of Directors. The number of directors of the corporation shall be fixed as provided in the Bylaws and may be increased or
decreased from time to time in the manner specified therein.

       5.2 Terms of Directors; Removal of Directors. The directors shall be divided into three classes designated as Class I, Class II and Class
III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At
the first annual meeting of shareholders following the adoption and filing of these Articles, the term of office of the Class I directors shall
expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of shareholders following the adoption
and filing of these Articles, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three
years. At the third annual meeting of shareholders following the adoption and filing of these Articles, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of shareholders,
directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

      Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. Neither the

                                                                           3
Board of Directors nor any individual director may be removed without cause. Subject to any limitation imposed by law, any individual
director or directors may be removed with cause if the number of votes cast in favor of removing such director (or the entire Board of
Directors) exceeds the number of votes cast against removal. No decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.

      5.3 Authority of Board of Directors to Amend Bylaws. Subject to the limitation(s) of RCW 23B.10.210, and subject to the power of
the shareholders of the corporation to change or repeal the Bylaws, the Board of Directors is expressly authorized to make, amend, or repeal the
Bylaws of the corporation unless the shareholders in amending or repealing a particular bylaw provide expressly that the Board of Directors
may not amend or repeal that bylaw.

      5.4 Indemnification of Directors, Officers, Employees and Agents. The capitalized terms in this Section 5.4 shall have the meanings
set forth in RCW 23B.08.500.
            5.4.1 The Corporation shall indemnify and hold harmless each individual who is or was serving as a Director or officer of the
     Corporation or who, while serving as a Director or officer of the Corporation, is or was serving at the request of the Corporation as a
     director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust,
     employee benefit plan, or other enterprise, against any and all Liability incurred with respect to any Proceeding to which the individual is
     or is threatened to be made a Party because of such service, and shall make advances of reasonable Expenses with respect to such
     Proceeding, to the fullest extent permitted by law, without regard to the limitations in RCW 23B.08.510 through 23B.08.550, and
     23B.08.560(2); provided that no such indemnity shall indemnify any Director or officer from or on account of (1) acts or omissions of the
     Director or officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct of the Director or officer
     finally adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with respect to which it was finally adjudged that such
     Director or officer personally received a benefit in money, property, or services to which the Director or officer was not legally entitled.
           5.4.2 The Corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee,
     or agent of the Corporation or, who, while a director, officer, employee, or agent of the Corporation, is or was serving at the request of the
     Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint
     venture, trust, employee benefit plan, or other enterprise against Liability asserted against or incurred by the individual in that capacity or
     arising from the individual’s status as a director, officer, employee, or agent, whether or not the Corporation would have power to
     indemnify the individual against such Liability under RCW 23B.08.510 or 23B.08.520.
          5.4.3 If, after the effective date of this Section 5.4, the Act is amended to authorize further indemnification of Directors or officers,
     then Directors and officers of the Corporation shall be indemnified to the fullest extent permitted by the Act.
           5.4.4 To the extent permitted by law, the rights to indemnification and advance of reasonable Expenses conferred in this Section 5.4
     shall not be exclusive of any other right

                                                                         4
      which any individual may have or hereafter acquire under any statute, provision of the Bylaws, agreement, vote of shareholders or
      disinterested directors, or otherwise. The right to indemnification conferred in this Section 5.4 shall be a contract right upon which each
      Director or officer shall be presumed to have relied in determining to serve or to continue to serve as such. Any amendment to or repeal
      of this Section 5.4 shall not adversely affect any right or protection of a Director or officer of the Corporation for or with respect to any
      acts or omissions of such Director or officer occurring prior to such amendment or repeal.
            5.4.5 If any provision of this Section 5.4 or any application thereof shall be invalid, unenforceable, or contrary to applicable law, the
      remainder of this Section 5.4, and the application of such provisions to individuals or circumstances other than those as to which it is held
      invalid, unenforceable, or contrary to applicable law, shall not be affected thereby.

      5.5 Limitation of Directors’ Liability. To the fullest extent permitted by the Act, as it exists on the date hereof or may hereafter be
amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for conduct as
a director, except for (i) acts or omissions that involve intentional misconduct or a knowing violation of law, (ii) conduct violating RCW
23B.08.310 (which involves distributions by the corporation), or (iii) any transaction from which the director will personally receive a benefit
in money, property, or services to which the director is not legally entitled. If the Act is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Act, as so amended.

      5.6 Amendment; Repeal. Any amendment to or repeal of this Section 5 shall not adversely affect any right or protection of a director of
this corporation with respect to any acts or omissions occurring prior to such amendment or repeal.

                                                                    ARTICLE 6

                                                               OTHER MATTERS

      6.1 Amendments to Articles of Incorporation. Except as otherwise provided in these Articles, as amended from time to time, the
corporation reserves the right to amend, alter, change, or repeal any provisions contained in these Articles in any manner now or hereafter
prescribed or permitted by statute. All rights of shareholders of the corporation are subject to this reservation. A shareholder of the corporation
does not have a vested property right resulting from any provision of these Articles of Incorporation.

      6.2 Correction of Clerical Errors. The corporation shall have authority to correct clerical errors in any documents filed with the
Secretary of State of Washington, including these Articles or any amendments hereto, without the necessity of special shareholder approval of
such corrections.

                                                                          5
                                  Exhibit 10.6

 NORTHSTAR NEUROSCIENCE, INC.

2006 PERFORMANCE INCENTIVE PLAN
                                            NORTHSTAR NEUROSCIENCE, INC.
                                          2006 PERFORMANCE INCENTIVE PLAN

1.    E STABLISHMENT , P URPOSE AND T ERM OF P LAN .
      1.1 Establishment . The Northstar Neuroscience, Inc. 2006 Performance Incentive Plan (the “ Plan ” ) is hereby established
effective as of the date of its approval by the shareholders of the Company (the “ Effective Date ” ). Prior to the Effective Date, the
Company may implement a reverse stock split. Because this Plan is not effective until the Effective Date, any such reverse stock split will
not affect any of the share numbers set forth in this Plan, except that the number of shares set forth in Section 4.4 that may become
available under this Plan shall be adjusted in connection with any such reverse stock split in accordance with the provisions of the Prior
Plan.
      1.2 Purpose . The purpose of the Plan is to advance the interests of the Participating Company Group and its shareholders by
providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating Company Group. The Plan seeks to achieve this purpose by
providing for Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Purchase Rights, Restricted Stock Bonuses,
Restricted Stock Units, Performance Shares, Performance Units, Deferred Compensation Awards, Cash-Based and Other Stock-Based
Awards and Nonemployee Director Awards.
      1.3 Term of Plan. The Plan shall continue in effect until its termination by the Committee; provided, however, that all Awards shall
be granted, if at all, within ten (10) years from the Effective Date.

2.    D EFINITIONS AND C ONSTRUCTION .
     2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:
           (a) “Affiliate” means (i) an entity, other than a Parent Corporation, that directly, or indirectly through one or more
     intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company
     directly or indirectly through one or more intermediary entities. For this purpose, the term ―control‖ (including the term ―controlled
     by‖) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the
     relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning
     assigned such term for the purposes of registration on Form S-8 under the Securities Act.
           (b) “Award” means any Option, Stock Appreciation Right, Restricted Stock Purchase Right, Restricted Stock Bonus,
     Restricted Stock Unit, Performance Share, Performance Unit, Deferred Compensation Award, Cash-Based Award, Other
     Stock-Based Award or Nonemployee Director Award granted under the Plan.
     (c) “Award Agreement” means a written or electronic agreement between the Company and a Participant setting forth the
terms, conditions and restrictions of the Award granted to the Participant.
     (d) “Board” means the Board of Directors of the Company.
     (e) “Cash-Based Award” means an Award denominated in cash and granted pursuant to Section 12.
       (f) “Cause” means, unless such term or an equivalent term is otherwise defined with respect to an Award by the Participant’s
Award Agreement or by a written contract of employment or service, any of the following: (i) the Participant’s theft, dishonesty,
willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Participating Company documents or records;
(ii) the Participant’s material failure to abide by a Participating Company’s code of conduct or other policies (including, without
limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s unauthorized use,
misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of a Participating Company
(including, without limitation, the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary
information); (iv) any intentional act by the Participant which has a material detrimental effect on a Participating Company’s
reputation or business; (v) the Participant’s repeated failure or inability to perform any reasonable assigned duties after written
notice from a Participating Company of, and a reasonable opportunity to cure, such failure or inability; (vi) any material breach by
the Participant of any employment, service, non-disclosure, non-competition, non-solicitation or other similar agreement between
the Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vii) the
Participant’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud, dishonesty,
misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with a Participating
Company.
      (g) “Change in Control” means, unless such term or an equivalent term is otherwise defined with respect to an Award by the
Participant’s Award Agreement or by a written contract of employment or service, the occurrence of any of the following:
              (i) any ―person‖ (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the ―beneficial
       owner‖ (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company
       representing more than fifty percent (50%) of the total combined voting power of the Company’s then-outstanding securities
       entitled to vote generally in the election of Directors; provided, however, that the following acquisitions shall not constitute a
       Change in Control: (1) an acquisition by any such person who on the Effective Date is the beneficial owner of more than
       fifty percent (50%) of such voting power; (2) any acquisition directly from the Company, including, without limitation, a
       public offering of securities; (3) any acquisition by the Company; (4) any acquisition by a trustee or other fiduciary under an
       employee benefit plan of a Participating Company; or (5) any acquisition by an entity owned directly or indirectly by the
       shareholders of the Company in substantially the same proportions as their ownership of the voting securities of the
       Company; or

                                                             2
                        (ii) an Ownership Change Event or series of related Ownership Change Events (collectively, a “ Transaction ” ) in
                  which the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction
                  direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the
                  outstanding securities entitled to vote generally in the election of Directors or, in the case of an Ownership Change Event
                  described in Section 2.1(ee)(iii), the entity to which the assets of the Company were transferred (the “ Transferee ” ), as the
                  case may be; or
                        (iii) a liquidation or dissolution of the Company; provided, however, that a Change in Control shall be deemed not to
                  include a transaction described in subsections (i) or (ii) of this Section 2.1(g) in which a majority of the members of the
                  board of directors of the continuing, surviving or successor entity, or parent thereof, immediately after such transaction is
                  comprised of Incumbent Directors.

       For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from
ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case
may be, either directly or through one or more subsidiary corporations or other business entities. The Committee shall have the right to
determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and
its determination shall be final, binding and conclusive.
                 (h) “Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.
                 (i) “Committee” means the Compensation Committee and such other committee or subcommittee of the Board, if any, duly
           appointed to administer the Plan and having such powers in each instance as shall be specified by the Board. If, at any time, there is
           no committee of the Board then authorized or properly constituted to administer the Plan, the Board shall exercise all of the powers
           of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.
                 (j) “Company” means Northstar Neuroscience, Inc., a Washington corporation, or any successor corporation thereto.
                 (k) “Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or Director)
           to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such
           services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in
           reliance on registration on a Form S-8 Registration Statement under the Securities Act.
                 (l) “Covered Employee” means, at any time the Plan is subject to Section 162(m), any Employee who is or may become a
           ―covered employee‖ as defined in Section 162(m), or any successor statute, and who is designated, either as an individual Employee
           or a member of a class of Employees, by the Committee no later than (i) the date ninety (90) days after the beginning of the
           Performance Period, or (ii) the date on which twenty-five

                                                                       3
percent (25%) of the Performance Period has elapsed, as a ―Covered Employee‖ under this Plan for such applicable Performance
Period.
     (m) “Deferred Compensation Award” means an award granted to a Participant pursuant to Section 11.
     (n) “Director” means a member of the Board.
     (o) “Disability” means the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the
Code.
      (p) “Dividend Equivalent Right” means the right of a Participant, granted at the discretion of the Committee or as otherwise
provided by the Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one
share of Stock for each share of Stock represented by an Award held by such Participant.
      (q) “Employee” means any person treated as an employee (including an Officer or Director who is also treated as an
employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is
an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a
director’s fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and
in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such
individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the
terms of the Plan as of the time of the Company’s determination of whether or not the individual is an Employee, all such
determinations by the Company shall be final, binding and conclusive as to such rights, if any, notwithstanding that the Company or
any court of law or governmental agency subsequently makes a contrary determination as to such individual’s status as an
Employee.
     (r) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
      (s) “Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the
Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company
herein, subject to the following:
             (i) Except as otherwise determined by the Committee, if, on such date, the Stock is listed on a national or regional
       securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock
       (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the
       Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market
       system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the
       Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities
       exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on

                                                            4
       which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the
       Committee, in its discretion.
             (ii) Notwithstanding the foregoing, the Committee may, in its discretion, determine the Fair Market Value on the basis
       of the opening, closing, or average of the high and low sale prices of a share of Stock on such date, the preceding trading day
       or the next succeeding trading day; and, for purposes other than determining the exercise price or purchase price of shares
       pursuant to an Award, the high or low sale price of a share of Stock on such date, the preceding trading day or the next
       succeeding trading day, the average of any such prices determined over a period of trading days or the actual sale price of a
       share of Stock received by a Participant. The Committee may vary its method of determination of the Fair Market Value as
       provided in this Section for different purposes under the Plan.
             (iii) If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair
       Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction
       other than a restriction which, by its terms, will never lapse.
     (t) “Incentive Stock Option” means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an
incentive stock option within the meaning of Section 422(b) of the Code.
      (u) “Incumbent Director” means a director who either (i) is a member of the Board as of the Effective Date or (ii) is elected
to the Board with the affirmative votes of at least a majority of the Directors who were not elected in connection with an actual or
threatened proxy contest relating to the election of directors of the Company.
     (v) “Insider” means an Officer, Director or any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
     (w) “Insider Trading Policy” means the written policy of the Company pertaining to the purchase, sale, transfer or other
disposition of the Company’s equity securities by Directors, Officers, Employees or other service providers who may possess
material, nonpublic information regarding the Company or its securities.
     (x) “Net-Exercise” means a procedure by which the Participant will be issued a number of shares of Stock determined in
accordance with the following formula:

         N = X(A-B)/A, where
             ―N‖ = the number of shares of Stock to be issued to the Participant upon exercise of the Option;
             ―X‖ = the total number of shares with respect to which the Participant has elected to exercise the Option;
             ―A‖ = the Fair Market Value of one (1) share of Stock determined on the exercise date; and
             ―B‖ = the exercise price per share (as defined in the Participant’s Award Agreement)

                                                             5
     (y) “Nonemployee Director” means a Director who is not an Employee.
     (z) “Nonemployee Director Award” means a Nonstatutory Stock Option, Stock Appreciation Right, Restricted Stock Award
or Restricted Stock Unit Award granted to a Nonemployee Director pursuant to Section 13 of the Plan.
      (aa) “Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Award Agreement) an incentive
stock option within the meaning of Section 422(b) of the Code.
     (bb) “Officer” means any person designated by the Board as an officer of the Company.
     (cc) “Option” means an Incentive Stock Option or a Nonstatutory Stock Option.
     (dd) “ Other Stock-Based Award ” means an Award denominated in shares of Stock and granted pursuant to Section 12.
      (ee) “Ownership Change Event” means the occurrence of any of the following with respect to the Company: (i) the direct or
indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or share exchange in which the Company is a party; or (iii) the sale,
exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more
subsidiaries of the Company).
     (ff) “Parent Corporation” means any present or future ―parent corporation‖ of the Company, as defined in Section 424(e) of
the Code.
     (gg) “Participant” means any eligible person who has been granted one or more Awards.
     (hh) “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.
    (ii) “Participating Company Group” means, at any point in time, all entities collectively which are then Participating
Companies.
     (jj) “Performance Award” means an Award of Performance Shares or Performance Units.
      (kk) “Performance Award Formula” means, for any Performance Award, a formula or table established by the Committee
pursuant to Section 10.3 which provides the basis for computing the value of a Performance Award at one or more threshold levels
of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

                                                             6
      (ll) “Performance-Based Compensation” means compensation under an Award that satisfies the requirements of
Section 162(m) for certain performance-based compensation paid to Covered Employees.
     (mm) “Performance Goal” means a performance goal established by the Committee pursuant to Section 10.3.
     (nn) “Performance Period” means a period established by the Committee pursuant to Section 10.3 at the end of which one or
more Performance Goals are to be measured.
      (oo) “Performance Share” means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the
value of a Performance Share, as determined by the Committee, based on performance.
      (pp) “Performance Unit” means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value
of a Performance Unit, as determined by the Committee, based upon performance.
     (qq) “Prior Plan” means the Company’s 1999 Stock Option Plan.
     (rr) “Restricted Stock Award” means an Award of a Restricted Stock Bonus or a Restricted Stock Purchase Right.
     (ss) “Restricted Stock Bonus” means Stock granted to a Participant pursuant to Section 8.
     (tt) “Restricted Stock Purchase Right” means a right to purchase Stock granted to a Participant pursuant to Section 8.
      (uu) “Restricted Stock Unit” or “Stock Unit” means a right granted to a Participant pursuant to Section 9 or Section 11,
respectively, to receive a share of Stock on a date determined in accordance with the provisions of such Sections, as applicable, and
the Participant’s Award Agreement.
      (vv) “Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or
regulation.
      (ww) “SAR” or “Stock Appreciation Right” means a right granted to a Participant pursuant to Section 7 to receive payment,
for each share of Stock subject to such SAR, of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock
on the date of exercise of the SAR over the exercise price.
     (xx) “Section 162(m)” means Section 162(m) of the Code.
     (yy) “Section 409A” means Section 409A of the Code (including regulations or administrative guidelines thereunder).

                                                            7
           (zz) “Securities Act” means the Securities Act of 1933, as amended.
           (aaa) “Service” means a Participant’s employment or service with the Participating Company Group, whether in the capacity
     of an Employee, a Director or a Consultant. Unless otherwise provided by the Committee, a Participant’s Service shall not be
     deemed to have terminated merely because of a change in the capacity in which the Participant renders such Service or a change in
     the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of
     the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have terminated if the Participant takes any
     military leave, sick leave, or other bona fide leave of absence approved by the Company. However, if any such leave taken by a
     Participant exceeds ninety (90) days, then on the ninety-first (91st) day following the commencement of such leave the Participant’s
     Service shall be deemed to have terminated, unless the Participant’s right to return to Service is guaranteed by statute or contract.
     Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be
     treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be
     deemed to have terminated either upon an actual termination of Service or upon the entity for which the Participant performs
     Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the
     Participant’s Service has terminated and the effective date of such termination.
           (bbb) “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.6.
           (ccc) “Subsidiary Corporation” means any present or future ―subsidiary corporation‖ of the Company, as defined in
     Section 424(f) of the Code.
           (ddd) “Ten Percent Owner” means a Participant who, at the time an Option is granted to the Participant, owns stock
     possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company
     (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.
           (eee) “Vesting Conditions” mean those conditions established in accordance with the Plan prior to the satisfaction of which
     shares subject to an Award remain subject to forfeiture or a repurchase option in favor of the Company exercisable for the
     Participant’s purchase price for such shares upon the Participant’s termination of Service.
      2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of
any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall
include the singular. Use of the term ―or‖ is not intended to be exclusive, unless the context clearly requires otherwise.

3.    A DMINISTRATION .
      3.1 Administration by the Committee. The Plan shall be administered by the Committee. All questions of interpretation of the
Plan, of any Award Agreement or of any other form of agreement or other document employed by the Company in the administration of

                                                                  8
the Plan or of any Award shall be determined by the Committee, and such determinations shall be final, binding and conclusive upon all
persons having an interest in the Plan or such Award, unless fraudulent or made in bad faith. Any and all actions, decisions and
determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan or Award Agreement or other
agreement thereunder (other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and
conclusive upon all persons having an interest therein.
      3.2 Authority of Officers. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has
apparent authority with respect to such matter, right, obligation, determination or election. The Board or Committee may, in its discretion,
delegate to a committee comprised of one or more Officers the authority to grant one or more Awards, without further approval of the
Board or the Committee, to any Employee, other than a person who, at the time of such grant, is an Insider or a Covered Person;
provided, however, that (a) such Awards shall not be granted for shares in excess of the maximum aggregate number of shares of Stock
authorized for issuance pursuant to Section 4.1, (b) each such Award shall be subject to the terms and conditions of the appropriate
standard form of Award Agreement approved by the Board or the Committee and shall conform to the provisions of the Plan, and
(c) each such Award shall conform to such limits and guidelines as shall be established from time to time by resolution of the Board or
the Committee.
   3.3 Powers of the Committee . In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the
Committee shall have the full and final power and authority, in its discretion:
          (a) to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of
     Stock, units or monetary value to be subject to each Award;
           (b) to determine the type of Award granted;
           (c) to determine the Fair Market Value of shares of Stock or other property;
           (d) to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares
     acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares pursuant to any Award, (ii) the
     method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation
     arising in connection with Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions
     of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Measures, Performance
     Period, Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance
     Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant’s termination of Service on
     any of the foregoing, and (viii) all other terms, conditions and

                                                                  9
     restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;
           (e) to determine whether an Award will be settled in shares of Stock, cash, or in any combination thereof;
           (f) to approve one or more forms of Award Agreement;
           (g) to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award
     or any shares acquired pursuant thereto;
           (h) to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto,
     including with respect to the period following a Participant’s termination of Service;
           (i) without the consent of the affected Participant and notwithstanding the provisions of any Award Agreement to the contrary,
     to unilaterally substitute at any time a Stock Appreciation Right providing for settlement solely in shares of Stock in place of any
     outstanding Option, provided that such Stock Appreciation Right covers the same number of shares of Stock and provides for the
     same exercise price (subject in each case to adjustment in accordance with Section 4.6) as the replaced Option and otherwise
     provides substantially equivalent terms and conditions as the replaced Option, as determined by the Committee;
           (j) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt sub-plans or supplements to, or
     alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the
     laws or regulations of or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose citizens
     may be granted Awards; and
          (k) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to
     make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem
     advisable to the extent not inconsistent with the provisions of the Plan or applicable law.
      3.4 Compliance with Section 162(m). If the Company is a ―publicly held corporation‖ within the meaning of Section 162(m), the
Board may establish a Committee of ―outside directors‖ within the meaning of Section 162(m) to approve the grant of any Award
intended to result in the payment of Performance-Based Compensation.
      3.5 Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of
equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance
with the requirements, if any, of Rule 16b-3.
     3.6 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the
Committee or as officers or employees of the Participating Company Group, members of the Board or the Committee and any officers or
employees of the Participating Company Group to whom authority to act for the Board, the

                                                                  10
Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees,
actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan,
or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the
same.

4.    S HARES S UBJECT TO P LAN .
     4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Sections 4.2, 4.3, 4.4, and 4.6, the maximum
aggregate number of shares of Stock that may be issued under the Plan after the Effective Date shall be equal to Three Million
(3,000,000) shares, and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof.
      4.2 Annual Increase in Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.6, the maximum
aggregate number of shares of Stock that may be issued under the Plan as set forth in Section 4.1 shall be cumulatively increased on
January 1, 2007 and on each subsequent January 1, through and including January 1, 2015, by a number of shares (the “ Annual Increase
” ) equal to the lesser of (i) two percent (2%) of the number of shares of Stock issued and outstanding on the immediately preceding
December 31 or (ii) One Million (1,000,000) shares. Notwithstanding the foregoing, the Board may act, prior to the first day of any
calendar year, to increase the share reserve by a number of shares of Stock as the Board shall determine, which number shall be less than
each of (i) and (ii).
      4.3 Share Accounting. If an outstanding Award for any reason expires or is terminated or cancelled without having been exercised
or settled in full, or if shares of Stock acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by
the Company for an amount not greater than the Participant’s purchase price, the shares of Stock allocable to the terminated portion of
such Award or such forfeited or repurchased shares of Stock shall again be available for issuance under the Plan. Shares of Stock shall
not be deemed to have been issued pursuant to the Plan (a) with respect to any portion of an Award that is settled in cash or (b) to the
extent such shares are withheld or reacquired by the Company in satisfaction of tax withholding obligations pursuant to Section 17.2.
Upon payment in shares of Stock pursuant to the exercise of a SAR, the number of shares available for issuance under the Plan shall be
reduced only by the number of shares actually issued in such payment. If the exercise price of an Option is paid by tender to the
Company, or attestation to the ownership, of shares of Stock owned by the Participant, or by means of a Net-Exercise, the number of
shares available for issuance under the Plan shall be reduced by the net number of shares for which the Option is exercised.

                                                                 11
      4.4 Adjustment for Unissued Prior Plan Shares. The maximum aggregate number of shares of Stock that may be issued under the
Plan as set forth in Section 4.1 shall be cumulatively increased from time to time by:
          (a) the number of shares of Stock subject to that portion of any option outstanding pursuant to the Prior Plan as of the
     Effective Date which, on or after the Effective Date, expires or is terminated or cancelled without having been exercised; and
           (b) the number of shares of Stock acquired pursuant to the Prior Plan subject to forfeiture or repurchase by the Company at the
     Participant’s purchase price which, on or after the date of termination of the Prior Plan, is so forfeited or repurchased; provided,
     however, that the aggregate number of shares of Stock authorized for issuance under the Prior Plan that may become authorized for
     issuance under the Plan pursuant to this Section 4.4 shall not exceed Three Million Ninety Two Thousand Nine Hundred Sixty-One
     (3,092,961) subject to adjustment as provided in Section 4.6.
      4.5 Maximum Number of Shares Issuable Pursuant to Incentive Stock Options. Subject to adjustment as provided in
Section 4.6, the maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to the exercise of Incentive
Stock Options shall not exceed Three Million (3,000,000), cumulatively increased on January 1, 2007 and on each subsequent January 1,
through and including January 1, 2015, by a number of shares equal to the smaller of the Annual Increase determined under Section 4.2
or Eight Million (8,000,000) shares. The maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to all
Awards other than Incentive Stock Options shall be the number of shares determined in accordance with Section 4.1, subject to
adjustment as provided in Sections 4.2, 4.3, 4.4 and 4.6.
      4.6 Adjustments for Changes in Capital Structure . Subject to any required action by the shareholders of the Company, in the
event of any change in the Stock effected without receipt of consideration by the Company after the Effective Date, whether through
merger, share exchange, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the
event of payment of a dividend or distribution to the shareholders of the Company in a form other than Stock (excepting normal cash
dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate adjustments shall be made in the number
and kind of shares subject to the Plan and to any outstanding Awards, in the Award limits set forth in Section 5.3 and in the exercise or
purchase price per share under any outstanding Award in order to prevent dilution or enlargement of Participants’ rights under the Plan.
For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as ―effected without receipt of
consideration by the Company.‖ If a majority of the shares which are of the same class as the shares that are subject to outstanding
Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of
another corporation (the “ New Shares ” ), the Committee may unilaterally amend the outstanding Awards to provide that such Awards
are for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise or purchase price per share of,
the outstanding Awards shall be adjusted in a fair and equitable manner as determined by the Committee, in its discretion. Any

                                                                  12
     fractional share resulting from an adjustment pursuant to this Section 4.6 shall be rounded down to the nearest whole number, and in no
     event may the exercise or purchase price under any Award be decreased to an amount less than the par value, if any, of the stock subject
     to such Award. The Committee in its sole discretion, may also make such adjustments in the terms of any Award to reflect, or related to,
     such changes in the capital structure of the Company or distributions as it deems appropriate, including modification of Performance
     Goals, Performance Award Formulas and Performance Periods. The adjustments determined by the Committee pursuant to this Section
     shall be final, binding and conclusive.

     The Committee may, without affecting the number of Shares reserved or available hereunder, authorize the issuance or assumption of
benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and
conditions as it may deem appropriate, subject to compliance with Sections 409A and 422 and any related guidance issued by the U.S. Treasury
Department, where applicable.

     5.    E LIGIBILITY , P ARTICIPATION AND A WARD L IMITATIONS .
           5.1 Persons Eligible for Awards. Awards, other than Deferred Compensation Award or Nonemployee Director Awards, may be
     granted only to Employees and Consultants. Deferred Compensation Awards may be granted only to Officers, Directors and individuals
     who are among a select group of management or highly compensated Employees. Nonemployee Director Awards may be granted only to
     persons who, at the time of grant, are Nonemployee Directors.
           5.2 Participation in Plan. Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than
     one Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been
     granted an Award, to be granted an additional Award.
           5.3 Award Limitations.
                 (a) Incentive Stock Option Limitations.
                        (i) Persons Eligible. An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is
                  an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an “ ISO-Qualifying
                  Corporation ” ). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of
                  an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
                  prospective Employee upon the condition that such person become an Employee of an ISO-Qualifying Corporation shall be
                  deemed granted effective on the date such person commences Service with an ISO-Qualifying Corporation, with an exercise
                  price determined as of such date in accordance with Section 6.1.
                          (ii) Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under
                  all stock option plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the
                  first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars
                  ($100,000), the portion of such options which exceeds such amount shall be

                                                                      13
             treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be
             taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the
             time the option with respect to such stock is granted. If the Code is amended to provide for a limitation different from that
             set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with
             respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive
             Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the
             Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the
             Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise, shares
             issued pursuant to each such portion shall be separately identified.
           (b) Nonemployee Director Award Limits. Subject to adjustment as provided in Section 4.6, no Nonemployee Director may be
     granted within any fiscal year of the Company one or more Nonemployee Director Awards for more than Seventy Five Thousand
     (75,000) shares; provided, however, that the foregoing annual limit shall be increased by one or more of the following additions, as
     applicable: (i) an additional Fifty Thousand (50,000) in the fiscal year in which the Nonemployee Director is first appointed or
     elected to the Board as a Nonemployee Director, (ii) an additional Thirty Thousand (30,000) shares in any fiscal year in which the
     Nonemployee Director is serving as the Chairman or Lead Director of the Board, (iii) an additional Fifteen Thousand
     (15,000) shares in any fiscal year for each committee of the Board on which the Nonemployee Director is then serving other than as
     chairman of the committee, and (iv) an additional Twenty Thousand (20,000) shares in any fiscal year for each committee of the
     Board on which the Nonemployee Director is then serving as chairman of the committee.

6.    S TOCK O PTIONS .
      Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the
Committee shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company
unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Options may incorporate all or any of the terms
of the Plan by reference and shall comply with and be subject to the following terms and conditions:
      6.1 Exercise Price. The exercise price for each Option shall be established in the discretion of the Committee; provided, however,
that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the
Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten
percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing,
an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner
qualifying under the provisions of Section 424(a) of the Code.

                                                                 14
      6.2 Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and
subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the
Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten
(10) years after the effective date of grant of such Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall be
exercisable after the expiration of five (5) years after the effective date of grant of such Option. Subject to the foregoing, unless otherwise
specified by the Committee in the grant of an Option, each Option shall terminate ten (10) years after the effective date of grant of the
Option, unless earlier terminated in accordance with its provisions.
      6.3   Payment of Exercise Price.
            (a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of
     shares of Stock being purchased pursuant to any Option shall be made (i) in cash or by check or cash equivalent, (ii) to the extent
     permitted by the Company at the time of exercise, by tender to the Company, or attestation to the ownership, of shares of Stock
     owned by the Participant having a Fair Market Value not less than the exercise price, (iii) to the extent permitted by the Company at
     the time of exercise, by delivery of a properly executed notice of exercise together with irrevocable instructions to a broker
     providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being
     acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of
     Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a “ Cashless Exercise ”
     ), (iv) to the extent permitted by the Company at the time of exercise, by delivery of a properly executed notice electing a
     Net-Exercise, (v) by such other consideration as may be approved by the Committee from time to time to the extent permitted by
     applicable law, or (vi) by any combination thereof. The Committee may at any time or from time to time grant Options which do
     not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or
     more forms of consideration.
            (b) Limitations on Forms of Consideration.
                   (i) Tender of Stock. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or
             attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the
             provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. Unless otherwise
             provided by the Committee, an Option may not be exercised by tender to the Company, or attestation to the ownership, of
             shares of Stock unless such shares either have been owned by the Participant for more than six (6) months (or such other
             period, if any, as the Committee may permit) and not used for another Option exercise by attestation during such period, or
             were not acquired, directly or indirectly, from the Company.
                   (ii) Cashless Exercise. The Company reserves, at any and all times, the right, in the Company’s sole and absolute
             discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a
             Cashless

                                                                   15
       Exercise, including with respect to one or more Participants specified by the Company notwithstanding that such program or
       procedures may be available to other Participants.
6.4   Effect of Termination of Service.
      (a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise
provided by the Committee in the grant of an Option and set forth in the Award Agreement, an Option shall terminate immediately
upon the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after the Participant’s
termination of Service to the extent it is then vested only during the applicable time period determined in accordance with this
Section and thereafter shall terminate:
             (i) Disability. If the Participant’s Service terminates because of the Disability of the Participant, the Option, to the
       extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be
       exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of
       twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the date of
       expiration of the Option’s term as set forth in the Award Agreement evidencing such Option (the “ Option Expiration Date
       ” ).
             (ii) Death. If the Participant’s Service terminates because of the death of the Participant, the Option, to the extent
       unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by
       the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the
       Participant’s death at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service
       terminated, but in any event no later than the Option Expiration Date. The Participant’s Service shall be deemed to have
       terminated on account of death if the Participant dies within three (3) months after the Participant’s termination of Service.
            (iii) Termination for Cause. Notwithstanding any other provision of the Plan to the contrary, if the Participant’s
       Service is terminated for Cause or if, following the Participant’s termination of Service and during any period in which the
       Option otherwise would remain exercisable, the Participant engages in any act that would constitute Cause, the Option shall
       terminate in its entirety and cease to be exercisable immediately upon such termination of Service or act.
             (iv) Other Termination of Service. If the Participant’s Service terminates for any reason, except Disability, death or
       Cause, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service
       terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months after the date on which
       the Participant’s Service terminated, but in any event no later than the Option Expiration Date.
      (b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other than termination of Service for Cause, if
the exercise of an Option within the applicable time periods set forth in Section 6.4(a) is prevented by the provisions of Section 16
below, the Option shall remain exercisable until three (3) months (or such longer period of time

                                                            16
     as determined by the Committee, in its discretion) after the date the Participant is notified by the Company that the Option is
     exercisable, but in any event no later than the Option Expiration Date.
           (c) Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing, other than termination of Service for
     Cause, if a sale within the applicable time periods set forth in Section 6.4(a) of shares acquired upon the exercise of the Option
     would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest
     to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to
     such suit, (ii) the one hundred and ninetieth (190th) day after the Participant’s termination of Service, or (iii) the Option Expiration
     Date.
      6.5 Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the
Participant’s guardian or legal representative. An Option shall not be subject in any manner to anticipation, alienation, sale, exchange,
transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer
by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its
discretion, and set forth in the Award Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable
subject to the applicable limitations, if any, described in the General Instructions to Form S-8 Registration Statement under the Securities
Act.

7.    S TOCK A PPRECIATION R IGHTS .
      Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award,
in such form as the Committee shall from time to time establish. No SAR or purported SAR shall be a valid and binding obligation of the
Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing SARs may incorporate all or any of
the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
      7.1 Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a related Option (a “ Tandem SAR ” )
or may be granted independently of any Option (a “ Freestanding SAR ” ). A Tandem SAR may only be granted concurrently with the
grant of the related Option.
      7.2 Exercise Price. The exercise price for each SAR shall be established in the discretion of the Committee; provided, however,
that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the
exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective
date of grant of the SAR.
     7.3 Exercisability and Term of SARs.
           (a) Tandem SARs. Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the
     related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with
     respect to

                                                                  17
     less than the full number of shares of Stock subject to the related Option. The Committee may, in its discretion, provide in any
     Award Agreement evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company
     and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its terms. A Tandem
     SAR shall terminate and cease to be exercisable no later than the date on which the related Option expires or is terminated or
     canceled. Upon the exercise of a Tandem SAR with respect to some or all of the shares subject to such SAR, the related Option
     shall be canceled automatically as to the number of shares with respect to which the Tandem SAR was exercised. Upon the exercise
     of an Option related to a Tandem SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be
     canceled automatically as to the number of shares with respect to which the related Option was exercised.
           (b) Freestanding SARs. Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and
     subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the
     Award Agreement evidencing such SAR; provided, however, that no Freestanding SAR shall be exercisable after the expiration of
     ten (10) years after the effective date of grant of such SAR.
       7.4 Exercise of SARs. Upon the exercise (or deemed exercise pursuant to Section 7.5) of a SAR, the Participant (or the
Participant’s legal representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall be
entitled to receive payment of an amount for each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair
Market Value of a share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be made (a) in
the case of a Tandem SAR, solely in shares of Stock in a lump sum as soon as practicable following the date of exercise of the SAR and
(b) in the case of a Freestanding SAR, in cash, shares of Stock, or any combination thereof as determined by the Committee in
compliance with Section 409A. Unless otherwise provided in the Award Agreement evidencing a Freestanding SAR, payment shall be
made in a lump sum as soon as practicable following the date of exercise of the SAR. The Award Agreement evidencing any
Freestanding SAR may provide for deferred payment in a lump sum or in installments in compliance with Section 409A. When payment
is to be made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of
Stock on the date of exercise of the SAR. For purposes of Section 7, a SAR shall be deemed exercised on the date on which the Company
receives notice of exercise from the Participant or as otherwise provided in Section 7.5.
      7.5 Deemed Exercise of SARs. If, on the date on which a SAR would otherwise terminate or expire, the SAR by its terms remains
exercisable immediately prior to such termination or expiration and, if so exercised, would result in a payment to the holder of such SAR,
then any portion of such SAR which has not previously been exercised shall automatically be deemed to be exercised as of such date with
respect to such portion.
     7.6 Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise provided herein and unless otherwise
provided by the Committee in the grant of a SAR and set forth in the Award Agreement, a SAR shall be exercisable after a Participant’s
termination of Service only to the extent and during the applicable time period determined in

                                                                  18
accordance with Section 6.4 (treating the SAR as if it were an Option) and thereafter shall terminate.
      7.7 Transferability of SARs. During the lifetime of the Participant, a SAR shall be exercisable only by the Participant or the
Participant’s guardian or legal representative. An SAR shall not be subject in any manner to anticipation, alienation, sale, exchange,
transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer
by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its
discretion, and set forth in the Award Agreement evidencing such Award, a Tandem SAR related to a Nonstatutory Stock Option or a
Freestanding SAR shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to
Form S-8 Registration Statement under the Securities Act.

8.    R ESTRICTED S TOCK A WARDS .
      Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a Restricted Stock Bonus or a
Restricted Stock Purchase Right and the number of shares of Stock subject to the Award, in such form as the Committee shall from time
to time establish. No Restricted Stock Award or purported Restricted Stock Award shall be a valid and binding obligation of the
Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Restricted Stock Awards may
incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
      8.1 Types of Restricted Stock Awards Authorized. Restricted Stock Awards may be granted in the form of either a Restricted
Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards may be granted upon such conditions as the Committee shall
determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the
grant of or satisfaction of Vesting Conditions applicable to a Restricted Stock Award is to be contingent upon the attainment of one or
more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through
10.5(a).
      8.2 Purchase Price. The purchase price for shares of Stock issuable under each Restricted Stock Purchase Right shall be
established by the Committee in its discretion. No monetary payment (other than applicable tax withholding) shall be required as a
condition of receiving shares of Stock pursuant to a Restricted Stock Bonus, the consideration for which shall be services actually
rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the
Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a
value not less than the par value of the shares of Stock subject to a Restricted Stock Award.
       8.3 Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period established by the Committee, which
shall in no event exceed thirty (30) days from the effective date of the grant of the Restricted Stock Purchase Right.

                                                                  19
     8.4 Payment of Purchase Price. Except as otherwise provided below, payment of the purchase price for the number of shares of
Stock being purchased pursuant to any Restricted Stock Purchase Right shall be made (a) in cash or by check or cash equivalent, (b) by
such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (c) by any
combination thereof.
       8.5 Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock Award may (but need not) be made
subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria,
including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in
the Award Agreement evidencing such Award. During any period in which shares acquired pursuant to a Restricted Stock Award remain
subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than
pursuant to an Ownership Change Event or as provided in Section 8.8. The Committee, in its discretion, may provide in any Award
Agreement evidencing a Restricted Stock Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to such
Restricted Stock Award would otherwise occur on a day on which the sale of such shares would violate the Company’s Insider Trading
Policy, then the satisfaction of the Vesting Conditions automatically be deemed to occur on the next day on which the sale of such shares
would not violate the Insider Trading Policy. Upon request by the Company, each Participant shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all
certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any
such transfer restrictions.
       8.6 Voting Rights; Dividends and Distributions. Except as provided in this Section, Section 8.5 and any Award Agreement,
during any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, the Participant
shall have all of the rights of a shareholder of the Company holding shares of Stock, including the right to vote such shares and to receive
all dividends and other distributions paid with respect to such shares. However, in the event of a dividend or distribution paid in shares of
Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.6,
any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant is
entitled by reason of the Participant’s Restricted Stock Award shall be immediately subject to the same Vesting Conditions as the shares
subject to the Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.
      8.7 Effect of Termination of Service. Unless otherwise provided by the Committee in the Award Agreement evidencing a
Restricted Stock Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s
death or disability), then (a) the Company shall have the option to repurchase for the purchase price paid by the Participant any shares
acquired by the Participant pursuant to a Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the date of the
Participant’s termination of Service and (b) the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to
a Restricted Stock Bonus which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service. The
Company shall have

                                                                  20
the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as
may be selected by the Company.
      8.8 Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock pursuant to a Restricted Stock Award
shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment
by creditors of the Participant or the Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights
with respect to a Restricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such
Participant or the Participant’s guardian or legal representative.

9.    R ESTRICTED S TOCK U NIT A WARDS .
      Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of Restricted Stock Units subject to
the Award, in such form as the Committee shall from time to time establish. No Restricted Stock Unit Award or purported Restricted
Stock Unit Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement.
Award Agreements evidencing Restricted Stock Units may incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
      9.1 Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted upon such conditions as the
Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in
Section 10.4. If either the grant of a Restricted Stock Unit Award or the Vesting Conditions with respect to such Award is to be
contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to
those set forth in Sections 10.3 through 10.5(a).
       9.2 Purchase Price. No monetary payment (other than applicable tax withholding, if any) shall be required as a condition of
receiving a Restricted Stock Unit Award, the consideration for which shall be services actually rendered to a Participating Company or
for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in
the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the
shares of Stock issued upon settlement of the Restricted Stock Unit Award.
      9.3 Vesting. Restricted Stock Unit Awards may (but need not) be made subject to Vesting Conditions based upon the satisfaction of
such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described
in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award.
      9.4 Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares
of Stock represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company). However,

                                                                   21
the Committee, in its discretion, may provide in the Award Agreement evidencing any Restricted Stock Unit Award that the Participant
shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the
date such Award is granted and ending, with respect to the particular shares subject to the Award, on the earlier of the date the Award is
settled or the date on which it is terminated. Such Dividend Equivalents Rights, if any, shall be paid by crediting the Participant with
additional whole Restricted Stock Units as of the date of payment of such cash dividends on Stock. The number of additional Restricted
Stock Units (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash dividends
paid on such date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the
Participant by (b) the Fair Market Value per share of Stock on such date. Such additional Restricted Stock Units shall be subject to the
same terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to
the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or other property or any other
adjustment made upon a change in the capital structure of the Company as described in Section 4.6, appropriate adjustments shall be
made in the Participant’s Restricted Stock Unit Award so that it represents the right to receive upon settlement any and all new,
substituted or additional securities or other property (other than normal cash dividends) to which the Participant would be entitled by
reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted or additional securities or other
property shall be immediately subject to the same Vesting Conditions as are applicable to the Award.
      9.5 Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement
evidencing a Restricted Stock Unit Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary
(including the Participant’s death or disability), then the Participant shall forfeit to the Company any Restricted Stock Units pursuant to
the Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service.
       9.6 Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant on the date on which Restricted Stock
Units subject to the Participant’s Restricted Stock Unit Award vest or on such other date determined by the Committee, in its discretion,
and set forth in the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other property
pursuant to an adjustment described in Section 9.4) for each Restricted Stock Unit then becoming vested or otherwise to be settled on
such date, subject to the withholding of applicable taxes, if any. If permitted by the Committee, subject to the provisions of Section 19
with respect to Section 409A, the Participant may elect in accordance with terms specified in the Award Agreement to defer receipt of all
or any portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section, and such deferred
issuance date(s) elected by the Participant shall be set forth in the Award Agreement. Notwithstanding the foregoing, the Committee, in
its discretion, may provide for settlement of any Restricted Stock Unit Award by payment to the Participant in cash of an amount equal to
the Fair Market Value on the payment date of the shares of Stock or other property otherwise issuable to the Participant pursuant to this
Section. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Unit Award that, if the
settlement of the Award with respect to any shares would otherwise occur on a day on which the sale of such shares would violate the
Company’s Insider Trading Policy, then the

                                                                  22
settlement with respect to such shares shall occur on the next day on which the sale of such shares would not violate the Insider Trading
Policy.
      9.7 Nontransferability of Restricted Stock Unit Awards. The right to receive shares pursuant to a Restricted Stock Unit Award
shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment
by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights
with respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by
such Participant or the Participant’s guardian or legal representative.

10.   P ERFORMANCE A WARDS .
      Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. No
Performance Award or purported Performance Award shall be a valid and binding obligation of the Company unless evidenced by a fully
executed Award Agreement. Award Agreements evidencing Performance Awards may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and conditions:
      10.1 Types of Performance Awards Authorized. Performance Awards may be granted in the form of either Performance Shares
or Performance Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or
Performance Units subject thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the
Award, and the other terms, conditions and restrictions of the Award.
      10.2 Initial Value of Performance Shares and Performance Units. Unless otherwise provided by the Committee in granting a
Performance Award, each Performance Share shall have an initial monetary value equal to the Fair Market Value of one (1) share of
Stock, subject to adjustment as provided in Section 4.6, on the effective date of grant of the Performance Share, and each Performance
Unit shall have an initial monetary value established by the Committee at the time of grant. The final value payable to the Participant in
settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to
which Performance Goals established by the Committee are attained within the applicable Performance Period established by the
Committee.
      10.3 Establishment of Performance Period, Performance Goals and Performance Award Formula. In granting each
Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or
more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance
Award Formula the final value of the Performance Award to be paid to the Participant. Unless otherwise permitted in compliance with
the requirements under Section 162(m) with respect to each Performance Award intended to result in the payment of Performance-Based
Compensation, the Committee shall establish the Performance Goal(s) and Performance Award Formula applicable to each Performance
Award no later than the earlier of (a) the date ninety (90) days after the commencement of the applicable

                                                                    23
Performance Period or (b) the date on which 25% of the Performance Period has elapsed, and, in any event, at a time when the outcome
of the Performance Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award Formula
applicable to a Covered Employee shall not be changed during the Performance Period. The Company shall notify each Participant
granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance
Award Formula.
      10.4 Measurement of Performance Goals. Performance Goals shall be established by the Committee on the basis of targets to be
attained ( “ Performance Targets ” ) with respect to one or more measures of business or financial performance (each, a “ Performance
Measure ” ), subject to the following:
           (a) Performance Measures. Performance Measures shall have the same meanings as used in the Company’s financial
     statements, or, if such terms are not used in the Company’s financial statements, they shall have the meaning applied pursuant to
     generally accepted accounting principles, or as used generally in the Company’s industry. Performance Measures shall be calculated
     with respect to the Company and each Subsidiary Corporation consolidated therewith for financial reporting purposes or such
     division or other business unit as may be selected by the Committee. For purposes of the Plan, the Performance Measures applicable
     to a Performance Award shall be calculated in accordance with generally accepted accounting principles, but prior to the accrual or
     payment of any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) of any
     change in accounting standards or any extraordinary, unusual or nonrecurring item, as determined by the Committee, occurring after
     the establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any, shall be made
     solely for the purpose of providing a consistent basis from period to period for the calculation of Performance Measures in order to
     prevent the dilution or enlargement of the Participant’s rights with respect to a Performance Award. Performance Measures may be
     one or more of the following, as determined by the Committee:
                  (i) revenue;
                  (ii) sales;
                  (iii) expenses;
                  (iv) operating income;
                  (v) gross margin;
                  (vi) operating margin;
                 (vii) earnings before any one or more of: stock-based compensation expense, interest, taxes, depreciation and
            amortization;
                  (viii) pre-tax profit;
                  (ix) net operating income;

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            (x) net income;
            (xi) economic value added;
            (xii) free cash flow;
            (xiii) operating cash flow;
            (xiv) balance of cash, cash equivalents and marketable securities;
            (xv) stock price;
            (xvi) earnings per share;
            (xvii) return on shareholder equity;
            (xviii) return on capital;
            (xix) return on assets;
            (xx) return on investment;
            (xxi) employee satisfaction;
            (xxii) employee retention;
            (xxiii) market share;
            (xxiv) customer satisfaction;
            (xxv) product development;
            (xxvi) research and development expenses;
            (xxvii) completion of an identified special project; and
            (xxviii) completion of a joint venture or other corporate transaction.
      (b) Performance Targets. Performance Targets may include a minimum, maximum, target level and intermediate levels of
performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the
level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value or as a value
determined relative to an index, budget or other standard selected by the Committee.
     10.5 Settlement of Performance Awards.
     (a) Determination of Final Value. As soon as practicable following the completion of the Performance Period applicable to a
Performance Award, the Committee

                                                           25
shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting final value of the
Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.
      (b) Discretionary Adjustment of Award Formula. In its discretion, the Committee may, either at the time it grants a
Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula
applicable to a Performance Award granted to any Participant who is not a Covered Employee to reflect such Participant’s
individual performance in his or her position with the Company or such other factors as the Committee may determine. If permitted
under a Covered Employee’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria as may be
established by the Committee, to reduce some or all of the value of the Performance Award that would otherwise be paid to the
Covered Employee upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the
Performance Award determined in accordance with the Performance Award Formula. No such reduction may result in an increase
in the amount payable upon settlement of another Participant’s Performance Award that is intended to result in Performance-Based
Compensation.
      (c) Effect of Leaves of Absence. Unless otherwise required by law or a Participant’s Award Agreement, payment of the final
value, if any, of a Performance Award held by a Participant who has taken in excess of thirty (30) days in leaves of absence during
a Performance Period shall be prorated on the basis of the number of days of the Participant’s Service during the Performance
Period during which the Participant was not on a leave of absence.
      (d) Notice to Participants. As soon as practicable following the Committee’s determination and certification in accordance
with Sections 10.5(a) and (b), the Company shall notify each Participant of the determination of the Committee.
      (e) Payment in Settlement of Performance Awards. Subject to the provisions of Section 19 with respect to Section 409A, as
soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), payment
shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to
receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of
such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless otherwise
provided in the Award Agreement evidencing a Performance Award, payment shall be made in a lump sum. If permitted by the
Committee, and subject to the provisions of Section 19 with respect to Section 409A, the Participant may elect to defer receipt of all
or any portion of the payment to be made to Participant pursuant to this Section, and such deferred payment date(s) elected by the
Participant shall be set forth in the Award Agreement. If any payment is to be made on a deferred basis, the Committee may, but
shall not be obligated to, provide for the payment during the deferral period of Dividend Equivalent Rights or interest.
      (f) Provisions Applicable to Payment in Shares. If payment is to be made in shares of Stock, the number of such shares shall
be determined by dividing the final value of the Performance Award by the value of a share of Stock determined by the method

                                                            26
     specified in the Award Agreement. Such methods may include, without limitation, the closing market price on a specified date
     (such as the settlement date) or an average of market prices over a series of trading days. Shares of Stock issued in payment of any
     Performance Award may be fully vested and freely transferable shares or may be shares of Stock subject to Vesting Conditions as
     provided in Section 8.5. Any shares subject to Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall
     be subject to the provisions of Sections 8.5 through 8.8 above.
      10.6 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to
shares of Stock represented by Performance Share Awards until the date of the issuance of such shares, if any (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its
discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to
Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date the Award is
granted and ending, with respect to the particular shares subject to the Award, on the earlier of the date on which the Performance Shares
are settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the Participant in the form
of additional whole Performance Shares as of the date of payment of such cash dividends on Stock. The number of additional
Performance Shares (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash
dividends paid on the dividend payment date with respect to the number of shares of Stock represented by the Performance Shares
previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Dividend Equivalent Rights may be
paid currently or may be accumulated and paid to the extent that Performance Shares become nonforfeitable, as determined by the
Committee. Settlement of Dividend Equivalent Rights may be made in cash, shares of Stock, or a combination thereof as determined by
the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 10.5. Dividend
Equivalent Rights shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or
other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.6,
appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon
settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the
Participant would entitled by reason of the shares of Stock issuable upon settlement of the Performance Share Award, and all such new,
substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the
Award.
     10.7 Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement
evidencing a Performance Award, the effect of a Participant’s termination of Service on the Performance Award shall be as follows:
           (a) Death or Disability. If the Participant’s Service terminates because of the death or Disability of the Participant before the
     completion of the Performance Period applicable to the Performance Award, the final value of the Participant’s Performance Award
     shall be determined by the extent to which the applicable Performance Goals have been attained with respect to the entire
     Performance Period and shall be prorated based on the number

                                                                  27
      of months of the Participant’s Service during the Performance Period. Payment shall be made following the end of the Performance
      Period in any manner permitted by Section 10.5.
          (b) Other Termination of Service. If the Participant’s Service terminates for any reason except death or Disability before the
      completion of the Performance Period applicable to the Performance Award, such Award shall be forfeited in its entirety.
       10.8 Nontransferability of Performance Awards. Prior to settlement in accordance with the provisions of the Plan, no
Performance Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance,
or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and
distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her
lifetime only by such Participant or the Participant’s guardian or legal representative.

11.   D EFERRED C OMPENSATION A WARDS .
     11.1 Establishment of Deferred Compensation Award Programs. This Section 11 shall not be effective unless and until the
Committee determines to establish a program pursuant to this Section. The Committee, in its discretion and upon such terms and
conditions as it may determine, subject to the provisions of Section 19 with respect to Section 409A, may establish one or more programs
pursuant to the Plan under which:
            (a) Elective Cash Compensation Reduction Awards. Participants designated by the Committee who are Officers, Directors or
      otherwise among a select group of management or highly compensated Employees may irrevocably elect, prior to a date specified
      by the Committee in compliance with Section 409A, to reduce such Participant’s compensation otherwise payable in cash (subject
      to any minimum or maximum reductions imposed by the Committee) and to be granted automatically at such time or times as
      specified by the Committee one or more Awards of Stock Units with respect to such numbers of shares of Stock as determined in
      accordance with the rules of the program established by the Committee and having such other terms and conditions as established
      by the Committee.
            (b) Stock Issuance Deferral Awards. Participants designated by the Committee who are Officers, Directors or otherwise
      among a select group of management or highly compensated Employees may irrevocably elect, prior to a date specified by the
      Committee in compliance with Section 409A, to be granted automatically an Award of Stock Units with respect to such number of
      shares of Stock and upon such other terms and conditions as established by the Committee in lieu of:
                  (i) shares of Stock otherwise issuable to such Participant upon the exercise of an Option;
                  (ii) cash or shares of Stock otherwise issuable to such Participant upon the exercise of a SAR; or
                  (iii) cash or shares of Stock otherwise issuable to such Participant upon the settlement of a Performance Award.

                                                                 28
      11.2 Terms and Conditions of Deferred Compensation Awards. Deferred Compensation Awards granted pursuant to this
Section 11 shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. No such Deferred
Compensation Award or purported Deferred Compensation Award shall be a valid and binding obligation of the Company unless
evidenced by a fully executed Award Agreement. Award Agreements evidencing Deferred Compensation Awards may incorporate all or
any of the terms of the Plan by reference, including the provisions of Section 19 with respect to Section 409A, and, except as provided
below, shall comply with and be subject to the terms and conditions of Section 9.
            (a) Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to
      shares of Stock represented by Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on
      the books of the Company or of a duly authorized transfer agent of the Company). However, a Participant shall be entitled to
      Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date the
      Stock Units are granted automatically to the Participant and ending on the earlier of the date on which such Stock Units are settled
      or the date on which they are forfeited. Such Dividend Equivalent Rights shall be paid by crediting the Participant with additional
      whole Stock Units as of the date of payment of such cash dividends on Stock. The number of additional Stock Units (rounded to the
      nearest whole number) to be so credited shall be determined by dividing (A) the amount of cash dividends paid on the dividend
      payment date with respect to the number of shares of Stock represented by the Stock Units previously credited to the Participant by
      (B) the Fair Market Value per share of Stock on such date. Such additional Stock Units shall be subject to the same terms and
      conditions and shall be settled in the same manner and at the same time (or as soon thereafter as practicable) as the Stock Units
      originally subject to the Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or other property or any
      other adjustment made upon a change in the capital structure of the Company as described in Section 4.6, appropriate adjustments
      shall be made in the Participant’s Stock Unit Award so that it represents the right to receive upon settlement any and all new,
      substituted or additional securities or other property (other than normal cash dividends) to which the Participant would entitled by
      reason of the shares of Stock issuable upon settlement of the Award.
            (b) Settlement of Deferred Compensation Awards. A Participant electing to receive an Award of Stock Units pursuant to this
      Section 11 shall specify at the time of such election a settlement date with respect to such Award in compliance with Section 409A.
      The Company shall issue to the Participant on the settlement date elected by the Participant, or as soon thereafter as practicable, a
      number of whole shares of Stock equal to the number of vested Stock Units subject to the Stock Unit Award. Such shares of Stock
      shall be fully vested, and the Participant shall not be required to pay any additional consideration (other than applicable tax
      withholding) to acquire such shares.

12.   C ASH -B ASED A WARDS AND O THER S TOCK -B ASED A WARDS .
     Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements in such form as the Committee shall
from time to time establish. No such Award or purported Award shall be a valid and binding obligation of the Company unless evidenced
by a

                                                                  29
fully executed Award Agreement. Award Agreements evidencing Cash-Based Awards and Other Stock-Based Awards may incorporate
all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:
       12.1 Grant of Cash-Based Awards. Subject to the provisions of the Plan, the Committee, at any time and from time to time, may
grant Cash-Based Awards to Participants in such amounts and upon such terms and conditions, including the achievement of performance
criteria, as the Committee may determine.
     12.2 Grant of Other Stock-Based Awards. The Committee may grant other types of equity-based or equity-related Awards not
otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted securities, stock-equivalent units, stock
appreciation units, securities or debentures convertible into common stock or other forms determined by the Committee) in such amounts
and subject to such terms and conditions as the Committee shall determine. Such Awards may involve the transfer of actual shares of
Stock to Participants, or payment in cash or otherwise of amounts based on the value of Stock and may include, without limitation,
Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.
      12.3 Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a monetary payment amount
or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of shares of Stock or units
based on such shares of Stock, as determined by the Committee. The Committee may require the satisfaction of such Service
requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in
Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. If the Committee
exercises its discretion to establish performance criteria, the final value of Cash-Based Awards or Other Stock-Based Awards that will be
paid to the Participant will depend on the extent to which the performance criteria are met. The establishment of performance criteria with
respect to the grant or vesting of any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based
Compensation shall follow procedures substantially equivalent to those applicable to Performance Awards set forth in Section 10.
      12.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards. Payment or settlement, if any, with
respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash, shares
of Stock or other securities or any combination thereof as the Committee determines. The determination and certification of the final
value with respect to any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall
comply with the requirements applicable to Performance Awards set forth in Section 10. To the extent applicable, payment or settlement
with respect to each Cash-Based Award and Other Stock-Based Award shall be made in compliance with Section 409A.
      12.5 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to
shares of Stock represented by Other Stock-Based Awards until the date of the issuance of such shares of Stock (as evidenced by the

                                                                   30
appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), if any, in settlement of such
Award. However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Other Stock-Based Award that
the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period
beginning on the date such Award is granted and ending, with respect to the particular shares subject to the Award, on the earlier of the
date the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be paid in accordance with
the provisions set forth in Section 9.4. Dividend Equivalent Rights shall not be granted with respect to Cash-Based Awards.
      12.6 Effect of Termination of Service. Each Award Agreement evidencing a Cash-Based Award or Other Stock-Based Award
shall set forth the extent to which the Participant shall have the right to retain such Award following termination of the Participant’s
Service. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Cash-Based Awards
or Other Stock-Based Awards, and may reflect distinctions based on the reasons for termination.
       12.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to the payment or settlement of a
Cash-Based Award or Other Stock-Based Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange,
transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer
by will or by the laws of descent and distribution. The Committee may impose such additional restrictions on any shares of Stock issued
in settlement of Cash-Based Awards and Other Stock-Based Awards as it may deem advisable, including, without limitation, minimum
holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market
upon which such shares of Stock are then listed and/or traded, or under any state securities laws applicable to such shares of Stock.

13.   N ONEMPLOYEE D IRECTOR A WARDS .
      From time to time, the Board or the Committee shall set the amount(s) and type(s) of Nonemployee Director Awards that shall be
granted to all Nonemployee Directors on a periodic, nondiscriminatory basis pursuant to the Plan, as well as the additional amount(s) and
type(s) of Nonemployee Director Awards, if any, to be awarded, also on a periodic, nondiscriminatory basis, in consideration of one or
more of the following: (a) the initial election or appointment of an individual to the Board as a Nonemployee Director, (b) a
Nonemployee Director’s service as Chairman or Lead Director of the Board, (c) a Nonemployee Director’s service on one or more of the
committees of the Board other than as the chairman of the committee, and (d) a Nonemployee Director’s service as the chairman of a
committee of the Board. The terms and conditions of each Nonemployee Director Award shall comply with the applicable provisions of
the Plan. Subject to the limits set forth in Section 5.3(b) and the foregoing, the Board or the Committee shall grant Nonemployee Director
Awards having such terms and conditions as it shall from time to time determine.

                                                                 31
14.   S TANDARD F ORMS OF A WARD A GREEMENT .
      14.1 Award Agreements . Each Award shall comply with and be subject to the terms and conditions set forth in the appropriate
form of Award Agreement approved by the Committee and as amended from time to time. Any Award Agreement may consist of an
appropriate form of Notice of Grant and a form of Award Agreement incorporated therein by reference, or such other form or forms,
including electronic media, as the Committee may approve from time to time.
     14.2 Authority to Vary Terms . The Committee shall have the authority from time to time to vary the terms of any standard form
of Award Agreement either in connection with the grant or amendment of an individual Award or in connection with the authorization of
a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or
forms of Award Agreement are not inconsistent with the terms of the Plan.

15.   C HANGE IN C ONTROL .
      15.1 Effect of Change in Control on Options and SARs .
           (a) Accelerated Vesting. The Committee may, in its sole discretion, provide in any Award Agreement, or in the event of a
      Change in Control, may take such actions as it deems appropriate to provide for the acceleration of the exercisability and vesting in
      connection with such Change in Control of any or all outstanding Options and SARs or shares acquired upon the exercise thereof
      upon such conditions, including termination of the Participant’s Service prior to, upon or following such Change in Control, and to
      such extent as the Committee shall determine.
            (b) Assumption or Substitution. In the event of a Change in Control, the surviving, continuing, successor, or purchasing entity
      or parent thereof, as the case may be (the “ Acquiror ” ), may, without the consent of any Participant, either assume or continue the
      Company’s rights and obligations under any or all outstanding Options and SARs or substitute for any or all outstanding Options
      and SARs substantially equivalent options and stock appreciation rights (as the case may be) for the Acquiror’s stock. Any Options
      or SARs which are neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised as of the
      time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of
      consummation of the Change in Control.
             (c) Cash-Out. The Committee may, in its sole discretion and without the consent of any Participant, determine that, upon the
      occurrence of a Change in Control, each or any Option or SAR outstanding immediately prior to the Change in Control shall be
      canceled in exchange for a payment with respect to each share of Stock subject to such canceled Option or SAR in (i) cash,
      (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control, or (iii) other property which,
      in any such case, shall be in an amount having a Fair Market Value equal to the excess of the Fair Market Value of the
      consideration to be paid per share of Stock in the Change in Control over the exercise price per share under such Option or SAR
      (the “ Spread ” ). In the event such determination is made by the Committee, the

                                                                  32
      Spread (reduced by applicable withholding taxes, if any) shall be paid to Participants in respect of their canceled Options and SARs
      as soon as practicable following the date of the Change in Control.
      15.2 Effect of Change in Control on Restricted Stock Awards, Restricted Stock Unit Awards, Performance Awards,
Cash-Based Awards, Other Stock-Based Awards and Deferred Compensation Awards. Subject to compliance with Section 409A, if
applicable, in the event of a Change in Control, each outstanding Restricted Stock Award, Restricted Stock Unit Award, Performance
Award, Cash-Based Award, Other Stock-Based Award and Deferred Compensation Award held by a Participant whose Service has not
terminated prior to the date of the Change in Control shall become vested in full and shall be settled effective as of the date of the Change
in Control. In addition, subject to compliance with Section 409A, if applicable, the Committee, in its sole discretion, may take such
actions as it deems appropriate to provide for the acceleration of vesting and/or settlement of any or all such outstanding Awards in
connection with and upon termination of the Participant’s Service prior to a Change in Control upon such conditions and to such extent as
the Committee shall determine.
      15.3 Effect of Change in Control on Nonemployee Director Awards. Subject to compliance with Section 409A, if applicable, in
the event of a Change in Control, each outstanding Nonemployee Director Award shall become immediately exercisable and vested in
full and shall be settled effective as of the date of the Change in Control.

16.   C OMPLIANCE WITH S ECURITIES L AW .
       The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable
requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market
system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless
(a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares
issuable pursuant to the Award or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be
issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of
the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to
issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the
Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any
applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

17.   T AX W ITHHOLDING .
      17.1 Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under the Plan, or
to require the Participant, through payroll withholding, cash payment or otherwise, to make adequate provision for, the federal, state,
local and foreign taxes, if any, required by law to be withheld by the Participating

                                                                  33
Company Group with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver
shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash
under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.
      17.2 Withholding in Shares. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable
to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of
Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of the
Participating Company Group. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding
obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates.

18.   A MENDMENT OR T ERMINATION OF P LAN .
       The Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the Company’s
shareholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan
(except by operation of the provisions of Section 4.6), (b) no change in the class of persons eligible to receive Incentive Stock Options,
and (c) no other amendment of the Plan that would require approval of the Company’s shareholders under any applicable law, regulation
or rule, including the rules of any stock exchange or market system upon which the Stock may then be listed. No amendment, suspension
or termination of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. Except as provided by
the next sentence, no amendment, suspension or termination of the Plan may adversely affect any then outstanding Award without the
consent of the Participant. Notwithstanding any other provision of the Plan to the contrary, the Committee may, in its sole and absolute
discretion and without the consent of any Participant, amend the Plan or any Award Agreement, to take effect retroactively or otherwise,
as it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any present or future law,
regulation or rule applicable to the Plan, including, but not limited to, Section 409A.

19.   C OMPLIANCE WITH S ECTION 409A .
      19.1 Awards Subject to Section 409A. The provisions of this Section 19 shall apply to any Award or portion thereof that is or
becomes subject to Section 409A, notwithstanding any provision to the contrary contained in the Plan or the Award Agreement
applicable to such Award. Awards subject to Section 409A include, without limitation:
             (a) Any Nonstatutory Stock Option that permits the deferral of compensation other than the deferral of recognition of income
      until the exercise of the Award.
           (b) Each Deferred Compensation Award.
             (c) Any Restricted Stock Unit Award, Performance Award, Cash-Based Award or Other Stock-Based Award that either
      (i) provides by its terms for settlement of all or any portion of the Award on one or more dates following the Short-Term Deferral
      Period

                                                                 34
           (as defined below) or (ii) permits or requires the Participant to elect one or more dates on which the Award will be settled.

      Subject to any applicable U.S. Treasury Regulations promulgated pursuant to Section 409A or other applicable guidance, the term ―
Short-Term Deferral Period ” means the period ending on the later of (i) the date that is two and one-half months from the end of the
Company’s fiscal year in which the applicable portion of the Award is no longer subject to a substantial risk of forfeiture or (ii) the date that is
two and one-half months from the end of the Participant’s taxable year in which the applicable portion of the Award is no longer subject to a
substantial risk of forfeiture. For this purpose, the term ―substantial risk of forfeiture‖ shall have the meaning set forth in any applicable U.S.
Treasury Regulations promulgated pursuant to Section 409A or other applicable guidance.
           19.2 Deferral and/or Distribution Elections. Except as otherwise permitted or required by Section 409A or any applicable U.S.
     Treasury Regulations promulgated pursuant to Section 409A or other applicable guidance, the following rules shall apply to any deferral
     and/or distribution elections (each, an ― Election ‖) that may be permitted or required by the Committee pursuant to an Award subject to
     Section 409A:
                 (a) All Elections must be in writing and specify the amount of the distribution in settlement of an Award being deferred, as
           well as the time and form of distribution as permitted by this Plan.
                 (b) All Elections shall be made by the end of the Participant’s taxable year prior to the year in which services commence for
           which an Award may be granted to such Participant; provided, however, that if the Award qualifies as ―performance-based
           compensation‖ for purposes of Section 409A and is based on services performed over a period of at least twelve (12) months, then
           the Election may be made no later than six (6) months prior to the end of such period.
                (c) Elections shall continue in effect until a written election to revoke or change such Election is received by the Company,
           except that a written election to revoke or change such Election must be made prior to the last day for making an Election
           determined in accordance with paragraph (b) above or as permitted by Section 19.3.
          19.3 Subsequent Elections . Any Award subject to Section 409A which permits a subsequent Election to delay the distribution or
     change the form of distribution in settlement of such Award shall comply with the following requirements:
               (a) No subsequent Election may take effect until at least twelve (12) months after the date on which the subsequent Election is
           made;
                 (b) Each subsequent Election related to a distribution in settlement of an Award not described in Section 19.3(b), 19.4(b), or
           19.4(f) must result in a delay of the distribution for a period of not less than five (5) years from the date such distribution would
           otherwise have been made; and

                                                                         35
                 (c) No subsequent Election related to a distribution pursuant to Section 19.4(d) shall be made less than twelve (12) months
           prior to the date of the first scheduled payment under such distribution.
         19.4 Distributions Pursuant to Deferral Elections . No distribution in settlement of an Award subject to Section 409A may
     commence earlier than:
                (a) Separation from service (as determined by the Secretary of the United States Treasury);
                (b) The date the Participant becomes Disabled (as defined below);
                (c) Death;
                 (d) A specified time (or pursuant to a fixed schedule) that is either (i) specified by the Committee upon the grant of an Award
           and set forth in the Award Agreement evidencing such Award or (ii) specified by the Participant in an Election complying with the
           requirements of Section 19.2 and/or 19.3, as applicable;
               (e) To the extent provided by the Secretary of the U.S. Treasury, a change in the ownership or effective control or the
           Company or in the ownership of a substantial portion of the assets of the Company; or
                (f) The occurrence of an Unforeseeable Emergency (as defined below).

      Notwithstanding anything else herein to the contrary, to the extent that a Participant is a ―Specified Employee‖ (as defined in
Section 409A(a)(2)(B)(i)) of the Company, no distribution pursuant to Section 19.4(a) in settlement of an Award subject to Section 409A may
be made before the date which is six (6) months after such Participant’s date of separation from service, or, if earlier, the date of the
Participant’s death.
           19.5 Unforeseeable Emergency . The Committee shall have the authority to provide in the Award Agreement evidencing any
     Award subject to Section 409A for distribution in settlement of all or a portion of such Award in the event that a Participant establishes,
     to the satisfaction of the Committee, the occurrence of an Unforeseeable Emergency. In such event, the amount(s) distributed with respect
     to such Unforeseeable Emergency cannot exceed the amounts necessary to satisfy such Unforeseeable Emergency plus amounts
     necessary to pay taxes reasonably anticipated as a result of such distribution(s), after taking into account the extent to which such
     hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s
     assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). All distributions with respect to an
     Unforeseeable Emergency shall be made in a lump sum as soon as practicable following the Committee’s determination that an
     Unforeseeable Emergency has occurred.

     The occurrence of an Unforeseeable Emergency shall be judged and determined by the Committee. The Committee’s decision with
respect to whether an Unforeseeable Emergency has

                                                                       36
occurred and the manner in which, if at all, the distribution in settlement of an Award shall be altered or modified, shall be final, conclusive,
and not subject to approval or appeal.
           19.6 Disabled. The Committee shall have the authority to provide in any Award subject to Section 409A for distribution in
     settlement of such Award in the event that the Participant becomes Disabled. A Participant shall be considered ―Disabled‖ if either:
                 (a) the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or
            mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than
            twelve (12) months, or
                  (b) the Participant is, by reason of any medically determinable physical or mental impairment which can be expected to result
            in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement
            benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Participant’s
            employer.

      All distributions payable by reason of a Participant becoming Disabled shall be paid in a lump sum or in periodic installments as
established by the Participant’s Election, commencing as soon as practicable following the date the Participant becomes Disabled. If the
Participant has made no Election with respect to distributions upon becoming Disabled, all such distributions shall be paid in a lump sum as
soon as practicable following the date the Participant becomes Disabled.
           19.7 Death. If a Participant dies before complete distribution of amounts payable upon settlement of an Award subject to
     Section 409A, such undistributed amounts shall be distributed to his or her beneficiary under the distribution method for death established
     by the Participant’s Election as soon as administratively possible following receipt by the Committee of satisfactory notice and
     confirmation of the Participant’s death. If the Participant has made no Election with respect to distributions upon death, all such
     distributions shall be paid in a lump sum as soon as practicable following the date of the Participant’s death.
           19.8 No Acceleration of Distributions. Notwithstanding anything to the contrary herein, this Plan does not permit the acceleration
     of the time or schedule of any distribution under this Plan, except as provided by Section 409A and/or the Secretary of the U.S. Treasury.

      20.   M ISCELLANEOUS P ROVISIONS .
            20.1 Repurchase Rights . Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and
     restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign
     at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by
     the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to
     the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates

                                                                         37
representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such
transfer restrictions.
     20.2 Forfeiture Events.
          (a) The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an
     Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events, in addition to
     any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to,
     termination of Service for Cause or any act by a Participant, whether before or after termination of Service, that would constitute
     Cause for termination of Service.
            (b) If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a
     result of misconduct, with any financial reporting requirement under the securities laws, any Participant who knowingly or through
     gross negligence engaged in the misconduct, or who knowingly or through gross negligence failed to prevent the misconduct, and
     any Participant who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002,
     shall reimburse the Company the amount of any payment in settlement of an Award earned or accrued during the twelve- (12-)
     month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever
     first occurred) of the financial document embodying such financial reporting requirement.
     20.3 Provision of Information. Each Participant shall be given access to information concerning the Company equivalent to that
information generally made available to the Company’s common shareholders.
       20.4 Rights as Employee, Consultant or Director. No person, even though eligible pursuant to Section 5, shall have a right to be
selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted
under the Plan shall confer on any Participant a right to remain an Employee, Consultant or Director or interfere with or limit in any way
any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating
Company other than the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean
that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.
       20.5 Rights as a Shareholder. A Participant shall have no rights as a shareholder with respect to any shares covered by an Award
until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior
to the date such shares are issued, except as provided in Section 4.6 or another provision of the Plan.
      20.6 Delivery of Title to Shares. Subject to any governing rules or regulations, the Company shall issue or cause to be issued the
shares of Stock acquired pursuant

                                                                 38
to an Award and shall deliver such shares to or for the benefit of the Participant by means of one or more of the following: (a) by
delivering to the Participant evidence of book entry shares of Stock credited to the account of the Participant; (b) by depositing such
shares of Stock for the benefit of the Participant with any broker with which the Participant has an account relationship; or (c) by
delivering such shares of Stock to the Participant in certificate form.
    20.7 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any
Award.
     20.8 Retirement and Welfare Plans. Neither Awards made under this Plan nor shares of Stock or cash paid pursuant to such
Awards may be included as ―compensation‖ for purposes of computing the benefits payable to any Participant under any Participating
Company’s retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that
such compensation shall be taken into account in computing a Participant’s benefit.
      20.9 Beneficiary Designation. Subject to local laws and procedures, each Participant may file with the Company a written
designation of a beneficiary who is to receive any benefit under the Plan to which the Participant is entitled in the event of such
Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same
Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the
Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the
effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective
designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to
the Participant’s legal representative.
     20.10 Severability. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or
unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and
enforceability of the remaining provisions (or any part thereof) of the Plan shall not in any way be affected or impaired thereby.
      20.11 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit, impair, or otherwise affect the
Company’s or another Participating Company’s right or power to make adjustments, reclassifications, reorganizations, or changes of its
capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or
(b) limit the right or power of the Company or another Participating Company to take any action which such entity deems to be necessary
or appropriate.
      20.12 Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts
payable to Participants pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation,
Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies
from its general funds, or to create any trusts, or

                                                                    39
     establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any
     investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or
     the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between
     the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or
     the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating
     Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan.
           20.13 Choice of Law. Except to the extent governed by applicable federal law, the validity, interpretation, construction and
     performance of the Plan and each Award Agreement shall be governed by the laws of the State of Washington, without regard to its
     conflict of law rules.

      IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Northstar Neuroscience,
Inc. 2006 Performance Incentive Plan as duly adopted by the Board on February 16, 2006.


                                                                                       / S / R AYMOND C ALVERT
                                                                                       Secretary

                                                                       40
                                                 NORTHSTAR NEUROSCIENCE, INC.
                                                NOTICE OF GRANT OF STOCK OPTION

     ________________________ (the “ Optionee ” ) has been granted an option (the “ Option ” ) to purchase certain shares of Stock of
Northstar Neuroscience, Inc. pursuant to the Northstar Neuroscience, Inc. 2006 Performance Incentive Plan (the “ Plan ” ), as follows:

       Grant Number:                            _____________________
       Date of Option Grant:                    _____________________
       Number of Option Shares:                 _____________________
       Exercise Price:                          $____________________per share
       Initial Vesting Date:                    _____________________(i.e., the date on which you first vest in some portion of your
                                                Option Shares)
       Option Expiration Date:                  The date ten (10) years after the Date of Option Grant.
       Tax Status of Option:                    _____________________Stock Option. (Enter ―Incentive‖ or ―Nonstatutory.‖ If blank,
                                                this Option will be a Nonstatutory Stock Option.)
       Vested Shares: Except as provided in the Stock Option Agreement, the number of Vested Shares (disregarding any resulting
       fractional share) as of any date is determined by multiplying the Number of Option Shares by the ―Vested Ratio‖ determined as of
       such date as follows:

                                                                                                                            Vested Ratio
                                                Prior to Initial Vesting Date                                                    0
                                                On Initial Vesting Date, provided the Optionee’s Service has not
                                                terminated prior to such date                                                   1/4
                                                Plus :
                                                For each full month of the Optionee’s continuous Service from
                                                Initial Vesting Date until the Vested Ratio equals 1/1, an
                                                additional                                                                     1/48

      By their signatures below, the Company and the Optionee agree that the Option is governed by this Notice and by the provisions of the
Plan and the Stock Option Agreement. The Optionee acknowledges that the Optionee has read and is familiar with their provisions, and hereby
accepts the Option subject to all of their terms and conditions.

NORTHSTAR NEUROSCIENCE, INC.                                                          OPTIONEE

By:
                                                                                      Signature

Its:
                                                                                      Date

Address:
                                                                                      Address
                                                  NORTHSTAR NEUROSCIENCE, INC.
                                                    STOCK OPTION AGREEMENT

       Northstar Neuroscience, Inc. has granted to the individual (the “ Optionee ” ) named in the Notice of Grant of Stock Option (the “ Notice
” ) to which this Stock Option Agreement (the “ Option Agreement ” ) is attached an option (the “ Option ” ) to purchase certain shares of
Stock upon the terms and conditions set forth in the Notice and this Option Agreement. The Option has been granted pursuant to and shall in all
respects be subject to the terms and conditions of the Northstar Neuroscience, Inc. 2006 Performance Incentive Plan (the “ Plan ” ), as
amended to the Date of Option Grant, the provisions of which are incorporated herein by reference. By signing the Notice, the Optionee:
(a) represents that the Optionee has received copies of, and has read and is familiar with the terms and conditions of, the Notice, the Plan and
this Option Agreement, (b) accepts the Option subject to all of the terms and conditions of the Notice, the Plan and this Option Agreement, and
(c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or Committee upon any questions arising under
the Notice, the Plan or this Option Agreement.

      1.    D EFINITIONS AND C ONSTRUCTION .
           1.1 Definitions . Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Notice or
     the Plan.
           1.2 Construction . Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation
     of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the
     plural shall include the singular. Use of the term ―or‖ is not intended to be exclusive, unless the context clearly requires otherwise.

      2.    T AX C ONSEQUENCES .
           2.1 Tax Status of Option . This Option is intended to have the tax status designated in the Notice.
                 (a) Incentive Stock Option . If the Notice so designates, this Option is intended to be an Incentive Stock Option within the
           meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The
           Optionee should consult with the Optionee’s own tax advisor regarding the tax effects of this Option and the requirements
           necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period
           requirements. (NOTE TO OPTIONEE: If the Option is exercised more than three (3) months after the date on which you cease to
           be an Employee (other than by reason of your death or permanent and total disability as defined in Section 22(e)(3) of the Code),
           the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by
           Section 422 of the Code.)

                                                                       1
           (b) Nonstatutory Stock Option. If the Notice so designates, this Option is intended to be a Nonstatutory Stock Option and
     shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code.
       2.2 ISO Fair Market Value Limitation . If the Notice designates this Option as an Incentive Stock Option, then to the extent that
the Option (together with all Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company
Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater
than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount will be treated as Nonstatutory
Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in
which they were granted, and the Fair Market Value of stock is determined as of the time the option with respect to such stock is granted.
If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be
deemed incorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an
Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 2.2, the
Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall
be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion
shall be issued upon the exercise of the Option. (NOTE TO OPTIONEE: If the aggregate Exercise Price (as defined in the Notice) of the
Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive
Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is
greater than $100,000, you should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as
an Incentive Stock Option.)

3.    A DMINISTRATION .
      All questions of interpretation concerning this Option Agreement shall be determined by the Board or Committee. All
determinations by the Board or Committee shall be final and binding upon all persons having an interest in the Option. Any Officer shall
have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of
or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or
election.

4.    E XERCISE OF THE O PTION .
      4.1 Right to Exercise . Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date
(as defined in the Notice) and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the number of
Vested Shares (as defined in the Notice) less the number of shares previously acquired upon exercise of the Option. In no event shall the
Option be exercisable for more shares than the Number of Option Shares (as defined in the Notice).
     4.2 Method of Exercise . Exercise of the Option shall be by written notice to the Company which must state the election to exercise
the Option, the number of whole shares of

                                                                   2
Stock for which the Option is being exercised and such other representations and agreements as to the Optionee’s investment intent with
respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the
Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission,
or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of
the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by
the Company of such written notice and the aggregate Exercise Price.
     4.3 Payment of Exercise Price .
           (a) Forms of Consideration Authorized . Except as otherwise provided below, payment of the aggregate Exercise Price for
     the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by
     tender to the Company, or attestation to the ownership, of whole shares of Stock owned by the Optionee having a Fair Market Value
     not less than the aggregate Exercise Price, to the extent permitted by the Company at the time of exercise, (iii) by means of a
     Cashless Exercise, to the extent permitted by the Company at the time of exercise, (iv) by delivery of a properly executed notice
     electing a Net-Exercise, to the extent permitted by the Company at the time of exercise, or (v) by any combination of the foregoing.
           (b) Limitations on Forms of Consideration .
                  (i) Tender of Stock . Notwithstanding the foregoing, the Option may not be exercised by tender to the Company, or
            attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the
            provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. The Option may not be
            exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been
            owned by the Optionee for more than six (6) months (and not used for another option exercise by attestation during such
            period) or were not acquired, directly or indirectly, from the Company.
                  (ii) Cashless Exercise . A “ Cashless Exercise ” means the delivery of a properly executed notice together with
            irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the
            proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option
            pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying
            with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve
            System). Notwithstanding anything in the Plan or this Option Agreement to the contrary, a Cashless Exercise shall only be
            permitted, if at all, provided (A) the Company has completed an underwritten public offering of its Stock pursuant to an
            effective registration statement filed under the Securities Act, and (B) the Company’s Stock is listed on a ―national securities
            exchange‖ (as such term is defined in the Exchange Act) or the Nasdaq National Market at the time of such proposed
            Cashless Exercise.

                                                                 3
             In addition, the Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to decline
             to approve or terminate any such program or procedure.
       4.4 Tax Withholding . At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the
Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees
to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required
to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option,
(ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation
providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the
Option. The Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Company shall have no obligation to deliver shares of Stock until the tax withholding obligations of the Participating
Company Group have been satisfied by the Optionee.
      4.5 Certificate Registration . Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the
shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of
the Optionee.
       4.6 Restrictions on Grant of the Option and Issuance of Shares . The grant of the Option and the issuance of shares of Stock
upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to
such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system
upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or
(ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the
terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.
The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s
legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability
in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the
exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to
evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be
requested by the Company.

                                                                    4
     4.7 Fractional Shares . The Company shall not be required to issue fractional shares upon the exercise of the Option.

5.    N ONTRANSFERABILITY OF THE O PTION .
      The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee’s guardian or legal
representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following
the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee’s legal representative or by
any person empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

6.    T ERMINATION OF THE O PTION .
      The Option shall terminate and may no longer be exercised after the first to occur of (a) the Option Expiration Date, (b) the
termination of the Optionee’s Service to the extent that the Option is unvested on such date, (c) the last date for exercising the Option
following termination of the Optionee’s Service as described in Section 7, or (d) a Change in Control to the extent provided in Section 8.

7.    E FFECT OF T ERMINATION OF S ERVICE .
     7.1 Option Exercisability .
          (a) Disability . If the Optionee’s Service terminates because of the Disability of the Optionee, the Option, to the extent vested
     and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee (or the Optionee’s
     guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee’s
     Service terminated, but in any event no later than the Option Expiration Date.
            (b) Death . If the Optionee’s Service terminates because of the death of the Optionee, the Option, to the extent vested and
     exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee’s legal representative or
     other person who acquired the right to exercise the Option by reason of the Optionee’s death at any time prior to the expiration of
     twelve (12) months after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration
     Date. The Optionee’s Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months
     after the Optionee’s termination of Service (other than a termination for Cause).
          (c) Termination for Cause . Notwithstanding any other provision of the Plan or this Option Agreement to the contrary, if the
     Optionee’s Service is terminated for Cause, the Option shall terminate and cease to be exercisable immediately upon such
     termination of Service.
          (d) Other Termination of Service . If the Optionee’s Service terminates for any reason, except Disability, death or Cause, the
     Option, to the extent vested and exercisable by the Optionee on the date on which the Optionee’s Service terminated, may be

                                                                  5
     exercised by the Optionee at any time prior to the expiration of three (3) months (or such other longer period of time as determined
     by the Board or Committee, in its discretion) after the date on which the Optionee’s Service terminated, but in any event no later
     than the Option Expiration Date.
      7.2 Extension if Exercise Prevented by Law . Notwithstanding the foregoing, except termination for Cause, if the exercise of the
Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain
exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event
no later than the Option Expiration Date.
      7.3 Extension if Optionee Subject to Section 16 ( b ). Notwithstanding the foregoing, except termination for Cause, if a sale
within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee
to suit under Section 16(b) of the Exchange Act, the Option shall remain exerciseable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee’s termination of Service, or (iii) the Option Expiration Date.

8.    C HANGE IN C ONTROL .
       In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or
parent thereof, as the case may be (the “ Acquiring Corporation ” ), may, without the consent of the Optionee, either assume the
Company’s rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring
Corporation’s stock. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent
that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised
as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change
in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all
applicable provisions of the Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 2.1(ee)(i)
of the Plan constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other
corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions
of Section 1504(b) of the Code, the Option shall not terminate unless the Board or Committee otherwise provides in its discretion.

9.    A DJUSTMENTS FOR C HANGES IN C APITAL S TRUCTURE .
      Subject to any required action by the shareholders of the Company, in the event of any change in the Stock effected without receipt
of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares,

                                                                   6
exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to
the shareholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair
Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number, Exercise Price and class of
shares subject to the Option, in order to prevent dilution or enlargement of the Optionee’s rights under the Option. For purposes of the
foregoing, conversion of any convertible securities of the Company shall not be treated as ―effected without receipt of consideration by
the Company.‖ If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the ― New
Shares ‖), the Board or Committee may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the
event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner as
determined by the Board or Committee, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 9 shall be rounded down to the nearest whole number, and in no event may the Exercise Price of the Option be
decreased to an amount less than the par value, if any, of the stock subject to the Option. Such adjustments shall be determined by the
Board or Committee, and its determination shall be final, binding and conclusive.

10.   R IGHTS AS A S HAREHOLDER , E MPLOYEE OR C ONSULTANT .
      The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of
a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee
understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating
Company and the Optionee, the Optionee’s employment is ―at will‖ and is for no specified term. Nothing in this Option Agreement shall
confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee’s Service as an Employee or Consultant, as the case may be, at any time.

11.   N OTICE OF S ALES U PON D ISQUALIFYING D ISPOSITION .
      The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of the Plan and this
Option Agreement. In addition, if the Notice designates this Option as an Incentive Stock Option, the Optionee shall (a) promptly notify
the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one
(1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and
(b) provide the Company with a description of the circumstances of such disposition. Until such time as the Optionee disposes of such
shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the
Optionee shall hold all shares acquired pursuant to the Option in the Optionee’s name (and not in the name of any nominee) for the one-

                                                                   7
year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time
during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired
pursuant to the Option requesting the transfer agent for the Company’s stock to notify the Company of any such transfers. The obligation
of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate
pursuant to the preceding sentence.

12.   L EGENDS .
       The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the
Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession
of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such
certificates may include, but shall not be limited to, the following:
    12.1 ―THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE
REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (―ISO‖). IN ORDER TO OBTAIN THE PREFERENTIAL TAX
TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO [ INSERT DISQUALIFYING
DISPOSITION DATE HERE ]. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO
THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE
INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER’S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR
TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.‖

13.   M ISCELLANEOUS P ROVISIONS .
      13.1 Binding Effect . Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.
      13.2 Termination or Amendment . The Board or Committee may terminate or amend the Plan or the Option at any time; provided,
however, that except as provided in Section 8 in connection with a Change in Control, no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation or is required to enable the Option, if designated an Incentive
Stock Option in the Notice, to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be
effective unless in writing.

                                                                   8
       13.3 Notices . Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to
the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the
address shown below that party’s signature or at such other address as such party may designate in writing from time to time to the other
party.
      13.4 Integrated Agreement . The Notice, this Option Agreement and the Plan constitute the entire understanding and agreement of
the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein and supersedes any prior
agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with
respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein,
the provisions of the Notice and the Option Agreement shall survive any exercise of the Option and shall remain in full force and effect.
      13.5 Applicable Law . This Option Agreement shall be governed by the laws of the State of Washington as such laws are applied
to agreements between Washington residents entered into and to be performed entirely within the State of Washington.
      13.6 Counterparts . The Notice may be executed in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

                                                                   9
                    Incentive Stock Option                                 Optionee: _______________________________
                    Nonstatutory Stock Option
                                                                                 Date: ______________________________

                                                  STOCK OPTION EXERCISE NOTICE

Northstar Neuroscience, Inc.
Attention: Chief Financial Officer
2401 Fourth Avenue, Suite 500
Seattle, WA 98121

Ladies and Gentlemen:

     1. Option . I was granted an option (the “ Option ” ) to purchase shares of the common stock (the “ Shares ” ) of Northstar
Neuroscience, Inc. (the “ Company ” ) pursuant to the Company’s 2006 Performance Incentive Plan (the “ Plan ” ), my Notice of Grant of
Stock Option (the “ Notice ” ) and my Stock Option Agreement (the “ Option Agreement ” ) as follows:

           Grant Number:                                                                                      __________________
           Date of Option Grant:                                                                              __________________
           Number of Option Shares:                                                                           __________________
           Exercise Price per Share:                                                                     $    __________________

      2. Exercise of Option . I hereby elect to exercise the Option to purchase the following number of Shares, all of which are Vested Shares
in accordance with the Notice and the Option Agreement:

           Total Shares Purchased:                                                                            __________________
           Total Exercise Price (Total Shares X Price per Share)                                         $    __________________

     3. Payments . I enclose payment in full of the total exercise price for the Shares in the following form(s), as authorized by my Option
Agreement:

            Cash:                                                                                     $______________________
            Check:                                                                                    $______________________
            Tender of Company Stock:                                                               Contact Plan Administrator
            Cashless Exercise:                                                                     Contact Plan Administrator
            Net-Exercise:                                                                          Contact Plan Administrator

                                                                       1
     4. Tax Withholding . I authorize payroll withholding and otherwise will make adequate provision for the federal, state, local and foreign
tax withholding obligations of the Company, if any, in connection with the Option. If I am exercising a Nonstatutory Stock Option, I enclose
payment in full of my withholding taxes, if any, as follows:

                                              (Contact Plan Administrator for amount of tax due.)

                     Cash:                                                  $ ______________________
                     Check:                                                 $ ______________________

         5. Optionee Information .

              My address is:     ___________________________________________________________________

                                 ___________________________________________________________________
              My Social Security Number is:     ________________________________________________________

      6. Notice of Disqualifying Disposition . If the Option is an Incentive Stock Option, I agree that I will promptly notify the Chief Financial
Officer of the Company if I transfer any of the Shares within one (1) year from the date I exercise all or part of the Option or within two
(2) years of the Date of Option Grant.

     7. Binding Effect . I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of
the Option Agreement, to all of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon my heirs,
executors, administrators, successors and assigns.

      I understand that I am purchasing the Shares pursuant to the terms of the Plan, the Notice and my Option Agreement, copies of which I
have received and carefully read and understand.

                                                                                       Very truly yours,


                                                                                       (Signature)
Receipt of the above is hereby acknowledged.
Northstar Neuroscience, Inc.

By:

Title:

Dated:

                                                                        2
                                                  NORTHSTAR NEUROSCIENCE, INC.
                                                    STOCK OPTION AGREEMENT
                                                       (Immediately Exercisable)

       Northstar Neuroscience, Inc. has granted to the individual (the “ Optionee ” ) named in the Notice of Grant of Stock Option (the “ Notice
” ) to which this Stock Option Agreement (the “ Option Agreement ” ) is attached an option (the “ Option ” ) to purchase certain shares of
Stock upon the terms and conditions set forth in the Notice and this Option Agreement. The Option has been granted pursuant to and shall in all
respects be subject to the terms and conditions of the Northstar Neuroscience, Inc. 2006 Performance Incentive Plan (the “ Plan ” ), as
amended to the Date of Option Grant, the provisions of which are incorporated herein by reference. By signing the Notice, the Optionee:
(a) represents that the Optionee has received copies of, and has read and is familiar with the terms and conditions of, the Notice, the Plan and
this Option Agreement, (b) accepts the Option subject to all of the terms and conditions of the Notice, the Plan and this Option Agreement, and
(c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Board or Committee upon any questions arising under
the Notice, the Plan or this Option Agreement.

      1.    D EFINITIONS AND C ONSTRUCTION .
           1.1 Definitions . Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Notice or
     the Plan.
           1.2 Construction . Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation
     of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the
     plural shall include the singular. Use of the term ―or‖ is not intended to be exclusive, unless the context clearly requires otherwise.

      2.    T AX C ONSEQUENCES .
           2.1 Tax Status of Option . This Option is intended to have the tax status designated in the Notice.
                 (a) Incentive Stock Option . If the Notice so designates, this Option is intended to be an Incentive Stock Option within the
           meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The
           Optionee should consult with the Optionee’s own tax advisor regarding the tax effects of this Option and the requirements
           necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period
           requirements. (NOTE TO OPTIONEE: If the Option is exercised more than three (3) months after the date on which you cease to
           be an Employee (other than by reason of your death or permanent and total disability as defined in Section 22(e)(3) of the Code),
           the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by
           Section 422 of the Code.)

                                                                       1
           (b) Nonstatutory Stock Option . If the Notice so designates, this Option is intended to be a Nonstatutory Stock Option and
     shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code.
       2.2 ISO Fair Market Value Limitation . If the Notice designates this Option as an Incentive Stock Option, then to the extent that
the Option (together with all Incentive Stock Options granted to the Optionee under all stock option plans of the Participating Company
Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater
than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount will be treated as Nonstatutory
Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in
which they were granted, and the Fair Market Value of stock is determined as of the time the option with respect to such stock is granted.
If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be
deemed incorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an
Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 2.2, the
Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall
be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion
shall be issued upon the exercise of the Option. (NOTE TO OPTIONEE: If the aggregate Exercise Price (as defined in the Notice) of the
Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive
Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is
greater than $100,000, you should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as
an Incentive Stock Option.)
       2.3 Election Under Section 83(b) of the Code . If the Optionee exercises this Option to purchase shares of Stock that are both
nontransferable and subject to a substantial risk of forfeiture, the Optionee understands that the Optionee should consult with the
Optionee’s tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code,
which must be filed no later than thirty (30) days after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are unvested and are
subject to a right of the Company to repurchase such shares at the Optionee’s original purchase price if the Optionee’s Service terminates,
or (b) the Optionee is an Insider and, under certain circumstances, exercises the Option within six (6) months of the Date of Option Grant
(if a class of equity security of the Company is registered under Section 12 of the Exchange Act). Failure to file an election under
Section 83(b), if appropriate, may result in adverse tax consequences to the Optionee. The Optionee acknowledges that the Optionee has
been advised to consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to the Optionee of the
exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON
WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE
ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE’S SOLE RESPONSIBILITY,
EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR
HER BEHALF.

                                                                  2
3.    A DMINISTRATION .
      All questions of interpretation concerning this Option Agreement shall be determined by the Board or Committee. All
determinations by the Board or Committee shall be final and binding upon all persons having an interest in the Option. Any Officer shall
have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of
or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or
election.

4.    E XERCISE OF THE O PTION .
     4.1 Right to Exercise .
           (a) In General . Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date (as
     defined in the Notice) and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number
     of Option Shares (as defined in the Notice) less the number of shares previously acquired upon exercise of the Option, subject to the
     Company’s repurchase rights set forth in Section 11.
           (b) ISO Exercise Limitation . If this Option is designated as an Incentive Stock Option in the Notice, then notwithstanding the
     provisions of Section 4.1(a) and except as provided in Section 4.1(c), the aggregate Fair Market Value of the shares of Stock with
     respect to which the Optionee may exercise the Option for the first time during any calendar year, when added to the aggregate Fair
     Market Value of the shares subject to any other options designated as Incentive Stock Options granted to the Optionee under all
     stock option plans of the Participating Company Group prior to the Date of Option Grant with respect to which such options are
     exercisable for the first time during the same calendar year, shall not exceed One Hundred Thousand Dollars ($100,000). For
     purposes of the preceding sentence, options designated as Incentive Stock Options shall be taken into account in the order in which
     they were granted, and the Fair Market Value of shares of stock shall be determined as of the time the option with respect to such
     shares is granted. Such limitation on exercise shall be referred to in this Option Agreement as the “ ISO Exercise Limitation . ” If
     Section 422 of the Code is amended to provide for a different limitation from that set forth in this Section 4.1(b), the ISO Exercise
     Limitation shall be deemed amended effective as of the date required or permitted by such amendment to the Code. The ISO
     Exercise Limitation shall terminate upon the earlier of (i) the Optionee’s termination of Service, (ii) the day immediately prior to
     the effective date of a Change in Control in which the Option is not assumed or substituted for by the Acquiring Corporation as
     provided in Section 8, or (iii) the day ten (10) days prior to the Option Expiration Date. Upon such termination of the ISO Exercise
     Limitation, the Option shall be deemed a Nonstatutory Stock Option to the extent of the number of shares subject to the Option
     which would otherwise exceed the ISO Exercise Limitation.
           (c) Exception to ISO Exercise Limitation . Notwithstanding any other provision of this Option Agreement, if compliance
     with the ISO Exercise Limitation as set forth

                                                                   3
     in Section 4.1(b) will result in the exercisability of any Vested Shares being delayed more than thirty (30) days beyond the date
     such shares become Vested Shares (the “ Vesting Date ” ), the Option shall be deemed to be two (2) options. The first option shall
     be for the maximum portion of the Number of Option Shares that can comply with the ISO Exercise Limitation without causing the
     Option to be unexercisable in the aggregate as to Vested Shares on the Vesting Date for such shares. The second option, which shall
     not be treated as an Incentive Stock Option as described in section 422(b) of the Code, shall be for the balance of the Number of
     Option Shares; that is, those such shares which, on the respective Vesting Date for such shares, would be unexercisable if included
     in the first option and thereby made subject to the ISO Exercise Limitation. Shares treated as subject to the second option shall be
     exercisable on the same terms and at the same time as set forth in this Option Agreement; provided, however, that (i) Section 4.1(b)
     shall not apply to the second option and (ii) each such share shall become a Vested Share on the Vesting Date such share must first
     be allocated to the second option pursuant to the preceding sentence. Unless the Optionee specifically elects to the contrary in the
     Optionee’s written notice of exercise, the first option shall be deemed to be exercised first to the maximum possible extent and then
     the second option shall be deemed to be exercised.
       4.2 Method of Exercise . Exercise of the Option shall be by written notice to the Company which must state the election to exercise
the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements
as to the Optionee’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement.
The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt
requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the
Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in
Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an
executed copy, if required herein, of the then current form of escrow agreement referenced below. The Option shall be deemed to be
exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such
executed agreement.
     4.3 Payment of Exercise Price .
           (a) Forms of Consideration Authorized . Except as otherwise provided below, payment of the aggregate Exercise Price for
     the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by
     tender to the Company, or attestation to the ownership, of whole shares of Stock owned by the Optionee having a Fair Market Value
     not less than the aggregate Exercise Price, to the extent permitted by the Company at the time of exercise, (iii) by means of a
     Cashless Exercise, as defined in Section 4.3(b), to the extent permitted by the Company at the time of exercise, (iv) by delivery of a
     properly executed notice electing a Net-Exercise, to the extent permitted by the Company at the time of exercise, or (v) by any
     combination of the foregoing.

                                                                 4
           (b) Limitations on Forms of Consideration .
                   (i) Tender of Stock . Notwithstanding the foregoing, the Option may not be exercised by tender to the Company, or
             attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the
             provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. The Option may not be
             exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been
             owned by the Optionee for more than six (6) months (and not used for another option exercise by attestation during such
             period) or were not acquired, directly or indirectly, from the Company.
                   (ii) Cashless Exercise . A “ Cashless Exercise ” means the delivery of a properly executed notice together with
             irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the
             proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option
             pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying
             with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve
             System). Notwithstanding anything in the Plan or this Option Agreement to the contrary, a Cashless Exercise shall only be
             permitted, if at all, provided (A) the Company has completed an underwritten public offering of its Stock pursuant to an
             effective registration statement filed under the Securities Act, and (B) the Company’s Stock is listed on a ―national securities
             exchange‖ (as such term is defined in the Exchange Act) or the Nasdaq National Market at the time of such proposed
             Cashless Exercise. In addition, the Company reserves, at any and all times, the right, in the Company’s sole and absolute
             discretion, to decline to approve or terminate any such program or procedure.
       4.4 Tax Withholding . At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the
Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees
to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required
to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option,
(ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation
providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the
Option. The Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established
pursuant to this Option Agreement until the tax withholding obligations of the Participating Company Group have been satisfied by the
Optionee.
      4.5 Certificate Registration . Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the
shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of
the Optionee.

                                                                   5
       4.6 Restrictions on Grant of the Option and Issuance of Shares . The grant of the Option and the issuance of shares of Stock
upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to
such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system
upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or
(ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the
terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.
The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s
legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability
in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the
exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to
evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be
requested by the Company.
     4.7 Fractional Shares . The Company shall not be required to issue fractional shares upon the exercise of the Option.

5.    N ONTRANSFERABILITY OF THE O PTION .
      The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee’s guardian or legal
representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following
the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee’s legal representative or by
any person empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

6.    T ERMINATION OF THE O PTION .
      The Option shall terminate and may no longer be exercised after the first to occur of (a) the Option Expiration Date, (b) the
termination of the Optionee’s Service to the extent that the Option is unvested on such date, (c) the last date for exercising the Option
following termination of the Optionee’s Service as described in Section 7, or (d) a Change in Control to the extent provided in Section 8.

                                                                    6
7.    E FFECT OF T ERMINATION OF S ERVICE .
     7.1 Option Exercisability .
          (a) Disability . If the Optionee’s Service terminates because of the Disability of the Optionee, the Option, to the extent vested
     and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee (or the Optionee’s
     guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee’s
     Service terminated, but in any event no later than the Option Expiration Date.
            (b) Death . If the Optionee’s Service terminates because of the death of the Optionee, the Option, to the extent vested and
     exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee’s legal representative or
     other person who acquired the right to exercise the Option by reason of the Optionee’s death at any time prior to the expiration of
     twelve (12) months after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration
     Date. The Optionee’s Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months
     after the Optionee’s termination of Service (other than a termination for Cause).
          (c) Termination for Cause . Notwithstanding any other provision of the Plan or this Option Agreement to the contrary, if the
     Optionee’s Service is terminated for Cause, the Option shall terminate and cease to be exercisable immediately upon such
     termination of Service.
           (d) Other Termination of Service . If the Optionee’s Service terminates for any reason, except Disability, death or Cause, the
     Option, to the extent vested and exercisable by the Optionee on the date on which the Optionee’s Service terminated, may be
     exercised by the Optionee at any time prior to the expiration of three (3) months (or such other longer period of time as determined
     by the Board or Committee, in its discretion) after the date on which the Optionee’s Service terminated, but in any event no later
     than the Option Expiration Date.
       7.2 Additional Limitations on Option Exercise . Notwithstanding the provisions of Section 7.1, the Option may not be exercised
after the Optionee’s termination of Service to the extent that the shares to be acquired upon exercise of the Option would be subject to the
Unvested Share Repurchase Option as provided in Section 11.
      7.3 Extension if Exercise Prevented by Law . Notwithstanding the foregoing, except termination for Cause, if the exercise of the
Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain
exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event
no later than the Option Expiration Date.
      7.4 Extension if Optionee Subject to Section 16(b) . Notwithstanding the foregoing, except termination for Cause, if a sale within
the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit
under Section 16(b) of the Exchange Act, the Option shall remain exerciseable until the

                                                                  7
earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject
to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee’s termination of Service, or (iii) the Option Expiration Date.

8.    C HANGE IN C ONTROL .
       In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or
parent thereof, as the case may be (the “ Acquiring Corporation ” ), may, without the consent of the Optionee, either assume the
Company’s rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring
Corporation’s stock. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent
that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised
as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change
in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all
applicable provisions of the Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 2.1(ee)(i)
of the Plan constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other
corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions
of Section 1504(b) of the Code, the Option shall not terminate unless the Board or Committee otherwise provides in its discretion.

9.    A DJUSTMENTS FOR C HANGES IN C APITAL S TRUCTURE .
      Subject to any required action by the shareholders of the Company, in the event of any change in the Stock effected without receipt
of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or
similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the shareholders of the
Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of
Stock, appropriate and proportionate adjustments shall be made in the number, Exercise Price and class of shares subject to the Option, in
order to prevent dilution or enlargement of the Optionee’s rights under the Option. For purposes of the foregoing, conversion of any
convertible securities of the Company shall not be treated as ―effected without receipt of consideration by the Company.‖ If a majority of
the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another corporation (the “ New Shares ” ), the Board or Committee
may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the
Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner as determined by the Board or
Committee, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9
shall be rounded down to

                                                                    8
the nearest whole number, and in no event may the Exercise Price of the Option be decreased to an amount less than the par value, if any,
of the stock subject to the Option. Such adjustments shall be determined by the Board or Committee, and its determination shall be final,
binding and conclusive.

10.   R IGHTS AS A S HAREHOLDER , E MPLOYEE OR C ONSULTANT .
      The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of
a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee
understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating
Company and the Optionee, the Optionee’s employment is ―at will‖ and is for no specified term. Nothing in this Option Agreement shall
confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee’s Service as an Employee or Consultant, as the case may be, at any time.

11.   U NVESTED S HARE R EPURCHASE O PTION .
      11.1 Grant of Unvested Share Repurchase Option . In the event the Optionee’s Service with the Participating Company Group is
terminated for any reason or no reason, with or without cause, or, if the Optionee, the Optionee’s legal representative, or other holder of
shares acquired upon exercise of the Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an
Ownership Change Event) any Unvested Shares, as defined in Section 11.2 below (the “ Unvested Shares ” ), the Company shall have
the right to repurchase the Unvested Shares under the terms and subject to the conditions set forth in this Section 11 (the “ Unvested
Share Repurchase Option ” ).
     11.2 Unvested Shares Defined . The “ Unvested Shares ” shall mean, on any given date, the number of shares of Stock acquired
upon exercise of the Option which exceed the Vested Shares determined as of such date.
      11.3 Exercise of Unvested Share Repurchase Option . The Company may exercise the Unvested Share Repurchase Option by
written notice to the Optionee within two hundred seventy (270) days after (a) termination of the Optionee’s Service (or exercise of the
Option, if later) or (b) the Company has received notice of the attempted disposition of Unvested Shares. If the Company fails to give
notice within such two hundred seventy (270) day period, the Unvested Share Repurchase Option shall terminate unless the Company and
the Optionee have extended the time for the exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase Option
must be exercised, if at all, for all of the Unvested Shares, except as the Company and the Optionee otherwise agree.
      11.4 Payment for Shares and Return of Shares to Company . The purchase price per share being repurchased by the Company
shall be an amount equal to the Optionee’s

                                                                   9
original cost per share, as adjusted pursuant to Section 9 (the “ Repurchase Price ” ). The Company shall pay the aggregate Repurchase
Price to the Optionee in cash within thirty (30) days after the date of the written notice to the Optionee of the Company’s exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of any purchase money indebtedness of the Optionee to
any Participating Company for the shares shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The shares being repurchased shall be delivered to the Company by the Optionee at the same time as the
delivery of the Repurchase Price to the Optionee.
     11.5 Assignment of Unvested Share Repurchase Option . The Company shall have the right to assign the Unvested Share
Repurchase Option at any time, whether or not such option is then exercisable, to one or more persons as may be selected by the
Company.
      11.6 Ownership Change Event . Upon the occurrence of an Ownership Change Event, any and all new, substituted or additional
securities or other property to which the Optionee is entitled by reason of the Optionee’s ownership of Unvested Shares shall be
immediately subject to the Unvested Share Repurchase Option and included in the terms ―Stock‖ and ―Unvested Shares‖ for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the Unvested Shares immediately prior to the Ownership
Change Event. While the aggregate Repurchase Price shall remain the same after such Ownership Change Event, the Repurchase Price
per Unvested Share upon exercise of the Unvested Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Shares following an Ownership Change Event, credited Service shall include all
Service with any corporation which is a Participating Company at the time the Service is rendered, whether or not such corporation is a
Participating Company both before and after the Ownership Change Event.

12.   E SCROW .
       12.1 Establishment of Escrow . To ensure that shares subject to the Unvested Share Repurchase Option will be available for
repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares which the Optionee purchases upon
exercise of the Option with an agent designated by the Company under the terms and conditions of an escrow agreement approved by the
Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any
time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as
described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee’s ownership of shares of Stock acquired upon exercise of the Option that remain, following such
Ownership Change Event or change described in Section 9, subject to the Unvested Share Repurchase Option shall be immediately
subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of
the escrow.
     12.2 Delivery of Shares to Optionee . As soon as practicable after the expiration of the Unvested Share Repurchase Option, but not
more frequently than twice each

                                                                 10
calendar year, the escrow agent shall deliver to the Optionee the shares and any other property no longer subject to such restriction.
      12.3 Notices and Payments . In the event the shares and any other property held in escrow are subject to the Company’s exercise
of the Unvested Share Repurchase Option, the notices required to be given to the Optionee shall be given to the escrow agent, and any
payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company,
the escrow agent shall deliver the shares and any other property which the Company has purchased to the Company and shall deliver the
payment received from the Company to the Optionee.

13.   Stock Distributions Subject to Option Agreement .
      If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of
any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such
event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee’s ownership of the
shares acquired upon exercise of the Option shall be immediately subject to the Unvested Share Repurchase Option with the same force
and effect as the shares subject to the Unvested Share Repurchase Option immediately before such event.

14.. N OTICE OF S ALES U PON D ISQUALIFYING D ISPOSITION .
       The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of the Plan and this
Option Agreement. In addition, if the Notice designates this Option as an Incentive Stock Option, the Optionee shall (a) promptly notify
the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one
(1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and
(b) provide the Company with a description of the circumstances of such disposition. Until such time as the Optionee disposes of such
shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the
Optionee shall hold all shares acquired pursuant to the Option in the Optionee’s name (and not in the name of any nominee) for the
one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any
time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares
acquired pursuant to the Option requesting the transfer agent for the Company’s stock to notify the Company of any such transfers. The
obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the
certificate pursuant to the preceding sentence.

                                                                   13
15.   L EGENDS .
      The Company may at any time place legends referencing the Unvested Share Repurchase Option and any applicable federal, state or
foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The
Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by
the Company, legends placed on such certificates may include, but shall not be limited to, the following:
    15.1 ―THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE
REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (―ISO‖). IN ORDER TO OBTAIN THE PREFERENTIAL TAX
TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO [ INSERT DISQUALIFYING
DISPOSITION DATE HERE ]. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO
THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE
INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER’S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR
TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.‖
     15.2 ―THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN UNVESTED SHARE REPURCHASE
OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER’S PREDECESSOR IN INTEREST, A COPY OF WHICH
IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.‖

16.   M ISCELLANEOUS P ROVISIONS .
      16.1 Binding Effect . Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.
      16.2 Termination or Amendment . The Board or Committee may terminate or amend the Plan or the Option at any time; provided,
however, that except as provided in Section 8 in connection with a Change in Control, no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation or is required to enable the Option, if designated an Incentive
Stock Option in the Notice, to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be
effective unless in writing.

                                                                   12
       16.3 Notices . Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to
the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the
address shown below that party’s signature or at such other address as such party may designate in writing from time to time to the other
party.
      16.4 Integrated Agreement . The Notice, this Option Agreement and the Plan constitute the entire understanding and agreement of
the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein and supersedes any prior
agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with
respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein,
the provisions of the Notice and the Option Agreement shall survive any exercise of the Option and shall remain in full force and effect.
      16.5 Applicable Law . This Option Agreement shall be governed by the laws of the State of Washington as such laws are applied
to agreements between Washington residents entered into and to be performed entirely within the State of Washington.
      16.6 Counterparts . The Notice may be executed in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

                                                                  13
 Incentive Stock Option                                                   Optionee: __________________________________________
 Nonstatutory Stock Option
                                                                                Date: __________________________________________

                                                  STOCK OPTION EXERCISE NOTICE
                                                   ( IMMEDIATELY EXERCISABLE)

Northstar Neuroscience, Inc.
Attention: Chief Financial Officer
2401 Fourth Avenue, Suite 500
Seattle, WA 98121
Ladies and Gentlemen:

     1. Option . I was granted an option (the “ Option ” ) to purchase shares of the common stock (the “ Shares ” ) of Northstar
Neuroscience, Inc. (the “ Company ” ) pursuant to the Company’s 2006 Performance Incentive Plan (the “ Plan ” ), my Notice of Grant of
Stock Option (the “ Notice ” ) and my Stock Option Agreement (the “ Option Agreement ” ) as follows:

           Grant Number:                                                                                      __________________
           Date of Option Grant:                                                                              __________________
           Number of Option Shares:                                                                           __________________
           Exercise Price per Share:                                                                     $    __________________

     2. Exercise of Option . I hereby elect to exercise the Option to purchase the following number of Shares:

           Vested Shares:                                                                                     __________________
           Unvested Shares:                                                                                   __________________
           Total Shares Purchased:                                                                            __________________
           Total Exercise Price (Total Shares X Price per Share)                                         $    __________________

     3. Payments . I enclose payment in full of the total exercise price for the Shares in the following form(s), as authorized by my Option
Agreement:

            Cash:                                                                                       $_____________________
            Check:                                                                                      $_____________________
            Tender of Company Stock:                                                                    Contact Plan Administrator
            Cashless Exercise:                                                                          Contact Plan Administrator
            Net-Exercise:                                                                               Contact Plan Administrator
     4. Tax Withholding . I authorize payroll withholding and otherwise will make adequate provision for the federal, state, local and foreign
tax withholding obligations of the Company, if any, in connection with the Option. If I am exercising a Nonstatutory Stock Option, I enclose
payment in full of my withholding taxes, if any, as follows:

                                              (Contact Plan Administrator for amount of tax due.)

               Cash:                                                         $____________________
               Check:                                                        $____________________

         5. Optionee Information .

              My address is:         ___________________________________________________________________
                                     ___________________________________________________________________
              My Social Security Number is:     ________________________________________________________

      6. Notice of Disqualifying Disposition . If the Option is an Incentive Stock Option, I agree that I will promptly notify the Chief Financial
Officer of the Company if I transfer any of the Shares within one (1) year from the date I exercise all or part of the Option or within two
(2) years of the Date of Option Grant.

      7. Binding Effect . I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of
the Option Agreement, including the Unvested Share Repurchase Option, to all of which I hereby expressly assent. This Agreement shall inure
to the benefit of and be binding upon my heirs, executors, administrators, successors and assigns.

      8. Election Under Section 83(b) of the Code . I understand and acknowledge that if I am exercising the Option to purchase Unvested
Shares (i.e., shares that remain subject to the Company’s Unvested Share Repurchase Option), that I should consult with my tax advisor
regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later
than thirty (30) days after the date on which I exercise the Option. I acknowledge that I have been advised to consult with a tax advisor prior to
the exercise of the Option regarding the tax consequences to me of exercising the Option. AN ELECTION UNDER SECTION 83(b) MUST
BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH I PURCHASE THE SHARES. THIS TIME PERIOD CANNOT BE
EXTENDED. I ACKNOWLEDGE THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS MY SOLE RESPONSIBILITY, EVEN IF
I REQUEST THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON MY BEHALF.

      I understand that I am purchasing the Shares pursuant to the terms of the Plan, the Notice and my Option Agreement, copies of which I
have received and carefully read and understand.

                                                                                       Very truly yours,


                                                                                       (Signature)

Receipt of the above is hereby acknowledged.
Northstar Neuroscience, Inc.

By:

Title:

Dated:
                                                                                                                                  Exhibit 10.19

                                               DIRECTOR RESIGNATION AGREEMENT

This Director Resignation Agreement (the ― Resignation Agreement ‖) dated as of March 7, 2006, is by and between Northstar Neuroscience,
Inc., a Washington corporation (the ― Company ‖), and Seth A. Rudnick, who is a director of the Company (the ― Director ‖).

                                                                 RECITALS

      A. The Company is proposing to file a registration statement on Form S-1 with the Securities and Exchange Commission for the initial
public offering of its common stock (the ― IPO ‖).

     B. The Board of Directors of the Company (the ― Board ‖) has approved an appointment of Albert J. Graf and Robert E. McNamara to the
Board effective upon the closing of the IPO.

      C. In furtherance of one of such appointments the Board has approved this Resignation Agreement, pursuant to which the Director agrees
to tender his resignation effective immediately prior to the closing of the IPO.

NOW, THEREFORE, the Director hereby agrees as follows:

                                                               AGREEMENT

1. Agreement to Resign . The Director hereby agrees to tenders his resignation from the Board effective immediately prior to the closing of the
IPO. At such time, the Director shall execute and deliver to the Company the written resignation in the form attached hereto as Exhibit A .

2. Miscellaneous .

      (a) This Resignation Agreement may be executed in two counterparts, including facsimile counterparts, each of which will be deemed an
original, but both of which taken together will constitute one and the same document.

      (b) This Resignation Agreement is governed by, and will be construed in accordance with, the law of the State of Washington without
regard to principles of conflict of laws.

NORTHSTAR NEUROSCIENCE, INC.                                                     DIRECTOR

By:         /s/ Alan J. Levy                                                     /s/ Seth A. Rudnick
Name: Alan J. Levy                                                               Seth A. Rudnick
Its: President and Chief Executive Officer


                                                                                                                                   Exhibit 23.1

                            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      We consent to the reference to our firm under the caption ―Experts‖ and to the use of our report dated February 23, 2006 in Amendment
No. 1 to the Registration Statement (Form S-1 No. 333-132135) and related Prospectus of Northstar Neuroscience, Inc. for the registration of
its common stock.

                                                                           /s/    Ernst & Young LLP

Seattle, Washington
March 29, 2006
                 __________________
           Total Exercise Price (Total Shares X Price per Share)                                             $    __________________

     3. Payments . I enclose payment in fu ll of the total exercise price fo r the Shares in the fo llo wing fo rm(s), as authorized by my Option
Agreement:

            Cash:                                                                                          $_____________________
            Check:                                                                                         $_____________________
            Tender of Co mpany Stock:                                                                      Contact Plan Ad min istrator
            Cashless Exercise:                                                                             Contact Plan Ad min istrator
            Net-Exercise:                                                                                  Contact Plan Ad min istrator
      4. Tax Withhol ding . I authorize payroll withholding and otherwise will make adequate provision for the federal, state, local and foreign
tax withholding obligations of the Co mpany, if any, in connection with the Option. If I am exercising a Nonstatutory Stoc k Option, I enclose
payment in fu ll of my withholding taxes, if any, as follows:

                                               (Contact Plan Admi nistrator for amount of tax due.)

               Cash:                                                         $____________________
               Check:                                                        $____________________

         5. Optionee Informati on .

              My address is:          ___________________________________________________________________
                                      ___________________________________________________________________
              My Social Security Nu mber is:    ________________________________________________________

      6. Notice of Disqualifying Disposition . If the Option is an Incentive Stock Option, I agree that I will pro mptly notify the Chief Financial
Officer of the Co mpany if I t ransfer any of the Shares within one (1) year fro m the date I exercise all or part of the Option or within two
(2) years of the Date of Option Grant.

      7. Bindi ng Effect . I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of
the Option Agreement, including the Unvested Share Repurch ase Option, to all o f wh ich I hereby expressly assent. This Agreement shall inure
to the benefit of and be binding upon my heirs, executors, ad min istrators, successors and assigns.

      8. Electi on Under Section 83(b) of the Code . I understand and acknowledge that if I am exercising the Option to purchase Unvested
Shares (i.e., shares that remain subject to the Company’s Unvested Share Repurchase Option), that I should consult with my tax advisor
regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b ) of the Code, wh ich must be filed no later
than thirty (30) days after the date on which I exercise the Option. I acknowledge that I have been advised to consult with a tax advisor prio r to
the exercise of the Option regarding the tax consequences to me of exercising the Option. AN ELECTION UNDER SECTION 83(b) M UST
BE FILED WITHIN 30 DA YS AFTER THE DATE ON W HICH I PURCHASE THE SHA RES. THIS TIM E PERIOD CANNOT BE
EXTENDED. I ACKNOW LEDGE THAT TIM ELY FILING OF A SECTION 83(b ) ELECTION IS M Y SOLE RESPONSIBILITY, EVEN IF
I REQUEST THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON M Y BEHA LF.

      I understand that I am purchasing the Shares pursuant to the terms of the Plan, the Notice and my Option Agreement, copies of which I
have received and carefully read and understand.

                                                                                        Very tru ly yours,


                                                                                        (Signature)

Receipt of the above is hereby acknowledged.
Northstar Neuroscience, Inc.

By:

Title:

Dated:
                                                                                                                                   Exhi bit 10.19

                                                DIRECTOR RES IGNATION AGREEMENT

This Director Resignation Agreement (the ― Resignation Agreement ‖) dated as of March 7, 2006, is by and between Northstar Neuroscience,
Inc., a Washington corporation (the ― Co mpany ‖), and Seth A. Rudnick, who is a director of the Co mpany (the ― Director ‖).

                                                                  RECITALS

      A. The Co mpany is proposing to file a registration statement on Form S -1 with the Securities and Exchange Co mmission for the init ial
public offering of its common stock (the ― IPO ‖).

     B. The Board of Directors of the Co mpany (the ― Board ‖) has approved an appointment of Albert J. Graf and Robert E. McNamara to the
Board effective upon the closing of the IPO.

      C. In fu rtherance of one of such appointments the Board has approved this Resignation Agreement, pursuant to which the Director agrees
to tender his resignation effective immed iately prior to the closing of the IPO.

NOW, THEREFORE, the Director hereby agrees as follows:

                                                                AGREEMENT

1. Agreement to Resign . The Director hereby agrees to tenders his resignation fro m the Board effect ive immediately prior to the closing of the
IPO. At such time, the Director shall execute and deliver to the Co mpany the written resignation in the form attached hereto as Exh ib it A .

2. M iscellaneous .

      (a) Th is Resignation Agreement may be executed in two counterparts, including facsimile counterparts, each of which will be d eemed an
original, but both of which taken together will constitute one and the same document.

      (b) This Resignation Agreement is governed by, and will be construed in accordance with, the law of the State of Washington without
regard to princip les of conflict of laws.

NORTHSTAR NEUROSCIENCE, INC.                                                   DIRECTOR

By:         /s/ Alan J. Levy                                                   /s/ Seth A. Rudnick
Name: Alan J. Levy                                                             Seth A. Rudnick
Its: President and Chief Executive Officer


                                                                                                                                     Exhi bit 23.1

                            CONS ENT OF INDEPENDENT REGIS TERED PUB LIC ACCOUNTING FIRM

      We consent to the reference to our firm under the caption ―Experts‖ and to the use of our report dated February 23, 2006 in A mendment
No. 1 to the Reg istration Statement (Fo rm S-1 No. 333-132135) and related Prospectus of Northstar Neuroscience, Inc. for the registration of
its common stock.

                                                                           /s/ Ernst & Young LLP

Seattle, Washington
March 29, 2006