Volcano 10Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-52045

Volcano Corporation

(Exact Name of Registrant as Specified in its Charter)


Delaware		*33-0928885*
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

2870 Kilgore Road
Rancho Cordova, California		95670
(Address of Principal Executive Offices)		(Zip Code)

(800) 228-4728
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filero Accelerated Filero Non-accelerated Filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding as of May 4, 2007
Common stock, $0.001 par value		38,345,787

VOLCANO CORPORATION

Quarterly Report on Form 10-Q for the quarter ended March 31, 2007

Index


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			3
a. Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006			3
b. Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006			4
c. Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2007			5
d. Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006			6
e. Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6. Exhibits			31
Signatures			32
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

VOLCANO CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)


	March 31,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	54,385		$	77,738
Short-term available-for-sale investments		42,484			17,787
Accounts receivable, net		22,725			21,575
Inventories		15,157			13,423
Prepaid expenses and other current assets		2,189			2,208

Total current assets		136,940			132,731
Restricted cash		354			352
Property and equipment, net		10,043			9,333
Intangible assets, net		11,187			11,946
Other non-current assets		695			363

	$	159,219		$	154,725

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,957		$	8,209
Accrued compensation		6,203			5,993
Accrued expenses and other current liabilities		4,556			5,292
Deferred revenues		3,480			2,675
Current maturities of long-term debt		1,557			1,654

Total current liabilities		24,753			23,823
Long-term debt		44			66
Deferred license fee		1,313			1,375
Other		258			279

Total liabilities		26,368			25,543

Commitments and contingencies(Note 5)

Stockholders’ equity:
Common stock, par value of $0.001; 250,000 shares authorized; 38,309 and 37,720 shares issued and outstanding at March 31, 2007 and December 31, 2006		38			38
Additional paid-in capital		195,572			193,468
Accumulated other comprehensive loss		(411	)		(302	)
Accumulated deficit		(62,348	)		(64,022	)

Total stockholders’ equity		132,851			129,182

	$	159,219		$	154,725

See notes to unaudited consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


	Three Months Ended March 31,
	2007			2006
Revenues	$	29,579		$	19,872
Cost of revenues		10,865			8,220

Gross profit		18,714			11,652
Operating expenses:
Selling, general and administrative		12,584			11,645
Research and development		4,688			4,553
Amortization of intangibles		786			774

Total operating expenses		18,058			16,972

Operating income (loss)		656			(5,320	)
Interest expense		(89	)		(1,312	)
Interest and other income, net		1,317			291

Income (loss) before provision for income taxes		1,884			(6,341	)
Provision for income taxes		210			33

Net income (loss)	$	1,674		$	(6,374	)


Net income (loss) per share
Basic	$	0.04		$	(0.93	)

Diluted	$	0.04		$	(0.93	)

Weighted-average shares outstanding
Basic		37,964			6,891

Diluted		41,685			6,891

See notes to unaudited consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)


							Accumulated
					Additional		Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Income (loss)			Deficit			Equity
Balance at December 31, 2006		37,720	$	38	$	193,468	$	(302	)	$	(64,022	)	$	129,182
Issuance of common stock under stock option plans		554		—		803								803
Employee stock-based compensation cost						1,199								1,199
Non-employee stock-based compensation cost						95								95
Vesting of previously exercised stock options						3								3
Increase in net proceeds from public offering						4								4
Exercise of warrants		35		—										—
Comprehensive income:
Net income											1,674			1,674
Foreign currency translation adjustments								(114	)					(114	)
Unrealized gain on investments								5						5

Total comprehensive income														1,565

Balance at March 31, 2007		38,309	$	38	$	195,572	$	(411	)	$	(62,348	)	$	132,851

See notes to unaudited consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Three Months Ended March 31,
	2007			2006
Operating activities
Net income (loss)	$	1,674		$	(6,374	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,814			2,366
Amortization of debt discount and deferred financing fees		42			199
Amortization of investment discount, net		(168	)		—
Interest capitalized as debt principal		—			1,020
Non-cash stock compensation expense		1,243			689
Gain on foreign exchange		(122	)		(188	)
Loss (gain) on disposal of long-lived assets		4			(34	)
Changes in operating assets and liabilities:
Accounts receivable		(1,074	)		1,183
Inventories		(1,672	)		(1,033	)
Prepaid expenses and other assets		(200	)		(1,938	)
Accounts payable		378			(3,342	)
Accrued compensation		202			531
Accrued expenses and other liabilities		(762	)		387
Deferred revenues		732			847

Net cash provided by (used in) operating activities		2,091			(5,687	)

Investing activities
Purchase of short-term available-for-sale securities		(28,626	)		—
Sale or maturity of available-for-sale securities		4,000			—
Capital expenditures		(1,368	)		(1,170	)
Cash paid for other intangibles		(28	)		(37	)
Proceeds from sale of long-lived assets		—			52

Net cash used in investing activities		(26,022	)		(1,155	)

Financing activities
Increase in net proceeds from public offering		4			—
Repayment of long-term debt		(174	)		(564	)
Proceeds from exercise of common stock options		803			2
Decrease in restricted cash		—			(31	)

Net cash provided by (used in) financing activities		633			(593	)

Effect of exchange rate changes on cash and cash equivalents		(55	)		(1	)
Net decrease in cash and cash equivalents		(23,353	)		(7,436	)
Cash and cash equivalents, beginning of period		77,738			15,219

Cash and cash equivalents, end of period	$	54,385		$	7,783

Supplemental disclosures
Interest capitalized as debt principal	$	—		$	1,020
Cash paid for interest		42			92
Cash paid for income taxes		297			20

See notes to unaudited consolidated financial statements.

VOLCANO CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Nature of Operations

Volcano Corporation (“we”, “us”, “our” or the “company”) designs, develops, manufactures and commercializes a broad suite of intravascular ultrasound, or IVUS, and functional measurement, or FM, products that we believe enhance the diagnosis and treatment of vascular and structural heart disease. Vascular disease, or atherosclerosis, is caused by the accumulation of fat-laden cells in the inner lining of the artery, leading to the formation of plaque or lesions. Accumulation of plaque in the arteries narrows the diameter of the inner channel of the artery, or the lumen, which reduces blood flow. During an IVUS procedure, an imaging catheter is placed inside an artery to produce a cross-sectional image of the size and shape of the artery’s lumen and provides information concerning the composition and density of plaque or lesions and the condition of the layers of the surrounding arterial walls. Our IVUS products consist of consoles, single-procedure disposable catheters and advanced functionality options. FM devices measure the pressure and flow characteristics of blood around plaque thereby allowing physicians to gauge the plaque’s impact on blood flow and pressure. Our FM products consist of pressure and flow consoles and single-procedure disposable pressure and flow guide wires.

We have prepared the accompanying financial information as of March 31, 2007 and for the three months ended March 31, 2007 and 2006, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2006.

In the opinion of management, the unaudited financial information as of March 31, 2007 and for the three months ended March 31, 2007 and 2006 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Reverse Stock Split

On May 22, 2006, our Board of Directors and stockholders approved a 1-for-1.1 reverse split of our common stock and, on May 24, 2006, we filed a Certificate of Amendment to our Restated Certificate of Incorporation effecting the reverse split. All common share and per share amounts retroactively reflect the reverse stock split. Except as otherwise noted, references to preferred stock do not reflect the reverse stock split, as the conversion price for each series of preferred stock and the number of shares of common stock into which each share of preferred stock is convertible were adjusted, in accordance with the terms and conditions of such series of preferred stock, upon the filing of the Certificate of Amendment to reflect the reverse stock split.

Concentrations of Credit Risk

Fukuda Denshi Co., Ltd., a distributor in Japan, accounted for 5.9% and 23.8% of our revenues in the three months ended March 31, 2007 and 2006, respectively, and 8.0% and 14.4% of our accounts receivable as of March 31, 2007 and December 31, 2006, respectively. Goodman Company, Ltd., a distributor in Japan, accounted for 17.4% and 2.9% of our revenues in the three months ended March 31, 2007 and 2006, respectively, and 17.0% and 14.7% of our accounts receivable as of March 31, 2007 and December 31, 2006, respectively. No other single customer accounted for more than 10% of our revenues for any period presented and as of March 31, 2007 and December 31, 2006, no other single customer accounted for more than 10% of our accounts receivable.

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),Share-Based Payment,(SFAS No. 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB No. 107) relating to SFAS No. 123(R) and we have applied the provisions of SAB No. 107 in our

adoption of SFAS No. 123(R). Prior to January 1, 2006, we accounted for share-based payments using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB No. 25), and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation(SFAS No. 123). In accordance with APB No. 25, stock-based compensation expense had been recognized only when the fair market value of our stock options granted to employees and directors was greater than the exercise price of the underlying stock at the date of grant.

We adopted SFAS No. 123(R) using the modified-prospective-transition method. Under that transition method, stock-based compensation cost recognized in the three months ended March 31, 2007 and 2006, includes stock-based compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and stock-based compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. See “Note 6. Stockholders’ Equity (Deficit)” for additional information.

Product Warranty Costs

We offer a one-year warranty for parts and labor on our products commencing upon the transfer of title and risk of loss to the customer. We accrue the estimated cost of product warranties at the time revenue is recognized based on historical results. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from these estimates, revisions to the estimated warranty liability would be required. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Accrued warranty liability is included in accrued expenses and other current liabilities in the consolidated balance sheets. The change in the accrued warranty liability for the three months ended March 31, 2007 and 2006 is summarized in the following table (in thousands):


	Three Months Ended
	March 31,
	2007			2006
Balance at beginning of period	$	706		$	359
Warranties issued		700			151
Settlements		(419	)		(172	)

Balance at end of period	$	987		$	338

Net Income (Loss) Per Share

Basic and diluted net income (loss) per share is presented in accordance with SFAS No. 128,Earnings per Share.Basic net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per share for the three months ended March 31, 2007, is computed by dividing consolidated net income by the weighted-average number of diluted shares outstanding during the period. For the three months ended March 31, 2006, our potential dilutive shares, which include outstanding common stock options, convertible preferred stock and warrants other than those described below, have not been included in the computation of diluted net loss per share, as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. Shares issuable upon exercise of warrants to purchase common stock, which require little or no cash consideration from the holder, are included in basic net loss per share using the treasury stock method. For the three months ended March 31, 2006, warrants to purchase an aggregate of up to 3,091,216 shares of our common stock at an exercise price of $0.011 have been reflected in the calculation of basic and diluted net loss per share using the treasury stock method. These warrants were automatically exercised in connection with our June 2006 initial public offering of common stock per the original terms of the warrants.

The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share data):


	Three Months Ended
	March 31,
	2007		2006
Basic:
Net income (loss)	$	1,674	$	(6,374	)

Weighted-average common shares outstanding:		37,964		6,891

Basic earnings (loss) per share	$	0.04	$	(0.93	)


Diluted:
Net income (loss)	$	1,674	$	(6,374	)
Weighted-average common shares outstanding — basic:		37,964		6,891
Dilutive effect of stock options and warrant		3,721		—

Weighted-average common shares outstanding — diluted:		41,685		6,891

Diluted earnings (loss) per share	$	0.04	$	(0.93	)

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with SFAS No. 128, these shares were not included in calculating diluted earnings per share. For the three months ended March 31, 2007, approximately 1,123,000 stock options were excluded from the calculation of diluted earnings per share because their exercise prices rendered them anti-dilutive. The following table sets forth potential shares of common stock, as of March 31, 2006, that are not included in the diluted net loss per share calculation because their effect was anti-dilutive (in thousands):


	March
	31, 2006
Convertible preferred stock		18,123
Stock options outstanding		5,049
Warrants to purchase convertible preferred stock		177
Warrants to purchase common stock		49
Unvested common stock subject to repurchase		70

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. This pronouncement recommends a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in our tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. We adopted FIN 48 effective January 1, 2007, and the adoption did not have a material impact on our consolidated financial position or results of operations.

In September 2006, the SEC released Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(SAB 108), which addresses how uncorrected errors in previous years should be considered when quantifying errors in current-year financial statements. SAB 108 requires registrants to consider the effect of all carry over and reversing effects of prior-year misstatements when quantifying errors in current-year financial statements. SAB 108 allows registrants to record the effects of adopting the guidance as a cumulative-effect adjustment to retained earnings. We adopted SAB 108 as of the beginning of fiscal year 2007 and the adoption did not have a material impact on our consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No.157,Fair Value Measurements(SFAS 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 and we will adopt SFAS 157 for our fiscal year beginning

January 1, 2008. We are currently assessing the potential impact the adoption of SFAS 157 will have on our consolidated results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115(SFAS 159). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and we will adopt SFAS 157 for our fiscal year beginning January 1, 2008. We are currently determining whether fair value accounting is appropriate for any of the eligible items and we cannot estimate the impact, if any, the adoption of SFAS 159 will have on our consolidated results of operations and financial position.

2. FINANCIAL STATEMENT DETAILS

Cash, Cash Equivalents and Short-Term Investments

Short-term investments have been classified as available-for-sale securities. At March 31, 2007, cash, cash equivalents and investments are detailed as follows (in thousands):


					Gross			Gross
					Unrealized			Unrealized
			Gross		Losses			Losses
			Unrealized		Less Than			12 Months or		Estimated Fair
	Cost		Gains		12 Months			Longer		Value
Non interest bearing cash (U.S. and International)	$	5,094	$	—	$	—		$	—	$	5,094
Money market funds (U.S.)		12,319									12,319
Corporate bonds		25,091		8		(7	)				25,092
Asset backed obligations		6,460									6,460
Commercial paper		47,900		4							47,904

Total	$	96,864	$	12	$	(7	)	$	—	$	96,869

As of March 31, 2007, all of our investments mature within one year. These investments are recorded on the balance sheet at estimated fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss. There have not been any sales of short-term investments in any period presented.

Inventories

Inventories consist of the following (in thousands):


	March 31,		December 31,
	2007		2006
Finished goods	$	3,988	$	5,302
Work-in-process		4,986		2,529
Raw materials		6,183		5,592

Total	$	15,157	$	13,423

3. DEBT AND CREDIT FACILITIES AND WARRANTS

Our outstanding debt, including current maturities, was $1.6 million and $1.7 million at March 31, 2007 and December 31, 2006, respectively.

Revolving Credit Facility

In July 2003, to provide working capital and for general corporate purposes, we entered into a revolving credit facility agreement with a bank. Effective July 2004 and 2005, we amended this revolving credit facility and in conjunction with these amendments, the credit facility was increased from $6.0 million to $8.0 million and from $8.0 million to $10.0 million, respectively. In April 2006, the revolving credit facility was amended and renewed and in July 2006, the revolving credit facility agreement was further amended. Certain terms in the amended revolving credit facility have been modified, including the borrowing base and interest rate calculations and the covenant requirements and the term has been extended to May 2007. We intend to maintain our credit facility in the foreseeable future, although there is no guarantee that it will be extended by the bank. Borrowings under the revolving credit facility, as amended in July 2006, are limited to $10.0 million, less amounts outstanding under letters of credit, a foreign exchange reserve and the aggregate amount of cash utilization services, which are subject to sub-limits of $1.0 million, $1.0 million and $500,000, respectively. At March 31, 2007, we had no borrowings and $10.0 million was available under the revolving credit facility. The revolving credit facility is secured by substantially all of our tangible assets and certain of our intangible assets.

Senior Subordinated Debt

Pursuant to a subordinated debt agreement entered into in December 2003, we repaid the outstanding balance of $29.2 million on our senior subordinated notes, as required by their terms, with the proceeds from our June 2006 initial public offering.

Key Covenants

Our debt agreements include several covenants that place restrictions on the incurrence of debt and liens, capital expenditures, the payment of dividends and mergers. Other covenants require us to meet certain defined profitability goals and to maintain a certain minimum quick ratio. We are in compliance with all covenants and limitations included in the provisions of our loan and credit agreements as of March 31, 2007 and December 31, 2006.

4. INTANGIBLE ASSETS

Intangible assets consist of developed technology, customer relationships, licenses, and patents and trademarks, which are amortized using the straight-line method over periods ranging from three to ten years, representing the estimated useful lives of the assets. During the three months ended March 31, 2007, we recorded intangible asset additions of $28,000 related to internally developed patents and trademarks.

Intangible assets subject to amortization, by major class, consist of the following (in thousands):


	March 31, 2007
							Weighted-
			Accumulated				Average Life
	Cost		Amortization		Net		(in years)

Developed technology	$	12,469	$	7,194	$	5,275		6.5
Licenses		7,034		2,924		4,110		8.6
Customer relationships		1,674		966		708		6.5
Patents and trademarks		1,397		303		1,094		9.1

	$	22,574	$	11,387	$	11,187		7.2

At March 31, 2007, future amortization expense associated with our intangible assets is expected to be as follows (in thousands):


2007 (nine months)	$	2,264
2008		2,984
2009		2,984
2010		808
2011		808
Thereafter		1,339

Total	$	11,187

5. COMMITMENTS AND CONTINGENCIES

Litigation

We are a party to various claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred and were not material in any period reported. Additionally, we assess, in conjunction with our legal counsel, the need to record a liability for litigation and contingencies. Reserve estimates are recorded when and if it is determined that a loss related matter is both probable and reasonably estimable. We believe that the ultimate disposition of these matters will not have a material impact on our results of operations, financial position or cash flows.

Purchase Commitments

We have obligations under non-cancelable purchase commitments, primarily for production materials. As of March 31, 2007, the future minimum payments under these non-cancelable purchase commitments, all requiring payment in 2007, totaled $5.8 million.

Indemnification

Our supplier, distributor and collaboration agreements generally include certain provisions for indemnification against liabilities if our products are recalled, infringe a third-party’s intellectual property rights or cause bodily injury due to alleged defects in our products. In addition, we have agreements with our Board of Directors, our President and Chief Executive Officer and our Chief Financial Officer indemnifying them against liabilities arising from such actions. To date, we have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

6. STOCKHOLDERS’ EQUITY

In May 2006, our stockholders approved a resolution to increase the number of authorized shares of our common stock to 250,000,000 and to increase the number of shares subject to our 2005 equity compensation plan by 2,272,727 shares to a total of 8,162,558. As of March 31, 2007, we have reserved 6,416,000 shares and 127,400 shares of our common stock for the issuance of options under our stock option plans and the exercise of common stock warrants, respectively. The increase to the authorized shares became effective upon the completion of our initial public offering.

Stockholders Rights Plan

In May 2006, our stockholders approved a stockholders rights plan and a classified board of directors with staggered terms of election. Pursuant to the stockholder rights plan, we declared and paid a dividend of one right for each share of common stock. Unless redeemed prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive shares of our preferred stock, or shares of an acquiring entity. The stockholders rights plan and the classified board of directors became effective upon the completion of our initial public offering in June 2006.

Public Offerings of our Common Stock

On June 15, 2006, we completed an initial public offering in which 7,820,000 shares of our common stock were sold to the public at an offering price of $8.00 per share. The initial public offering resulted in net proceeds of $54.5 million, after deducting offering expenses and underwriting discounts and commissions. Of the net proceeds, $29.2 million was used to repay our senior subordinated debt, as required by its terms and $750,000 was used to pay the outstanding balance of our short-term debt. In conjunction with the

offering, all of our outstanding shares of preferred stock were converted into 18,123,040 shares of our common stock immediately prior to the closing of the offering and certain warrants to purchase 3,103,943 shares of our common stock were by their terms, automatically exercised on a cash-less basis upon the closing of the offering, resulting in the net issuance of 3,097,943 shares of our common stock.

On December 12, 2006, we completed a follow-on offering in which 3,500,000 shares of our common stock were sold by the company and 4,000,000 shares were sold by certain selling stockholders, including officers of the company. In addition, we sold 795,000 shares under an over-allotment option exercised by the underwriters. The follow-on offering, including the exercise of the over-allotment option, resulted in net proceeds to the Company of $66.8 million, after deducting offering expenses and underwriting discounts and commissions.

Warrants

As of March 31, 2007, there is a warrant outstanding to purchase 127,400 shares of our common stock at a price of $3.30 per share. The warrant is immediately exercisable by the holder and expires on March 31, 2011.

Stock-Based Compensation

As of March 31, 2007, we have granted options under the 2005 Equity Compensation Plan (the 2005 Plan) and the 2000 Long Term Incentive Plan (the 2000 Plan) under which a maximum aggregate number of 8,162,558 shares of our common stock may be issued or transferred to our employees, non-employee directors and consultants. Effective October 2005, all options will be granted under the 2005 Plan. Options previously granted under the 2000 Plan that are cancelled or expire will increase the shares available for grant under the 2005 Plan. The terms of grant vary by plan and as of March 31, 2007, 1,256,865 shares remained available to grant.

The following table sets forth stock-based compensation expense included in the Company’s consolidated statements of operations (in thousands):


	Three Months
	Ended
	March 31,
	2007		2006
Cost of revenues	$	112	$	68
Selling, general and administrative		923		506
Research and development		208		115

Included in the table above is $95,000 and $136,000 of stock-based compensation expense related to non-employees in the three months ended March 31, 2007 and 2006, respectively. Additionally, there was $203,000 and $152,000 of total stock-based compensation cost capitalized in inventory as of March 31, 2007 and December 31, 2006, respectively.

We have not recognized, and we do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation cost as a result of the full valuation allowance on our net deferred tax assets and our net operating loss carryforwards.

We use the Black-Scholes-Merton option-pricing model (“Black-Scholes model”). Option valuation models require the input of highly subjective assumptions including the expected life of the stock-based award and the expected stock price volatility. The assumptions discussed here represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded and pro forma stock-based compensation expense could have been materially different. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, the stock-based compensation expense could be materially different.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following assumptions:


	Three Months Ended
	March 31,
	2007			2006
Risk-free interest rate		4.8% - 4.9	%		4.6	%
Expected life (years)		4.75			4.75
Estimated volatility		54	%		61	%
Expected dividends	None			None

Risk-Free Interest Rate—We base the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury constant maturity securities with the same or substantially equivalent remaining term.

Expected Life—Our expected life represents the period that the stock-based awards are expected to be outstanding. With the adoption of SFAS No. 123(R) on January 1, 2006, as permitted by SAB No. 107, we adopted a temporary “shortcut approach” to developing the estimate of the expected term of an employee stock option. Under this approach, the expected life is presumed to be the mid-point between the vesting date and the contractual end of the option grant. The “short-cut approach” is not permitted for options granted, modified or settled after December 31, 2007. Prior to the adoption of SFAS No. 123(R), the expected life of our stock options was determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of our share-based awards.

Estimated Volatility—We calculate volatility based upon the trading history and implied volatility of the common stock of comparable medical device companies in determining an estimated volatility when using the Black-Scholes option-pricing formula to determine the fair value of options granted.

Expected Dividends—Since we have not declared any dividends in the past, we use a zero value for the expected dividend value factor when using the Black-Scholes option-pricing formula to determine the fair value of options granted.

Estimated Forfeitures—When estimating forfeitures, we considered voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.

A summary of the status of our non-vested shares as of March 31, 2007 and changes during the three months ended March 31, 2007 is as follows:


				Weighted-Average
				Grant Date Fair
	Shares			Value
Non-vested shares at December 31, 2006		1,891,033		$	3.94
Grants of options		1,071,456			9.34
Vesting of options		(301,042	)		3.96
Forfeitures or expirations of options		(29,729	)		5.46

Non-vested shares at March 31, 2007		2,631,718			6.12

Option activity for the three months ended March 31, 2007 is as follows:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual Life		intrinsic value
	Shares			Price		(in years)		(in thousands)
Outstanding at December 31, 2006		4,672,408		$	2.98
Grants of options		1,071,456			19.15
Exercises		(554,669	)		1.45
Forfeitures or expirations		(29,729	)		9.52

Outstanding and exercisable at March 31, 2007		5,159,466			6.46		6.8	$	60,798

Vested and expected to vest as of March 31, 2007		5,077,161			6.36		6.8	$	60,340

As required by SFAS No. 123(R), we made an estimate of expected forfeitures and we are recognizing compensation cost only for those equity awards expected to vest.

The total intrinsic value of stock options exercised during the three months ended March 31, 2007 was $9.5 million, which represents the difference between the exercise price of the option and the estimated fair value of our common stock on the dates exercised. As of March 31, 2007, $14.9 million of total unrecognized compensation cost related to stock options issued to employees is expected to be recognized over a weighted average term of 3.2 years.

7. SEGMENT AND GEOGRAPHIC INFORMATION

Our chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, we consider ourselves to be in a single reporting segment, specifically the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. We do not assess the performance of our geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, our assets are primarily located in the United States and are not allocated to any specific region. We do not produce reports for, or measure the performance of, our geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenues.

Revenues for the three months ended March 31, 2007 and 2006 based on geographic location are summarized in the following table (in thousands):


	Three Months Ended
	March 31,
	2007		2006
Revenues:
United States	$	15,227	$	9,916
Japan		7,651		5,308
Europe, the Middle East and Africa		5,309		3,684
Rest of world		1,392		964

	$	29,579	$	19,872

8. Related Parties

Medtronic, Inc. and Its Affiliates

We have collaborations with Medtronic, Inc. and certain of its affiliates (collectively, Medtronic). Medtronic was an investor in our Series B Preferred Stock. In connection with our initial public offering in June 2006, their investment in our preferred stock automatically converted into shares of our common stock. In December 2006, Medtronic’s ownership in our company was reduced when they sold common stock as a selling stockholder in an underwritten public offering of our common stock.

In July 2003, we were paid a $2.5 million license fee by Medtronic in exchange for the fully paid, royalty-free, perpetual, irrevocable, worldwide license. The license fee has been deferred and is being recognized as revenue over the estimated 10-year term of the agreement. The amount recorded in revenues totaled $62,500 during each the three month periods ended March 31, 2007 and 2006. At March 31, 2007, the amount deferred was $1.6 million, of which $250,000 was reflected in the current portion of deferred revenues. In addition, we recorded revenues related to the sale of a component of our IVUS catheter totaling $48,000 and $297,000 to Medtronic during the three months ended March 31, 2007 and 2006, respectively. At March 31, 2007 and December 31, 2006, there was $48,000 and $5,000 due from Medtronic, respectively.

9. Provision for Income Taxes

We accrue interest and penalties on underpayment of income taxes related to unrecognized tax benefits as a component of income tax expense in our consolidated statements of operations. No amounts were recognized for interest and penalties upon adoption of FIN 48 or during the three months ended March 31, 2007.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. We have not been audited by any jurisdiction since our inception in 2000. We are open for audit by the U.S. Internal Revenue Service and state tax jurisdictions from our inception in 2000 to 2006. We are open for audit by Belgian and various European tax jurisdictions from the inception of Volcano Europe S.A./N.V. in 2003 to 2006. We are open for audit by Japanese tax jurisdictions since the inception of Volcano Japan Co. Ltd. in 2006.

For the three month periods ended March 31, 2007 and 2006, we recorded a provision for income taxes of approximately $210,000 and $33,000, respectively, consisting primarily of foreign income taxes, domestic state taxes and federal alternative minimum tax.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report onForm 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements that may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future operations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under Part II, Item 1A — “Risk Factors” and elsewhere in this report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Overview

We design, manufacture and commercialize a broad suite of intravascular ultrasound, or IVUS, and functional measurement, or FM, products that we believe enhance the diagnosis and treatment of vascular and structural heart disease. Our products seek to deliver all of the benefits associated with conventional IVUS and FM devices, while providing enhanced functionality and proprietary features that address the limitations associated with conventional forms of these technologies. As a result, we believe that our IVUS and FM products have the potential to become the standard of care to address the needs of patients, hospitals, physicians and third-party payors on a cost-effective basis.

We have corporate infrastructure in the United States, Europe and Japan, direct sales capabilities in the United States and a combination of direct sales and distribution relationships in international markets, including Japan, Europe, the Middle East, Africa, Canada, Asia Pacific and Latin America. Our corporate headquarters, located in Rancho Cordova, California, contains our worldwide manufacturing and research and development operations. We have sales offices in Alpharetta, Georgia and Tokyo, Japan, sales and distribution offices in Zaventem, Belgium, a third-party distribution facility in Chiba, Japan, a research and development facility in Cleveland, Ohio and an administrative office in San Diego, California.

We have focused on building our U.S. and international sales and marketing infrastructure to market our products to physicians and technicians who perform percutaneous interventional procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals. As of March 31, 2007, we had approximately 530 worldwide employees, including approximately 250 manufacturing employees, 120 sales and marketing employees and 68 research and development employees. Included in the 120 sales and marketing employees are 16 marketing employees, 85 sales and sales support employees in the United States, 12 sales and sales support employees in Europe, 6 sales and sales support employees in Japan and one direct sales representative responsible for Asia.

In the three months ended March 31, 2007 and 2006, 18.2% and 18.5%, respectively, of our revenues and 14.1% and 12.2%, respectively, of our operating expenses were denominated in foreign currencies, primarily the Euro. As a result, we are subject to risks related to fluctuations in foreign currency exchange rates, which could affect our operating results in the future.

Our IVUS products are comprised of consoles, single-procedure disposable catheters and advanced functionality options. Our family of consoles includes the IVUS In-Vision Gold, or IVG, and the PC-based s5. The s5 family of products was launched in 2006 and is our primary console offering. We are developing advanced functionality options including real-time VH IVUS, IVUS and angiographic image co-registration, and phased array and rotational catheter compatibility. Our single-procedure disposable IVUS catheters only operate and interface with our family of IVUS consoles. We believe we are the only company worldwide that offers both phased array and rotational catheters.

Our FM products consist of pressure and flow consoles and single-procedure disposable pressure and flow guide wires. Our FM consoles are mobile, proprietary and high speed electronic systems with different functionalities and sizes designed and manufactured to process and display the signals received from our guide wires.

We are developing customized cath lab versions of our consoles and advanced functionality options as part of our vfusion cath lab integration initiative. The significantly expanded functionality of our vfusion offering will allow for networking of patient information, control of IVUS and FM information at both the operating table and in the cath lab control room, as well as the capability for images to be displayed on standard cath lab monitors. We expect to continue to develop new products and technologies to expand our vfusion offering.

As of March 31, 2007, we had a worldwide installed base of over 1,900 IVUS consoles and over 700 FM consoles. We intend to grow and leverage this installed base to drive recurring sales of our single-procedure disposable catheters and guide wires. In the three months ended March 31, 2007, the sale of our single-procedure disposable catheters and guide wires accounted for $22.6 million, or 76.4% of our revenues, a $5.6 million, or 33.2%, increase from the same period in 2006, in which the sale of our single-procedure disposable catheters and guide wires accounted for $17.0 million, or 85.3% of our revenues.

We manufacture our IVUS and FM consoles, IVUS catheters and FM guide wires at our facility in Rancho Cordova, California. We use third-party manufacturing partners to produce circuit boards and mechanical sub-assemblies used in the manufacture of our consoles. We also use third-party manufacturing partners for certain proprietary components used in the manufacture of our single-procedure disposable products. We perform incoming inspection on these circuit boards, mechanical sub-assemblies and components, assemble them into finished products, and test the final product to assure quality control.

As a development stage company from our inception in January 2000 until July 2003, we were engaged principally in the research and development of tools designed to diagnose vulnerable plaque. In July 2003, we purchased substantially all of the assets and assumed certain liabilities associated with the IVUS and FM product lines of Jomed, Inc., or the Jomed Acquisition. We also acquired certain IVUS patents and technology from Philips in July 2003. These purchases were significant in executing our strategy to leverage our IVUS technology and build our business.

In March 2006, we entered into a supply and distribution agreement with GE, pursuant to which we are collaborating on the development and distribution of our s5i GE Innova product, which is our IVUS imaging system console that is installed directly into a cath lab on a permanent basis and is able to be integrated with GE’s Innova system. Under the terms of the agreement, GE has been granted exclusive distribution rights worldwide, excluding Japan, for the s5i GE Innova product for a period of 12 months, subject to minimum purchase forecasts, and non-exclusive distribution rights thereafter. The 12-month exclusivity period commenced on August 15, 2006. GE has also been granted non-exclusive distribution rights worldwide, excluding Japan, for our s5i product. Unless extended, or terminated earlier in accordance with its terms, the agreement will expire on December 31, 2009. GE’s obligation to purchase products from us under the agreement is limited to firm purchase orders made by GE and accepted by us. No minimum purchase requirements are required and the forecasts to be provided under the agreement will not be binding. While we have not previously entered into a distribution arrangement that is similar to our agreement with GE, we believe our relationship with GE will enable us to increase sales of our consoles worldwide, excluding Japan.

We completed our initial public offering on June 15, 2006 in which we sold 7,820,000 shares of our common stock to the public at an offering price of $8.00 per share. The initial public offering resulted in net proceeds of $54.5 million, after deducting offering expenses and underwriting discounts and commissions. Of the net proceeds, $29.2 million was used to repay our senior subordinated debt, as required by its terms. In addition, through March 31, 2007, $2.9 million was used for other debt repayment, $4.0 million was used for capital expenditures and $312,000 was used for the acquisition of intangibles. The remaining net proceeds have been invested in short-term investments in accordance with our investment policy. In conjunction with our initial public offering, all our outstanding shares of preferred stock were converted into 18,123,040 shares of our common stock immediately prior to the closing of the offering and certain warrants to purchase 3,103,943 shares of our common stock were, by their terms, automatically exercised on a cash-less basis upon the closing of the offering, resulting in the net issuance of 3,097,943 shares of our common stock.

Financial Operations Overview

The following is a description of the primary components of our revenue and expenses.

Revenues.We derive our revenues primarily from the sale of our IVUS and FM consoles and single-procedure disposables. In the three months ended March 31, 2007, 85.0% of our revenues were derived from the sale of our IVUS consoles and IVUS single-procedure disposables, as compared with 83.1% in the three months ended March 31, 2006. Other revenues consist primarily of spare parts sales, service and maintenance revenues, shipping and handling revenues and license fees from Medtronic, Inc.

Our sales in the United States are generated by our direct sales representatives and our products are shipped to hospitals throughout the United States from our facility in Rancho Cordova, California. Our international sales are generated by our direct sales representatives or through independent distributors and are shipped throughout the world from our facilities in Rancho Cordova, California, Zaventem, Belgium and Chiba, Japan.

We expect to experience variability in our quarterly revenues from IVUS and FM consoles due to the timing of hospital capital equipment purchasing decisions, a condition which is inherent in our industry. Further, we expect variability of our revenues based on the timing of our new product introductions which may cause our customers to delay their purchasing decisions until the new products are commercially available. Alternatively, we may include in our arrangements with customers an obligation to deliver new products which are not yet commercially available. In these cases, we would be required to defer associated revenues from these customers until we have met our delivery obligations.

Cost of Revenues.Cost of revenues consists primarily of material costs for the products that we sell and other costs associated with our manufacturing process such as personnel costs, rent and depreciation. In addition, cost of revenues includes royalty expenses for licensed technologies included in our products, service costs, provisions for warranty, distribution, freight and packaging costs and stock-based compensation expense. We expect our gross margin to improve if we are able to complete our ongoing efforts to streamline and improve our manufacturing processes and increase production volumes.

Selling, General and Administrative.Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel serving the sales, marketing, executive, finance, information technology and human resource functions. Other costs include travel and entertainment expenses, facility costs, trade show, training and other promotional expenses, professional fees for legal and accounting services and stock-based compensation expense. We expect that our selling, general and administrative expenses will increase as we add sales personnel and as we continue to be subject to the reporting obligations applicable to public companies, including compliance with the requirements under the 2002 Sarbanes-Oxley Act.

Research and Development.Research and development expenses consist primarily of salaries and related expenses for personnel, consultants, prototype materials, clinical studies, depreciation, regulatory filing fees, certain legal costs related to our intellectual property and stock-based compensation expense. We expense research and development costs as incurred. We expect our research and development expenses to increase as we continue to develop our products and technologies.

Amortization of Intangibles.Intangible assets, which consist of our developed technology, licenses, customer relationships, patents and trademarks, are amortized using the straight-line method over their estimated useful lives ranging from three to ten years.

Interest Expense.Interest expense is comprised primarily of interest expense on our notes payable, short-term debt and term loans and the amortization of debt discount and deferred financing fees. We expect interest expense in 2007 to decrease as a result of the June 2006 repayment of the outstanding balance of $29.2 million on our senior subordinated notes and as we continue to pay down our remaining debt balances in 2007 and 2008.

Interest and Other Income (Expense), Net.Interest and other income (expense), net is comprised of interest income from our cash and cash equivalents, interest from our short-term available-for-sale investments and gains and losses on foreign currency transaction.

Provision for Income Taxes.Provision for income taxes is comprised of Federal, state, local and foreign income taxes.

Due to uncertainty surrounding the realization of deferred tax assets through future taxable income, we have provided a full valuation allowance against these assets in the United States and Europe. Federal and state income tax expense reflects current taxes expected to be paid. Foreign tax expense includes current taxes expected to be paid in Europe and current and deferred tax expense on income reported in Japan.

Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the three months ended March 31, 2007 and 2006, expressed as dollar amounts (in thousands) and as a percentage of revenues:


	Three Months Ended March 31,
	2007					2006
Revenues	$	29,579		100.0	%	$	19,872		100.0	%
Cost of revenues		10,865		36.7			8,220		41.4

Gross profit		18,714		63.3			11,652		58.6
Operating expenses:
Selling, general and administrative		12,584		42.5			11,645		58.6
Research and development		4,688		15.8			4,553		22.9
Amortization of intangibles		786		2.7			774		3.9

Total operating expenses		18,058		61.0			16,972		85.4

Operating income (loss)		656		2.2			(5,320	)	(26.8	)
Interest expense		(89	)	(0.3	)		(1,312	)	(6.6	)
Interest and other income, net		1,317		4.5			291		1.5

Income (loss) before provision for income taxes		1,884		6.4			(6,341	)	(31.9	)
Provision for income taxes		210		0.6			33		0.2

Net income (loss)	$	1,674		5.7	%	$	(6,374	)	(32.1	)%

The following table sets forth our revenues by geography expressed as dollar amounts (in thousands) and the changes in revenues between the specified periods expressed as percentages:


	Three Months Ended March 31,
					Percentage
	2007		2006		Change
Revenues(1):
United States	$	15,227	$	9,916		53.6	%
Japan		7,651		5,308		44.1
Europe, the Middle East and Africa		5,309		3,684		44.1
Rest of world		1,392		964		44.4

	$	29,579	$	19,872		48.8


(1)		Revenues are attributed to countries based on location of the customer, except for original equipment manufacturer revenues which are attributed to the geography of the legal entity invoicing.

The following table sets forth our revenues by product expressed as dollar amounts (in thousands) and the changes in revenues between the specified periods expressed as percentages:


	Three Months Ended March 31,
					Percentage
	2007		2006		Change
IVUS:
Consoles	$	5,823	$	2,012		189.4	%
Single-procedure disposables		19,314		14,501		33.2
FM:
Consoles		409		380		7.6
Single-procedure disposables		3,277		2,457		33.4
Other		756		522		44.8

	$	29,579	$	19,872		48.8

Comparison of Three Months Ended March 31, 2007 and 2006

Revenues.Revenues increased $9.7 million, or 48.8%, to $29.6 million in the three months ended March 31, 2007, as compared to revenues of $19.9 million in the three months ended March 31, 2006. In the three months ended March 31, 2007, IVUS revenue

increased $8.6 million, or 52.2%, compared with the same period in 2006. The $8.6 million increase is comprised of $4.8 million, or 33.2%, from higher sales volume of our single-procedure disposable IVUS products and $3.8 million, or 189.4%, from an increase in sales of our IVUS consoles. The increase in IVUS console revenues in the three months ended March 31, 2007, resulted from higher sales volume of our newer s5 family of consoles compared with sales of our discontinued IVG consoles during the same period in 2006. Our FM revenues increased $849,000, or 29.9%. Increases in revenues were realized across all our key markets.

Cost of Revenues.Cost of revenues increased $2.6 million, or 32.2%, to $10.9 million, or 36.7% of revenues in the three months ended March 31, 2007, from $8.2 million, or 41.4% of revenues in the three months ended March 31, 2006. The decrease in cost of revenues as a percent of revenues in the three months ended March 31, 2007 is primarily due to the sale of higher margin s5 consoles as compared to previous generation lower margin IVG consoles sold during the three months ended March 31, 2006, an increase in the average selling price and a decrease in production cost of certain IVUS catheters.

Gross margin was 63.3% of revenues in the three months ended March 31, 2007 as compared to 58.6% of revenues in the three months ended March 31, 2006. The improvement in gross margin in the three months ended March 31, 2007 as compared with the three months ended March 31, 2006 was primarily a result of sales of our higher margin s5 consoles in 2007 as compared to our lower margin IVG IVUS consoles in 2006. Additionally, gross margins were favorably affected by increases in the average selling price and production cost decreases for certain IVUS disposable catheters, partially offset by higher freight expenses and warranty reserves.

Selling, General and Administrative.Selling, general and administrative expenses increased $939,000, or 8.1%, to $12.6 million, or 42.5% of revenues in the three months ended March 31, 2007, as compared to $11.6 million, or 58.6% of revenues in the three months ended March 31, 2006. The increase in the three months ended March 31, 2007 as compared with the three months ended March 31, 2006 was primarily due to higher stock-based compensation expense, increased information technology expense, facility expense and payroll-related expense due to increased headcount. The increase was also due to higher professional fees as a result of becoming a publicly traded company in June 2006.

Research and Development.Research and development expenses increased $135,000, or 3.0%, to $4.7 million, or 15.8% of revenues in the three months ended March 31, 2007, as compared to $4.6 million, or 22.9% of revenues in the three months ended March 31, 2006. The increase in research and development expenses in the three months ended March 31, 2007, was primarily due to higher clinical and regulatory expenses, stock-based compensation expense, and payroll-related costs associated with increased headcount. These increases were partially offset by a decrease in product development costs in the three months ended March 31, 2007, associated with the development of the s5 IVUS console during the same period in 2006.

Amortization of Intangibles.Amortization expense increased $12,000, or 1.6%, to $786,000, or 2.7% of revenues in the three months ended March 31, 2007, as compared to $774,000, or 3.9% of revenues in the three months ended March 31, 2006. The increase in amortization expense was related to internally developed patent and trademark costs incurred and capitalized in 2006.

Interest Expense.Interest expense decreased $1.2 million, or 93.2% to $89,000, or 0.3% of revenues in the three months ended March 31, 2007, as compared to $1.3 million, or 6.6% of revenues in the three months ended March 31, 2006. This decrease was entirely due to a reduction in debt primarily from the pay down of $29.2 million of our senior subordinated notes in June 2006.

Interest and Other Income, Net.Interest and other income, net was $1.3 million in the three months ended March 31, 2007, as compared to $291,000 in the three months ended March 31, 2006. The change in the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 was primarily attributable to a $1.1 million increase in interest income due to higher cash and cash equivalents and short-term available-for-sale investment balances following our June 2006 initial public offering and our December 2006 secondary offering.

Provision for income taxes.Provision for income taxes for the three months ended March 31, 2007 and March 31, 2006 was $210,000 and $33,000, respectively. The increase is principally attributable to higher foreign income taxes in 2007.

Liquidity and Capital Resources

Sources of Liquidity

At March 31, 2007, our cash and cash equivalents and short-term available-for-sale investments totaled $96.9 million. We invest our excess funds in short-term securities issued by corporations, banks, municipalities and financial holding companies and in money market funds comprised of these same types of securities.

At March 31, 2007, our accumulated deficit was $62.3 million. Since inception, we have generated significant operating losses and as a result we did not generate sufficient cash flow to fund our operations and the growth in our business. Accordingly, we had financed our operations and acquisitions primarily through the issuances of $62.5 million of preferred stock, $20.0 million of senior subordinated notes and $7.0 million of term loans. These issuances of equity and debt were supplemented with borrowings from our revolving credit facility and equipment financing arrangements. In addition, in July 2003, we financed a portion of our acquisition of certain IVUS patents and technology by entering into a non-interest bearing note with Philips in the amount of $3.3 million. The issuances of our senior subordinated notes, term loans and our revolving credit facility included warrants to purchase our Series B preferred stock, which automatically converted into warrants to purchase common stock upon the completion of our initial public offering, or our common stock.

In July 2006, our revolving credit facility was amended and certain terms were modified, including the borrowing base and interest rate calculations and the covenant requirements, and the term was extended to May 31, 2007. At March 31, 2007, borrowings under our revolving credit facility were limited to $10.0 million, less amounts outstanding under letters of credit, a foreign exchange reserve and the aggregate amount of cash utilization services, which are subject to sub-limits of $1.0 million, $1.0 million and $500,000, respectively. Our revolving credit facility bears interest at the bank’s rate. The revolving credit facility is secured by substantially all of our tangible assets and certain of our intangible assets. At March 31, 2007, we had no borrowings and $10.0 million was available under our revolving credit facility.

We are subject to financial covenants requiring us to meet certain defined profitability goals and to maintain a certain minimum quick ratio. In addition, we are subject to several covenants that place restrictions on our ability to incur additional debt and liens, pay dividends and sell or dispose of any of our assets outside the normal course of business. Under our revolving credit facility, the minimum quick ratio requirement is 1.50 to 1 and the maximum net loss amount is $1.5 million for the quarter ended March 31, 2007. We are in compliance with all covenants and limitations included in the provisions of our loan agreements and credit facilities as of March 31, 2007.

Cash Flows

Cash Flows from Operating Activities.Cash provided by operating activities of $2.1 million for the three months ended March 31, 2007 reflected our net income of $1.7 million, adjustments for non-cash expenses consisting primarily of depreciation and amortization of $1.8 million and stock-based compensation expense of $1.2 million. These amounts were partially offset by a $1.7 million increase in inventory and a $1.1 million increase in accounts receivable. The increase in inventory and accounts receivable was primarily due to the timing of receipts and payments as well as increased sales and manufacturing activity.

Cash used in operating activities of $5.7 million for the three months ended March 31, 2006 reflected our net loss of $6.4 million, offset by adjustments for non-cash expenses consisting primarily of $2.4 million in depreciation and amortization, $1.0 million capitalized as debt principal and $689,000 in stock-based compensation expense. In addition, accounts receivable decreased $1.2 million and liabilities, excluding accounts payable, increased $1.8 million. These sources of cash were offset by a $1.0 increase in inventories, a $1.9 million increase in prepaid expenses and other current assets and a $3.3 million decrease in accounts payable. These changes are due to the timing of payments and costs incurred prior to the consummation of our June 2006 initial public offering.

Cash Flows from Investing Activities.Cash used in investing activities was $26.0 million in the three months ended March 31, 2007 and $1.2 million in the three months ended March 31, 2006. During the three months ended March 31, 2007, $28.6 million was used to purchase short-term available-for-sale securities and $1.4 million was used for capital expenditures, primarily for medical diagnostic equipment. This was partially offset by $4.0 million from the maturity of short-term available-for-sale securities. Cash used in investing activities during the three months ended March 31, 2006 was primarily from capital expenditures for medical diagnostic equipment and manufacturing equipment.

Capital expenditures were $1.4 million in the three months ended March 31, 2007. We expect that our capital expenditures in 2007 will be approximately $6.0 million, primarily for the purchase of medical diagnostic equipment and equipment to support our research and development activities.

Cash Flows from Financing Activities.Cash provided by financing activities was $633,000 in the three months ended March 31, 2007, primarily due to $803,000 in proceeds from the exercise of employee stock options, partially offset by the repayment of $174,000 of long-term debt. Cash used in financing activities was $593,000 in the three months ended March 31, 2006, primarily due to the repayment of $564,000 in long-term debt.

Future Liquidity Needs

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, the continuing acceptance of our products in the marketplace, competing technologies and market and regulatory developments. As of March 31, 2007, we believe our current cash and cash equivalents, our short-term available-for-sale investments and, if required, borrowings under our revolving credit facility, will be sufficient to fund working capital requirements, capital expenditures, debt service and operations for at least the next 12 months. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future.

Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control — See Part II, Item 1A — “Risk Factors.” Should we require additional funding, such as to satisfy our short-term and long-term debt obligations when due, or to make additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us.

As of March 31, 2007, we have Federal and state net operating loss carryforwards of $38.0 million and $17.0 million, respectively, available to reduce future taxable income if we become profitable. We expect to utilize our available net operating loss carryforwards to reduce future tax obligations in the event we are successful in achieving profitability. However, limitations on our ability to use net operating loss carryforwards and other minimum state taxes may increase our overall tax obligations.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and there have been no material changes other than to the income taxes policy discussed below .

Our accounting policy for income taxes was recently modified due to the adoption of Interpretation No. 48,Accounting for Uncertainty in Income Taxes,(FIN 48) and is described below.

In June 2006, the Financial Accounting Standards Board (FASB) issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results. We adopted FIN 48 effective January 1, 2007, and the adoption did not have a material impact on our consolidated financial position or results of operations.

Off-Balance Sheet Arrangements

As of March 31, 2007, we did not have any off-balance sheet arrangements that have or are reasonably likely to have current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows. In the ordinary course of business, we are exposed to interest rate and foreign exchange risk. Fluctuations in interest rates and the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro, could adversely affect our financial results.

Our exposure to interest rate risk at March 31, 2007, is related to the investment of our excess cash into highly liquid, short-term financial investments. We invest in money market funds in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments. Due to the short-term nature of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.

Our exposure to interest rate risk at March 31, 2007 also relates to our variable rate debt. Our revolving credit facility bears interest at the bank’s prime rate. At March 31, 2007, the interest rate on our revolving credit facility was 8.5% and no borrowings were outstanding. Based on our maximum credit limit of $10.0 million under the revolving credit facility, a one hundred basis point change in the bank’s prime rate would impact net interest expense by $100,000 over a twelve month period.

We are exposed to foreign currency risk related to our European operations, including Euro denominated intercompany receivables. We also have a note payable denominated in Euros with a third party. Because our intercompany receivables and our note payable are accounted for in Euros, any appreciation or devaluation of the Euro will result in a gain or loss to the consolidated statements of operations.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, these officers have concluded that, as of March 31, 2007, our disclosure controls and procedures were effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q. There were no changes in our internal control over financial reporting during such period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of controls

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

The Company is not presently party to any material litigation.

Item 1A.Risk Factors

This “Risk Factors” section provides updated information in certain areas from the “Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the “Annual Report). Set forth below are certain risk factors that have been expanded or updated from the Annual Report on Form 10-K. The risks and uncertainties described in the Annual Report, as expanded or updated below do not constitute all the risk factors that pertain to our business, but we do believe that they reflect the more important ones. Please review our Annual Report on Form 10-K for a complete listing of “Risk Factors” that pertain to our business.

We have a limited operating history, have incurred significant operating losses since inception and cannot assure you that we will achieve profitability.

We were formed in January 2000 and until 2003 were a development stage company substantially devoted to the research and development of tools designed to diagnose vulnerable plaque. In July 2003, we acquired substantially all of the assets related to the IVUS and functional measurement, or FM, product lines from Jomed, Inc., or the Jomed Acquisition, and commenced the manufacturing, sale and distribution of IVUS and FM products. We have yet to demonstrate that we have sufficient revenues to become a sustainable, profitable business. Even if we do achieve significant revenues, we expect our operating expenses will increase as we expand our business to meet anticipated growing demand for our products and as we devote resources to our sales, marketing and research and development activities. If we are unable to reduce our cost of revenues and our operating expenses, we may not achieve profitability. As of March 31, 2007, we had an accumulated deficit of $62.3 million. Although we have reported net income after taxes in the three month periods ended September 30, 2006, December 31, 2006 and March 31, 2007, we expect to experience quarterly fluctuations in our revenues due to the timing of capital purchases by our customers and to a lesser degree the seasonality of disposable consumption by our customers and our expenses as we make future investments in research and development, selling and marketing and general and administrative activities that will cause us to experience variability in our reported earnings and losses in future periods. Failure to achieve and sustain profitability would negatively impact the market price of our common stock.

Competition from companies that have longer operating histories and greater resources than us may harm our IVUS business.

The medical device industry, including the market for IVUS products, is highly competitive, subject to rapid technological change and significantly affected by new product introductions and market activities of other participants. As a result, even if the size of the IVUS market increases, we can make no assurance that our revenues will increase. In addition, as the markets for medical devices, including IVUS products, develop, additional competitors could enter the market. To compete effectively, we will need to continue to demonstrate that our products are attractive alternatives to other devices and treatments. We believe that our continued success depends on our ability to:

	•		innovate and maintain scientifically advanced technology;

	•		apply our technology across products and markets;

	•		develop proprietary products;

	•		successfully conduct or sponsor clinical studies that expand our markets;

	•		obtain and maintain patent protection for our products;

	•		obtain and maintain regulatory clearance or approvals;

	•		cost-effectively manufacture and successfully market our products; and

	•		attract and retain skilled personnel.

With respect to our IVUS products, our biggest competitor is Boston Scientific. We also compete in Japan with Terumo Corporation. Boston Scientific, Terumo and other potential competitors are substantially larger than us and may enjoy competitive advantages, including:

	•		more established distribution networks;

	•		entrenched relationships with physicians;

	•		products and procedures that are less expensive;

	•		broader range of products and services that may be sold in bundled arrangements;

	•		greater experience in launching, marketing, distributing and selling products;

	•		greater experience in obtaining and maintaining the FDA and other regulatory clearances and approvals;

	•		established relationships with healthcare providers and payors; and

	•		greater financial and other resources for product development, sales and marketing, acquisitions of products and companies, and intellectual property protection.

For these reasons, we may not be able to compete successfully against our current or potential future competitors, and sales of our IVUS products may decline.

We are dependent on our collaborations, and events involving these collaborations or any future collaborations could delay or prevent us from developing or commercializing products.

The success of our current business strategy and our near- and long-term viability will depend on our ability to execute successfully on existing strategic collaborations and to establish new strategic collaborations. Collaborations allow us to leverage our resources and technologies and to access markets that are compatible with our own core areas of expertise. To penetrate our target markets, we may need to enter into additional collaborative agreements to assist in the development and commercialization of future products. Establishing strategic collaborations is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position and our internal capabilities. Our discussions with potential collaborators may not lead to the establishment of new collaborations on favorable terms.

We have collaborations with Medtronic, Inc. and certain of its affiliates, or Medtronic, The Cleveland Clinic Foundation, GE and Philips. In each collaboration, we combine our technology or core capabilities with that of the third party to either permit greater penetration into markets, as in the case of Medtronic, GE and Philips, or enhance the functionality of our current and planned products, as in the case of The Cleveland Clinic Foundation.

We have limited control over the amount and timing of resources that our current collaborators or any future collaborators devote to our collaborations or potential products. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop or commercialize products that arise out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. Moreover, in the event of termination of a collaboration agreement, termination negotiations may result in less favorable terms.

To market and sell our products, we depend on third-party distributors, and they may not be successful.

We currently depend on third-party distributors to sell our products. If these distributors are not successful in selling our products, we may be unable to increase or maintain our level of revenue. Over the long term, we intend to grow our business internationally, and to do so we will need to attract additional distributors to expand the territories in which we do not directly sell our products. Our distributors may not commit the necessary resources to market and sell our products. If current or future distributors do not perform adequately or if we are unable to locate distributors in particular geographic areas, we may not realize revenue growth internationally.

A significant portion of our annual revenue is derived from sales to our Japanese distributors, Fukuda Denshi and Goodman. In the three months ended March 31, 2007, we generated revenues of $1.7 million from sales to Fukuda Denshi and revenues of $5.1 million

from sales to Goodman. Additionally, Fukuda Denshi has sub-distribution agreements with other parties who act as sub-distributors of our products. While these multi-level agreements allow us to access specific customers and markets, they create complex distribution arrangements and increase our reliance on our Japanese distributors. We entered into an agreement with Fukuda Denshi in March 2006 that extended our commercial relationship though June 2012. This agreement became effective upon the transfer of the related regulatory approvals held by Fukuda Denshi, which took place on June 1, 2006. A significant change in our relationship with our distributors or in the relationships between our distributors may have a negative impact on our ability to sustain and grow our business in Japan.

In certain other international markets, we also use distributors. Other than Japan, no one market in which we use distributors represents a significant portion of our revenues but, in the aggregate, problems with these distribution arrangements could negatively affect our international sales strategy, negatively impact our revenues and the market price of our stock. In addition, in the event that we experience any difficulties under our March 2006 agreement with GE for our s5i and s5i GE Innova IVUS, or in coordinating our efforts with GE, our full commercial launch and revenue from the sale of our s5i and s5i GE Innova IVUS products will be adversely affected.

The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.

We derive, and anticipate we will continue to derive, a significant portion of our revenues from operations in Japan and Europe. In the three months ended March 31, 2007, revenues to customers located in Japan and Europe were $7.7 million and $5.3 million, representing 25.9% and 17.9%, respectively, of our total revenue. As we expand internationally, we will need to hire, train and retain qualified personnel for our direct sales efforts and retain distributors and train their personnel in countries where language, cultural or regulatory impediments may exist. We cannot ensure that distributors, physicians, regulators or other government agencies will accept our products, services and business practices. In addition, we purchase some components on the international market. The sale and shipment of our products and services across international borders, as well as the purchase of components from international sources, subject us to extensive U.S. and foreign governmental trade regulations. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping and sales activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions, including:

	•		our ability to obtain, and the costs associated with obtaining, U.S. export licenses and other required export or import licenses or approvals;

	•		operating under government-run healthcare systems and changes in third-party reimbursement policies;

	•		changes in duties and tariffs, taxes, trade restrictions, license obligations and other non-tariff barriers to trade;

	•		burdens of complying with a wide variety of foreign laws and regulations related to healthcare products;

	•		costs of localizing product and service offerings for foreign markets;

	•		business practices favoring local companies;

	•		longer payment cycles and difficulties collecting receivables through foreign legal systems;

	•		difficulties in enforcing or defending agreements and intellectual property rights; and

	•		changes in foreign political or economic conditions.

We cannot ensure that one or more of these factors will not harm our business. Any material decrease in our international revenues or inability to expand our international operations would adversely impact our revenues, results of operations and financial condition.

Our products may in the future be subject to product recalls or voluntary market withdrawals that could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated recall or voluntary recall or market withdrawal by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls or voluntary withdrawals of any of our products would divert managerial and financial resources, and have an adverse effect on our financial condition and results of operations. A recall or voluntary withdrawal could harm our reputation with customers, affect revenues and negatively affect our stock price.

We depend on one distributor to hold the shonins related to our FM products imported into Japan and for ongoing regulatory compliance, and difficulties involving this relationship will impair our ability to sell our FM products in Japan.

Goodman currently distributes our FM products in Japan and is responsible for Japanese regulatory compliance in relation to these products, including obtaining and maintaining the applicable shonins and ensuring ongoing compliance with Japanese laws and regulations relating to importation and sale. We have neither the capability nor the authority to import or sell our FM products in Japan and are dependent on Goodman to do so. In the three months ended March 31, 2007 and 2006, sales of our FM products in Japan accounted for 19.2% and 16.0%, respectively, of our FM product revenues and 2.4% and 2.3%, respectively, of our total revenues. Our distribution relationship with Goodman is based on an agreement executed in 1994. By its terms, this agreement expired in 1999 unless extended by mutual written agreement. No formal amendment to the agreement has extended its terms. However, Goodman and we have continued to operate in accordance with its terms, including the adoption of new pricing exhibits, placement and fulfillment of orders, and payment of invoices, since we acquired certain FM assets in 2003. If Goodman fails to maintain regulatory compliance related to our FM products, we will be unable to sell our FM products in Japan. Furthermore, if Goodman successfully argues that it is under no obligation to distribute our FM products and ceases to distribute our FM products, we will no longer be able to sell our FM products in Japan.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On January 5, 2007, warrants covering 43,188 shares of our common stock were exercised on a cash-less basis resulting in the net issuance of 34,833 shares of our common stock. The exercise price of the warrants was $3.30 and the fair market value of our common stock on the date of exercise was $17.06. These warrants were issued to a bank on July 18, 2003, in connection with the granting to us of a revolving credit facility.

Use of Proceeds

On June 15, 2006, we completed an initial public offering of 7,820,000 shares of our common stock, which included 1,020,000 shares sold pursuant to the exercise of the underwriters’ over-allotment option. Proceeds from our initial public offering, after deducting offering expenses and underwriting discounts and commissions, were $54.5 million. Pursuant to a subordinated debt agreement entered into in December 2003, we repaid the outstanding balance of $29.2 million on our senior subordinated notes, as required by their terms, with a portion of the proceeds from our initial public offering. In addition, through March 31, 2007, $2.9 million was used for other debt repayment, $4.0 million was used for capital expenditures and $312,000 was used for the acquisition of intangibles. The remaining net proceeds have been invested in short-term investments in accordance with our investment policy.

We expect to use the remaining net proceeds from our initial public offering for sales and marketing initiatives to support the ongoing commercialization of our products and to use the remainder of our net proceeds for research and development activities and general corporate purposes.

Item 6.Exhibits


Exhibit
No.		Description of Exhibit
2.1		Asset Purchase Agreement dated July 10, 2003 by and among Jomed, Inc., Jomed N.V., Jomed GmBH, Jomed Benelux S.A. and Volcano Therapeutics, Inc. (filed as Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678) (the “Form S-1”), as originally filed on March 24, 2006, and incorporated herein by reference).

2.2		Asset Transfer Agreement, by and between Pacific Rim Medical Ventures Corp and Koninklijke Philips Electronics N.V., dated July 3, 2003 (filed as Exhibit 2.2 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

3.2		Bylaws of the Registrant (filed as Exhibit 3.3 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.5 to the Form S-1, as originally filed on May 24, 2006, and incorporated herein by reference).

4.1		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Form S-1, as originally filed on May 24, 2006, and incorporated herein by reference).

4.2		Amended and Restated Investors’ Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.3		Warrant to Purchase Series B Preferred Stock, issued by the Registrant to Venture Lending & Leasing IV, LLC, dated September 30, 2004 (filed as Exhibit 4.4 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.4		Warrant to purchase shares of common stock issued by the Registrant to Silicon Valley Bank, dated July 18, 2003 (filed as Exhibit 4.8 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.5		Warrant to purchase shares of Series B Preferred Stock issued by the Registrant to Silicon Valley Bank, dated July 18, 2004 (filed as Exhibit 4.9 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.6		Rights Agreement, by and between the Registrant and American Stock Transfer & Trust Company, dated June 20, 2006 (filed as Exhibit 4.1 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

4.7		Form of Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

31.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Signature	Title	Date

/s/ John T. Dahldorf John T. Dahldorf	Chief Financial Officer (principal financial officer, principal	May 8, 2007
	accounting officer and duly authorized officer)

Exhibit Index


Exhibit
No.		Description of Exhibit
2.1		Asset Purchase Agreement dated July 10, 2003 by and among Jomed, Inc., Jomed N.V., Jomed GmBH, Jomed Benelux S.A. and Volcano Therapeutics, Inc. (filed as Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678) (the “Form S-1”), as originally filed on March 24, 2006, and incorporated herein by reference).

2.2		Asset Transfer Agreement, by and between Pacific Rim Medical Ventures Corp and Koninklijke Philips Electronics N.V., dated July 3, 2003 (filed as Exhibit 2.2 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

3.2		Bylaws of the Registrant (filed as Exhibit 3.3 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.5 to the Form S-1, as originally filed on May 24, 2006, and incorporated herein by reference).

4.1		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Form S-1, as originally filed on May 24, 2006, and incorporated herein by reference).

4.2		Amended and Restated Investors’ Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.3		Warrant to Purchase Series B Preferred Stock, issued by the Registrant to Venture Lending & Leasing IV, LLC, dated September 30, 2004 (filed as Exhibit 4.4 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.4		Warrant to purchase shares of common stock issued by the Registrant to Silicon Valley Bank, dated July 18, 2003 (filed as Exhibit 4.8 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.5		Warrant to purchase shares of Series B Preferred Stock issued by the Registrant to Silicon Valley Bank, dated July 18, 2004 (filed as Exhibit 4.9 to the Form S-1, as originally filed on March 24, 2006, and incorporated herein by reference).

4.6		Rights Agreement, by and between the Registrant and American Stock Transfer & Trust Company, dated June 20, 2006 (filed as Exhibit 4.1 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

4.7		Form of Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Form 10-Q, as originally filed on August 9, 2006, and incorporated herein by reference).

31.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Volcano (VOLC) Inactive 10-Q2007 Q1 Quarterly report

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