The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2006. Operating results are not necessarily indicative of results that may occur in future periods.

This report includes various forward-looking statements that are subject to risks and uncertainties, many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth below under Part II – Item 1A “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2006. Forward-looking statements discuss matters that are not historical facts and include, but are not limited to, discussions regarding our operating strategy, sales and marketing strategy, regulatory strategy, industry, economic conditions, financial condition, liquidity and capital resources and results of operations. Such statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,” “would,” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future, but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Overview

Stereotaxis designs, manufactures and markets an advanced cardiology instrument control system for use in a hospital’s interventional surgical suite to enhance the treatment of arrhythmias and coronary artery disease. The Stereotaxis System is designed to enable physicians to complete more complex interventional procedures by providing image guided delivery of catheters and guidewires through the blood vessels and chambers of the heart to treatment sites. This is achieved using externally applied magnetic fields that govern the motion of the working tip of the catheter or guidewire, resulting in improved navigation, efficient procedures and reduced x-ray exposure. The core components of the Stereotaxis System have received regulatory clearance in the U.S., Canada and Europe.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We review our estimates and judgments on an on-going basis. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting policies are critical to the judgments and estimates we use in preparing our financial statements. For a complete listing of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2006.

Our accounting policy for income taxes was recently modified due to the adoption of FIN 48. In June 2006, the Financial Accounting Standards Board (FASB) issued FIN 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and provides guidance on the recognition, de-recognition and measurement of benefits related to an entity’s uncertain tax positions. FIN 48 is effective for us beginning January 1, 2007. The adoption of FIN 48 did not have an impact on our financial position or results of operations.

In February 2007, The FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. We are currently evaluating the impact of adopting SFAS 159 on our financial statements.

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Revenue Recognition

For arrangements with multiple deliverables, we allocate the total revenue to each deliverable based on the provisions of Staff Accounting Bulletin (SAB) 104 and Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and recognize revenue for each separate element as the criteria are met.

In the second quarter of 2007, we determined that installation met the criteria under SAB 104 and EITF Issue No. 00-21 for recognition as a separate element or unit of accounting. Revenue for system sales is recognized upon delivery for the portion of sales price due upon delivery, provided delivery has occurred, title has passed, there are no uncertainties regarding acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable, and collection of the related receivable is reasonably assured. The sales price due upon installation (10% or less) is recognized as revenue when the standard installation process is complete. If more than 10% of the sales price is due upon installation, revenue recognition is deferred until the standard installation process is complete. When installation is the responsibility of the customer, revenue from system sales is recognized upon shipment since these arrangements do not include an installation element or right of return privileges. If uncertainties exist regarding collectability, we recognize revenue when those uncertainties are resolved. Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Revenue from services and license fees, whether sold individually or as a separate unit of accounting in a multi-element arrangement, is deferred and amortized over the service or license fee period, which is typically one year. Revenue from services is derived primarily from the sale of annual product maintenance plans. We recognize revenue from disposable device sales or accessories upon shipment and an appropriate reserve for returns is established. We recognize fees earned on the shipment of product to customers as revenue and recognize costs incurred on the shipment of product to customers as cost of revenue.

Results of Operations

Comparison of the Three Months Ended June 30, 2007 and 2006

Revenue . Revenue increased to $7.8 million for the three months ended June 30, 2007 from $3.8 million for the three months ended June 30, 2006, an increase of approximately 105%. Revenue from the sale of systems increased from $2.9 million to $5.8 million, an increase of approximately 102% because of an increase in the number of systems delivered from three to five. Revenue from sales of disposable interventional devices, service and accessories increased to $2.1 million for the three months ended June 30, 2007 from approximately $954,000 for the three months ended June 30, 2006, an increase of approximately 116%. This increase was principally attributable to the increased base of installed systems.

Purchase orders and other commitments for our magnetic navigation system were approximately $55 million at June 30, 2007. We do not include orders for disposables, service or other accessories in the backlog data. Backlog includes amounts withheld at the time of revenue recognition which will be included in systems revenue in the future when the related obligations are completed. There can be no assurance that we will recognize revenue in any particular period or at all because some of our purchase orders and other commitments are subject to contingencies that are outside our control. In addition, these orders and commitments may be revised, modified or cancelled, either by their express terms, as a result of negotiations, or by project changes or delays.

Cost of Revenue . Cost of revenue increased to $4.3 million for the three months ended June 30, 2007 from $2.2 million for the three months ended June 30, 2006, an increase of approximately 99%. This increase was in part due to the increased number of systems sold. Cost of sales for the quarter ended June 30, 2007 also includes a $1.9 million impairment charge to the carrying value of the first generation Niobe 1 systems remaining in inventory.

Research and Development Expenses . Research and development expenses increased to $7.1 million for the three months ended June 30, 2007 from $5.5 million for the three months ended June 30, 2006, an increase of approximately 28%. The increase was due principally to an increase in expenses related to the 8mm and irrigated catheter development and other research and development projects.

General and Administrative Expenses . General and administrative expenses increased to $4.8 million for the three months ended June 30, 2007 from $4.3 million for the three months ended June 30, 2006, an increase of approximately 13%. The increase was due primarily to increased headcount and compensation costs.

Sales and Marketing Expenses . Sales and marketing expenses increased to approximately $7.0 million for the three months ended June 30, 2007 from $5.7 million for the three months ended June 30, 2006, an increase of approximately 22%. The increase related primarily to increased salary, benefits and travel expenses associated with expanded sales headcount.

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Interest Income . Interest income decreased to $491,000 for the three months ended June 30, 2007 from $630,000 for the three months ended June 30, 2006, a decrease of approximately 22% due to lower invested balances.

Interest Expense . Interest expense decreased approximately 81% to $63,000 for the three months ended June 30, 2007 from $330,000 for the three months ended June 30, 2006 primarily due to the amortization of warrant expense during 2006 related to the affiliate line of credit.

Comparison of the Six Months Ended June 30, 2007 and 2006

Revenue . Revenue increased to $17.0 million for the six months ended June 30, 2007 from $5.5 million for the six months ended June 30, 2006, an increase of approximately 206%. Revenue from the sale of systems increased to $13 million from $3.8 million, an increase of approximately 238%, because of an increase in the number of systems delivered from four to eleven. Revenue from sales of disposable interventional devices, service and accessories increased to $4.0 million for the six months ended June 30, 2007 from $1.7 million for the six months ended June 30, 2006, an increase of approximately 136%. This increase was principally attributable to the increased base of installed systems.

Cost of Revenue . Cost of revenue increased to $7.6 million for the six months ended June 30, 2007 from $3.4 million for the six months ended June 30, 2006, an increase of approximately 122%. This increase was due in part to the increased number of systems sold. Cost of sales for the 2007 period also includes a $1.9 million impairment charge to the carrying value of the first generation Niobe systems remaining in inventory.

Research and Development Expenses . Research and development expenses increased to $12.8 million for the six months ended June 30, 2007 from $11.7 million for the six months ended June 30, 2006, an increase of approximately 10%. The increase was due principally to an increase in expenses related to the 8mm and irrigated catheter development and other research and development projects.

General and Administrative Expenses . General and administrative expenses increased to $9.8 million for the six months ended June 30, 2007 from $8.3 million for the six months ended June 30, 2006, an increase of approximately 18%. The increase was due primarily to expanded activity in clinical affairs and training and increased compensation costs.

Sales and Marketing Expenses . Sales and marketing expenses increased to $13.1 million for the six months ended June 30, 2007 from $10.6 million for the six months ended June 30, 2006, an increase of approximately 23%. The increase related primarily to increased salary, benefits and travel expenses associated with expanded sales headcount.

Interest Income . Interest income decreased to $874,000 for the six months ended June 30, 2007 from $1.1 million for the six months ended June 30, 2006, a decrease of approximately 21% due to lower invested balances.

Interest Expense . Interest expense decreased approximately 84% to $142,000 for the six months ended June 30, 2007 from $884,000 for the six months ended June 30, 2006 primarily due to the amortization of warrant expense during 2006 related to the affiliate line of credit.

Liquidity and Capital Resources

Liquidity refers to the liquid financial assets available to fund our business operations and pay for near-term obligations. These liquid financial assets consist of cash and cash equivalents, as well as investments. In addition to our cash and cash equivalent balances, we maintained $6.8 million of investments in commercial paper and auction rate securities at June 30, 2007 and $21.8 million of investments in corporate debt securities, U.S. government agency notes, commercial paper, certificates of deposit and auction rate securities at December 31, 2006. At June 30, 2007, we had working capital of approximately $37.4 million, compared to $40.4 million at December 31, 2006.

The following table summarizes our cash flow by operating, investing and financing activities for each of six month periods ended June 30, 2007 and 2006 (in thousands):

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Net cash used in operating activities . We used approximately $22.7 million and $26.8 million of cash for operating activities during the six months ended June 30, 2007 and 2006, respectively, primarily as a result of operations during these periods. Cash used to fund operating assets and liabilities was $2.4 million and $1.9 million during the six months ended June 30, 2007 and June 30, 2006, respectively.

Net cash provided by (used in) investing activities . We generated approximately $12.1 million of cash from investing activities during the six months ended June 30, 2007, principally from the maturity of investments. During the six months ended June 30, 2006, we used approximately $8.2 million of cash, substantially for the purchase of investments. We used approximately $3.0 million and $1.9 million of cash for the purchase of equipment during the six months ended June 30, 2007 and 2006, respectively.

Net cash provided by financing activities . We generated approximately $21.5 million from financing activities during the six months ended June 30, 2007 primarily from the proceeds of our common stock offering in the first quarter of 2007. We drew $2 million under our equipment line and repaid amounts drawn under our working capital line and scheduled amounts due under older equipment loans. We generated approximately $62.5 million from financing activities during the six months ended June 30, 2006, primarily from the proceeds of our common stock offering.

In March 2007, we entered into a loan modification agreement with our primary lender to increase the maximum borrowing capacity from $10 million to $25 million. In addition, this agreement provided for an additional $2 million in equipment advances which was drawn in June 2007. The maturity date of the revolving line of credit under the loan agreement was extended to March 2009 and the interest rate will be calculated at the lender’s prime rate plus either 0.25% or 0.75%, depending on a defined liquidity measure. These loan agreements are secured by substantially all of our assets. The loan agreements include customary affirmative, negative and financial covenants. For example, we are restricted from incurring additional debt, disposing of or pledging our assets, entering into merger or acquisition agreements, making certain investments, allowing fundamental changes to our business, ownership, management or business locations, and from making certain payments in respect of stock or other ownership interests, such as dividends and stock repurchases. In the event our quick asset ratio (as defined in the agreement) falls below 1.75 to 1, we would be required to meet certain operating performance covenants. We are also required under the loan agreements to maintain our primary operating account and the majority of our cash and investment balances in accounts with the lender. As of June 30, 2007, we had no outstanding amounts due under our working capital line of credit resulting in an unused line of approximately $25.0 million with borrowing capacity of approximately $13.3 million, secured by qualifying receivables and inventory balances. As of June 30, 2007, we had aggregate outstanding balances of approximately $2.5 million under our two equipment loan agreements. As of June 30, 2007, we were in compliance with all covenants of this agreement.

In November 2005, we entered into a six-month commitment with certain affiliates providing for the availability of up to $20.0 million in unsecured borrowings. This commitment was available to be drawn against at any time through May 10, 2006, the initial six-month commitment period. The commitment period, as well as the maturity date on any funds drawn under the commitment, was subject to one six-month extension, through November 2006, at our sole election. The lenders received five-year warrants to purchase shares of our common stock upon commitment of the funds. We did not draw funds under this agreement nor did we extend the commitment period beyond its May 2006 expiration.

In February 2006, we completed an offering of 5,500,000 shares of our common stock at $12.00 per share which included the exercise by the underwriters of an option to purchase an additional 500,000 shares. In conjunction with these transactions, we received approximately $61.7 million in net proceeds after deduction of underwriting discounts and commissions and payment of offering expenses.

In August 2006, we filed a universal shelf registration statement for the issuance and sale from time to time to the public of up to $75 million in securities, including debt, preferred stock, common stock and warrants. The shelf registration was declared effective by the SEC in September 2006. In March 2007, we completed an offering of 1,919,000 shares of our common stock at $10.50 per share pursuant to the shelf registration. In conjunction with this transaction, we received approximately $20.1 million in net proceeds after deducting offering expenses. Although we have no immediate plans to raise additional capital, we believe the shelf registration affords us the financial flexibility to react to future opportunities in the market. In addition, we filed a registration statement relating to the exercise of warrants previously issued in various private financings. To the extent such warrants are exercised on a cash basis, we will receive proceeds from the exercise of such warrants; however, we will not receive the proceeds from the sales of the underlying shares.

We expect to have negative cash flow from operations through 2007. We expect to continue the development and commercialization of our products, the continuation of our research and development programs and the advancement of new products into clinical development. We expect that total operating expenses for the year will increase approximately 20%

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over 2006 expenditures as we continue to increase our direct sales and marketing efforts and strengthen our training capabilities in support of our targeted system order growth. Until we can generate significant cash flow from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of our public offerings, private sales of our equity securities and working capital and equipment financing loans. In the future, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financings. We cannot accurately predict the timing and amount of our utilization of capital, which will depend on a number of factors outside of our control.

While we believe our existing cash, cash equivalents and investments and available bank lines will be sufficient to fund our operating expenses and capital equipment requirements through the next 12 months, we cannot assure you that we will not require additional financing before that time. We also cannot assure you that such additional financing will be available on a timely basis on terms acceptable to us or at all, or that such financing will not be dilutive to our stockholders. If adequate funds are not available to us, we could be required to delay development or commercialization of new products, to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves or to reduce the marketing, customer support or other resources devoted to our products, any of which could have a material adverse effect on our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.