10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to          .

Commission file number: 000-50988

VNUS Medical Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware	94-3216535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2200 Zanker Road, San Jose, California (Address of principal executive offices)	95131 (Zip Code)

Registrant’s telephone number, including area code:

(408) 473-1100

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o          No þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o          No þ

      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.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      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 filer o          Accelerated filer þ          Non-accelerated filer o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      The aggregate market value of the registrant’s common equity held by non-affiliates was approximately $104.6 million on June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter.

      As of March 1, 2006, 14,999,259 shares of the registrant’s common stock, par value $0.001, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Part III of this report incorporates information by reference from the registrant’s definitive proxy statement for its annual meeting of stockholders, which proxy statement is due to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2005.

VNUS MEDICAL TECHNOLOGIES, INC.

TABLE OF CONTENTS

		Page
PART I
FORWARD LOOKING STATEMENTS			3
Item 1.	Business		3
Item 1A.	Risk Factors		20
Item 1B.	Unresolved Staff Comments		35
Item 2.	Properties		35
Item 3.	Legal Proceedings		35
Item 4.	Submission of Matters to a Vote of Security Holders		35
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		36
Item 6.	Selected Consolidated Financial Data		37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		48
Item 8.	Financial Statements and Supplementary Data		49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72
Item 9A.	Controls and Procedures		72
Item 9B.	Other Information		72
PART III
Item 10.	Directors and Executive Officers of the Registrant		73
Item 11.	Executive Compensation		73
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		73
Item 13.	Certain Relationships and Related Transactions		73
Item 14.	Principal Accountant Fees and Services		73
PART IV
Item 15.	Exhibits and Financial Statement Schedules		73
EXHIBIT 10.19
EXHIBIT 10.20
EXHIBIT 10.21
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

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PART I

FORWARD-LOOKING STATEMENTS

      Certain statements contained in or incorporated by reference into this report are forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements that are predictive in nature and depend upon or refer to future events or conditions, which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects,” “may,” “will,” “should,” “could,” “potential,” or similar expressions. In addition, any statements concerning future financial performance, reimbursement rates, ongoing business strategies or prospects, and possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption “Risk Factors” in Part I, Item 1A below. Our actual results, performance or achievements or industry results could differ materially from any future results, performance, achievements or industry results expressed or implied by such forward-looking statements. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Item 1:     Business

Overview

      We are a leading provider of medical devices for the minimally invasive treatment of venous reflux disease, a progressive condition caused by incompetent vein valves in the legs. We also provide devices for use in the minimally invasive treatment of other peripheral vascular diseases, including devices for use in peripheral arterial bypass and arteriovenous graft procedures. Venous reflux disease results in symptoms such as leg pain, swelling, fatigue, skin ulcers and painful varicose veins. Our primary product line, the VNUS Closure^® system, consists of a proprietary radio-frequency, or RF, generator and proprietary disposable endovenous catheters to close diseased veins through the application of temperature-controlled RF energy. We estimate that in excess of 135,000 patients have been treated using our Closure system since 1999, with approximately 55,000 of these patients treated in 2005.

      Published population studies indicate that approximately 25 million people in the United States and 40 million people in Western Europe suffer from symptomatic venous reflux disease and experience painful symptoms. Due to the pain and discomfort of the condition, venous reflux disease can be disabling and have a significant impact on a person’s quality of life by disrupting physical, social and professional activities. We believe that the large prevalence of venous reflux disease and the limitations of other available treatments have created a significant opportunity for our Closure system.

      Treatment for symptomatic venous reflux disease often begins with conservative therapy, such as compression stockings or leg elevation to temporarily relieve symptoms. Patients may also receive treatments for the cosmetic signs of venous reflux disease such as visible varicose veins. However, none of these treatments address the underlying cause of the disease. These treatments may alleviate, but do not eliminate, symptoms such as leg pain or swelling, and the cosmetic signs of the disease frequently recur. For patients with more advanced stages of the disease who seek long-term relief from symptoms, treatment often involves removing a patient’s diseased saphenous vein from the circulatory system. Historically, open surgery, such as vein stripping and ligation, has been the standard of care, but it is traumatic and can result in significant post-operative pain and extended recuperation. We believe that physicians and patients are seeking minimally invasive alternatives to surgery that effectively treat venous reflux and painful varicose veins.

      We believe our Closure system represents a significant advance over vein stripping and also provides significant advantages over minimally invasive treatments that use laser energy to treat the vein in a procedure referred to as endovenous laser ablation, or EVL. Our Closure procedure effectively treats venous reflux disease and painful varicose veins, is minimally invasive, can be used in an outpatient or physician office

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setting, and allows patients to quickly resume normal activities. Moreover, our Closure procedure is supported by a significant amount of clinical data. For example, in 2000, we sponsored a randomized trial that compared our Closure procedure to vein stripping, which found our Closure procedure to be as effective as vein stripping at two years following treatment, with fewer side effects and faster recovery.

      As of March 1, 2006, our Closure procedure was accepted by the policies of approximately 100 health insurers, representing over 220 million covered lives in the United States. We sell our Closure system in the United States through our 60-person direct sales organization and market our Closure system in selected international markets, primarily through distributors.

Corporate Background

      Our principal offices are currently located at 2200 Zanker Road, Suite F, San Jose, California 95131 and our telephone number is (408) 473-1100. We were incorporated in Delaware in January 1995. In March 2006, we expect to move our principal offices to 5799 Fontanoso Way, San Jose, California 95138 and our telephone number will be (408) 360-7200. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our website (www.vnus.com under the “Investor Relations” caption) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.

      The terms VNUS^®, Closure^®, and VNUS Closure^®, as well as our logo, are our registered trademarks. The term U-Clip^tm is a trademark of Medtronic, Inc.

Venous Reflux Disease

      Healthy leg veins contain valves that allow blood to move in one direction from the lower limbs towards the heart. These valves open when blood is flowing toward the heart, and close to prevent venous reflux, or the backward flow of blood. When veins weaken and become enlarged, their valves cannot close properly, leading to venous reflux and impaired drainage of venous blood from the legs. Venous reflux is most common in the superficial veins. The largest superficial vein is the great saphenous vein, which runs from the top of the foot to the groin, where it attaches to a deep vein.

      Factors that contribute to venous reflux disease include female gender, heredity, obesity, lack of physical activity, multiple pregnancies, age, past history of blood clots in the legs and professions that involve long periods of standing. According to population studies, the prevalence rate of visible tortuous varicose veins, a common indicator of venous reflux disease, is up to 15% for adult men and up to 25% for adult women. Our clinical registry of over 1,000 patients shows that the average age of patients treated with our Closure procedure is 48 and that over 75% of the patients are women.

      Venous reflux can be classified as either asymptomatic or symptomatic, depending on the degree of severity. Symptomatic venous reflux disease is a more advanced stage of the disease and can have a profound impact on the patient’s quality of life. Persons with symptomatic venous reflux disease may seek treatment due to a combination of symptoms and signs, which may include:

•  leg pain and swelling;

•  leg heaviness and fatigue;

•  painful varicose veins;

•  skin changes such as discoloration or inflammation; and

•  open skin ulcers.

      A primary goal of treating symptomatic venous reflux is to eliminate the reflux at its source, usually the great saphenous vein. If a diseased vein is either closed or removed, blood automatically reroutes into other veins without any known negative consequences to the patient.

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Venous Reflux Market

      Based on published population studies, approximately 25 million people in the United States suffer from symptomatic venous reflux disease. A separate study we commissioned found that of the symptomatic patients, approximately 1.2 million currently seek treatment each year in the United States, of which we estimate over 800,000 have reflux in the great saphenous vein. In addition, we estimate that, of these 800,000 patients, approximately:

•  620,000 patients receive compression stockings or varicose vein procedures that do not address the primary underlying cause of venous reflux;

•  70,000 patients undergo vein stripping surgery; and

•  120,000 patients receive minimally invasive treatment with endovenous ablation, including our Closure procedure.

      In Western Europe, the prevalence rate of venous reflux disease is comparable to the United States, resulting in approximately 1.6 times the number of people in the United States, or 40 million people, suffering from symptomatic venous reflux disease. However, we estimate the incidence of saphenous vein treatment procedures is approximately 3.5 times the incidence in the United States, with approximately 700,000 patients treated annually.

      Based on the prevalence of the disease and its potentially debilitating outcomes, the economic impact of venous reflux is significant. A study we commissioned estimated that approximately 2 million work days are lost annually in the United States as a result of symptomatic venous reflux.

Current Treatment Alternatives

      Patients suffering from venous reflux disease can receive various treatments for relief from the condition. To provide long-term elimination of symptoms as well as the signs of venous reflux, including varicose veins, refluxing veins are surgically removed or closed. Three treatments use this approach: conventional vein stripping, endovenous laser ablation and our Closure procedure.

      Conventional Vein Stripping and Ligation Surgery. Vein stripping and ligation surgery has historically been the conventional treatment for addressing reflux in the great saphenous vein. This procedure typically involves general anesthesia in a hospital outpatient setting and begins with groin surgery to expose and ligate, or tie off, the diseased great saphenous vein and surrounding tributary veins. Next, a stripping tool is inserted at the groin, threaded through the great saphenous vein along the length of the thigh and out through the skin just below the knee. The top of the great saphenous vein is then tied to the stripping tool, which is pulled from below the knee to remove the vein from the body. In conjunction with vein stripping, patients often undergo phlebectomy to remove individual visible varicose veins on the leg. Although vein stripping effectively treats saphenous vein reflux, the surgery can be traumatic. Recuperation may require days to weeks before patients resume normal activities or return to work. Other primary drawbacks of vein stripping include that it often results in significant bruising of the thigh and temporary discoloration of the skin and it may cause nerve injury.

      Despite these drawbacks, we estimate there are approximately one million vein stripping surgeries performed worldwide each year, with approximately 70,000 performed in the United States and 700,000 in Western Europe. As a result, we believe there is a large opportunity for a minimally invasive venous reflux treatment that avoids or minimizes the drawbacks of vein stripping.

      Endovenous Laser Ablation, or EVL. EVL is a minimally invasive procedure that utilizes an optical fiber that delivers laser energy to heat the blood inside the saphenous vein. The laser delivers energy that boils the blood, producing steam that damages the vein and creates a blood clot. The optical fiber is withdrawn while laser energy is delivered, inducing a blood clot to occlude the length of the treated vein.

      We believe the drawbacks of the most common EVL procedure and technology are significant. For example, EVL does not provide feedback during treatment to guide laser energy delivery or optical fiber

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withdrawal speed to reflect variability in vein size and blood volume. Without guidance from feedback, EVL can result in undesirable treatment outcomes such as perforation of the vein wall or a large blood clot along the treated vein. This creates the potential for significant pain, tenderness, bruising and skin discoloration during the post-operative period.

      EVL is less invasive than vein stripping and according to published reports, can effectively treat venous reflux disease and is approximately 10 minutes faster to perform than our Closure procedure, which takes 40 to 60 minutes for experienced users. Newer EVL modalities featuring different wavelengths have recently been introduced that may have the potential to reduce pain and bruising complications compared to earlier EVL systems. However, only minimal clinical data on these systems has been published to date with no long-term follow-up clinical data yet available.

      Due to the drawbacks of EVL, we believe a significant opportunity exists for a minimally invasive procedure that has substantial clinical evidence establishing equivalence or superiority to vein stripping, provides physicians more control over the therapy and results in less pain and discomfort for patients.

The VNUS Closure Procedure

      Using our Closure system, physicians close diseased, large superficial veins such as the great saphenous vein. This is accomplished by inserting our proprietary catheter into a vein to directly heat the vein wall with temperature-controlled RF energy. Heating the vein wall causes collagen in the wall to shrink and the vein to close. The blood then naturally reroutes to healthy veins. Our Closure procedure is commonly performed in the physician’s office or as an outpatient procedure, in both cases using local anesthesia to numb the leg before treatment. Currently, it is more commonly performed in a hospital setting, though it is also performed in a physician’s office. We expect that in 2006 Closure procedures will be more commonly performed in a physician’s office or surgicenter.

      Physicians generally instruct their patients to walk regularly for several days after our Closure procedure has been performed and return within 72 hours for an ultrasound examination.

      We believe our Closure procedure provides the following benefits for patients and physicians:

•  Minimally Invasive Outpatient Procedure. Our Closure procedure can be performed using local anesthesia in a physician’s office, as well as in an outpatient hospital setting or surgicenter.

•  Less Post-Operative Pain. Independent comparative studies have shown that patients receiving our Closure procedure return to work and normal activity significantly faster than those receiving vein stripping. In a comparative trial of our Closure procedure versus EVL, patients treated using our Closure system in one leg and EVL in the other leg exhibited less pain and bruising in the leg treated with our Closure system.

•  Excellent Clinical Outcomes. In a randomized comparative trial of our Closure procedure and vein stripping conducted in 2000, our Closure procedure was found to be as effective as vein stripping at two years following treatment, with fewer side effects and faster recovery. Another comparative trial of our Closure procedure versus EVL showed our Closure procedure exhibited greater efficacy and less post-operative bruising and pain.

•  Long-Lasting Results. Our published multi-center registry data shows our Closure procedure eliminated venous reflux in 87% of 119 limbs evaluated at four years and 84% of 117 limbs evaluated at five years.

•  Safe and Controlled Procedure. Our Closure system includes a number of safety features designed to ensure precise delivery of RF energy. Our system continuously monitors the temperature of the vein wall and adjusts energy delivery throughout the procedure to provide a high level of effectiveness and a low incidence of adverse events during recovery.

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•  Cosmetically Appealing. We believe that our Closure system results in less bruising, pain and skin discoloration than both vein stripping and EVL. Additionally, because our Closure procedure is catheter-based, it results in little or no scarring compared to vein stripping.

      We believe the primary disadvantages of our Closure procedure versus treatment using EVL are that our Closure catheter is more expensive than the EVL optical fiber and the EVL procedure is approximately five to ten minutes shorter to perform than our Closure procedure.

Clinical Results

      We have established a significant body of clinical data demonstrating the effectiveness and advantages of our Closure procedure.

Randomized Trials of our Closure Procedure Versus Vein Stripping

      In 2000, we sponsored an 80-patient multi-center randomized comparative trial of our Closure procedure versus vein stripping, referred to as the EVOLVeS trial. In the EVOLVeS trial every clinical outcome that resulted in a statistical difference between treatment groups was in favor of our Closure system over vein stripping.

      Results from the EVOLVeS trial showed that our minimally invasive Closure procedure provided equivalent elimination of venous reflux at two years after treatment. In the EVOLVeS trial, venous reflux was absent at two years in 91.7% of the limbs treated with our Closure procedure and in 89.7% of limbs treated with vein stripping, as reported in the European Journal of Vascular and Endovascular Surgery in January 2005. There was no statistical difference between the two groups in rates of nerve injury, infection and psychological scores related to quality of life measurement. In the EVOLVeS trial, patients treated with our Closure procedure recuperated faster, had less post-operative pain, fewer adverse events and better health-related quality of life than patients treated with vein stripping surgery. These data were published in August 2003 in a peer-reviewed article in the Journal of Vascular Surgery. Superior results of our Closure system were illustrated by the following facts:

•  Patients treated with our Closure procedure returned to normal activities in an average of 1.2 days, compared to 3.9 days for patients treated with vein stripping;

•  81% of Closure patients returned to normal activities within one day compared to only 47% of vein stripping patients; and

•  Employed patients treated with our Closure procedure returned to work an average of 7.7 days faster than employed patients treated with vein stripping surgery.

      As shown in the following table, our Closure procedure also resulted in significantly fewer complications and adverse findings than vein stripping at 72 hours and three weeks after treatment. Potential complications and adverse findings included events such as infection, blood clots, tenderness, bruising, skin redness, subcutaneous bleeding and nerve injury resulting in localized numbness or tingling.

	% of Limbs Free of Adverse Findings
	Closure Procedure			Vein Stripping
72 Hours		43	%		17	%
3 Weeks		71	%		39	%

      Severity of patient leg pain was scored at pre-treatment, three days, one week, three weeks, four months, one year and two years after treatment. Patients treated with vein stripping reported worsening of leg pain three days and one week after surgery, while patients treated with our Closure procedure reported a reduction of leg pain as early as three days after treatment. Patients treated with our Closure procedure reported significantly better reduction of leg pain than patients treated with vein stripping at every follow up. Two years after treatment, patients from our Closure procedure treatment group reported an 86% reduction of leg pain compared to only 51% after vein stripping surgery.

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      In addition to the EVOLVeS trial, two single-center randomized trials were independently performed by third parties comparing our Closure procedure to vein stripping. These trials involved the treatment of 28 patients in one trial and 60 in the other and reached the same general conclusions as the published EVOLVeS trial. The clinical outcomes from these single-center trials showed that patients treated with our Closure procedure exhibited significantly less post-operative pain, faster return to normal activities, faster restoration of physical function and better quality of life than vein stripping patients. Other clinical outcomes in these trials showed no significant differences between the treatment groups.

Closure Procedure Versus Endovenous Laser Treatment

      An independent randomized comparative trial of our Closure procedure and EVL was reported at the American Venous Forum meeting in February 2003. A summary of this study was published in 2005 in the medical journal, “Seminar in Vascular Surgery”. The study involved 50 patients with saphenous vein reflux in both legs. For each patient, our Closure procedure was performed in one leg and EVL in the other leg. As shown in the following table, patients treated with our Closure procedure experienced significantly better efficacy as determined by vein occlusion rates, and had less post-operative pain and thigh bruising than patients treated with EVL.

	Closure Procedure			EVL
Bruising at one week following treatment		4	%		40%
Primary vein occlusion		82	%		56%

      The investigator in this trial also used foam sclerotherapy injections at any patient follow-up in which it was observed that the treated veins were not completely closed. With the assistance of foam sclerotherapy injections, the vein occlusion rates remained significantly better for the Closure treated legs, reporting 92% for Closure treated limbs and 84% for EVL treated limbs.

      In the study, there was no statistical difference found between our Closure procedure and EVL for other potential clinical complications such as rates of nerve injury, skin burns or infection. We are aware of two other published single-center reports comparing EVL and Closure procedure results. The data from these two reports were retrospective and were not generated in a designed-study approach. In these reports, the efficacy of both procedures was good and the authors reported a slightly higher efficacy for EVL and a lower complication rate for our Closure procedure.

Clinical Registry of the Closure Procedure

      In 1998, we established an ongoing clinical registry to which more than 30 centers worldwide have contributed data. Last year, long-term data for up to five years following treatment was published, as is noted in the table below, and shows the efficacy of our Closure procedure at eliminating venous reflux.

			Elimination of
Time of Follow Up	# of Limbs		Reflux
1 Year		473		88	%
2 Years		263		88	%
3 Years		133		88	%
4 Years		119		87	%
5 Years		117		84	%

      Long-term elimination of saphenous vein reflux by our Closure procedure was accompanied by significant relief of symptoms. Our clinical registry data show that, prior to treatment with our Closure procedure, 85% of patients reported leg pain, 79% reported leg heaviness and fatigue and 39% exhibited leg swelling, while after five years following treatment, 9% reported leg pain, 8% reported leg heaviness and fatigue and 4% exhibited leg swelling.

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Single-Center Studies of Our Closure Procedure

      The two largest independent single-center studies of our Closure procedure reported 97% vein occlusion in 170 patients, as reported in a peer-reviewed article in 2002 in the Japanese Journal of Phlebology, and 99% vein occlusion in 217 limbs, as indicated in a non-peer reviewed report presented at the European Society of Vascular Surgery in September 2003, in each case at one year after treatment with our Closure system. In September 2004, an article published in the Journal of Vascular Surgery by a group of physicians at Maimonides Medical Center in Brooklyn, New York, reported a 16% incidence of blood clots extending into deep veins in the first 73 limbs treated by the group with our Closure procedure. Complete clot resolution was achieved within two weeks in all but one patient and no patient developed serious subsequent issues. The incidence of blood clots reported by this group is inconsistent with 10 other previously published independent peer-reviewed reports that found an incidence of blood clots from 0% to 1% in over 2,000 limbs treated. In addition, we are not aware of any other physicians to whom we have sold catheters that have reported an incidence of blood clots similar to that found by the Maimonides Medical Center physicians. In a Letter to the Editor published in the Journal of Vascular Surgery in February 2005, this group of physicians acknowledged the benefits of our Closure procedure and indicated that they continue to perform our procedure. We do not believe the 510(k) clearance for our Closure procedure will be impacted by this article or that the Food and Drug Administration will take any adverse action with respect to the incidents identified in this report. However, if the Food and Drug Administration were to identify any serious safety risk it could impose a product recall or withdraw our clearance. Although we believe this is an isolated occurrence, prospective customers may deem this report relevant and require additional information or references prior to purchasing our products or refrain from purchasing our products.

Products

      Our Closure system consists of a proprietary RF generator and proprietary disposable catheters. We also sell sterile supply kits and other accessory supplies used to perform our Closure procedure. Additionally, we sell disposable devices to treat perforator vein reflux, instruments to remove varicose veins, compression stockings, and the U-Clip™ anastomotic device used to attach blood vessels together in peripheral bypass and hemodialysis access procedures.

Disposable Endovenous Catheters

      Our proprietary disposable endovenous ClosurePLUS^tm catheters are used to deliver RF energy to heat the walls of saphenous veins. Each catheter has a set of collapsible electrodes located at the tip. The electrodes expand to contact the inner wall of the vein to be treated and produce uniform heating on all sides of the vein wall as well as a localized depth of heating to limit damage to surrounding tissue. The electrodes collapse as the vein shrinks in response to heating.

      A temperature sensor located on one of the electrodes measures and transmits the temperature of the vein wall to the RF generator, which automatically adjusts its power level. This enables the generator to use the minimum amount of power necessary for the catheter to deliver a consistent temperature and close the vein. The catheters also have a hollow center, or lumen, which allows fluid delivery and the use of a standard guide wire. Our catheters are available in two sizes, allowing doctors to treat saphenous vein diameters that encompass over 95% of patients.

      In 2005, we introduced two new disposable endovenous RF devices: the ClosureRFS^tm and the ClosurePLEX^tm. These devices are intended to broaden the clinical applicability of our VNUS Closure system to include the treatment of incompetent perforator vein and tributary veins connected to the greater saphenous vein. These catheters, which are compatible with our RF generator, are intended to treat smaller diameter veins, are shorter in length and smaller in diameter than our ClosurePLUS catheters, and the electrodes located at the tip do not expand.

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RF Generator

      Our RF generator delivers energy to the catheter and continuously monitors the temperature at the vein wall, automatically adjusting the power delivered to the catheter to achieve a target temperature. This feedback system is designed to allow the physician to perform our Closure procedure at a relatively constant temperature over the entire length of the treated vein. The RF generator is controlled by proprietary embedded software which allows it to recognize each catheter model and to automatically select the appropriate algorithm. The RF generator is a table top unit and has a digital display panel that can be configured for multiple languages and provides readings of the temperature of the vein wall at the point where energy is applied, the power used during treatment, and the impedance, or amount of resistance between electrodes, so that the physician can determine whether the electrodes are maintaining adequate contact with the vein wall.

Accessories and Other Products

      Our accessory products include our Closure procedure pack and other ancillary products for inserting catheters and devices into veins. Our Closure procedure pack contains the sterile supplies needed to perform our Closure procedure, consisting of gowns, surgical drapes, scalpels, introducer sheaths and other incidental supplies. Our other ancillary products include reusable phlebectomy instruments for removal of varicose veins and vein access supplies such as introducer sheaths and needles.

The U-Clip^TM Anastomotic Device

      In January 2006, we acquired exclusive distribution rights within the U.S. vascular surgery market to the U-Clip^tm anastomotic device manufactured by Medtronic, Inc. The U-Clip device is a proprietary, self-closing device designed to create high-quality connections between blood vessels, or anastomoses, without tying knots or managing sutures. The target market for this product will be vascular surgeons who commonly perform both arteriovenous, or AV, fistula and peripheral arterial bypass surgery. AV fistula surgery is used to create a connection between a vein and artery, typically in the arm, so there is sufficient blood flow available to access for hemodialysis. We believe that in the United States, approximately 133,000 AV fistula and AV graft procedures and 100,000 peripheral arterial bypass procedures are performed annually.

Seasonality

      We experienced lower sequential sales of our disposable endovenous catheters and RF generators in the first and third quarters of 2005, compared to the second and fourth quarters of 2005. We believe this seasonality occurred as a result of a lower number of our Closure procedures scheduled during the December holiday period and early in the first quarter of the year as well as normal summer slowdown in demand.

Sales and Marketing

      We have focused our sales and marketing efforts on increasing awareness of our Closure system among physicians with an active vein treatment practice and among those looking to establish such a practice. These physicians include vascular and general surgeons, interventional radiologists and phlebologists, among others.

      We maintain a direct sales organization in the United States, which, as of December 31, 2005, consisted of 60 employees. We also have a direct sales presence in France and Germany through our German subsidiary, and a clinical specialist based in Europe. We market our products in other selected international markets primarily through exclusive distributors. Our international network of distributors currently market and sell our products in ten countries in Europe, six countries in Asia and seven countries in the rest of the world. We plan to enter into additional distribution agreements on a market-by-market basis.

      Our marketing group supports our sales representatives primarily through four physician-targeted initiatives:

•  We educate and train physicians interested in performing our Closure procedure in the great saphenous vein. We also educate experienced physicians in the use of our Closure procedure for treatments in

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	perforator veins, tributary veins, large veins, venous ulcer patients and small saphenous veins through workshops and one-on-one training sessions.
•	We assist physicians in educating their current and potential patients about our Closure procedure. We create and make available an expansive array of support tools for physician use such as patient videos, brochures and patient testimonials designed to help physicians educate patients on the many benefits of our Closure procedure.
•	We advise physicians during the reimbursement process via the support of our Reimbursement Services team, which works directly with physicians and their office personnel, hospital and surgicenter personnel, and patients to obtain authorization from payors for patients to receive our Closure procedure. We also work with providers to challenge any procedure authorization denials by payors by providing our clinical data.
•	We seek to add and promote products to leverage our position as the leader in vein treatments and as the single-source supplier for a physician’s vein treatment needs.

      Our marketing group also engages in consumer-directed initiatives to encourage patients to contact their physicians regarding our Closure procedure. We seek to educate potential patients through patient screening events, public relations, advertisements and articles in prominent magazines, newspapers, websites, and local and national television. We have also established a website where we provide information to patients and physicians interested in our Closure procedure.

      No single customer accounted for 10% or more of our net revenues in 2005, 2004 or 2003.

Reimbursement

      Payment for patient care in the United States is generally made by third-party payors, which include private insurers and governmental insurance programs such as Medicare. We anticipate that sales volumes and prices of our products will continue to be dependent in large part on the availability of reimbursement from these third-party payors. To date, third-party reimbursement for our Closure procedure is well established in the United States. Approximately 100 individual third-party payors have established a policy of coverage encompassing approximately 220 million lives in the United States. All of the top ten health insurers and administrators in the United States cover our Closure procedure, including nearly all Blue Cross Blue Shield entities, United Healthcare, Aetna, Cigna, Humana and Kaiser.

      Separate CPT codes have been approved by the American Medical Association for both radio-frequency and laser ablation of venous reflux and became effective at the beginning of 2005. In 2006, the national average payment by Medicare to physicians under the Medicare fee schedule is $2,222 when our Closure procedure is performed in the physician’s office, which is slightly higher than the 2005 rate of $2,216 due to an adjustment of the relative value units for our Closure procedure. The rate remains $175 more than the national average Medicare rate paid for laser ablation in the physician’s office. If our Closure procedure is performed in a hospital, the Medicare national average payment to physicians is $365, which is the same rate established for laser ablation and is the same rate as 2005. When our Closure procedure is performed on a Medicare patient in the hospital, the hospital will receive a national average payment of $1,719 as reimbursement for our Closure catheter and supplies, which is $181 higher than the 2005 rate of $1,538, and is the same amount the hospital will receive for supplies and equipment used in laser ablation. The rate increase reflected a change to a higher ambulatory payment class group for our codes. Consideration was given to disposable cost and other resources used in delivery.

      We estimate that approximately 10% of the U.S. patients who receive treatment with our Closure system are covered by or eligible for Medicare coverage. Private healthcare insurers may establish payment rates that are different from Medicare and these rates are typically higher.

      Acceptance of our products in international markets is dependent, in part, upon the availability and adequacy of reimbursement within prevailing healthcare payment systems. In international markets, reimbursement and healthcare payment systems vary significantly by country. International reimbursement and

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healthcare payment systems include both government sponsored healthcare and private insurance. Currently, our Closure procedure is covered and reimbursed by the five largest private healthcare insurers in the United Kingdom. We have launched several initiatives in Europe to achieve third party or national reimbursement, particularly in France and Germany. Our Closure procedure was listed in the nomenclature of surgical procedures published in July 2005 in France, but reimbursement for our procedure was not approved at that time. We are working with the appropriate authorities to achieve reimbursable status in the future.

      We believe that approximately 99% of our U.S. customers have successfully received reimbursement for our Closure procedure using established medical reimbursement codes.

Research and Development

      In response to physician feedback and our own assessments, we are continually working on enhancements to our product designs and procedures to improve patient outcomes, improve ease-of-use and shorten procedure time. In addition, we are exploring the development of new products and new indications in the treatment of various venous diseases.

      We sponsor and conduct clinical research activities with investigators and institutions to measure key clinical outcomes that can influence market adoption of our Closure procedure. We also conduct clinical studies in support of new products that we are developing. We perform preclinical studies for the development and evaluation of new products and procedural techniques.

      In the years ended December 31, 2005, 2004 and 2003, we incurred $3.8 million, $4.5 million and $3.5 million, respectively, in research and development expenses.

Business Development

      From time to time, we have considered the acquisition of product lines and licensing of technology and complementary products. For example, in January 2006 we entered into a Distributor Agreement with Medtronic USA, Inc., under which we were granted, with limited exceptions, the exclusive right to distribute Medtronic’s U-Clip^tm anastomotic devices within the United States for vascular surgery procedures. The U-Clip is a proprietary, self-closing device designed to create high-quality connections between blood vessels, or anastomoses, without tying knots or managing sutures. We believe that the U-Clip device offers surgeons a fast and easy way to implement the benefits of interrupted suturing when joining blood vessels. This unique technology provides potential sales and marketing synergies with our flagship Closure product line, which is routinely sold in the vascular surgery market.

      Our business development focus is on adding additional peripheral vascular products that can be marketed to vascular surgeons and interventionalists using our direct U.S. sales organization.

Manufacturing

      We currently manufacture, package and label our disposable catheters within our 30,000 square foot facility in San Jose, California. We outsource the manufacture of our RF generators and accessory products. On November 15, 2005, we entered into a lease agreement for a new facility, also located in San Jose, California. In March 2006, we plan to move our company headquarters and manufacturing operations to this facility, which consists of 93,000 square feet. The term of the lease is March 1, 2006 through February 28, 2014. We believe that the new manufacturing facilities are adequate for our current needs and for the foreseeable future.

      The manufacturing process for our disposable catheters includes the assembly, testing, packaging, sterilization and inspection of components that have been manufactured by us or to our specifications by suppliers. We purchase components used in our disposable products from various suppliers. When practicable, we have established second-source suppliers. However, we rely on sole-source suppliers to manufacture a limited number of the components used in our disposable catheters. In addition, we attempt to mitigate supply shortages through maintaining inventory levels based on the risk associated with a particular supplier.

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Typically, we have not obtained contractual commitments from our suppliers to continue to supply products to us, nor are we contractually obligated to continue to purchase from a particular supplier.

      Our quality assurance group provides an independent inspection at various steps in the manufacturing cycle that is designed to verify that each lot of components and finished products are compliant with our specifications and applicable regulatory requirements. Sterilization testing is processed at a certified third-party laboratory to verify the effectiveness of the sterilization process. Our quality assurance systems are required to be in conformance with the Quality System Regulations as mandated by the Food and Drug Administration. For sale of products in the European Community, our products and quality structure are required to be compliant to the current standard, ISO 13485 for medical devices. Prior to receiving certification under ISO 13485 in October 2003, we maintained certification under ISO 9001/ EN46001 for the same purpose. Our products are regulated in the European Union as medical devices per the European Union Directive (93/42/ EEC), also known as the Medical Device Directive. An authorized third-party reviewer, a Notified Body, must approve our products for CE marking. Our Closure system was CE marked in 1998. Our ClosureRFS^tm family of products and accessory products are also CE marked. Maintenance of the CE mark, our license to ship into the European Union and other international jurisdictions, requires re-certification to the updated ISO 13485:2003 standard by June 1, 2006. We do not anticipate any issues in achieving our re-certification.

      We rely on Byers Peak, Inc. to manufacture our RF generators to our custom specifications. Under our non-exclusive agreement with Byers Peak, Inc., we provide a rolling 90-day firm commitment order for generators and a six-month rolling forecast. We are required to purchase all inventory of parts and work in progress if we revise our commitment or forecast, cancel orders or terminate the agreement. Byers Peak, Inc. also provides us a warranty on the generators for the shorter of 18 months from the date of shipment to us or 12 months from the date of first use. The initial term of this agreement expires on February 20, 2007, but is extended indefinitely thereafter until terminated by us or Byers Peak, Inc. upon 180 days’ notice.

      Suppliers of components used in the manufacture of our disposable catheters and our RF generators may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, including the Food and Drug Administration’s Quality System Regulations, equipment malfunction and environmental factors. Furthermore, establishing additional or replacement suppliers for our materials may take a substantial period of time, as a change in supplier may require us to submit a new 510(k) submission. This could create supply disruptions that would materially adversely affect our reputation, product sales and profitability.

      For those components other than RF generators for which there are relatively few alternate sources of supply, we believe that we could establish additional or replacement sources of supply in a timely manner to meet the requirements of our business.

Patents and Proprietary Technology

      We believe that in order to maintain our competitive advantage, we must develop and maintain the proprietary aspects of our technologies. To this end, we file patent applications to protect technology, inventions and improvements that we believe are significant to the growth of our business. As of December 31, 2005, we had 30 issued U.S. patents and 30 pending U.S. patent applications, many of which relate to our Closure system and procedure, including, among other things, vein shrinkage and occlusion using various forms of energy, including RF; self expanding and collapsing electrodes; and use of single and double electrode array devices. We also have other issued U.S. patents and pending U.S. patent applications that are not directly related to our Closure system or procedure. Our issued patents related to our Closure system and procedure will expire between 2016 and 2018. As of December 31, 2005, we had 22 foreign patents providing protection in Australia, New Zealand, Singapore, Russia, China and Europe, and we had 35 pending foreign patent applications, many of which relate to our Closure technology, in Europe, Japan, Australia, Canada, New Zealand, Singapore, Russia and other countries.

      We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We also require our employees,

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consultants and advisors who we expect to work on our products to agree to disclose and assign to us all inventions conceived during their term of employment or contract, using our property, or which relate to our business. Despite measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. For a discussion of current litigation in which we have asserted that three companies that supply EVL products have infringed on our patents, see Part I, Item 3 — “Legal Proceedings” below. Finally, our competitors may independently develop similar technologies.

      The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the risk of an infringement claim against us grows. While we attempt to ensure that our products and methods do not infringe other parties’ patents and proprietary rights, our competitors may assert that our products, and the methods we employ, are covered by U.S. patents held by them. In addition, our competitors may assert that future products and methods we may market infringe their patents.

Competition

      Within the market for the treatment of venous reflux disease, we compete primarily against companies that have commercialized and sell EVL systems, but also against vein stripping surgery. Sclerotherapy and phlebectomy procedures that treat varicose veins at the surface of the skin are complementary to our Closure procedure because they do not treat saphenous vein reflux and may be used in conjunction with our Closure system.

      Vein stripping and ligation surgery has historically been the standard of care to address venous reflux disease. This procedure is well established among physicians who treat venous reflux disease, has extensive long-term data, is routinely taught to new surgeons and has remained relatively unchanged for the past 50 years.

      Competitors that have developed and market EVL systems include AngioDynamics, Inc., biolitec AG, Diomed Holdings, Inc., Dornier MedTech GmbH, New Star Lasers, Inc., doing business as CoolTouch Inc., and Vascular Solutions, Inc. Most of these competitors’ EVL systems use laser energy to occlude diseased veins by clotting the blood in the vein. New Star Lasers claims that its EVL system occludes diseased veins by causing the collagen in the vein wall to shrink, rather than by clotting the blood. Some of these competitors may have greater technical and marketing resources than we do, and they may succeed in developing products that would render our instruments obsolete or noncompetitive. In addition, the optical fiber used in EVL costs less than our Closure catheters and the EVL procedure is approximately five to ten minutes shorter than our Closure procedure.

      Additionally, we are aware that physicians have used foam sclerotherapy to treat great saphenous reflux. Similar to sclerotherapy, in this procedure the physician combines air with a sclerosant solution to create a foam for injection into the refluxing saphenous vein. The Food and Drug Administration has not approved the marketing of sclerosant solutions for this purpose. Provensis, a division of BTG plc, after having its clinical trial of sclerosant foam placed on clinical hold by the Food and Drug Administration, reported it is reformulating and re-testing its sclerosant foam. In July 2005, BTG plc announced that the Food and Drug Administration had lifted its hold on BTG plc’s conducting clinical trials of its sclerosant foam product.

      Because of the size of the potential market, we anticipate that new or existing competitors may develop competing products, procedures or clinical solutions. These products, procedures or solutions could prove to be more effective, safer or less costly than our Closure procedure. The introduction of new products, procedures or clinical solutions by competitors may result in price reductions, reduced margins or loss of market share and may render our products obsolete.

      We believe that the principal competitive factors in the market for the treatment of venous reflux include:

•  improved patient outcomes;

•  approval of reimbursement by healthcare payors;

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•  the publication of peer-reviewed clinical studies;

•  product quality;

•  cost effectiveness;

•  acceptance by leading physicians;

•  ease-of-use for physicians;

•  sales and marketing capability;

•  timing and acceptance of product innovation; and

•  patent protection.

Government Regulation

United States

      Our products are regulated in the United States as medical devices by the Food and Drug Administration and other regulatory bodies.

      Unless an exemption applies, each medical device we seek to commercially distribute in the United States will require either prior 510(k) clearance or prior pre-market approval from the Food and Drug Administration. The Food and Drug Administration can also impose restrictions on the sale, distribution or use of devices at the time of their clearance or approval, or subsequent to marketing.

      510(k) Clearance Pathway. When we are required to obtain a 510(k) clearance for a device that we seek to market, we must submit a pre-market notification to the Food and Drug Administration demonstrating that the device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 (or to a pre-1976 class III device for which the Food and Drug Administration has not yet called for the submission of pre-market approval applications). The Food and Drug Administration attempts to respond to a 510(k) pre-market notification within 90 days of submission of the notification, but the response may be a request for additional information or data, sometimes including clinical data. As a practical matter, pre-market clearance can take significantly longer, including up to one year or more.

      After a device receives 510(k) clearance for a specific intended use, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, will require a new 510(k) clearance or could require pre-market approval. The Food and Drug Administration requires each manufacturer to make this determination initially, but the Food and Drug Administration can review any such decision and can disagree with a manufacturer’s determination. If the Food and Drug Administration disagrees with a manufacturer’s determination that a new clearance or approval is not required for a particular modification, the Food and Drug Administration can require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements to our Closure system device that we believe do not require new 510(k) clearances. We have used the Special 510(k) submission option to obtain Food and Drug Administration clearance on products that have undergone minor modifications, as well as the traditional 510(k) clearance process for more substantial changes.

      Pre-market Approval Pathway. A pre-market approval application must be submitted if the device cannot be cleared through the 510(k) process. The pre-market approval process is much more demanding than the 510(k) pre-market notification process. A pre-market approval application must be supported by extensive data and information including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the Food and Drug Administration’s satisfaction the safety and effectiveness of the device. After the Food and Drug Administration determines that a pre-market approval application is complete, the Food and Drug Administration accepts the application and begins an in-depth

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review of the submitted information. The Food and Drug Administration, by statute and regulation, has 180 days to review an accepted pre-market approval application, although the review generally occurs over a significantly longer period of time, and can take up to several years.

      Clinical Trials. A clinical trial is almost always required to support a pre-market approval application and is sometimes required for a 510(k) pre-market notification. Clinical trials for a “significant risk” device require submission of an application for an investigational device exemption, or IDE, to the Food and Drug Administration. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Clinical trials for a significant risk device may begin once the IDE application is approved by the Food and Drug Administration and the Institutional Review Board, or IRB, overseeing the clinical trial. If the product is deemed a “non-significant risk” device under Food and Drug Administration regulations, only informed consent and approval from the IRB overseeing the clinical trial is required. Clinical trials are subject to extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an IRB at the relevant clinical trials site and in accordance with applicable regulations and policies including, but not limited to, the Food and Drug Administration’s Good Clinical Practice requirements. We, the Food and Drug Administration or the IRB at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. The results of clinical testing may not be sufficient to obtain approval of the product.

      Continuing Food and Drug Administration Regulation. After a device is placed on the market, numerous regulatory requirements apply, including:

•  Quality System Regulations, which require manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process;

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

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

•  notices of correction or removal, and recall regulations.

      The MDR regulations require that we report to the Food and Drug Administration any incident in which our product may have caused or contributed to a death or serious injury, or in which our product malfunctioned and, if the malfunction were to recur, it would likely cause or contribute to a death or serious injury. As of December 31, 2005 we have submitted 52 MDRs. In 39 cases, a thrombus, or blood clot, was noticed after varying lengths of time after our Closure procedure was performed. In five cases, the patient developed a pulmonary embolism. In March 2005, we received a report that a patient treated with a motorized varicose vein treatment device and our radiofrequency ablation catheter was admitted to a hospital and diagnosed with a pulmonary embolism 13 days after the procedure and died the following day. We reported this event to the Food and Drug Administration via the MDR process. This is the first report we have received of a patient death following treatment with our catheter or system. Pulmonary embolism is a known risk from any surgical procedure including our radiofrequency procedure, and is described in our risk factors and product labeling. We believe that none of these incidents were caused by design faults or defects in our product.

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

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      We have registered with the Food and Drug Administration as a medical device manufacturer and we have obtained a manufacturing license from the California Department of Health and Services. Compliance with regulatory requirements is assured through periodic, unannounced facility inspections by the Food and Drug Administration and the Food and Drug Branch of the California Department of Health Services, and these inspections may include the manufacturing facilities of our subcontractors. Failure to comply with applicable regulatory requirements can result in an enforcement action by the Food and Drug Administration, which may include any of the following sanctions:

•  Warning Letters or untitled letters;

•  fines, injunctions, and civil penalties;

•  recall or seizure of our products;

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

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

•  refusing our request for 510(k) clearance or pre-market approval of new products;

•  withdrawing 510(k) clearance or pre-market approvals that are already granted; and

•  criminal prosecution.

      The Food and Drug Administration has twice inspected our facility and Quality System, and the Food and Drug Branch of the California Department of Health Services has inspected our facility and Quality System once. In each of these inspections no significant incidents of non-compliance were found. We cannot assure you that we can maintain the same level of regulatory compliance in the future at our facility.

      Current Clearances. We have received 510(k) clearances to market our VNUS Closure system, our VNUS ClosureRFS, our VNUS ClosurePLEX and our VNUS RF Generator. Our VNUS VarEx Phlebectomy Instruments are exempt from the pre-market notification requirements. We do not presently have any 510(k) or pre-market approval submissions pending at the Food and Drug Administration.

European Union

      Our products are regulated in the European Union as medical devices per the European Union Directive (93/42/ EEC), also known as the Medical Device Directive. An authorized third party reviewer, a Notified Body, must approve our products for CE marking. Our Closure system was CE marked in 1998. Our RFS^tm family of products and accessory products are also CE marked. We cannot assure you that we will be able to obtain the CE mark approval for new products in the future. The CE mark is contingent upon our continued compliance with applicable regulations and the Quality System Requirements of the ISO 13485 standard. Maintenance of the CE mark, our license to ship into the European Union and other international jurisdictions, requires re-certification to the updated ISO 13485:2003 standard by June 1, 2006. We do not anticipate any issues in achieving our re-certification.

      The European Community has regulations similar to that of the Food and Drug Administration for the advertising and promotion of medical devices, clinical investigations and adverse events. We believe that we are in compliance with such regulations at this time.

Rest of the World

      Most major markets have different levels of regulatory requirements for medical devices. Our Closure system is currently approved/cleared/licensed/registered in Canada, South Korea, Singapore, China, Hong Kong, Australia, New Zealand, Mexico, Venezuela and South Africa. Modifications to the approved products require a new regulatory submission in all major markets. The regulatory requirements and the review time vary significantly from country to country. We cannot assure you that we will be able to obtain or maintain the required regulatory approvals. Our Closure system can also be marketed in the several other countries that do

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not regulate medical devices. We cannot assure you of the timing or successes of our efforts to obtain the required approvals for current and future products in the international markets.

Fraud and Abuse Laws

Anti-Kickback Statute

      The federal healthcare Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part under a federal healthcare program, such as the Medicare and Medicaid programs. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals or otherwise generate business involving goods or services reimbursed in whole or in part under federal healthcare programs, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions, such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, some kickback allegations have been claimed to violate the Federal False Claims Act, discussed in more detail below.

      The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, the Office of Inspector General of Health and Human Services, or OIG, has issued a series of regulations, known as the “safe harbors,” beginning in July 1991. These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG. Many states have adopted laws similar to the Anti-Kickback Statute, and some apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

      Government officials have focused recent enforcement efforts on marketing of healthcare services, among other activities, and recently have brought cases against individuals or entities with sales personnel who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business.

Stark Law

      The Ethics in Patient Referral Act of 1989, commonly referred to as the federal physician self-referral law or the Stark Law, prohibits physician referrals of Medicare patients to an entity for certain “designated health services” if the physician or an immediate family member has an indirect or direct financial relationship with the entity and no statutory or regulatory exception applies. Financial relationships include an ownership interest in, or compensation arrangement with, the entity. The Stark Law also prohibits an entity receiving a prohibited referral from billing and collecting for services rendered pursuant to such referral. “Designated health services” under the Stark Law include inpatient and outpatient hospital services.

      A person who engages in a scheme to circumvent the Stark Law’s prohibitions may be fined up to $100,000 for each such arrangement or scheme. In addition, anyone who presents or causes to be presented a claim to the Medicare program in violation of the Stark Law is subject to monetary penalties of up to $15,000 per claim submitted, an assessment of several times the amount claimed, and possible exclusion from participation in federal healthcare programs. In addition, claims submitted in violation of the Stark Law may be alleged to be subject to liability under the federal False Claims Act and its whistleblower provisions (as discussed below).

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      Several states in which we operate have enacted legislation that prohibits physician self-referral arrangements or requires physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Some of these statutes cover all patients and are not limited to Medicare beneficiaries. Possible sanctions for violating state physician self-referral laws vary, but may include loss of license and civil and criminal sanctions. State laws vary from jurisdiction to jurisdiction and, in a few states, are more restrictive than the federal Stark Law. Some states have indicated they will interpret their own self-referral statutes the same way that the Centers for Medicare and Medicaid Services interpret the Stark Law, but it is possible that states will interpret their own laws differently in the future.

False Claims Laws

      Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. Several healthcare companies have been prosecuted under the false claims laws for allegedly providing free products to customers with the expectation that the customers would bill federal programs for the products. The majority of states also have statutes or regulations similar to the federal false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

Fraud on a Health Benefit Plan and False Statements

      The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government-sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.

Privacy and Security

      HIPAA requires certain “covered entities” to comply with established standards regarding the privacy and security of protected health information, or PHI, and to use standardized code sets when conducting certain electronic transactions. HIPAA further requires that covered entities enter into agreements meeting certain regulatory requirements with their “business associates”, which effectively obligate the business associates to safeguard the covered entity’s PHI against improper use and disclosure. While not directly regulated by HIPAA, a business associate may face significant contractual liability pursuant to such an agreement if the business associate breaches the agreement or causes the covered entity to fail to comply with HIPAA. In the course of our business operations, we have become the business associate of one or more covered entities. Accordingly, we incur compliance-related costs in meeting HIPAA-related obligations under business associates agreements to which we are a party. Moreover, if we fail to meet our contractual obligations under such agreements, we may incur significant liability.

Employees

      As of December 31, 2005, we had 206 employees, consisting of 22 in research and development, clinical research and regulatory affairs, 62 in manufacturing and quality assurance, 101 in sales and marketing and 21 in general and administrative functions. From time to time we also employ independent contractors to support our engineering, marketing, sales and support, clinical, and general and administrative organizations.

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Financial Information

      The additional financial information required to be included in this Item 1 is incorporated herein by reference to Part II, Items 6 and 8 of this report.

Item 1A:     Risk Factors

We expect to derive substantially all of our future revenues from sales of our Closure system. If our Closure system fails to achieve substantial market acceptance, we may not generate sufficient revenues to continue our operations.

      Currently, our primary product offering is our Closure system, which is comprised of two components: our RF generator and our disposable catheter. We commercially introduced our Closure system in late 1998 in Europe and in 1999 in the United States. We launched a new generation RF generator in the fourth quarter of 2004. We expect that sales of our Closure system will continue to account for substantially all of our revenues for at least the next several years. Vein stripping and ligation surgery is the current standard of care for the treatment of venous reflux disease. This procedure is well established among physicians, has extensive long-term data, is routinely taught to new surgeons and has remained relatively unchanged for the past 50 years. By contrast, our Closure system is a relatively newer treatment procedure for venous reflux disease. We may have difficulty gaining widespread acceptance and maintaining widespread use of our Closure system among physicians for a number of reasons, including:

•  the results of any adverse clinical studies relating to the safety or effectiveness of our Closure system;

•  the cost of our Closure system products;

•  the discovery of design or manufacturing defects in our Closure system, including in the system’s software component;

•  perceived liability risks associated with the use of new technologies or procedures for venous reflux disease;

•  the failure of our Closure system to meet physician’s expectations;

•  the availability of alternative treatments or procedures that may be, or may be perceived as, more effective, safer, faster, easier to use or less costly than our Closure system; and

•  if reimbursement from U.S. healthcare payors for our Closure system is reduced, inadequate or discontinued.

If physicians do not adopt and utilize our Closure system, we will not achieve greater, or maintain our current, revenues or be profitable.

      Our success also depends on whether physicians view our Closure system as safe, effective and economically beneficial. We believe that physicians will not adopt and utilize our Closure system unless they determine, based on experience and other factors, that our Closure system is an attractive alternative to other available treatment methods, including vein stripping and endovenous laser ablation, or EVL. We also believe that recommendations and support of our Closure system by influential physicians and other healthcare providers are important for market acceptance and adoption.

      In addition, we recommend that a physician performing our Closure procedure use noninvasive ultrasound imaging during the procedure and for preparation and follow-up purposes. The purchase of ultrasound imaging equipment can cost $25,000 or more. Not all physicians who may otherwise be qualified to perform our Closure procedure have access to this equipment. Accordingly, physicians who do not have access to ultrasound imaging equipment may not find it sufficiently cost effective to begin performing our Closure procedure.

      After purchasing our Closure system, a physician needs to purchase a new Closure catheter for each procedure. Sales of our disposable Closure catheters are a major component of our overall revenues. If

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physicians do not continue to utilize our Closure system by reordering catheters at least at current levels, we will not achieve greater revenue, may not maintain our current revenue and our stock price may significantly decline.

Competition from existing and new products and procedures may decrease our market share and cause our revenues to decline.

      The medical device industry, including the market for venous reflux disease treatments, is highly competitive, subject to rapid technological change and significantly affected by new product introductions and market activities of other participants. For example, in 2002, the first EVL product was cleared for marketing in the United States.

      Several companies are marketing EVL systems for the treatment of venous reflux disease. These companies include AngioDynamics, Inc., biolitec AG, Diomed Holdings, Inc., Dornier MedTech GmbH, New Star Lasers, Inc., doing business as CoolTouch Inc., and Vascular Solutions, Inc. Most of these companies’ EVL systems for the treatment of venous reflux disease include laser fibers that are offered at lower prices than the price of our disposable catheters. These or other competitors may also succeed in developing additional products that are superior to our Closure system or that otherwise render our Closure system obsolete or noncompetitive. Some of these companies are larger than us or may enjoy competitive advantages, including:

•  products and procedures that are less expensive and take less time to perform;

•  perceived benefits in product performance and clinical outcomes;

•  established distribution networks;

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

•  established relationships with physicians, healthcare providers and payors; and

•  greater financial and other resources for product development, sales and marketing and patent litigation.

      Because of the size of the venous reflux market, we anticipate that new or existing competitors may develop competing products, procedures or clinical solutions. These products, procedures or solutions could prove to be more effective, faster, safer or less costly than our Closure procedure. The introduction of new products, procedures or clinical solutions by competitors may result in price reductions, reduced margins or loss of market share and may render our products obsolete. In addition, during the last fiscal year, we discounted the sales price of our catheters to improve our competitive position. Continued discounting in the future could cause our revenue or profit margins to decline and have an adverse effect on our results of operations.

We may experience significant fluctuations in our quarterly results and we project that we will not maintain our recent profitability.

      As of December 31, 2005, we had an accumulated deficit of approximately $35.8 million. Although we have been profitable for the last nine fiscal quarters, we cannot assure you that we will sustain profitability or that losses will not occur in the future. We intend to increase operating expenses in 2006 in areas such as patent litigation, research and development, and marketing and sales, which we project will result in a net loss for 2006. Also, fluctuations in our quarterly results of operations have and will continue to result from numerous factors, including:

•  physician and patient acceptance of our products and procedures;

•  the effect of competing technological and market developments;

•  seasonal demand;

•  delays or interruptions in manufacturing and shipping of our products;

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•  practices of insurance companies and Medicare with respect to reimbursement for our procedure and our products;

•  pricing of our products;

•  our ability to hire and train a sufficient number of sales and marketing personnel;

•  timing of new product introductions;

•  timing of orders received; and

•  our ability to train physicians in performing our Closure procedure.

      These factors, some of which are not within our control, may cause the price of our common stock to fluctuate substantially. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial results are not always meaningful and should not be relied upon as an indication of our future performance.

      In addition, we anticipate that our operating expenses will increase substantially in the foreseeable future as we expand our sales and marketing, manufacturing and product development activities and administrative staff. We estimate that our expansion efforts and higher expenses will be expensive enough to offset the effect of increased revenues and will lead to a net loss in 2006, which is likely to result in a decline in the market price for our common stock.

If we fail to meet the requirements of the NASDAQ Stock Market, our stock could be delisted.

      On January 11, 2006, we received a letter from the NASDAQ Stock Market, Inc., or NASDAQ, stating that, because we have two directors, rather than three, serving on the audit committee of our board of directors, we are not currently in compliance with NASDAQ Marketplace Rule 4350. This rule requires that the audit committee of a public company have three independent directors. The NASDAQ has notified us that, in accordance with Marketplace Rule 4350(d), we will be provided a cure period until the earlier of our next annual meeting of stockholders or May 17, 2006 in order to regain compliance. The governance and nominating committee of our board of directors is actively searching for qualified candidates to fill this position. In the event that we are unable to find a qualified candidate who is willing to serve on our audit committee within the cure period, we will not be in compliance with Marketplace Rule 4350 and NASDAQ may delist our securities.

If we fail to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting on a consolidated basis, our ability to provide accurate financial reports could be impaired and our stock price and investor confidence in our company could be materially and adversely affected.

      As a public company, we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm that both addresses management’s assessments and internal controls. Effective internal controls are necessary for us to provide reliable financial reports and help prevent fraud. To the extent that ineffective internal controls are part of our disclosure controls and procedures, there is also a risk that we would not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue a favorable assessment if we conclude that our internal controls over financial reporting are ineffective. We also cannot be certain that the measures we implement will ensure that we maintain adequate controls over our financial processes and reporting in the future. If we reach the conclusion that our controls are ineffective, fail to implement required new or improved controls or encounter difficulties in their implementation or our independent registered public accounting firm is unable to provide us with an unqualified report as required by Section 404, our business, results of operations or financial

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condition could be materially harmed, we could encounter difficulties attracting and retaining quality management personnel, or directors to serve on our audit committee, we could be subjected to costly litigation and increased legal and financial compliance costs and our stock price could decline significantly.

Changes in financial accounting standards to share-based payments are expected to have a significant effect on our reported results.

      The Financial Accounting Standards Board recently issued a revised standard that requires that we record compensation expense in the statement of operations for share-based payments, such as employee stock options, using the fair value method. The adoption of the new standard is expected to have a significant effect on our reported earnings, although it will not affect our cash flows, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the values of share-based payments. As a result, our adoption of the new standard in the first quarter of fiscal 2006 could negatively affect our stock price and our stock price volatility. In addition, the amount of such expense was not reflected in our historical financial results. Consequently, when we begin recording such compensation expense in 2006, the period over period comparisons will be significantly affected by the inclusion of such expense in 2006 and the absence of such expense from prior periods. If investors do not appropriately consider these changes in accounting rules, the price at which our stock is traded could be adversely affected.

Our intellectual property rights may not provide meaningful commercial protection for our products, which could enable third parties to use our technology or methods, or very similar technology or methods, and could reduce our ability to compete.

      Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We may need to assert claims or engage in litigation to protect our proprietary rights, which could cause us to incur substantial costs, could place significant strain on our financial resources, and divert the attention of management from our business. On July 21, 2005, we filed a Complaint for Patent Infringement against Diomed Holdings, Inc. and Diomed, Inc., and on October 12, 2005, we filed a Complaint for Patent Infringement against AngioDynamics, Inc. and Vascular Solutions, Inc., both in the United States District Court, Northern District of California, alleging infringement of four of our patents. For a discussion regarding this litigation, see Part I, Item 3 — “Legal Proceedings” below. We may incur substantial costs in pursuing this litigation and the outcome of this litigation is uncertain. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to design around our patents. In addition, although we have entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.

      Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Foreign countries generally do not allow patents to cover methods for performing surgical procedures. If our intellectual property does not provide significant protection against competition, our competitors could compete more directly with us, which could result in a decrease in our market share. All of these factors may harm our competitive position.

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If we do not execute effectively our plan to move our headquarters and manufacturing facility in 2006, we may experience interruptions or delays in our ability to manufacture our products and we may be unable to meet customer demand for our products.

      We have entered into a lease agreement for a 93,000 square foot facility located in San Jose, California. The term of the lease is March 1, 2006 through February 28, 2014. We plan to move our company headquarters and manufacturing operations from our present facility, also in San Jose, California, to this facility, and expect to begin occupying the new premises starting in March 2006. Before we are able to begin manufacturing and shipping product from our new facility, we will need to ensure that we are in compliance with the Food and Drug Administration’s Quality System Regulations and current Good Manufacturing Practices, as well as the ISO 13485:2003 quality management standard for medical devices. The lease at our current facility continues after March 1, 2006 and we plan to continue our manufacturing and shipping operations at our present facility until our new facility meets these compliance requirements. If we are unable to transition our manufacturing operations to our new facility as planned, we may experience delays or disruptions in our ability to manufacture and ship product as requested by our customers. If we fail to qualify our new facility or equipment or encounter major observations of flaws in our system by inspectors from federal, state or international registration bodies, we may have to correct any deficiencies before product can be shipped from our new facility, which may have a material, adverse effect on the results of our operations.

To successfully grow our business, we will need to attract additional qualified personnel and retain key personnel.

      To successfully grow our business, we will need to attract additional qualified personnel, including management and technical personnel. To succeed in the implementation of our business strategy, our management team must rapidly execute our sales strategy, achieve market acceptance for our Closure system and further develop products, while managing anticipated growth by implementing effective planning, manufacturing and operating processes. Managing this growth will require us to attract and retain additional management and technical personnel. Our offices are located in San Jose, California, where competition for employees with experience in the medical device industry is intense. We rely on direct sales employees to sell our Closure system in the United States. We have expanded our sales team and failure to adequately train our employees in the use and benefits of our products will prevent us from achieving our market share and revenue growth goals. We cannot assure you that we will be able to attract and retain the additional personnel necessary to grow and expand our business and operations. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and sales activities.

Inadequate levels of reimbursement for our Closure procedure from governmental or other third-party payors could affect the adoption or use of our Closure system and may cause our revenues to decline.

      Widespread adoption or use of our Closure system by the medical community is unlikely to occur if physicians do not receive sufficient reimbursement from payors for performing our Closure procedure. To date, our Closure procedure typically has been reimbursed by private healthcare insurance, managed care payors and Medicare. Many private payors use reimbursement amounts determined by the Centers for Medicare and Medicaid Services, or CMS, which administers the Medicare program, as a guideline in setting their reimbursement policies. Actions by CMS or other government agencies may diminish reimbursement payments to physicians, hospitals and outpatient surgery centers. Additionally, some private payors do not follow the Medicare guidelines and those payors may reimburse for only a portion of our procedure, or not at all. Even to the extent our Closure procedure is reimbursed by private and governmental payors, adverse changes in payors’ policies toward reimbursement for the procedure would also harm our ability to market and sell our Closure system.

      We are unable to predict all changes to the reimbursement methodologies that will be employed by private or governmental third-party payors. Reimbursement rates established for 2006 are not significantly different from the rates established for 2005. Due to a wide range of physician payment levels in 2004 for performing our Closure procedure in a hospital setting, the 2006 payment rates as established by CMS are less for some physicians performing our Closure procedure in a hospital setting than the rates paid in 2004. As a

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result, some physicians who currently perform our Closure procedure in a hospital may choose to perform the procedure in an office setting, a trend we experienced in 2005, which may delay catheter purchases, in which case our business may be harmed. Additionally, the establishment of reimbursement payment rates by CMS does not guarantee that private healthcare insurers will establish payment rates similar to or better than Medicare.

      For some governmental payors, such as the Medicaid program, reimbursement differs from state to state, and some state Medicaid programs may not reimburse for our procedure in an adequate amount, if at all. Any lack of private or governmental third-party payor coverage or inadequate reimbursement for procedures performed using our Closure system could harm our business and reduce our revenues.

      Our international success is dependent upon the availability of reimbursement within prevailing foreign healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the other countries in which we sell our Closure system, and these efforts are expected to continue. To the extent our Closure system has historically received reimbursement under a foreign healthcare payment system, such reimbursement has typically been significantly less than the reimbursement provided in the United States. If adequate levels of reimbursement from governmental and third-party payors outside of the United States are not attained and maintained, sales of our Closure system outside of the United States may decrease and we may fail to achieve or maintain significant non-U.S. sales.

Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.

      Byers Peak, Inc. is, and we expect for the foreseeable future will be, a sole-source supplier of our RF generators. We and our contract manufacturers also rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, including the Food and Drug Administration’s Quality System Regulations, equipment malfunction and environmental factors, any of which could delay or impede our ability to meet demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm our business, including:

•  suppliers may make errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in shipment of our products;

•  we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;

•  we may have difficulty locating and qualifying alternative suppliers for our disposable catheter components or RF generators;

•  our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements;

•  switching components may require product redesign and submission to the Food and Drug Administration of a pre-market supplement or possibly a separate pre-market approval, either of which could significantly delay production; and

•  our suppliers manufacture products for a range of customers, and fluctuations in demand for the products those suppliers manufacture for others may affect their ability to deliver components for us in a timely manner.

      Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive procedures.

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      To mitigate the risk of supply interruptions from a sole-source supplier, we may determine to maintain excess inventory of the products or components they supply. Managing our inventory levels is important to our cash position and results of operations. An excessive amount of inventory reduces our cash available for operations and may result in excess or obsolete materials. Inadequate inventory levels may make it difficult for us to meet customer product demand, resulting in decreased revenues. An inability to forecast future revenues or estimated life cycles of products may result in inventory-related charges that would negatively affect our gross margins and results of operations.

We depend on our officers and if we are not able to retain them or recruit additional qualified personnel, our business will suffer.

      We are highly dependent on our President and Chief Executive Officer, Brian E. Farley, and other officers. Due to the specialized knowledge each of our officers possesses with respect to our Closure system and our operations, the loss of service of one or more of these individuals could significantly affect our ability to operate and manage our business. We do not have any insurance in the event of the death or disability of any of these key personnel. Each of our officers may terminate their employment without notice and without cause or good reason. We cannot assure you that we will be able to retain other qualified personnel or recruit other qualified personnel in the event of any future terminations.

We lack published long-term randomized trial data comparing the efficacy of our Closure procedure with vein stripping and EVL. If future data proves to be inconsistent with our clinical results, our revenues may decline.

      Currently, there is no randomized trial data beyond two years comparing the long-term efficacy of our Closure procedure to alternative treatments. Additional long-term patient follow-up studies may indicate that our Closure procedure is not as safe and effective as vein stripping or EVL. Currently available published data from a comparative study of our Closure procedure versus vein stripping is limited to the two-year period following treatment. If new studies or comparative studies generate results that are not as favorable as our clinical results, our revenues may decline. Furthermore, physicians may not choose to purchase our Closure system and insurers may not choose to provide reimbursement for our Closure procedure until they receive additional published long-term clinical evidence and recommendations from prominent physicians that indicate our Closure system effectively treats venous reflux disease.

If we are unable to manufacture an adequate supply of our products, we could lose customers and revenues and our growth could be limited.

      In order for us to maintain and expand our business successfully within the United States and internationally, we must manufacture commercial quantities of components that comprise our Closure system in compliance with regulatory requirements at an acceptable cost and on a timely basis. Our anticipated growth may strain our ability to manufacture an increasingly large supply of our products. Manufacturing facilities often experience difficulties in scaling up production, including problems with production yields, process changes and quality control and assurance. In addition, precision manufacturing, as is required to manufacture our products, is subject to human error and it is possible that we may not follow our own internal controls when manufacturing our products. If we cannot scale or maintain our manufacturing operations appropriately, maintain control over expenses or otherwise adapt to anticipated growth, or if we have underestimated our future growth, we may not have the capability to satisfy market demand, which would harm our business.

If we become subject to product liability claims and our product liability insurance coverage is inadequate or inapplicable, we may be required to engage in costly litigation or pay significant damages and our business may be harmed.

      The manufacture and sale of our products may expose us to product liability claims and product recalls, including those that may arise from the misuse or malfunction of, or design flaws in, our products, or use of our products with components not manufactured by us. Our Closure procedure may result in a variety of

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complications, some of which are potentially serious. The most serious potential complications include a pulmonary embolism, which is a blood clot that travels to the lungs and may cause shortness of breath or even death, blood clots in deep veins, skin burns and nerve inflammation. Successful results using our Closure system are dependent upon physician technique. Although we inform physicians of the risks associated with failing to follow the proper technique when performing our Closure procedure, we cannot assure you that these efforts will prevent complications. For example, in September 2004, an article published in the Journal of Vascular Surgery reported the preliminary experience of a group of physicians that found a 16% incidence of blood clots extending into deep veins in the first 73 limbs they treated with our Closure procedure. If our procedure proves ineffective, patients may seek a refund of the cost of performing their procedure and damages for having to have been subjected to our procedure.

      We carry product liability insurance that is limited in scope and amount and may not be adequate to fully protect us against product liability claims. We could be required to pay damages that exceed our insurance coverage. Any product liability claim, with or without merit, could result in an increase in our product liability insurance rates or our inability to secure coverage on reasonable terms, if at all. Even in the absence of a claim, our insurance rates may rise in the future to a point where we decide not to carry this insurance. Even a meritless or unsuccessful product liability claim would be time consuming and expensive to defend and could result in the diversion of management’s attention from our business. In addition, product liability claims that call into question the safety or efficacy of our products could cause injury to our reputation and may potentially result in customers seeking alternative treatment methods. Any of these events could negatively affect our earnings and financial condition.

The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of management’s attention and require us to pay damages and discontinue selling our products.

      The medical device industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert that our system or the methods we employ in the use of our system are covered by U.S. or foreign patents held by them. This risk is exacerbated by the fact that there are numerous issued and pending patents relating to the use of RF energy in catheter-based procedures in the medical technology field. Because patent applications can take many years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our Closure system may infringe. There could also be existing patents of which we are unaware that one or more components of our system may inadvertently infringe. As the number of competitors in the market for the treatment of venous reflux disease grows, the possibility of inadvertent patent infringement by us or a patent infringement claim against us increases.

      Any litigation or claim against us may cause us to incur substantial costs, could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe them, we could be prevented from selling our Closure system unless we can obtain a license to use the technology or ideas covered by such patent or are able to redesign our Closure system to avoid infringement. A license may not be available on terms acceptable to us, or at all, and we may not be able to redesign our products to avoid any infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the Food and Drug Administration and other regulatory bodies, which would be time-consuming and expensive. If we are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business would suffer. In addition, our patents are vulnerable to various invalidity attacks, such as those based upon earlier patent applications, patents, publications, products or processes, which might invalidate or limit the scope of the protection that our patents afford.

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If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and penalties.

      Our products are classified as medical devices. Medical devices are subject to extensive regulation in the United States by the Food and Drug Administration and numerous other federal, state and foreign governmental authorities. Food and Drug Administration regulations specific to medical devices are wide ranging and govern, among other things:

•  design, development and manufacturing;

•  testing;

•  clinical trials in humans;

•  electronic product safety;

•  labeling;

•  storage;

•  marketing;

•  pre-market clearance or approval;

•  record keeping procedures;

•  advertising and promotion;

•  post-market surveillance and reporting of deaths, serious injuries or malfunctions; and

•  export.

      Our manufacturing processes are required to comply with the Food and Drug Administration’s Quality System Regulations, which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The Food and Drug Administration enforces its Quality System Regulations through periodic unannounced inspections and if our manufacturing facility fails a Quality System inspection, our operations and manufacturing could be interrupted. Failure to take adequate and timely corrective action in response to an adverse Quality System inspection could force a shutdown of our manufacturing operations or a recall of our products.

      Compliance with these regulations can be complex, expensive and time-consuming. If we fail to comply with such regulations, we could be subject to the imposition of injunctions, suspensions or loss of regulatory approvals, product recalls, orders for repair, replacement or refund, customer notifications, termination of distribution, product seizures or civil penalties. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities or those of our suppliers are possible. If we are required to shut down our manufacturing operations or recall any of our products, we may not be able to provide our customers with the quantity of products they require, and we could lose customers and suffer reduced revenue. If we are unable to obtain sufficient quantities of high quality products to meet customer demand on a timely basis, we could lose customers, our growth could be limited and our business could be harmed.

      We are also subject to medical device reporting, or MDR, regulations that require us to report to the Food and Drug Administration if our products cause or contribute to a death or serious injury or if they malfunction. As of December 31, 2005, we have submitted 52 medical device reports. In 39 cases, a thrombus, or blood clot, was noticed at varying lengths of time after our Closure procedure was performed. In five cases, the patient developed a pulmonary embolism. In March 2005, we received a report that a patient treated with a motorized varicose vein treatment device and our radiofrequency ablation catheter was admitted to a hospital and diagnosed with a pulmonary embolism 13 days after the procedure and died the following day. We also reported this event to the Food and Drug Administration via the MDR process. This is the only report we have received of a patient death following treatment with our catheter or system. We believe that none of these incidents were caused by design faults or defects in our products. However, it is possible that claims could be made against us alleging that our products are defective or unsafe. Our failure to comply with

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applicable regulatory requirements could result in an enforcement action by the Food and Drug Administration, which could include any of the above sanctions. In addition, the identification of serious safety risks could result in product recalls or withdrawal of our clearance or approval. The imposition of any one or more of these penalties could have a negative effect on our production, product sales and profitability.

      Our third party component manufacturers may also be subject to the same sanctions and, as a result, may be unable to supply components for our products. Any failure to retain governmental clearances or approvals that we currently hold or to obtain additional similar clearances or approvals could prevent us from successfully marketing our products and technology and could harm our operating results. Furthermore, changes in the applicable governmental regulations could prevent further commercialization of our products and technologies and could harm our business.

If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.

      Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and technologies. Accordingly, we may in the future pursue the acquisition of complementary businesses, products or technologies instead of developing them ourselves. We do not know if we will be able to successfully complete any acquisitions, or whether we will be able to successfully integrate any acquired business, product or technology or retain any key employees. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or technologies effectively, our business will suffer. In addition, any amortization or charges resulting from the costs of acquisitions could increase our expenses.

Any failure in our efforts to train physicians could reduce the market acceptance of our products and reduce our revenues.

      There is a learning process involved for physicians to become proficient in the use of our products. It is critical to the success of our sales efforts to adequately train a sufficient number of physicians and to provide them with adequate instruction in the use of our Closure system and RFS devices. Following completion of training, we rely on the trained physicians to advocate the benefits of our products in the broader marketplace. Convincing physicians to dedicate the time and energy necessary for adequate training is challenging, and we cannot assure you that we will be successful in these efforts. If physicians are not properly trained, they may misuse or ineffectively use our products. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could negatively affect our reputation and sales of our Closure system or RFS devices.

We spend considerable time and money complying with federal, state and foreign regulations and, if we are unable to fully comply with such regulations, we could face substantial penalties.

      We are directly or indirectly through our customers, subject to extensive regulation by both the federal government and the states and foreign countries in which we conduct our business. The laws that directly or indirectly affect our ability to operate our business include, but are not limited to, the following:

•  the Federal Food, Drug, and Cosmetic Act, which regulates the design, testing, manufacture, labeling, marketing, distribution and sale of prescription drugs and medical devices;

•  state food and drug laws;

•  the Sarbanes-Oxley Act of 2002;

•  the federal Anti-Kickback Law, which prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid Programs;

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•  Medicare laws and regulations that prescribe the requirements for coverage and payment, including the amount of such payment, and laws prohibiting false claims for reimbursement under Medicare and Medicaid;

•  the federal physician self-referral prohibition, commonly known as the Stark Law, which, in the absence of a statutory or regulatory exception, prohibits the referral of Medicare patients by a physician to an entity for the provision of designated healthcare services, if the physician or a member of the physician’s immediate family has a direct or indirect financial relationship, including an ownership interest in, or a compensation arrangement with, the entity and also prohibits that entity from submitting a bill to a federal payor for services rendered pursuant to a prohibited referral;

•  state laws that prohibit the practice of medicine by non-physicians and fee-splitting arrangements between physicians and non-physicians, as well as state law equivalents to the Anti-Kickback Law and the Stark Law, which may not be limited to government reimbursed items; and

•  the Federal Trade Commission Act and similar laws regulating advertising and consumer protection.

      If our past or present operations are found to be in violation of any of the laws described above or the other governmental regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations. If we are required to obtain permits or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, or curtailment or restructuring of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by applicable regulatory authorities or the courts, and their provisions are open to a variety of interpretations and additional legal or regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.

Product sales or introductions may be delayed or canceled as a result of the Food and Drug Administration’s regulatory process, which could cause our sales or profitability to decline.

      The process of obtaining and maintaining regulatory approvals and clearances to market a medical device from the Food and Drug Administration and similar regulatory authorities abroad can be costly and time consuming, and we cannot assure you that such approvals and clearances will be granted. Pursuant to Food and Drug Administration regulations, unless exempt, the Food and Drug Administration permits commercial distribution of a new medical device only after the device has received 510(k) clearance or is the subject of an approved pre-market approval application. The Food and Drug Administration will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. The pre-market approval application process is more costly, lengthy and uncertain than the 510(k) process, and must be supported by extensive data, including data from preclinical studies and human clinical trials. Because we cannot assure you that any new products, or any product enhancements, that we develop will be subject to the shorter 510(k) clearance process, significant delays in the introduction of any new products or product enhancement may occur. We cannot assure you that the Food and Drug Administration will not require a new product or product enhancement go through the lengthy and expensive pre-market approval application process.

      Delays in obtaining regulatory clearances and approvals may:

•  delay or eliminate commercialization of products we develop;

•  require us to perform costly procedures;

•  diminish any competitive advantages that we may attain; and

•  reduce our ability to collect revenues or royalties.

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      Although we have obtained 510(k) clearance from the Food and Drug Administration to market our Closure system, we cannot assure you that the clearance of our Closure system will not be withdrawn or that we will not be required to obtain new clearances or approvals for modifications or improvements to our products.

Modifications to our products may require new marketing clearances or approvals or require us to cease marketing or recall the modified products until such clearance or approvals are obtained.

      Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a pre-market approval application. The Food and Drug Administration requires every manufacturer to make this determination in the first instance, but the Food and Drug Administration may review any manufacturer’s decision. We have made modifications to elements of our Closure system and RFS devices for which we have not sought additional 510(k) clearance. The Food and Drug Administration may not agree with our decisions regarding whether new clearances or approvals are required. If the Food and Drug Administration disagrees with us, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval. In addition, we could be subject to significant regulatory fines or penalties. Furthermore, our products could be subject to recall if the Food and Drug Administration determines, for any reason, that our products are not safe or effective. Delays in receipt or failure to receive clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could reduce our sales, profitability and future growth prospects.

We sell our products internationally and are subject to various risks relating to such international activities which could harm our international sales and profitability.

      During the years ended December 31, 2004 and December 31, 2005, 4% and 4%, respectively, of our net revenues were attributable to international markets. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations. Our international business may be adversely affected by changing economic conditions in foreign countries. Because most of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become more costly to the international consumer and therefore less competitive in international markets, which could adversely affect our profitability. Furthermore, while currently only a small percentage of our sales are denominated in non-U.S. currency, this percentage may increase in the future, in which case fluctuations in exchange rates could affect demand for our products. Engaging in international business inherently involves a number of other difficulties and risks, including:

•  export restrictions and controls relating to technology;

•  the availability and level of reimbursement within prevailing foreign healthcare payment systems;

•  pricing pressure that we may experience internationally;

•  required compliance with existing and new foreign regulatory requirements and laws;

•  laws and business practices favoring local companies;

•  longer payment cycles;

•  difficulties in enforcing agreements and collecting receivables through foreign legal systems;

•  political and economic instability;

•  potentially adverse tax consequences, tariffs and other trade barriers;

•  international terrorism and anti-American sentiment;

•  difficulties and costs of staffing and managing foreign operations;

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•  changes in currency exchange rates; and

•  difficulties in enforcing intellectual property rights.

      Our exposure to each of these risks may increase our costs, lengthen our sales cycle and require significant management attention. We cannot assure you that one or more of these factors will not harm our business.

We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label” uses.

      If we are incorrect in our belief that our promotional materials and training methods regarding physicians are conducted in compliance with regulations of the Food and Drug Administration and other applicable regulations, and the Food and Drug Administration determines that our promotional materials or training constitutes promotion of an unapproved use, the Food and Drug Administration could request that we modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

      Some of our employees were previously employed at universities or other medical device companies. Although there are no claims currently pending against us, we may be subject to future claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of these former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research or sales personnel or their work product could hamper or prevent our ability to improve our products or sell our existing products, which would harm our business.

Our stock price may be volatile which may cause the value of our stock to decline or subject us to a securities class action litigation.

      The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

•  the depth and liquidity of the market for our common stock;

•  volume and timing of orders for our products;

•  developments generally affecting medical device companies;

•  the announcement of new products or product enhancements by us or our competitors;

•  changes in earnings estimates or recommendations by securities analysts;

•  investor perceptions of us and our business, including changes in market valuations of medical device companies;

•  actions by institutional or other large stockholders;

•  our results of operations and financial performance; and

•  general economic, industry and market conditions.

      In addition, the stock market in general, and the NASDAQ Stock Market and the market for medical devices in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading

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price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expense and the diversion of management’s attention from our business.

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

      If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. As of March 1, 2006, we had 14,999,259 shares of common stock outstanding. All of these shares are freely tradable without restriction or further registration under the federal securities laws, pursuant to Rule 144, 144(k) and 701, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act of 1933.

      Additionally, existing stockholders holding an aggregate of approximately 6,700,000 shares of common stock, including shares of common stock underlying warrants, have the right, subject to some conditions, to require us to file a registration statement with the SEC or include their shares in registration statements that we may file for ourselves or other stockholders. If we register their shares of common stock, they can freely sell those shares in the public market.

Our business may be harmed by a natural disaster, terrorist attacks or other unanticipated problems.

      Our manufacturing and office facilities are located in a single building in San Jose, California, which will continue to be true after we complete the planned move of these facilities. Despite precautions taken by us, a natural disaster such as fire or earthquake, a terrorist attack or other unanticipated problems at this building could interrupt our ability to manufacture our products or operate our business. These disasters or problems may also destroy our product inventories. While we carry insurance for certain natural disasters and business interruption, any prolonged or repeated disruption or inability to manufacture our products or operate our business could result in losses that exceed the amount of coverage provided by this insurance, and in such event could harm our business.

Our future capital needs are uncertain; we may need to raise additional funds in the future and such funds may not be available on acceptable terms, if at all.

      We believe that the net proceeds from our initial public offering, completed in October 2004, together with our current cash, cash equivalents and short-term investments, will be sufficient to meet our projected capital requirements for at least the next 12 months. Our capital requirements will depend on many factors, including:

•  the revenues generated by sales of our products;

•  the costs associated with expanding our manufacturing, marketing, sales and distribution efforts;

•  the rate of progress and cost of our research and development activities;

•  the costs of obtaining and maintaining Food and Drug Administration and other regulatory clearance of our products and products in development;

•  the effects of competing technological and market developments;

•  the number and timing of acquisitions and other strategic transactions; and

•  the cost of litigation and other legal actions.

      As a result of these factors, we may need to raise additional funds, and we cannot be certain that such funds will be available to us on acceptable terms, if at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to

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relinquish potentially valuable rights to our future products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to expand our operations, develop new products, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements.

Concentration of ownership among our existing directors, executive officers and principal stockholders may prevent new investors from influencing significant corporate decisions.

      Our executive officers, directors and greater than 10% stockholders directly or indirectly beneficially own or control a significant portion of our outstanding shares of common stock. These executive officers, directors and significant stockholders, acting as a group, have substantial control over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. Some of these persons or entities may have interests different than our other stockholders. For example, these stockholders may delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders, and these persons or entities may pursue strategies that are different from the wishes of other investors.

Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could cause our stock price to decline and prevent attempts by our stockholders to replace or remove our current management.

      In addition to the effect that the concentration of ownership by our officers, directors and significant stockholders may have, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may enable our management to resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Such provisions include:

•  our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;

•  advance notice requirements for stockholders to nominate individuals to serve on our board of directors or for stockholders to submit proposals that can be acted upon at stockholder meetings;

•  our board of directors is classified so that not all members of our board of directors are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

•  stockholder action by written consent is prohibited;

•  special meetings of our stockholders are permitted to be called only by a majority of our board of directors, the chairman of our board of directors or our president;

•  stockholders are not permitted to cumulate their votes for the election of directors;

•  newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors are to be filled only by majority vote of the remaining directors, even though less than a quorum is then in office;

•  our board of directors is expressly authorized to modify, alter or repeal our bylaws; and

•  stockholders are permitted to amend our bylaws only upon receiving at least 75% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

      We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting

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stock. These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delaying or impeding a merger, tender offer or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Item 1B:     Unresolved Staff Comments

      Not applicable.

Item 2:     Properties

      We are headquartered in San Jose, California, where we lease approximately 30,000 square feet under a lease expiring June 30, 2007. Our manufacturing operations are contained in our headquarters building. On November 15, 2005, we entered into a lease agreement for a new facility, also located in San Jose, California. We plan to move our company headquarters and manufacturing operations to this facility, which consists of 93,000 square feet. The term of the lease is March 1, 2006 through February 28, 2014. We believe that the new facilities are adequate for our current needs and the foreseeable future.

Item 3:     Legal Proceedings

      On July 21, 2005, we announced that we had filed a patent infringement action in the United States District Court, Northern District of California, against Diomed Holdings, Inc. and Diomed, Inc. (collectively, “Diomed”) for infringement of our U.S. Patent Nos. 6,258,084, 6,638,273, 6,752,803, and 6,769,433. Diomed markets endovenous laser ablation products for use in methods which we believe infringe several of our patents. We are seeking an injunction prohibiting Diomed from selling these products in addition to monetary damages. On September 15, 2005, Diomed answered our complaint and asserted counterclaims against us for a judicial declaration that the asserted patents are not infringed and are invalid. On October 12, 2005, we filed an amended complaint for patent infringement against AngioDynamics, Inc. (“AngioDynamics”) and Vascular Solutions, Inc. (“Vascular Solutions”) adding them as additional defendants in the lawsuit, which is entitled VNUS Medical Technologies, Inc. v. Diomed Holdings, Inc., et al. Case No. C05-02972 MMC (N.D. Cal.). AngioDynamics and Vascular Solutions market endovenous laser ablation products for use in methods which we believe infringe these same patents. We are seeking an injunction prohibiting AngioDynamics and Vascular Solutions from selling these products in addition to monetary damages. On October 31, 2005, Diomed filed a new answer and counterclaims against us for a judicial declaration that the asserted patents are not infringed, are invalid and are unenforceable. On December 9, 2005, AngioDynamics and Vascular Solutions both answered our amended complaint and asserted counterclaims against us for a judicial declaration that the asserted patents are not infringed and are invalid. We have answered and denied all counterclaims against us. The Court has scheduled a claims construction hearing for November 2006 and the trial in this matter to begin in October 2007.

Item 4:     Submission of Matters to a Vote of Security Holders

      There were no submissions of matters to a vote of security holders during the quarter ended December 31, 2005.

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PART II

Item 5:     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

      Our common stock has been traded on The NASDAQ Stock Market under the symbol “VNUS” since our initial public offering on October 20, 2004. The following table sets forth the intra-day high and low per share bid prices of our common stock from October 20, 2004 through December 31, 2005, as reported by The NASDAQ Stock Market.

		High		Low
Year Ended December 31, 2004
	October 20, 2004 — December 31, 2004	$	21.30	$	12.80
Year Ended December 31, 2005
	First Quarter		14.90		10.08
	Second Quarter		13.54		9.20
	Third Quarter		13.35		9.42
	Fourth Quarter		11.45		8.00

      As of March 1, 2006, there were approximately 88 holders of record of our common stock.

Dividend Policy

      We have never paid cash dividends on our stock and currently anticipate that we will continue to retain any future earnings to finance the growth of our business.

Securities Authorized for Issuance Under Equity Compensation Plans

      See the information incorporated by reference to Part III, Item 12 of this report for information regarding securities authorized for issuance under our equity compensation plans.

Issuer Purchases of Equity Securities

      Neither we, nor any affiliated purchaser of ours, acquired any of our equity securities during the year ended December 31, 2005.

Changes in Securities and Use of Proceeds

      We effected the initial public offering of our common stock pursuant to a Registration Statement on Form S-1 (File No. 333-117640) that was declared effective by the SEC on October 19, 2004. In connection with our initial public offering, we received net proceeds of approximately $54.0 million. To date, we have used approximately $16.0 million of the proceeds from our initial public offering for sales and marketing activities, approximately $2.7 million of the proceeds from our initial public offering for clinical research and product developing activities and approximately $11.1 million of the proceeds from our initial public offering for working capital and other general corporate purposes.

      We expect to use the remaining net proceeds from our initial public offering to fund our operations, including sales and marketing activities, clinical research and development and for working capital and other general corporate purposes. In addition, we may use a portion of the remaining net proceeds from our initial public offering to acquire products, technologies or businesses that are complementary to our own.

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Item 6:     Selected Consolidated Financial Data

      The following table sets forth our selected financial data. This information should be read together with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included under Part II, Item 7 of this report below. The statements of operations data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004, are derived from our audited financial statements included elsewhere in this report. The statements of operations data for the years ended December 31, 2002 and 2001, and the balance sheet data as of December 31, 2003, 2002 and 2001 are derived from our audited financial statements that are not included in this report. The historical results are not necessarily indicative of our operating results or financial position to be expected in the future.

			Years Ended December 31,
			2005		2004		2003			2002			2001
			(In thousands, except per share data)
			(Unaudited)
Consolidated Statements of Operations Data:
Net revenues			$	49,170	$	38,166	$	21,838		$	10,041		$	5,564
Cost of revenues(1)				12,311		9,542		6,311			3,646			3,262
Gross profit				36,859		28,624		15,527			6,395			2,302
Operating expenses:
	Sales and marketing(1)			20,173		16,235		11,997			7,728			5,602
	Research and development(1)			3,815		4,540		3,513			2,099			2,305
	General and administrative(1)			9,025		5,200		2,772			2,806			2,656
		Total operating expenses		33,013		25,975		18,282			12,633			10,563
Income (loss) from operations				3,846		2,649		(2,755	)		(6,238	)		(8,261	)
Interest income (expense) and other, net				1,779		439		171			283			(240	)
Income (loss) before income taxes				5,625		3,088		(2,584	)		(5,955	)		(8,501	)
Provision for income taxes				275		222		—			—			—
Net income (loss)			$	5,350	$	2,866	$	(2,584	)	$	(5,955	)	$	(8,501	)
Basic net income (loss) per share(2)			$	0.37	$	0.73	$	(1.97	)	$	(4.73	)	$	(7.09	)
Diluted net income (loss) per share			$	0.35	$	0.23	$	(1.97	)	$	(4.73	)	$	(7.09	)
Shares used in computing basic net income (loss) per share(2)				14,652		3,946		1,309			1,260			1,199
Shares used in computing diluted net income (loss) per share(2)				15,466		12,368		1,309			1,260			1,199

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(1)  Includes charges for amortization of deferred stock-based compensation in the following amounts:

		2005		2004		2003		2002		2001
Cost of revenues		$	65	$	90	$	56	$	51	$	576
Sales and marketing			264		525		257		342		491
Research and development			68		84		89		160		285
General and administrative			279		352		146		278		120
	Total	$	676	$	1,051	$	548	$	831	$	1,472

(2)  See Note 2 of the notes to our financial statements for a description of the method used to compute basic and diluted net income (loss) per share and shares used in computing basic and diluted net income (loss) per share.

	Years Ended December 31,
	2005			2004			2003			2002			2001
	(In thousands)
	(Unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	46,797		$	68,566		$	11,711		$	12,601		$	17,376
Short-term investments		25,718			—			—			—			—
Working capital		77,362			70,681			12,713			14,530			19,141
Total assets		85,339			77,972			17,789			17,885			22,442
Total accumulated deficit		(35,823	)		(41,173	)		(44,039	)		(41,455	)		(35,500	)
Total stockholders’ equity	$	79,522		$	72,308		$	14,241		$	16,214		$	21,299

Item 7:     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This financial review presents our operating results for each of the three years in the period ended December 31, 2005, and our financial condition at December 31, 2005. You should read the following discussion of our financial condition and results of our operations in conjunction with the information presented in our consolidated financial statements and the related notes to our consolidated financial statements. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Factors that could cause or contribute to these differences include those discussed in “Risk Factors” Part 1, Item 1A, as well as those discussed elsewhere. Our actual results could differ materially from those discussed here. The cautionary statements made herein should be read as applying to all related forward-looking statements wherever they appear herein.

Business Overview

      We are a leading provider of medical devices for the minimally invasive treatment of venous reflux disease, a progressive condition caused by incompetent vein valves in the legs. We also provide devices for use in the minimally invasive treatment of other peripheral vascular diseases, including devices for use in peripheral arterial bypass and arteriovenous graft procedures. Venous reflux disease results in symptoms such as leg pain, swelling, fatigue, skin ulcers and painful varicose veins. Our primary product line, the Closure system, consists of a proprietary RF generator and proprietary disposable endovenous catheters and devices to close diseased veins through the application of temperature-controlled RF energy. We estimate that in excess of 135,000 patients have been treated using our Closure system since 1999. In January 2005, we began a limited introduction of our ClosureRFS^tm family of products, which can be used for perforator vein ablation.

      Since our inception in January 1995, we have focused on the development of minimally invasive treatments for venous reflux disease. Until 1999, our operations consisted primarily of start-up activities, including the development of our Closure system, recruiting personnel and raising capital. We launched commercial sales of our Closure system in Europe in late 1998 and in the United States in late 1999.

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      For the year ended December 31, 2005, we generated net revenues of $49.2 million and net income of $5.4 million. As of December 31, 2005, we have incurred cumulative losses of approximately $35.8 million. From inception to September 30, 2003 we were not profitable. We were profitable beginning in the last quarter of 2003 and have been profitable in each of the eight quarters since. We are planning to make significant investments in our operations during 2006 and are projecting a net loss for that year.

      We market our Closure system through a direct sales organization in the United States and a subsidiary in Germany. We also market and sell our products through distributors throughout the world.

      Most of our U.S. customers are reimbursed by governmental and third-party payors, and that reimbursement is subject to periodic review and adjustment. Currently, our Closure procedure is covered by the policies of approximately 100 health insurers, representing over 220 million covered lives in the United States.

      Our net revenues are derived from the sale of disposable endovenous catheters and devices, RF generators and accessory products, which comprised 76%, 18% and 6% of our net revenues, respectively, in 2005. We expect that any shift in the percentage of net revenues derived from the sales of disposable catheters and RF generators during 2006 will be modest. We manufacture, package and label our disposable endovenous catheters and devices and outsource the manufacture of our RF generators and accessory packs.

      We have a diverse customer base of hospitals, physicians and physician groups, with no customer accounting for 10% or more of our net revenues or accounts receivable in the years ended December 31, 2005, 2004 and 2003.

Financial Operations Overview

      Net Revenues. Our net revenues are derived primarily from the sale of disposable endovenous catheters and RF generators. Our large installed base of RF generators facilitates a recurring revenue stream from the sale of disposable catheters. In addition, we derive a small portion of our revenues from the sale of accessory products.

      Cost of Revenues. Our cost of revenues represents the cost of materials, overhead, direct labor and delivery charges associated with the manufacture of disposable catheters, the purchase and delivery of RF generators, the purchase and delivery of accessory products, depreciation and amortization of stock-based compensation.

      Sales and Marketing Expenses. Sales and marketing expenses consist primarily of marketing personnel compensation, sales force incentive compensation, travel, promotional materials, advertising, patient education materials, other expenses incurred to provide reimbursement services and clinical training and amortization of deferred stock-based compensation.

      Research and Development Expenses. Research and development expenses consist primarily of personnel expenses, supplies, materials and expenses associated with product development, expenses associated with preclinical and clinical studies and amortization of related deferred stock-based compensation.

      General and Administrative Expenses. General and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration, legal fees, accounting fees, facilities expenses and amortization of related deferred stock-based compensation.

Critical Accounting Policies and Estimates

      The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we re-evaluate our judgments and estimates, including those related to doubtful accounts, income taxes and loss contingencies. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that are believed to be reasonable under the circumstances. Actual results

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may differ from these estimates under different assumptions or conditions. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies.

      Revenue Recognition. We recognize revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”). SAB No. 104 requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.

      We generally use contracts and customer purchase orders to determine the existence of an arrangement. We use shipping documents and third-party proof of delivery to verify delivery. We assess whether the fee is fixed or determinable based on the terms of the agreement associated with the transaction. In order to determine whether collection is reasonably assured, we assess a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. If we determine that collection is not reasonably assured, we defer the recognition of revenue until collection becomes reasonably assured, which is generally upon receipt of payment.

      Our domestic and international return policy allows customers to return unused products for a period of 30 and 60 days, respectively, subject to restocking fees. We make provisions for estimated returns and allowances based on historical levels. To date, returns and allowances have been insignificant. If actual returns and allowances were to deviate significantly from our estimates, our revenues could be adversely affected.

      Valuation of Inventory. We value our inventory at the lower of cost or market. We calculate an inventory reserve for estimated obsolescence or excess inventory based upon historical demand and assumptions about future demand for our products and market conditions. The allowance is measured as the difference between the current cost of the inventory and estimated market value and is charged to the provision for inventory obsolescence, which is a component of our cost of revenues. At the point of recognition of the loss, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology, we could be required to increase our inventory allowance and our gross profit could be adversely affected. Historically, we have not had a significant incidence of inventory obsolescence.

      Warranty Costs. At the time we recognize revenues, we establish an accrual for estimated warranty expense associated with revenues, recorded as a component of cost of revenues. We offer a one-year limited warranty on our RF generator which is included in the sales price of the generator. Our estimate of costs to service our warranty obligations is based upon the number of units sold, historical and anticipated cost per claim and rates of warranty claims. We primarily estimate material costs based upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. Our service agreement with our RF generator manufacturer provides us with a warranty on the generators for the shorter of 18 months from the date of shipment to us or 12 months from the date of first use. As such, our warranty expense is only required to cover those expenses not covered by our service agreement. If we experience an increase in warranty claims compared with our historical experience, or if costs of servicing warranty claims are greater than the expectations on which the accrual has been based, our gross profit could be adversely affected. Historically, our warranty claims have been immaterial.

      Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate the allowance based on the aging of account balances, collection history, credit quality of the customer and current economic conditions that may affect a customer’s ability to pay.

      We generally maintain a diverse customer base that mitigates the risk of concentration with one customer. However, if the overall condition of the healthcare industry were to deteriorate, resulting in an impairment of our customers’ ability to make payments, significant additional allowances could be required.

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Additionally, if a major customer’s creditworthiness deteriorates, or if actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our financial results.

      Income Taxes. We account for income taxes under the liability method. Under this method, we determine deferred tax assets and liabilities at the balance sheet date based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses and gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in our financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax bases of an asset or a liability and its reported amount on the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, we must establish a valuation allowance to reduce the deferred tax assets to the amounts expected to be realized.

      As part of the process of preparing our financial statements, we are required to estimate our income taxes. This process involves estimating our current tax liability, together with assessing temporary differences that may result in deferred tax assets. Our effective tax rates differ from the statutory rates due to the impact of net operating loss carryforwards, research and experimentation tax credits, state taxes and the tax impact of non-U.S. operations. Because we have had a history of net losses from inception through the year ended December 31, 2003, and because we are projecting a net loss in 2006, recovery of our deferred tax assets is in doubt and we have established a valuation allowance against the entire balance of our deferred tax assets. If we are able to demonstrate consistent profitability in the future, and we are able to establish that recovery is more likely than not, we would reduce our valuation allowance at a future date.

      Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and other tax authorities; however, we are not currently under audit by any taxing jurisdiction. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

      Stock-Based Compensation Expense. We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and Financial Accounting Standards Board Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under APB Opinion No. 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of our stock and the amount an employee must pay to acquire the stock. SFAS No. 123 defines a “fair value” based method of accounting for an employee stock option or similar equity investment. In the fourth quarter of 2005, we began awarding restricted stock units as well as stock options to employees.

      We award a limited number of stock options and warrants to non-employees. We account for non-cash stock-based expense from options and warrants issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Pronouncement No. 96-18, “Accounting for Equity Investments that are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” For these options and warrants, we recognize the non-cash stock-based expense over the service period of the underlying awards, based on an estimate of their fair value on the vesting dates using the Black-Scholes option-pricing model. All unvested options issued to non-employees are marked to market until such options vest.

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      We amortize stock-based compensation relating to stock option awards on the accelerated vesting method over the vesting periods of the stock options, which is generally four years. The accelerated vesting method provides for vesting of portions of the overall awards at interim dates and results in accelerated vesting as compared to the straight-line method. We amortize stock-based compensation relating to restricted stock awards on a straight-line basis over the vesting periods of the restricted stock units. From January 1, 2003 through December 31, 2005, we recorded unearned stock-based compensation of $4.4 million. Employee stock-based compensation amortized to expense during the three-year period was $2.0 million. At December 31, 2005, we had a total of $2.5 million remaining to be amortized over the vesting periods of the stock options and restricted stock units.

      We have evaluated Financial Accounting Standards Board Statement No. 123(R) (“SFAS No. 123(R)”) and Staff Accounting Bulletin No. 107 (“SAB No. 107”), which require companies to expense the fair value of employee stock options and other forms of stock-based compensation. We expect that the adoption of SFAS No. 123(R) and SAB No. 107 in the first quarter of fiscal year 2006 will have a material impact on our consolidated results of operations and net earnings per share. We expect to apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis. We also expect to apply the modified prospective method, which requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of fiscal year 2006.

      Based on the closing price of our common stock on December 30, 2005 of $8.38 per share, the intrinsic value of the options and restricted stock units outstanding at December 31, 2005 was $5.1 million, of which $2.1 million was vested and $3.0 million was unvested.

Recent Accounting Pronouncements

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of the provisions of SFAS No. 151 is not expected to have a material adverse impact on our financial position and results of operations.

      In December 2004, the FASB issued FASB Statement No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) revises FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. SFAS No. 123(R) is effective for our quarter ending March 31, 2006, and will apply to our employee stock option plans. We expect that the adoption of SFAS No. 123(R) in the first quarter of fiscal year 2006 will have a material impact on our consolidated results of operations and net earnings per share. We expect to apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees. Upon adoption of SFAS 123(R), we expect to apply the modified prospective transition method, except for those options that were measured using the minimum value method under FAS 123, for which we expect to apply the prospective transition method. Upon adoption, all stock-based compensation will be amortized on a straight-line basis.

      In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share Based Payment” (“SAB No. 107”). SAB No. 107 provides guidance for the implementation of SFAS No. 123(R) with respect to valuation techniques, expected volatility and expected term for valuing employee stock options among other matters. The provisions of SAB No. 107 will be effective for us when we adopt SFAS No. 123(R) during the first quarter of fiscal 2006.

      In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a Replacement of Accounting Principles Board Opinion No. 20 (“APB 20”) and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires companies to apply voluntary changes in accounting principles on

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a retrospective basis unless it is impracticable to do so. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. Accordingly, companies must apply the new accounting principle to previously issued financial statements as if that principle had always been used. SFAS No. 154’s retrospective-application requirement replaces APB 20’s requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS No. 154 are effective for accounting changes made in fiscal years beginning after December 15, 2005 and will only impact the financial statements in periods in which a change in accounting principle is made.

      In September 2005, the Emerging Issues Task Force (“EITF”) issued EITF Statement 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). The Task Force reached a consensus that leasehold improvements acquired in a business combination or that are placed in service significantly after, and not contemplated at or near the beginning of, the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 applies to leasehold improvements that are purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of the provisions of EITF 05-6 did not have a material impact on our financial position and results of operations for 2005 and is not expected to have a material impact on our financial position and results of operations for 2006.

      In October 2005, the FASB issued FASB Staff Position 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP 13-1”). FASB Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” requires that rental costs associated with operating leases be allocated on a straight-line basis in accordance with FASB Statement No. 13, “Accounting for Leases,” and FASB Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” starting with the beginning of the lease term. FSP 13-1 provides additional guidance regarding how a lessee should determine the beginning of the lease term. FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense in operating income, if the lessee has the right to control the use of the leased asset during and after the construction period. The guidance in FSP 13-1 is effective for the first reporting period beginning after December 15, 2005 and is not expected to have a material impact on our financial position and results of operations.

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Results of Operations

      The following table sets forth our results of operations expressed as percentages of revenues, for the years ended December 31, 2005, 2004, and 2003:

			Years Ended December 31,
			2005			2004			2003
Net revenues				100.0	%		100.0	%		100.0	%
Cost of revenues				25.0			25.0			28.9
Gross profit				75.0			75.0			71.1
Operating expenses:
	Sales and marketing			41.0			42.6			54.9
	Research and development			7.8			11.9			16.1
	General and administrative			18.3			13.6			12.7
		Total operating expenses		67.1			68.1			83.7
Income (loss) from operations				7.9			6.9			(12.6	)
Interest income and other, net				3.6			1.2			0.8
Income (loss) before provision for income taxes				11.5			8.1			(11.8	)
Provision for income taxes				0.6			0.6			—
Net income (loss)				10.9	%		7.5	%		(11.8	)%

      The following table sets forth the percentage of net revenues derived from the sale of disposable endovenous catheters and devices, RF generators and accessories for the years ended December 31, 2005, 2004 and 2003:

	Years Ended December 31,
	2005			2004			2003
Catheters		76	%		77	%		72	%
RF Generators		18	%		18	%		24	%
Accessories		6	%		5	%		4	%
		100	%		100	%		100	%

      The following table sets forth the percentage of net revenues from domestic and international sales for the years ended December 31, 2005, 2004, and 2003:

	Years Ended December 31,
	2005			2004			2003
United States		96	%		96	%		96	%
Europe		3	%		3	%		3	%
Other International		1	%		1	%		1	%
		100	%		100	%		100	%

      Net Revenues. Net revenues increased 29%, or $11.0 million, to $49.2 million in 2005 from $38.2 million in 2004. Net revenues increased 75%, or $16.4 million, to $38.2 million in 2004, from $21.8 million in 2003. The increase in 2005 was primarily due to an increase in the number of disposable catheters and RF generators sold as a result of our increased direct selling and marketing efforts in the United States, as well as the limited launch of the ClosureRFS^tm family of products and additional single use accessories. These increases were partially offset by a 7% decline in the average U.S. selling price of disposable catheters and an 11% decline in the average selling price of U.S. RF generators. The increase in 2004 was also due to an increase in the number of disposable catheters and RF generators sold as a result of our increased direct selling and marketing efforts in the United States. However, these increases were not significantly offset by discounts

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in average selling price. We expect net revenues to continue to increase in 2006, though at a more modest rate. We also expect modest price discounting to continue due to competitive pressures. Our product revenue mix in 2005 was comparable to 2004, and we expect the mix to be approximately the same in 2006. International sales accounted for 4% of net revenues in 2005, the same as in 2004 and 2003. We expect that the percent of net revenues from international sales will remain at approximately 4% of net revenues in 2006.

      Gross Profit. Cost of revenues increased 29%, or $2.8 million, to $12.3 million in 2005, from $9.5 million in 2004. Cost of revenues increased 51%, or $3.2 million, to $9.5 million in 2004, from $6.3 million in 2003. The increases in 2005 and 2004 were primarily due to the increased number of disposable catheters and RF generators sold, partially offset by lower direct material, labor and overhead costs per unit in the production of disposable catheters. Gross profit in 2005 was $36.9 million, or 75% of net revenues, compared to $28.6 million, or 75% of net revenues in 2004 and $15.5 million, or 71% of net revenues in 2003. The increases in gross profit margin percentage in 2005 and 2004 were primarily due to the allocation of manufacturing overhead over a greater number of units produced, as well as reduced direct costs of production per unit of our disposable catheters. These increases were partially offset by decreases in average selling prices of our disposable catheters and RF generators. We expect prices of our disposable catheters to continue to decline in 2006. However, we do not expect an offsetting decline in cost due to higher fixed manufacturing overhead related to the new facility and increased compensation cost due to the adoption of SFAS No. 123(R). Increased catheter production volume is expected to absorb some portion of the higher overhead expense. As a result, we expect that our gross margin percentage in 2006 will be less than our gross margin percentage in 2005.

      Sales and Marketing Expenses. Sales and marketing expenses increased 24%, or $4.0 million, to $20.2 million in 2005, from $16.2 million in 2004. Sales and marketing expenses increased 35%, or $4.2 million, to $16.2 million in 2004, from $12.0 million in 2003. The increase in 2005 was primarily the result of increased payroll and related expenses of $2.8 million incurred related to a 33% increase in sales and marketing personnel as well as a $583,000 increase in product promotion and advertising expenses. The increase in 2004 was primarily due to increased payroll and related expenses of $3.3 million as compared to 2003 incurred in connection with the addition of employees to our marketing and direct sales organization, increased amortization of deferred stock compensation expenses of $269,000 and increased product promotion and advertising expenses of $270,000. We expect sales and marketing expenses to increase in 2006 as we continue to invest in marketing programs and begin expensing stock-based compensation in accordance with SFAS No. 123(R).

      Research and Development Expenses. Research and development expenses decreased 16%, or $725,000, to $3.8 million in 2005, from $4.5 million in 2004. Research and development expenses increased 29%, or $1.0 million, to $4.5 million in 2004, from $3.5 million in 2003. The decrease in 2005 was primarily due to a 26% decrease in project-related expenses of $404,000 as well as $256,000 in research and development expenses that were charged to product cost to support improvements in the manufacturability of existing products. The increase in 2004 of $1.0 million was primarily due to increased payroll and related expenses of $936,000 and clinical study expenses of $161,000 in support of our new RFG generator product development. The new generator began shipping in November 2004. We expect research and development expenses to increase in 2006 as we continue to invest in the development of new products and consequently, the need to conduct new clinical studies. Expenses will also increase due to expensing of stock-based compensation in accordance with SFAS No. 123(R).

      General and Administrative Expenses. General and administrative expenses increased 74%, or $3.8 million, to $9.0 million in 2005, from $5.2 million in 2004. General and administrative expenses increased 88%, or $2.4 million, to $5.2 million, from $2.8 million in 2003. The increase in 2005 was primarily due to consulting and accounting fees related to compliance with regulations applicable to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, in the amount of $1.8 million, increased personnel expenses of $1.2 million, increased insurance expenses of $356,000, as well as $89,000 in bank fees and $111,000 in bad debt expense. Also, $127,000 was incurred in legal fees to pursue patent infringement litigation. The increase in 2004 was primarily due to increased professional fees of $1.2 million, increased personnel expenses of $656,000, increased amortization of deferred stock-based compensation of $178,000 as well as an increase in

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insurance expenses and state and local taxes. These increases were driven primarily by the costs of becoming, and operating as, a public company. We expect general and administrative expenses to increase at a more modest rate in 2006 primarily due to continued patent litigation expenses. Expenses will also increase due to expensing of stock-based compensation in accordance with SFAS No. 123(R).

      Interest Income and Other, Net. Interest income and other, net, increased 305%, or $1.3 million, to $1.8 million in 2005, from $439,000 in 2004. Interest income and other, net, increased 155%, or $267,000, to $439,000 in 2004, from $171,000 in 2003. The increase in 2005 was primarily due to increased average cash and short-term investment balances in 2005 and to a lesser extent, higher interest rates earned on our interest bearing accounts. The increase in 2004 was also primarily due to increased average cash balances in 2004 and to a lesser extent, higher interest rates earned on our interest-bearing accounts. We expect interest income and other to increase slightly in 2006 primarily due to higher interest rates earned on our interest-bearing accounts.

      Provision for Income Taxes. We have significant net operating loss (“NOL”) and tax credit carryforwards. The $275,000 provision for income taxes in 2005 represents the estimated state income taxes payable, reduced for the use of NOL and tax credit carryforwards. In 2004, we recorded $222,000 in income tax provision. We recorded no provision for income taxes in 2003 due to net operating losses. We expect to use NOL and other tax carryforward amounts to the extent taxable income is earned in 2006 and beyond. At December 31, 2005, we had federal NOL carryforwards of approximately $28.8 million and state NOL carryforwards of approximately $21.9 million. The federal NOL carryforwards expire in various periods through 2022 and the state NOL carryforwards expire in various periods through 2012. We have federal and state research tax credit carryforwards of approximately $951,000 and $1.1 million, respectively. The federal research credits expire in various periods through 2022 and the state research credits can be carried forward indefinitely. The amounts of and the benefits from NOL and credit carryforwards may be impaired in some circumstances. Events that may cause such limitations include, but are not limited to, sale of equity securities and other changes in ownership. We have historically experienced significant operating losses and operate in an industry subject to rapid technological changes. Additionally, we are projecting a net loss in 2006. Therefore, we believe there is sufficient uncertainty regarding our ability to generate future taxable income and use these NOL and tax credit carryforwards such that a full valuation allowance for deferred tax assets was required at December 31, 2005. We will retain a full valuation allowance until such time that we determine it is more likely than not that we will recognize the benefit of the deferred tax assets. Prior to the release of the valuation allowance, to the extent that we are profitable, our effective tax rate should continue to be substantially less than the applicable statutory rates. Following the release of our valuation allowance, our effective tax rate will approximate the applicable statutory rates.

Liquidity and Capital Resources

	December 31,
	2005			2004			2003
Cash and cash equivalents	$	46,797		$	68,566		$	11,711
Short-term investments		25,718			—			—
Working capital		77,362			70,681			12,713
Net cash provided by (used in) operating activities		3,750			3,229			(680	)
Net cash used in investing activities		(26,669	)		(525	)		(238	)
Net cash provided by financing activities		1,150			54,151			28

      We incurred net losses from inception through September 30, 2003 of $44.1 million and have been profitable in each subsequent quarter. We are projecting a net loss in 2006. We currently invest our cash and cash equivalents in several large money market funds consisting of debt instruments of the U.S. government, its agencies and high-quality corporate issuers with original maturities of less than three months. Investments designated as short-term consist of cash invested in debt instruments of the U.S. government and its agencies and high-quality corporate issuers with original maturities greater than three months and remaining maturities less than one year. Since inception, we have financed our operations primarily through private sales of

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convertible preferred stock and common stock, and cash generated from operations. In addition, we raised approximately $54.0 million, net of issuance costs, from our initial public offering of common stock in October 2004.

      Net cash provided from operating activities was $3.8 million in 2005. Cash provided from operating activities in 2005 was attributable primarily to net income after adjustments for non-cash depreciation and amortization charges, partially offset by increases in accounts receivable, inventories, prepaid expenses, accounts payable and other long-term assets. The increases in accounts receivable, inventories and accounts payable were driven by a 29% increase in revenue, to $49.2 million in 2005 from $38.2 million in 2004. The increase in prepaid and other expenses primarily reflects an increase in interest receivable on short-term investments. We did not have any short-term investments in 2004. The increase in other long-term assets reflects the deposit made on our new facility which we expect to occupy in March 2006. Under the terms of our new lease, the landlord has agreed to provide an allowance for the planning and construction of tenant improvements in the amount of approximately $1.0 million. The leasehold improvements made with the allowance will be recorded as deferred rent, which will be reflected as cash provided by operating activities due to an increase in other liabilities in 2006. An offsetting amount will be recorded as leasehold improvements. Net cash provided from operating activities was $3.2 million in 2004. Cash provided from operating activities in 2004 was attributable primarily to net income after adjustments for non-cash depreciation and amortization charges, partially offset by increases in accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities. The increases in accounts receivable, inventories, accounts payable and accrued liabilities were driven by a 75% increase in revenue, to $38.2 million in 2004 from $21.8 million in 2003. Net cash used in operating activities was $680,000 for the year ended 2003. Cash used in operating activities in 2003 was attributable primarily to net losses after adjustment for non-cash depreciation and amortization charges and increases in accounts receivable associated with higher revenues, partially offset by increased accounts payable balances. Inventory balances increased $773,000 in 2004 from 2003 primarily to accommodate the increased demand for our disposable catheters.

      Net cash used in investing activities was $26.7 million, $525,000 and $238,000 for the years ended 2005, 2004 and 2003, respectively. For 2005, cash used in investing activities primarily reflects purchases of short-term investments, and to a much lesser degree, purchases of property and equipment primarily for research and development, information technology, manufacturing operations and facility improvements. For 2004 and 2003, cash used in investing activities primarily reflects purchases of property and equipment primarily for research and development, information technology, manufacturing operations and facility improvements. Under the terms of our new lease, the landlord has agreed to provide an allowance for the planning and construction of tenant improvements in the amount of approximately $1.0 million. The leasehold improvements made with the allowance will be recorded as leasehold improvements upon being placed into service, which will be reflected as a use of cash in investing activities in 2006. An offsetting amount will be recorded as deferred rent.

      Net cash provided by financing activities was $1.2 million in 2005, $54.2 million in 2004, and $28,000 in 2003. The 2005 amount reflects proceeds received upon the exercise of stock options. The 2004 amount primarily reflects proceeds received upon our initial public offering in October 2004 and the exercise of stock options. Net cash provided by financing activities was $28,000 in 2003. The amounts in 2003 reflect proceeds received upon the exercise of stock options.

      We expect that marketing, research and general and administrative expenses will increase in absolute dollars in connection with the growth of our business and our operations as a public company, including consulting expenses associated with compliance with SFAS No. 123(R) and patent litigation. We also expect to incur additional costs and expenses related to our new corporate headquarters. We expect to fund these increased costs and expenditures from our cash flows from operations and our existing cash balance. However, our future capital requirements depend on numerous forward-looking factors. These factors include, but are not limited to, the following: the revenues generated by sales of our products; the costs associated with expanding our manufacturing, marketing, sales and distribution efforts; the rate of progress and cost of our research and development activities; patent litigation; the costs of obtaining and maintaining Food and Drug

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Administration and other regulatory clearances of our products and products in development; the effects of competing technological and market developments; the costs associated with being a public company, including consulting expenses associated with compliance with SFAS No. 123(R) and Section 404 of the Sarbanes-Oxley Act of 2002 and the number and timing of acquisitions and other strategic transactions.

      We believe that our current cash and cash equivalents, and cash we expect to generate from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, we may require additional funds in order to further develop the marketplace, complete clinical studies and deliver new products to our customers. We may seek financing of future cash needs through the sale of equity securities and debt. We cannot assure you that additional financing will be available when needed or that, if available, such financing will be obtained on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our business operations or may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity or debt securities, substantial dilution to existing stockholders may result.

Off-Balance Sheet Arrangements

      We did not have any off-balance sheet arrangements as of December 31, 2005.

Contractual Obligations and Capital Expenditure Requirements

      The following table summarizes our contractual obligations as of December 31, 2005:

	Payments Due by Period
Contractual Obligations and Capital Expenditure			Less Than		1-3		3-5		More Than
Requirements	Total		1 Year		Years		Years		5 Years
	(In thousands)
Operating lease obligations	$	8,737	$	816	$	2,850	$	3,594	$	1,477
Inventory purchase commitments		2,074		2,074		—		—		—
Leasehold improvements		2,180		2,180		—		—		—
Total	$	12,991	$	5,070	$	2,850	$	3,594	$	1,477

Item 7A:     Quantitative and Qualitative Disclosures about Market Risk

      To date, substantially all of our sales have been denominated in U.S. dollars. Approximately 2% of total sales have been denominated in currencies other than U.S. dollars. Accordingly, we believe that there is currently no material exposure to risk from changes in foreign currency exchange rates.

      Our exposure to interest rate risk at December 31, 2005 is related to our investment of our excess cash and cash equivalents in debt instruments of the U.S. government and its agencies, and in high-quality corporate issuers via several large money market funds. The funds maintain an average investment maturity of 90 days or less. Due to the short-term nature of these investments, we believe that there is currently no material exposure to interest rate risk arising from our investments.

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Item 8:      Consolidated Financial Statements and Supplementary Data

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		50
Consolidated Balance Sheets at December 31, 2005 and 2004		52
Consolidated Statements of Operations for each of the years in the three year period ended December 31, 2005		53
Consolidated Statements of Stockholders’ Equity for each of the years in the three year period ended December 31, 2005		54
Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 2005		55
Notes to Consolidated Financial Statements		56
Schedule II, Valuation and Qualifying Accounts and Reserves		77

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

VNUS Medical Technologies, Inc.

      We have completed an integrated audit of VNUS Medical Technologies, Inc.’s 2005 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of VNUS Medical Technologies, Inc. and its subsidiary at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the accompanying financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of this Annual Report, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation

50

of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 14, 2006

51

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

			December 31,
			2005			2004
			(In thousands,
			except share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	46,797		$	68,566
	Short-term investments			25,718			—
	Accounts receivable, net of allowance for doubtful accounts of $308 and $195, respectively			6,448			5,347
	Inventories			2,915			1,644
	Prepaid expenses and other current assets			1,265			677
		Total current assets		83,143			76,234
Property and equipment, net				1,363			1,096
Other assets				833			642
		Total assets	$	85,339		$	77,972
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,233		$	1,242
	Accrued liabilities			4,548			4,311
		Total current liabilities		5,781			5,553
Other liabilities				36			111
		Total liabilities		5,817			5,664
Commitments and contingencies (Note 9)
Stockholders’ equity:
	Convertible preferred stock: $0.001 par value; 10,000,000 authorized; none issued and outstanding at December 31, 2005 and December 31, 2004, respectively			—			—
	Common stock: $0.001 par value; 56,666,666 authorized, 14,899,989 and 14,371,439 issued and outstanding at December 31, 2005 and 2004, respectively			15			14
	Additional paid-in capital			117,924			114,698
	Deferred stock-based compensation			(2,544	)		(1,231	)
	Accumulated other comprehensive loss			(50	)		—
	Accumulated deficit			(35,823	)		(41,173	)
		Total stockholders’ equity		79,522			72,308
		Total liabilities and stockholders’ equity	$	85,339		$	77,972

The accompanying notes are an integral part of these consolidated financial statements.

52

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

			Year Ended December 31,
			2005		2004		2003
			(In thousands, except share and
			per share data)
Net revenues			$	49,170	$	38,166	$	21,838
Cost of revenues(1)				12,311		9,542		6,311
Gross profit				36,859		28,624		15,527
Operating expenses
	Sales and marketing(1)			20,173		16,235		11,997
	Research and development(1)			3,815		4,540		3,513
	General and administrative(1)			9,025		5,200		2,772
		Total operating expenses		33,013		25,975		18,282
Income (loss) from operations				3,846		2,649		(2,755	)
Interest income and other income, net				1,779		439		171
Income (loss) before provision for taxes				5,625		3,088		(2,584	)
Provision for income taxes				275		222		—
Net income (loss)			$	5,350	$	2,866	$	(2,584	)
Net income (loss) per share (see Note 2)
Basic			$	0.37	$	0.73	$	(1.97	)
Diluted			$	0.35	$	0.23	$	(1.97	)
Weighted average number of shares used in per share calculations (see Note 2)
Basic				14,652		3,946		1,309
Diluted				15,466		12,368		1,309

(1)  Includes the following charges for stock-based compensation:

	Year Ended December 31,
	2005		2004		2003
Cost of revenues	$	65	$	90	$	56
Sales and marketing		264		525		257
Research and development		68		84		89
General administrative		279		352		146
	$	676	$	1,051	$	548

The accompanying notes are an integral part of these consolidated financial statements.

53

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

		Convertible																	Accumulated
		Preferred Stock						Common Stock					Additional			Deferred			Other						Total
													Paid-In			Stock-Based			Comprehensive			Accumulated			Shareholders’
		Shares			Amount			Shares			Amount		Capital			Compensation			Loss			Deficit			Equity
		(In thousands, except share and per share data)
Balances at December 31, 2002			25,186,747		$	25			1,308,028		$	1	$	58,267		$	(624	)	$	—		$	(41,455	)	$	16,214
	Exercise of stock options		—			—			21,341			—		28			—			—			—			28
	Deferred stock compensation for stock option grants		—			—			—			—		401			(366	)		—			—			35
	Fair value of options issued for services		—			—			—			—		22			—			—			—			22
	Cancellation of options		—			—			—			—		(32	)		32			—			—			—
	Amortization of deferred stock-based compensation		—			—			—			—		—			526			—			—			526
Net loss			—			—			—			—		—			—			—			(2,584	)		(2,584	)
Balances at December 31, 2003			25,186,747			25			1,329,369			1		58,686			(432	)		—			(44,039	)		14,241
	Exercise of warrants for Series C preferred stock		33,006			—			—			—		—			—			—			—			—
	Net exercise of warrants for common stock		—			—			2,602			—		—			—			—			—			—
	Exercise of stock options		—			—			82,871			—		149			—			—			—			149
	Deferred stock compensation for stock option grants		—			—			—			—		1,701			(1,701	)		—			—			—
	Fair value of options issued for services		—			—			—			—		181			—			—			—			181
	Cancellation of options		—			—			—			—		(32	)		32			—			—			—
	Conversion of preferred stock to common stock		(25,219,753	)		(25	)		8,957,389			9		16			—			—			—			—
	Issuance of common stock in initial public offering								4,000,000			4		53,998			—			—			—			54,002
	Repurchase of restricted stock common stock		—			—			(792	)		—		(1	)		—			—			—			(1	)
	Amortization of deferred stock-based compensation		—			—			—			—		—			870			—			—			870
Net income			—			—			—			—		—			—			—			2,866			2,866
Balances at December 31, 2004			—			—			14,371,439			14		114,698			(1,231	)		—			(41,173	)		72,308
	Unrealized loss on short-term investments																			(50	)					(50	)
	Exercise of stock options		—			—			528,550			1		1,149			—			—			—			1,150
	Deferred stock compensation for stock option grants		—			—			—			—		10			(10	)		—			—			—
	Deferred stock compensation for restricted stock units (RSUs)		—			—			—			—		2,264			(2,264	)		—			—			—
	Fair value of options issued for services		—			—			—			—		62			—			—			—			62
	Cancellation of options		—			—			—			—		(284	)		284			—			—			—
	Cancellation of RSU’s		—			—			—			—		(63	)		63			—			—			—
	Amortization of deferred stock-based compensation		—			—			—			—		—			614			—			—			614
	Tax benefit on exercise of employee stock options		—			—			—			—		88			—			—			—			88
Net income			—			—			—			—		—			—			—			5,350			5,350
Balances at December 31, 2005			—		$	—			14,899,989		$	15	$	117,924		$	(2,544	)	$	(50	)	$	(35,823	)	$	79,522

The accompanying notes are an integral part of these consolidated financial statements.

54

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Year Ended December 31,
			2005			2004			2003
			(In thousands)
Cash flows from operating activities:
Net income (loss)			$	5,350		$	2,866		$	(2,584	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
	Depreciation and amortization			634			420			351
	Non-employee stock compensation and amortization of deferred stock-based compensation			676			1,051			583
	Tax benefit on the exercise of employee stock options			88			—			—
	Changes in operating assets and liabilities:
	Accounts receivable			(1,101	)		(2,018	)		(1,485	)
	Inventories			(1,271	)		(773	)		560
	Prepaid expenses and other assets			(588	)		(435	)		19
	Other long-term assets			(191	)		2			—
	Accounts payable			(9	)		358			472
	Accrued and other liabilities			162			1,758			1,404
		Net cash provided by (used in) operating activities		3,750			3,229			(680	)
Cash flows from investing activities:
	Purchase of short-term investments			(34,468	)		—			—
	Sale/maturities of short-term investments			8,700			—			—
	Purchase of property and equipment			(901	)		(525	)		(238	)
		Net cash used in investing activities		(26,669	)		(525	)		(238	)
Cash flows from financing activities:
	Proceeds from the sale of common stock			—			55,800			—
	Stock issuance costs			—			(1,798	)		—
	Proceeds from the exercise of stock options for common stock			1,150			149			28
		Net cash provided by financing activities		1,150			54,151			28
Net (decrease) increase in cash and cash equivalents				(21,769	)		56,855			(890	)
Cash and cash equivalents at the beginning of the year				68,566			11,711			12,601
Cash and cash equivalents at the end of the period			$	46,797		$	68,566		$	11,711
Supplemental disclosure of cash flow information:
	Deferred stock-based compensation			1,927			1,669			334

The accompanying notes are an integral part of these consolidated financial statements.

55

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company

      VNUS Medical Technologies, Inc. (the “Company”) was incorporated in Delaware on January 4, 1995. The Company is a leading provider of medical devices for the minimally invasive treatment of venous reflux disease, a progressive condition caused by incompetent vein valves in the legs. The Company also provides devices for use in the minimally invasive treatment of other peripheral vascular diseases, including devices for use in peripheral arterial bypass and arteriovenous graft procedures. In late 1998, the Company introduced its Closure^® system in Europe. In late 1999, the Company introduced its Closure system in the United States.

      The Company has funded its operations through the issuance of convertible preferred stock and common stock, and through cash provided from operations. During 1999, the Company commenced volume shipment of its product and emerged from the development stage. Although no longer in the development stage, the Company continues to be subject to certain risks common to companies in similar stages of development, including its dependence on a limited product line; limited manufacturing, marketing and sales experience; reliance on key individuals; potential competition from larger, more established companies and uncertainty of future profitability. The Company completed its initial public offering of common stock in October 2004.

Note 2 — Summary of Significant Accounting Policies

      Principles of consolidation and basis of presentation. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions have been eliminated in consolidation. Certain prior-period amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current presentations.

      Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

      Net Income (Loss) Per Share. The Company computes basic net income (loss) per share by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period less the weighted average number of common shares subject to repurchase by the Company. Basic net income (loss) per share excludes the dilutive effect of potential stock options including stock options, unvested common stock subject to repurchase, restricted stock units and warrants. Diluted income per share reflects the dilution of potential common shares outstanding during the period. In computing diluted income per share, the Company adjusts share count by assuming that all in-the-money options and restricted stock units are exercised and that the Company repurchases shares with the proceeds of these hypothetical exercises. The Company further assumes that any unamortized deferred stock-based compensation is also used to repurchase shares. In determining the hypothetical shares repurchased, the Company uses the average stock price for the period.

56

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table sets forth the computation of basic and diluted net income (loss) attributable to common stockholders per common share (in thousands, except per share data):

		Year Ended December 31,
		2005		2004			2003
Numerator:
Net income (loss) available to common stockholders, basic and diluted		$	5,350	$	2,866		$	(2,584	)
Denominator:
Weighted average common shares outstanding			14,652		3,947			1,318
Weighted average unvested common shares subject to repurchase			—		(1	)		(9	)
Weighted average common shares outstanding used in computing basic net income (loss) per share			14,652		3,946			1,309
Effect of dilutive securities:
	Stock options, restricted stock units, warrants, weighted average convertible preferred stock, weighted average unvested common shares subject to repurchase agreements, deferred stock-based compensation		814		8,422			—
Total shares, diluted			15,466		12,368			1,309
Net income (loss) per common share:
	Basic	$	0.37	$	0.73		$	(1.97	)
	Diluted	$	0.35	$	0.23		$	(1.97	)

      The following outstanding convertible preferred stock and warrants, common stock warrants, employee stock options and unvested common shares subject to repurchase were excluded from the computation of diluted net income per share as they had an antidilutive effect (in thousands):

	Year Ended
	December 31,
	2005		2004		2003
Convertible preferred stock (assuming conversion, using appropriate conversion ratio, to common shares)		—		—		8,957
Convertible preferred stock warrants (assuming conversion, using appropriate conversion ratio, to common shares)		—		—		13
Common stock warrants		—		—		147
Stock options		214		38		1,389
Unvested common shares subject to repurchase agreements		—		—		4
		214		38		10,510

      Cash and Cash Equivalents. The Company considers all highly-liquid investment instruments with an original maturity of three months or less to be cash equivalents. As of December 31, 2005 and 2004, the Company held its cash and cash equivalents in a checking account, a money market account and investment accounts with several high-credit-quality financial institutions.

      Short-Term Investments. Short-term investments, which include money market instruments, debt instruments of the U.S. government and its agencies and high-quality corporate issuers, are classified as available-for-sale and reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss).

57

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additionally, the Company assesses whether an other-than-temporary impairment loss on its investments has occurred due to declines in fair value or other market conditions. The Company has not identified any such impairment losses to date.

      Fair Value of Financial Instruments. The Company’s financial instruments, including cash and cash equivalents, short-term investments, prepaid expenses and other current assets, accrued liabilities and accounts payable are carried at cost, which approximates fair value because of the short-term nature of those instruments.

      Inventory. Inventory is stated at the lower of cost or market, cost being determined using the first-in, first-out method. Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors.

      Property and Equipment. Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or the lease term of the respective assets, if applicable. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease.

      The depreciation and amortization period for property and equipment categories are as follows:

Furniture and fixtures	3 years
Computer and office equipment	3 years
Laboratory equipment	5 years
Purchased software	3 to 5 years

      Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Repairs and maintenance are charged to operations as incurred.

      Long-Lived Assets. The Company evaluates its long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows. The Company has not identified any such impairment losses to date.

      Revenue Recognition. The Company sells its disposable catheters and radio frequency, or RF, generators, to end-users in the United States and in international markets. Catheters and RF generators are also sold through distributors in international markets. The Company also sells RF generators to third-party leasing companies in the United States. These third-party leasing companies provide long-term lease financing to end-users. The Company does not provide such long-term lease financing to end-users.

      Revenues from the sale of the Company’s disposable catheters and RF generators are recognized when persuasive evidence of an arrangement exists, title has transferred, the seller’s price is fixed or determinable and collectibility is reasonably assured. The Company’s domestic sales return policy allows customers to return unused products for a period within 30 days subject to restocking fees. The Company’s international sales return policy allows customers to return unused products for a period within 60 days subject to restocking fees. The Company makes provisions for estimated returns and allowances based on historical levels. To date, returns and allowances have not been significant.

      Warranty. The Company provides a one year limited warranty on its RF generator which is included in the sales price of the generator. The Company provides for the estimated future costs of repair, upgrade or replacement upon shipment of the product. The warranty accrual is based upon historical trends in the volume

58

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of product returns within the warranty period and the cost to repair or replace the equipment. The warranty expense has been insignificant for all periods presented.

      Research and Development Costs. Costs related to research, design and development of products are charged to research and development expense as incurred.

      Advertising Expenses. Advertising costs are expensed as incurred. Advertising expenses incurred in the years ended December 31, 2005, 2004 and 2003 were $321,000, $229,000 and $184,000 respectively.

      Stock-based Compensation. The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No 25,” in accounting for its employee stock options. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

      Pro forma information regarding net income (loss) is presented as if the Company recorded compensation expense based on the fair value of stock-based awards in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123,” is as follows (in thousands, except per share data):

	Year Ended
	2005			2004			2003
Net income (loss), as reported	$	5,350		$	2,866		$	(2,584	)
Add: Employee stock-based compensation expense determined under the intrinsic method, net of tax		502			809			526
Deduct: Stock-based compensation expense determined under fair value based method, net of tax		(1,938	)		(925	)		(627	)
Pro forma net income (loss)	$	3,914		$	2,750		$	(2,685	)
Weighted average number of shares used in per share calculation
Basic		14,652			3,946			1,309
Diluted		15,218			12,368			1,309
Pro forma net income (loss) per share
Basic	$	0.27		$	0.70		$	(2.05	)
Diluted	$	0.26		$	0.22		$	(2.05	)

      The above pro forma effects on net income (loss) may not be representative of the effects on future results as options granted typically vest over four or five years and additional option grants are expected to be made in future years.

      The value of each option granted was estimated on the date of grant with the following weighted average assumptions:

	Year Ended
	2005			2004			2003
Risk free interest rates		3.71 – 4.45	%		2.64 – 3.62	%		1.95 – 3.04	%
Expected Life (in years)		3.70			4.00			4.00
Dividend Yield		—			—			—
Volatility		51.59	%		65.00	%		—	*

*  Note: Prior to the Company’s initial public offering on October 20, 2004, the minimum value method was used.

59

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Based on the above assumptions, the weighted average fair value of employee stock option grants was $10.82, $6.85, and $2.50 per share for the years ended December 31, 2005, 2004 and 2003, respectively.

      The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,”, which require that such equity instruments are recorded at their fair value on the measurement date, which is typically the date of grant. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest.

      Comprehensive Income (Loss). Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners, and is to include unrealized gains and losses that have historically been excluded from net income and loss and reflected instead in equity. Unrealized gains and losses on short-term investments are recorded in other comprehensive income (loss) as a component of equity for 2005.

      Income Taxes. The Company accounts for income taxes under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

      Recent Accounting Pronouncements. In November 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of the provisions of SFAS No. 151 is not expected to have a material adverse impact on the Company’s financial position and results of operations.

      In December 2004, the FASB issued FASB Statement No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) revises FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. SFAS No. 123(R) is effective for the Company’s quarter ending March 31, 2006, and will apply to the Company’s employee stock option plans. The Company has evaluated the requirements of SFAS No. 123(R) and expects that the adoption of SFAS No. 123(R) in the first quarter of fiscal year 2006 will have a material impact on the Company’s consolidated results of operations and net earnings per share. The Company expects to apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees. Upon adoption of SFAS 123(R), the Company expects to apply the modified prospective transition method, except for those options that were measured using the minimum value method under FAS 123, for which the Company expects to apply the prospective transition method. Upon adoption, all stock based compensation will be amortized on a straight-line basis.

      In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share Based Payment” (“SAB No. 107”). SAB No. 107 provides guidance for the implementation of SFAS No. 123(R) with respect to valuation techniques, expected volatility and expected term for valuing employee stock options among other matters. The provisions of SAB No. 107 will be effective for the Company when the Company adopts SFAS No. 123(R) during the first quarter of fiscal 2006.

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a Replacement of Accounting Principles Board Opinion No. 20 (“APB 20”) and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires companies to apply voluntary changes in accounting principles on a retrospective basis unless it is impracticable to do so. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. Accordingly, companies must apply the new accounting principle to previously issued financial statements as if that principle had always been used. SFAS No. 154’s retrospective-application requirement replaces APB 20’s requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS No. 154 are effective for accounting changes made in fiscal years beginning after December 15, 2005 and will only impact the financial statements in periods in which a change in accounting principle is made.

      In September 2005, the Emerging Issues Task Force issued EITF Statement 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). The Task Force reached a consensus that leasehold improvements acquired in a business combination or that are placed in service significantly after, and not contemplated at or near the beginning of, the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 applies to leasehold improvements that are purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of the provisions of EITF 05-6 did not have a material impact on the Company’s financial position and results of operations in 2005 and is not expected to have a material impact on the Company’s financial position and results of financial operations for 2006.

      In October 2005, the FASB issued FASB Staff Position 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP 13-1”). FASB Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” requires that rental costs associated with operating leases be allocated on a straight-line basis in accordance with FASB Statement No. 13, “Accounting for Leases,” and FASB Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” starting with the beginning of the lease term. FSP 13-1 provides additional guidance regarding how a lessee should determine the beginning of the lease term. FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense in operating income, if the lessee has the right to control the use of the leased asset during and after the construction period. The guidance in FSP 13-1 is effective for the first reporting period beginning after December 15, 2005 and is not expected to have a material impact on the Company’s financial position and results of operations.

Note 3 — Concentration of Credit Risk

      Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts in several financial institutions in the United States and internationally. Deposits held with financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any material losses on its deposits of cash and cash equivalents.

      Concentrations of credit risk with respect to short-term investments are limited due to the Company’s cash investment policies which limit cash investments to short-term, low-risk investments. Short-term investments include money market instruments, debt instruments of the U.S. government and its agencies and high-quality corporate issuers, all with maturity dates less than one year.

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many geographies. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable. No single customer represents more than 10% of the accounts receivable amount or revenues for any period presented.

      The Company relies on Byers Peak, Inc. to manufacture its RF generators. The Company expects that Byers Peak, Inc. will be a sole-source supplier of the RF generators for the foreseeable future. The Company also relies on sole-source suppliers to manufacture some of the components used in its disposable catheters. The Company’s manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, including the Food and Drug Administration’s Quality System Regulations, equipment malfunction and environmental factors, any of which could delay or impede its ability to meet demand.

Note 4 — Operating Segment and Geographic Information

      The Company is organized and operates as one operating segment to provide medical devices for the minimally invasive treatment of venous reflux disease and uses one measure of profitability to manage its business. In accordance with FASB Statement No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”), the chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. Since the Company operates in one segment and provides one group of similar products and services, all financial segment and product line information required by SFAS No. 131 can be found in the consolidated financial statements.

      The following is a summary of the percentage of the Company’s net revenues by geographic region and by product within the Company’s single segment.

	Years Ended
	December 31,
	2005			2004			2003
United States		96	%		96	%		96	%
Europe		3	%		3	%		3	%
Other International		1	%		1	%		1	%
		100	%		100	%		100	%

Catheters	76	%	77	%	72	%
RF Generators	18	%	18	%	24	%
Accessories	6	%	5	%	4	%
	100	%	100	%	100	%

      All long-lived assets are located in the United States.

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5 — Short-Term Investments

      At December 31, 2004, the Company had no short-term investments.

      At December 31, 2005, short-term investments were classified as available-for-sale securities and are reported at fair value as follows (in thousands):

		December 31, 2005
		Gross		Gross		Gross
		Amortized		Unrealized		Unrealized			Estimated
		Cost		Gains		Losses			Fair Value
Short-term investments
	Certificates of deposit and money market funds	$	688	$	—	$	(3	)	$	685
	Commercial paper		987		1		—			988
	Corporate debt securities		19,629		—		(38	)		19,591
	Asset backed securities		4,464				(10	)		4,454
		$	25,768	$	1	$	(51	)	$	25,718

      Proceeds from the sales of available-for-sale securities and gross realized gains and gross realized losses on available-for-sale securities were immaterial during the twelve months ended December 31, 2005.

      All of the investments in the table above that were in an unrealized loss position at December 31, 2005 were in a continuous unrealized loss position for less than 12 months and these unrealized losses were considered not to be other-than-temporary due primarily to their nature, quality and short-term holding.

      The estimated fair values of short-term investments classified by date of contractual maturity at December 31, 2005 are as follows (in thousands):

	December 31,
	2005
One year or less	$	21,264
One to five years		4,454
	$	25,718

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6 — Balance Sheet Components

      The following tables provide details of selected balance sheet components (in thousands):

	December 31,
	2005			2004
Prepaid expenses and other current assets
Prepaid expenses	$	902		$	663
Interest receivable		314			—
Other		49			14
	$	1,265		$	677
Inventories
Finished goods	$	1,528		$	626
Raw materials and sub-assemblies		893			876
Radio-frequency generators		494			142
	$	2,915		$	1,644
Property and equipment, net
Furniture and fixtures	$	158		$	138
Computers and office equipment		637			493
Leasehold improvements		1,107			924
Laboratory equipment		962			735
Purchased software		674			442
Construction in progress		95			—
		3,633			2,732
Less: Accumulated depreciation and amortization		(2,270	)		(1,636	)
	$	1,363		$	1,096
Accrued liabilities
Sales commissions and bonuses	$	1,975		$	2,402
Payroll and related expenses		718			692
Taxes payable, including taxes on earnings		424			490
Deferred revenue		222			145
Other		1,209			582
	$	4,548		$	4,311

Note 7 — Interest Income and Other Income, Net

	December 31,
	2005			2004		2003
Interest income	$	1,852		$	351	$	135
Foreign exchange gain (loss)		(152	)		46		35
Other		79			42		1
	$	1,779		$	439	$	171

64

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8 — Income Taxes

      At December 31, 2005, the Company had net operating loss, or NOL, carryforwards of approximately $28.8 million and $21.9 million for federal and state jurisdictions, respectively, available to reduce future taxable income. The federal NOL carryforwards expire in various periods through 2022 and the state NOL carryforwards expire in various periods through 2012. The Company had federal and state research tax credit carryforwards of approximately $951,000 and $1.1 million, respectively. The federal research credits expire in various periods through 2022 and the California research credits can be carried forward indefinitely.

      The difference between the U.S. federal statutory income tax rate (benefit) and the Company’s effective tax rate were as follows:

	Years Ended December 31,
	2005			2004			2003
U.S. federal statutory tax rate		35.00	%		35.00	%		(34.00	)%
State income taxes, net of federal benefit		5.58	%		6.40	%		(5.83	)%
Meals/ entertainment and other permanent adjustments		1.57	%		—			—
Deferred tax assets utilized during the year		(48.60	)%		(59.03	)%		(16.58	)%
Net increase in temporary tax adjustments		1.25	%		4.72	%		54.38	%
Amortization of book stock-based compensation		4.77	%		11.14	%		8.45	%
AMT tax credit not benefited		2.69	%		—			—
Other		2.64	%		8.93	%		(6.42	)%
		4.90	%		7.16	%		0.00	%

      Deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2005			2004
Net operating loss carryovers	$	11,166		$	12,470
Tax credits		1,857			1,661
Accruals, allowances and reserves		515			564
Capitalization & cost recovery		711			494
Other		136			134
Net deferred tax assets		14,385			15,323
Valuation allowance		(14,385	)		(15,323	)
Net deferred tax assets	$	—		$	—

      Due to uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company has provided a full valuation allowance, and, therefore, no benefit has been recognized for the NOL and other deferred tax assets.

      The Tax Reform Act of 1986 limits the use of NOL and tax credit carryforwards in the case of an “ownership change” of a corporation. Any ownership changes, as defined, may restrict utilization of carryforwards.

Note 9 — Commitments and Contingencies

      Leases. The Company leases office space and equipment under non-cancelable operating leases with various expiration dates through 2014. Rent expense for the years ended December 31, 2005, 2004 and 2003

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

was $869,000, $815,000, and $672,000, respectively. In November 2005, the Company entered into a lease agreement with Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company, for a facility located in San Jose, California. The Company plans to move its headquarters and manufacturing operations to this facility, which consists of 93,000 square feet. The term of the lease is March 1, 2006 through February 28, 2014, which includes a rent holiday period during which the Company is not required to make lease payments. The terms of both the existing and new facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

      At December 31, 2005, future minimum lease payments, including the payments on the new facility, are as follows (in thousands):

Year Ending December 31,	Operating Leases
2006	$	816
2007		837
2008		918
2009		1,095
2010		1,166
2011 and thereafter		3,905
	$	8,737

      Under the terms of the new lease, the landlord has agreed to provide an allowance for the planning and construction of tenant improvements in the amount of approximately $1.0 million, which will be recorded as deferred rent at the inception of the lease term. Rent expense associated with future minimum lease payments on the Company’s new facility will be reduced by amortization of the tenant improvement allowance over the life of the lease. An offsetting amount will be recorded as leasehold improvements at the inception of the lease term. Leasehold improvements will be depreciated over the lease term, or the estimated lives of the improvements, whichever is shorter.

      Indemnifications. In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations, and accordingly, the Company has not accrued any amounts for such indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

      Purchase Commitments. At December 31, 2005, the Company had approximately $2.1 million in purchase commitments with suppliers.

      Leasehold Improvements. At December 31, 2005, the Company had approximately $2.2 million in commitments related to leasehold improvements planned for its new facility which the Company expects to occupy in March 2006. Under the terms of the new lease, the landlord has agreed to provide an allowance for the planning and construction of tenant improvements in the amount of approximately $1.0 million, which will be recorded as leasehold improvements when placed into service. Total leasehold improvements of $2.2 million will be depreciated over the life of the lease or their estimated useful lives, whichever is shorter. An offsetting amount for the $1.0 million tenant improvement allowance portion of the leasehold improvements will be recorded as deferred rent, which will be amortized on a straight-line basis as a reduction to lease expense over the lease term.

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Contingencies. The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 10 — Stock Option Plans

      In 1995, the Company established the 1995 Stock Plan (the “1995 Plan”) covering employees, directors and consultants of the Company. Under the terms of the 1995 Plan, incentive and nonqualified stock options and stock purchase rights could be granted for up to 1,008,000 shares of the Company’s authorized but unissued common stock. In May 2000, upon the adoption of the Company’s 2000 Equity Incentive Plan (the “2000 Plan”), the Company ceased granting options under the 1995 Plan.

      In May 2000, the Company established the 2000 Plan covering employees, directors and consultants of the Company. Under the terms of the 2000 Plan, incentive and nonqualified stock options and stock purchase rights may be granted. Initially, 420,000 shares of the Company’s authorized but unissued common stock were available for grant under the 2000 Plan. On each anniversary of the 2000 Plan’s adoption by the Board of Directors, the share reserve was automatically increased by 98,000 shares. In 2001 and 2002, the stockholders approved a 300,000 and a 133,333 share increase to the 2000 Plan, respectively. In January 2004, the stockholders approved a 333,333 share increase to the 2000 Plan. In October 2004, the shareholders approved (i) an 800,000 share increase to the 2000 Plan, which increased the number of authorized shares of the Company’s common stock issuable under the 2000 Plan to 2,378,666, and (ii) on December 31 of each year, beginning on December 31, 2005, further increase the number of shares reserved for issuance under 2000 Plan by the lower of (x) 800,000 shares, (y) 4% of the number of shares of the Company’s common stock then outstanding or (z) such other number of shares of our common stock as is determined by the administrator of the 2000 Plan, provided that the maximum number of shares of the Company’s common stock that may be issued upon the exercise of incentive stock options during the term of the 2000 Plan may not exceed 6,378,666.

      Accordingly, on December 31, 2005, 595,999 shares were authorized for issuance, equal to 4% of the shares outstanding on that date. In September 2005, the Board of Directors adopted a form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement, intended to serve as a standard form agreement for restricted stock unit grants (“RSUs”) issued to employees, executive officers, directors and consultants under the Company’s VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (the “Amended Equity Incentive Plan”). The Board approved the Amended Equity Incentive Plan in November 2005, which authorized the granting of restricted stock units under the plan including the form of grant adopted in September 2005.

      Under the terms of the 1995 Plan and the Amended Equity Incentive Plan, options and RSUs have a maximum term of 10 years and vest over schedules determined by the Board of Directors. Certain options, upon the discretion of the plan administrator, are exercisable prior to becoming vested, and are subject to the Company’s right to repurchase the unvested shares at the exercise price. Nonqualified stock options may be granted to employees and consultants at no less than 85% of the fair market value of the stock at the date of the grant.

      In 2001, the Board of Directors approved a severance plan for management and key employees whereby a change in control in the Company would accelerate vesting of options under certain conditions. On November 7, 2005, the Board of Directors adopted the Amended and Restated VNUS Severance Plan for Management and Key Employees (the “Amended Severance Plan”). In particular, the Amended Severance Plan expands the definition of “good reason” for determining whether a participant’s termination of employment was a “qualifying termination,” thereby entitling the participant to certain payments and the acceleration of the vesting of certain equity awards, including stock options, restricted stock and restricted stock units. “Good reason” now includes, with respect to participants that are employees of the Company at

67

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the vice president level and above, removal of duties customarily assigned to an employee with such participant’s title, or a substantial adverse alteration in the nature or status of such participant’s duties; provided, however, that a significant reduction in job responsibility and/or authority shall not be deemed to have occurred simply by virtue of a change of control, the fact that the Company becomes a subsidiary of another entity or the Company’s status changing from publicly-traded to privately-held, as a result of the change of control.

      Activity under the 1995 Plan and the Amended Equity Incentive Plan is as follows:

				Options/ RSUs Outstanding					Weighted
	Options/ RSUs								Average
	Available for			Number of			Range of		Exercise
	Future Grant			Options/ RSUs			Exercise Prices		Price
Balances at December 31, 2002		374,568			974,601		$	0.04 – $ 7.14	$	2.15
Authorized		98,000			—			—		—
Granted		(489,915	)		489,915			1.50		1.50
Exercised		—			(21,341	)		0.43 –   1.50		1.32
Terminated/cancelled		50,010			(53,814	)		0.43 –   7.14		2.66
Balances at December 31, 2003		32,663			1,389,361		$	0.04 – $ 7.14	$	1.92
Authorized		1,231,333			—			—		—
Granted		(477,944	)		477,944			3.00 –  16.70		5.41
Exercised		—			(82,871	)		0.04 –   7.14		1.79
Terminated/cancelled		101,632			(104,712	)		0.71 –  10.50		2.87
Balances at December 31, 2004		887,684			1,679,722		$	0.04 – $16.70	$	2.86
Authorized		595,999			—			—		—
Expired		(273	)		—			—		—
Granted		(1,021,218	)		1,021,218			0.00 –  13.78		8.61
Exercised		—			(528,550	)		0.61 –  10.50		2.18
Terminated/cancelled		210,486			(210,486	)		0.00 –  14.91		5.18
Balances at December 31, 2005		672,678			1,961,904		$	0.00 – $16.70	$	6.60

68

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The options and restricted stock units (RSUs) outstanding and currently exercisable by exercise price at December 31, 2005 are as follows:

	Options and RSUs Outstanding
					Options and RSUs
			Weighted		Exercisable
			Average
			Remaining				Weighted
			Contractual				Average
	Number of		Life (In		Number of		Exercise
Exercise Prices	Options/RSUs		Years)		Options/RSUs		Price
$ 0.00 –  0.01		242,259		9.85		393	$	—
0.11 –  0.71		181,594		2.46		181,594		0.59
1.50 –  1.50		408,370		6.69		324,354		1.50
3.00 –  3.00		220,480		8.18		96,672		3.00
6.00 – 10.05		176,826		7.40		93,909		7.41
10.08 – 10.76		219,244		9.20		50,169		10.67
10.86 – 10.95		173,880		9.45		19,688		10.86
10.97 – 12.44		191,270		9.50		6,443		11.59
12.45 – 14.91		122,981		9.23		9,425		13.40
15.00 – 15.00		20,000		8.82		20,000		15.00
16.70 – 16.70		5,000		8.91		1,354		16.70
		1,961,904		7.91		804,001	$	3.55

      The Company’s stock plans only approve early exercise of stock options and RSUs upon approval of the Company’s plan administrator. At December 31, 2005, there were no shares subject to repurchase.

      Employee Deferred Stock-Based Compensation. Deferred stock compensation to employees related to stock options represents the aggregate difference, at the grant date, between the respective exercise price of stock options and RSUs and the fair value of the underlying stock.

      The deferred stock compensation is amortized on an accelerated basis to expense over the vesting period of the individual stock option awards, generally four years. The amortization method used is in accordance with Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” (“FIN 28”). The deferred stock compensation for RSUs is amortized on a straight-line basis to expense over the vesting period of the individual awards, generally four years. The Company recorded unearned stock-based compensation of approximately $2.3 million, $1.7 million, and $366,000 during the years ended December 31, 2005, 2004 and 2003 respectively. Deferred stock compensation amortized to expense during these respective periods was approximately $614,000, $870,000, and $526,000, respectively.

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company granted stock options to employees with exercise prices below their estimated fair market value as follows:

							Weighted
			Weighted		Weighted		Average
	Number of		Average		Average		Intrinsic
	Options		Exercise		Fair Value		Value
Grants Made During the Quarter Ended	Granted		Price		per Share		per Share
March 31, 2004		168,620	$	3.00	$	6.51	$	3.51
June 30, 2004		144,883	$	3.77	$	10.56	$	6.79
September 30, 2004		49,391	$	9.93	$	13.31	$	3.38
December 31, 2004		24,130	$	10.73	$	15.21	$	4.48
March 31, 2005		3,333	$	10.50	$	13.45	$	2.95
June 30, 2005		—	$	—	$	—	$	—
September 30, 2005		—	$	—	$	—	$	—
December 31, 2005		—	$	—	$	—	$	—

      The Company granted restricted stock units to employees with exercise prices below their estimated fair market value as follows:

							Weighted
			Weighted		Weighted		Average
	Number of		Average		Average		Intrinsic
	RSUs		Exercise		Fair Value		Value
Grants Made During the Quarter Ended	Granted		Price		per Share		per Share
March 31, 2004		—	$	—	$	—	$	—
June 30, 2004		—	$	—	$	—	$	—
September 30, 2004		—	$	—	$	—	$	—
December 31, 2004		—	$	—	$	—	$	—
March 31, 2005		—	$	—	$	—	$	—
June 30, 2005		—	$	—	$	—	$	—
September 30, 2005		—	$	—	$	—	$	—
December 31, 2005		249,279	$	—	$	9.02	$	9.02

      Stock Compensation Expense Related to Consultant Services. During the years ended December 31, 2005, 2004 and 2003, the Company granted options to consultants to purchase 5,000, 17,663, and 19,000 shares of common stock, respectively, in exchange for services, at a range of exercise prices between $0.72 and $13.53 per share. The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%; expected lives of one to five years; risk-free interest rates ranging between 1.32% to 6.80% and expected volatility of 52% to 71%. Stock compensation expense is being recognized in accordance with FIN 28 over the vesting periods of the related options. In 2005, 2004 and 2003, the Company recorded stock compensation expense of $62,000, $181,000, and $22,000, respectively.

Note 11 — Employee Benefit Plans

      The Company sponsors a 401(k) defined contribution plan covering all employees. Contributions made by the Company are determined annually by the Board of Directors. There have been no contributions by the Company (approved or payable) through December 31, 2005.

70

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12 — Selected Quarterly Financial Data (unaudited):

      The following tables present the Company’s operating results expressed in dollars and as a percent of revenues for each of the eight quarters ending December 31, 2005. This data has been derived from unaudited financial statements that, in the opinion of the Company’s management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with the Company’s annual audited consolidated financial statements and notes thereto appearing elsewhere in this report. These operating results are not necessarily indicative of results for any future period.

	Dec. ’05			Sept. ’05		June ’05		Mar. ’05		Dec. ’04		Sept. ’04		June ’04		Mar. ’04
	(In thousands)
	(Unaudited)
Net revenues	$	13,535		$	12,129	$	12,314	$	11,192	$	11,186	$	10,116	$	9,230	$	7,634
Cost of revenues(1)		3,521			2,915		3,145		2,730		2,845		2,562		2,285		1,850
Gross profit		10,014			9,214		9,169		8,462		8,341		7,554		6,945		5,784
Total operating expenses(1)		9,879			7,898		8,067		7,169		7,651		6,494		6,443		5,387
Income from operations		135			1,316		1,102		1,293		690		1,060		502		397
Interest income and other, net		575			458		385		361		340		46		21		32
Income before provision for income taxes		710			1,774		1,487		1,654		1,030		1,106		523		429
Provision for (benefit from) income taxes		(66	)		121		104		116		16		111		52		43
Net income	$	776		$	1,653	$	1,383	$	1,538	$	1,014	$	995	$	471	$	386

(1)  Includes charges for stock-based compensation in the following amounts:

Cost of revenues	$	14	$	16	$	17	$	18	$	26	$	26	$	24	$	14
Operating expenses		190		130		111		180		284		270		273		134
Total	$	204	$	146	$	128	$	198	$	310	$	296	$	297	$	148

	Dec. ’05			Sept. ’05			June ’05			Mar. ’05			Dec. ’04			Sept. ’04			June ’04			Mar. ’04
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		26.0			24.0			25.5			24.4			25.4			25.3			24.8			24.2
Gross profit		74.0			76.0			74.5			75.6			74.6			74.7			75.2			75.8
Total operating expenses		73.0			65.1			65.5			64.0			68.4			64.2			69.8			70.6
Income from operations		1.0			10.9			9.0			11.6			6.2			10.5			5.4			5.2
Interest income and other, net		4.2			3.8			3.1			3.1			3.0			0.4			0.2			0.4
Income before provision for income taxes		5.2			14.7			12.1			14.7			9.2			10.9			5.6			5.6
Provision for (benefit from) income taxes		(0.5	)		1.0			0.9			1.0			0.1			1.1			0.6			0.6
Net income		5.7	%		13.7	%		11.2	%		13.7	%		9.1	%		9.8	%		5.0	%		5.0	%

71

Item 9:      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

Item 9A. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

      We maintain “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2005.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

      Further, management determined that, as of December 31, 2005, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Management of VNUS Medical Technologies, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on those criteria.

      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing in Item 8 of this Annual Report on Form 10-K, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005.

Item 9B. Other Information

      None.

72

PART III

Item 10:      Directors and Executive Officers of the Registrant

      The information required under this item is incorporated herein by reference to our definitive proxy statement that will be prepared pursuant to Regulation 14A.

Item 11:      Executive Compensation

      The information required under this item is incorporated herein by reference to our definitive proxy statement that will be prepared pursuant to Regulation 14A.

Item 12:      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The information required under this item is incorporated herein by reference to our definitive proxy statement that will be prepared pursuant to Regulation 14A.

Item 13:      Certain Relationships and Related Transactions

      The information required under this item is incorporated herein by reference to our definitive proxy statement that will be prepared pursuant to Regulation 14A.

Item 14:      Principal Accountant Fees and Services

      The information required under this item is incorporated herein by reference to our definitive proxy statement that will be prepared pursuant to Regulation 14A.

PART IV

Item 15:      Exhibits and Financial Statement Schedules

      (a) 1. Consolidated Financial Statements and Supplementary Data:

      The following financial statements are included herein under Item 8 of this report:

	Page
	Number
Report of Independent Registered Public Accounting Firm		50
Audit of Management’s Assessment of Internal Controls Over Financial Reporting
Consolidated Balance Sheets at December 31, 2005 and December 31, 2004		52
Consolidated Statements of Operations for Each of the Years in the Three Year Period Ended December 31, 2005		53
Consolidated Statements of Stockholders’ Equity for Each of the Years in the Three Year Period Ended December 31, 2005		54
Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 2005		55
Notes to Consolidated Financial Statements		56

      2. Financial Statement Schedules:

Schedule II — Valuation and Qualifying Accounts 77

      3. Exhibit Index

73

INDEX OF EXHIBITS

Exhibit
Number			Description
	3	.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	3	.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	4	.1	Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form No. S-1/A 333-117640, filed on October 15, 2004).
	4	.2	Fifth Restated Stockholder Rights Agreement, dated August 15, 2001 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	4	.3	Warrant to purchase common stock between VNUS Medical Technologies, Inc. and The Bay City Capital Fund I, L.P. (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form No. 333-117640, filed on July 23, 2004).
	10	.1#	Stock Purchase Right Grant Notice and Restricted Stock Purchase Agreement, by and between VNUS Medical Technologies, Inc. and Dennis Rosenberg, dated July 29, 2005 (incorporated by reference to the Company’s Report on Form 8-K dated July 29, 2005).
	10	.2#	VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated November 10, 2005).
	10	.3#	Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement Under the VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated September 8, 2005).
	10	.4#	VNUS Medical Technologies, Inc. 1995 Stock Plan (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.5#	First Amendment to the VNUS Medical Technologies, Inc. 1995 Stock Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.6#	Second Amendment to the VNUS Medical Technologies, Inc. 1995 Stock Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.7#	Amended and Restated VNUS Severance Plan for Management and Key Employees (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated November 8, 2005).
	10	.8#	Summary of the 2004 Bonus Payments and 2005 Salary for the Chief Executive Officer (incorporated by reference to the Company’s Report on Form 8-K dated March 25, 2005).
	10	.9#	Summary of the 2004 Bonus Payments and 2005 Salaries for Executive Officers (incorporated by reference to the Company’s Report on Form 8-K dated March 16, 2005).
	10	.10#	Summary of the 2005 Bonus Payments and 2006 Salaries for Executive Officers, including the Chief Executive Officer (incorporated by reference to the Company’s Report on Form 8-K dated January 31, 2006).
	10	.11#	Form of Indemnity Agreement for Directors and Officers (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	10	.12#	Dennis Rosenberg Offer Letter, dated July 7, 2005 (incorporated by reference to the Company’s Report on Form 8-K dated July 29, 2005).
	10	.13#	Charlene A. Friedman Offer Letter, dated October 26, 2005 (incorporated by reference to the Company’s Report on Form 8-K dated November 10, 2005).

74

Exhibit
Number			Description
	10	.14	RF Generator Development Agreement between VNUS Medical Technologies, Inc. and Stellartech Research Corporation dated May 26, 2000 (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on August 18, 2004).
	10	.15	Service and Supply Agreement by and between VNUS Medical Technologies, Inc. and Byers Peak, Inc., dated February 20, 2004 (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	10	.16	Lease by and between SPI Commerce Park, LP and VNUS Medical Technologies, Inc., dated January 24, 2001 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.17	First Amendment to Lease Agreement by and between SPI Commerce Park, LP and VNUS Medical Technologies, Inc., dated August 1, 2003 (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.18	Second Amendment to Lease Agreement by and between SPI Commerce Park, LP and VNUS Medical Technologies, Inc., dated February 13, 2004 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.19*	Lease Agreement by and between Legacy Partners I SJ Fontanoso, LLC and VNUS Medical Technologies, Inc., dated November 15, 2005.
	10	.20*+	Distributor Agreement, dated January 24, 2006, by and between Medtronic USA, Inc. and VNUS Medical Technologies, Inc.
	10	.21*+	Addendum to Distributor Agreement, dated January 24, 2006, by and between Medtronic USA, Inc. and VNUS Medical Technologies, Inc.
	21*		List of Subsidiaries of VNUS Medical Technologies, Inc.
	23	.1*	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
	31	.1*	Certification of Chief Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
	31	.2*	Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
	32*		Certification of Chief Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

*	Filed herewith.
#	Management compensation or arrangement.
+	Confidential treatment requested for certain portions of this document.

      (b) Exhibits.

      The exhibits required by Item 601 of Regulation S-K are filed or furnished herewith.

75

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.

VNUS MEDICAL TECHNOLOGIES, INC.

By  /s/ BRIAN E. FARLEY

Brian E. Farley

President, Chief Executive Officer

and Director

Date: March 14, 2006

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

By	/s/ BRIAN E. FARLEY Brian E. Farley	President, Chief Executive Officer and Director (Principal Executive Officer)	Date: March 14, 2006
By	/s/ TIMOTHY A. MARCOTTE Timothy A. Marcotte	Vice President and Chief Financial Officer (Principal Financial Officer)	Date: March 14, 2006
By	/s/ W. JAMES FITZSIMMONS W. James Fitzsimmons	Director	Date: March 14, 2006
By	/s/ KATHLEEN D. LAPORTE Kathleen D. Laporte	Director	Date: March 14, 2006
By	/s/ EDWARD W. UNKART Edward W. Unkart	Director	Date: March 14, 2006
By	/s/ LORI M. ROBSON, PH.D. Lori M. Robson, Ph.D.	Director	Date: March 14, 2006
By	/s/ MICHAEL J. COYLE Michael J. Coyle	Director	Date: March 14, 2006

76

FINANCIAL STATEMENT SCHEDULE

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

	Balance at							Balance at
	Beginning							End of
	of Period		Additions		Write-offs			Period
	(In thousands)
Allowance for Doubtful Accounts Year Ended:
December 31, 2003	$	164		43		(15	)	$	192
December 31, 2004	$	192		105		(102	)	$	195
December 31, 2005	$	195		216		(103	)	$	308
Allowance for Excess and Obsolete Inventory Year Ended:
December 31, 2003	$	148		77		(29	)	$	196
December 31, 2004	$	196		68		(233	)	$	31
December 31, 2005	$	31		174		(50	)	$	155
Allowance for Deferred Tax Assets Year Ended:
December 31, 2003	$	15,066		1,365		—		$	16,431
December 31, 2004	$	16,431		—		(1,108	)	$	15,323
December 31, 2005	$	15,323				(938	)	$	14,385

77

INDEX OF EXHIBITS

Exhibit
Number			Description
	3	.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	3	.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	4	.1	Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form No. S-1/A 333-117640, filed on October 15, 2004).
	4	.2	Fifth Restated Stockholder Rights Agreement, dated August 15, 2001 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	4	.3	Warrant to purchase common stock between VNUS Medical Technologies, Inc. and The Bay City Capital Fund I, L.P. (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form No. 333-117640, filed on July 23, 2004).
	10	.1#	Stock Purchase Right Grant Notice and Restricted Stock Purchase Agreement, by and between VNUS Medical Technologies, Inc. and Dennis Rosenberg, dated July 29, 2005 (incorporated by reference to the Company’s Report on Form 8-K dated July 29, 2005).
	10	.2#	VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated November 10, 2005).
	10	.3#	Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement Under the VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated September 8, 2005).
	10	.4#	VNUS Medical Technologies, Inc. 1995 Stock Plan (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.5#	First Amendment to the VNUS Medical Technologies, Inc. 1995 Stock Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.6#	Second Amendment to the VNUS Medical Technologies, Inc. 1995 Stock Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.7#	Amended and Restated VNUS Severance Plan for Management and Key Employees (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated November 8, 2005).
	10	.8#	Summary of the 2004 Bonus Payments and 2005 Salary for the Chief Executive Officer (incorporated by reference to the Company’s Report on Form 8-K dated March 25, 2005).
	10	.9#	Summary of the 2004 Bonus Payments and 2005 Salaries for Executive Officers (incorporated by reference to the Company’s Report on Form 8-K dated March 16, 2005).
	10	.10#	Summary of the 2005 Bonus Payments and 2006 Salaries for Executive Officers, including the Chief Executive Officer (incorporated by reference to the Company’s Report on Form 8-K dated January 31, 2006).
	10	.11#	Form of Indemnity Agreement for Directors and Officers (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	10	.12#	Dennis Rosenberg Offer Letter, dated July 7, 2005 (incorporated by reference to the Company’s Report on Form 8-K dated July 29, 2005).
	10	.13#	Charlene A. Friedman Offer Letter, dated October 26, 2005 (incorporated by reference to the Company’s Report on Form 8-K dated November 10, 2005).

78

Exhibit
Number			Description
	10	.14	RF Generator Development Agreement between VNUS Medical Technologies, Inc. and Stellartech Research Corporation dated May 26, 2000 (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on August 18, 2004).
	10	.15	Service and Supply Agreement by and between VNUS Medical Technologies, Inc. and Byers Peak, Inc., dated February 20, 2004 (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1/A No. 333-117640, filed on September 28, 2004).
	10	.16	Lease by and between SPI Commerce Park, LP and VNUS Medical Technologies, Inc., dated January 24, 2001 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.17	First Amendment to Lease Agreement by and between SPI Commerce Park, LP and VNUS Medical Technologies, Inc., dated August 1, 2003 (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.18	Second Amendment to Lease Agreement by and between SPI Commerce Park, LP and VNUS Medical Technologies, Inc., dated February 13, 2004 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 No. 333-117640, filed on July 23, 2004).
	10	.19*	Lease Agreement by and between Legacy Partners I SJ Fontanoso, LLC and VNUS Medical Technologies, Inc., dated November 15, 2005.
	10	.20*+	Distributor Agreement, dated January 24, 2006, by and between Medtronic USA, Inc. and VNUS Medical Technologies, Inc.
	10	.21*+	Addendum to Distributor Agreement, dated January 24, 2006, by and between Medtronic USA, Inc. and VNUS Medical Technologies, Inc.
	21*		List of Subsidiaries of VNUS Medical Technologies, Inc.
	23	.1*	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
	31	.1*	Certification of Chief Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
	31	.2*	Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
	32*		Certification of Chief Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

*	Filed herewith.
#	Management compensation or arrangement.
+	Confidential treatment requested for certain portions of this document.

      (b) Exhibits.

      The exhibits required by Item 601 of Regulation S-K are filed or furnished herewith.

79 EX-10.19 2 f17688exv10w19.htm EXHIBIT 10.19

EXHIBIT 10.19

Fontanoso Lease Agreement

Basic Lease Information

Lease Date:	November 15, 2005
Landlord:	Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company
Landlord’s Address:	c/o Legacy Partners Commercial, Inc.
	4000 East Third Avenue, Suite 600
	Foster City, California 94404-4805
Tenant:	VNUS Medical Technologies, Inc., a Delaware corporation
Tenant’s Address:	Until Tenant occupies the Premises
	c/o VNUS Medical Technologies, Inc.
	2200 Zanker Road, Suite F
	San Jose, California 95131
	Attn: Mr. Timothy Marcotte, CFO
	Thereafter, to Tenant at the Premises, Attn: Mr. Timothy Marcotte, CFO
Premises:	Approximately 93,650 rentable square feet as shown on Exhibit A
Premises Address:	5799 Fontanoso Way
	San Jose, California 95138
Building:	Approximately 93,650 rentable square feet
Lot:	APN 679-001-007

Term:      The commencement date of the Lease (“Commencement Date”) shall occur on the earlier to occur of (i) the date Tenant first occupies the Premises or (ii) the date the Tenant Improvements (defined in Exhibit B) are Substantially Complete (defined in Exhibit B) and the expiration date of the Lease (“Expiration Date”) shall occur on the date ninety-six (96) months following the Commencement Date. The Commencement Date is anticipated to occur on March 1, 2006 (“Anticipated Commencement Date”).

Base Rent and Adjustments
to Base Rent(¶3):

Months of Term	Base Rent Per Month
0 – 15	$	0.00
16 – 24	$	60,872.50
25 – 36	$	77,261.25
37 – 48	$	91,777.00

Thereafter, commencing with the 49^th month of the Term, Base Rent shall increase annually by three percent (3%) over the Base Rent payable during the preceding year.

Advance Rent (¶3):	Eighty Thousand Nine Hundred Ninety-Eight and 63/100 Dollars ($80,998.63)
Security Deposit (¶4):	One Hundred Twenty-Six Thousand Seven Hundred Thirty-Nine and 04/100 Dollars ($126,739.04)
Permitted Uses (¶9):	General office, research and development and light manufacturing, but only to the extent permitted by the City of San Jose and all agencies and governmental authorities having jurisdiction thereof
Parking Spaces:	Three Hundred thirteen (313) non-designated spaces

Brokers (¶33):	CB Richard Ellis for Tenant
	Commercial Property Services for Landlord

Exhibits:	Exhibit A -	Premises, Building and/or Lot
	Exhibit B -	Tenant Improvements
	Exhibit C -	Rules and Regulations
	Exhibit D -	Intentionally Omitted
	Exhibit E -	Tenant’s Initial Hazardous Materials Disclosure Certificate
	Exhibit F -	Change of Commencement Date — Example
	Exhibit G -	N/A
	Exhibit H -	Furniture, Fixtures and Equipment
	Exhibit I -	Subordination Non-Disturbance and Attornment Agreement
Addenda:	Addendum 1 -	Option to Extend the Term

Table of Contents

Section		Page
1.	Premises		4
2.	Occupancy; Adjustment of Commencement Date		4
3.	Rent		4
4.	Security Deposit		5
5.	Condition of Premises; Tenant Improvements		5
6.	Additional Rent		5
7.	Utilities and Services		7
8.	Late Charges		7
9.	Use of Premises		7
10.	Alterations; and Surrender of Premises		8
11.	Repairs and Maintenance		10
12.	Insurance		11
13.	Limitation of Liability and Indemnity		12
14.	Assignment and Subleasing		12
15.	Subordination		14
16.	Right of Entry		15
17.	Estoppel Certificate		15
18.	Tenant’s Default		15
19.	Remedies for Tenant’s Default		16
20.	Holding Over		16
21.	Landlord’s Default		17
22.	Parking		17
23.	Transfer of Landlord’s Interest		17
24.	Waiver		17
25.	Casualty Damage		17
26.	Condemnation		19
27.	Environmental Matters/Hazardous Materials		19
28.	Financial Statements		20
29.	General Provisions		21
30.	Signs		22
31.	Mortgagee Protection		22
32.	Warranties of Tenant		22
33.	Brokerage Commission		23
34.	Quiet Enjoyment		23
35.	Existing Furniture, Systems and Equipment		23

NNN (Single Tenant) Tenant Improvements
Lease Agreement

The Basic Lease Information set forth on Page 1 and this Lease are and shall be construed as a single instrument.

1. Premises

Landlord hereby leases the Premises to Tenant upon the terms and conditions contained herein. For purposes of this Lease, the term “Premises” shall mean and refer to the entirety of the Building and the Lot. Additionally, for purposes of this Lease, the term “Lot” shall mean and refer to the land upon which the Building is situated. The term “Common Areas” shall mean and refer to those portions of the Premises exclusive of the Building and shall include but not be limited to parking areas, access and perimeter roads, sidewalks, landscaped areas and similar areas and facilities. Landlord and Tenant hereby agree that for purposes of this Lease, as of the Lease Date, the rentable square footage area of each of the Premises and the Building shall be deemed to be the number of rentable square feet as set forth in the Basic Lease Information. Tenant further agrees that the number of rentable square feet of the Building may subsequently change after the Lease Date commensurate with any modifications to any of the foregoing by Landlord.

2. Occupancy; Adjustment of Commencement Date

     2.1    If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on the Anticipated Commencement Date in the condition specified in Section 5 hereof, Landlord shall not be subject to any liability nor shall the validity of the Lease be affected; provided, the Term of this Lease and the obligation to pay Rent shall commence on the date possession is actually tendered to Tenant and the Expiration Date shall be extended commensurately. If the commencement date and/or the expiration date of this Lease is other than the Anticipated Commencement Date and Expiration Date specified in the Basic Lease Information, Landlord and Tenant shall execute a written amendment to this Lease, substantially in the form of Exhibit F hereto, wherein the parties shall specify the actual commencement date, expiration date and the date on which Tenant is to commence paying Rent. Tenant shall execute and return such amendment to Landlord within fifteen (15) days after Tenant’s receipt thereof. The word “Term” whenever used herein refers to the initial term of this Lease and any valid extension(s) thereof. Notwithstanding the foregoing, if Landlord shall not deliver the Premises to Tenant with the Tenant Improvements Substantially Complete (as defined in Exhibit B hereto) (subject to delays on a day for day basis due to Force Majeure Delays (defined in Section 25.1.2 below) and Tenant Delays (as defined in Exhibit B)), on or before March 1, 2006, Tenant shall receive a credit against Base Rent in an amount equal to one (1) day of Base Rent for each day following May 1, 2006 that the Tenant Improvements are not Substantially Complete (for example, if the Tenant Improvements are Substantially Complete on June 1, 2006, after taking into consideration that Tenant is not obligated to pay Base Rent for the first fifteen (15) months of the Term, Tenant shall be obligated to commence paying Base Rent on September 1, 2007). The foregoing example is based upon a “free rent” period of fifteen (15) months and a one-month Base Rent credit pursuant to this Section 2.1. In addition, if the Tenant Improvements are not Substantially Complete by September 1, 2006 (as such date may be extended by Force Majeure Delays and/or Tenant Delays) (with any such extension(s), the “Adios Date”), Tenant may, by written notice to Landlord given at any time after the Adios Date and prior to such Substantial Completion, terminate this Lease. If Tenant is entitled to terminate this Lease and properly and timely does so pursuant to this Section, then (a) this Lease shall terminate upon Landlord’s receipt of Tenant’s notice of termination, (b) Landlord shall promptly return to Tenant all amounts deposited by Tenant with Landlord pursuant to the terms of this Lease, (c) each party shall bear its respective fees and costs incurred with respect to the negotiation of this Lease and performing its respective obligations hereunder through the date of termination and (d) neither party shall have any further rights or obligations hereunder.

     2.2    If Landlord permits Tenant to occupy the Premises prior to the actual Commencement Date, such occupancy shall be at Tenant’s sole risk and subject to all the provisions of this Lease. Additionally, Landlord shall have the right to impose additional reasonable conditions on Tenant’s early occupancy.

3. Rent

On the date that Tenant executes this Lease, Tenant shall deliver to Landlord the original executed Lease, the Advance Rent (which shall be applied against the Rent payable for the first month(s) Tenant is required to pay Rent), the Security Deposit, and all insurance certificates evidencing the insurance required to be obtained by Tenant under Section 12 and Exhibit B of this Lease. Tenant agrees to pay Landlord, without prior notice or demand, abatement, offset, deduction or claim, in advance at Landlord’s Address (i) with respect to Base Rent, on the first (1st) day of the seventeenth (17^th) month of the Term and thereafter on the first (1^st) day of each month throughout the balance of the Term of this Lease and (ii) with respect to Additional Rent, Operating Expenses, Tax Expenses, and Utility Expenses, on the Commencement Date and thereafter on the first (1^st) day of each month throughout the Term. The term “Rent” whenever used herein refers to the aggregate of all these amounts. If Landlord permits Tenant to occupy the Premises without requiring Tenant to pay rental payments for a period of time, the waiver of the requirement to pay rental payments shall only apply to the waiver of the Base Rent. The Rent for any fractional part of a calendar month at the commencement or expiration or termination of the Lease Term shall be a prorated amount of the Rent for a full calendar month based upon a thirty (30) day month. To the extent not already paid as part of the Advance Rent any prorated Rent shall be paid on the first date that Tenant is obligated to make a payment of Rent hereunder, and any prorated Rent for the final calendar month hereof shall be paid on the first day of the calendar month in which the date of expiration or termination occurs.

4. Security Deposit

Simultaneously with Tenant’s execution and delivery of this Lease, Tenant shall deliver to Landlord, as a Security Deposit for the faithful performance by Tenant of its obligations under this Lease, the amount specified in the Basic Lease Information. If Tenant is in default hereunder, Landlord may, but without obligation to do so, use all or any portion of the Security Deposit to cure the default or to compensate Landlord for all damages sustained by Landlord in connection therewith. Tenant shall, within ten (10) days of written demand, pay to Landlord a sum equal to the portion of the Security Deposit so applied or used to replenish the amount of the Security Deposit held to increase such deposit to the amount initially deposited with Landlord. At any time after Tenant has materially and chronically defaulted hereunder, as determined in Landlord’s reasonable discretion, Landlord may require an increase in the amount of the Security Deposit required hereunder, not to exceed Two Hundred Fifty-Three Thousand Four Hundred Seventy-Eight and 08/100 Dollars ($253,478.08) for the then balance of the Term and Tenant shall, within fifteen (15) days of demand, pay to Landlord such additional sums. Within thirty (30) days after the expiration or termination of this Lease, Landlord shall return the Security Deposit to Tenant, less such amounts as are reasonably necessary, as determined by Landlord, to remedy Tenant’s default(s) hereunder or to otherwise restore the Premises to a clean and safe condition, reasonable wear and tear excepted. If the cost to restore the Premises exceeds the amount of the Security Deposit, Tenant shall promptly deliver to Landlord any and all of such excess sums. Landlord shall not be required to keep the Security Deposit separate from other funds, and, unless otherwise required by law, Tenant shall not be entitled to interest on the Security Deposit. In no event or circumstance shall Tenant have the right to any use of the Security Deposit and, specifically, Tenant may not use the Security Deposit as a credit or to otherwise offset any payments required hereunder. Tenant waives (i) California Civil Code Section 1950.7 and any and all other laws, rules and regulations applicable to security deposits in the commercial context (“Security Deposit Laws”), and (ii) any and all rights, duties and obligations either party may now or, in the future, will have relating to or arising from the Security Deposit Laws. Notwithstanding anything to the contrary herein, the Security Deposit may be retained and applied by Landlord (a) to offset Rent which is unpaid either before or after termination of this Lease, and (b) against other damages suffered by Landlord before or after termination of this Lease.

5. Condition of Premises; Tenant Improvements

Tenant agrees to accept the Premises on the Commencement Date as then being suitable for Tenant’s intended use and in good operating order, condition and repair in its then existing “AS IS” condition, except as otherwise set forth in Exhibit B hereto. The Tenant Improvements (defined in Exhibit B) shall be installed in accordance with the terms, conditions, criteria and provisions set forth in Exhibit B or in the succeeding sentence. Landlord shall deliver the Premises to Tenant with all Building Systems in good working order and condition. For purposes hereof, “Building Systems” shall exclusively mean heat, ventilation and air conditioning systems, and the electrical, plumbing and other mechanical systems (including life/fire safety systems) that serve the Premises. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises in good condition and state of repair, except for any “punch list” type items as to which Tenant notifies Landlord in writing within thirty (30) days of taking possession. Tenant expressly acknowledges and agrees that neither Landlord nor any of Landlord’s agents, representatives or employees has made any representations as to the suitability, fitness or condition of the Premises for the conduct of Tenant’s business or for any other purpose, including without limitation, any storage incidental thereto. Any Tenant Improvements to be constructed hereunder shall be in compliance with the requirements of the ADA (defined below), and all costs incurred for purposes of compliance therewith shall be a part of and included in the costs of the Tenant Improvements.

6. Additional Rent

It is intended by Landlord and Tenant that this Lease be a “triple net lease.” The costs and expenses described in this Section 6 and all other sums, charges, costs and expenses specified in this Lease other than Base Rent are to be paid by Tenant to Landlord as additional rent (collectively, “Additional Rent”).

     6.1    Operating Expenses

               6.1.1 Definition of Operating Expenses. Tenant shall pay to Landlord all Operating Expenses as Additional Rent. The term “Operating Expenses” as used herein shall mean the total amounts paid or payable by Landlord in connection with the ownership, management, maintenance, repair and operation of the Premises. These Operating Expenses may include, but are not limited to, Landlord’s cost of: (i) repairs to, and maintenance of, the roof membrane, the non-structural portions of the roof and the non-structural elements of the perimeter exterior walls of the Premises; (ii) maintaining the outside paved area, parking lot, landscaping and other portions of the Common Areas; (iii) annual insurance premium(s) insuring against personal injury and property damage (including, if Landlord elects, “all risk” or “special purpose” coverage) and all other insurance, including, but not limited to, earthquake and flood for the Premises, rental value insurance against loss of Rent for a period of at least nine (9) months commencing on the date of loss, and subject to the provisions of Section 25 below, any deductible; (iv) (a) modifications and/or new improvements to any portion of the Premises occasioned by any rules, laws or regulations effective subsequent to the Lease Date; (b) reasonably necessary replacement improvements to any portion of the Premises after the Commencement Date; and (c) new improvements to the Premises that reduce operating costs or improve life/safety conditions, all of the foregoing as reasonably determined by Landlord, in its sole but reasonable discretion (with respect to improvements to life/safety conditions, such improvements shall be required by law or regulation or reasonably determined by Landlord to be likely required in the foreseeable future, or shall be of a type or nature then being installed by other similarly situated landlords in comparable buildings); provided, if such costs are of a capital nature, then such costs or allocable portions thereof shall be amortized on a straight-line basis over the estimated useful life of the capital item or fifteen (15) years whichever is shorter, as reasonably determined by Landlord, together with reasonable interest on the unamortized balance; (v) the management and administration of any and all portions of the Premises, including, without limitation, a property management fee, accounting, auditing, billing, postage, salaries and benefits for clerical and supervisory employees, whether located on the Premises or off-site, payroll taxes and legal and accounting costs and all fees, licenses and permits related to the ownership, operation and management of the Premises; (vi) preventative maintenance and repair

contracts including, but not limited to, contracts for elevator systems (if any) and heating, ventilation and air conditioning systems, lifts for disabled persons, if Landlord elects to so procure; (vii) security and fire protection services for any portion of the Premises, if and to the extent, in Landlord’s sole discretion, such services are provided; (viii) the creation and modification of any rail spur or track agreements, licenses, easements or other similar undertakings with respect to the Premises; (ix) supplies, materials, equipment, rental equipment and other similar items used in the operation and/or maintenance of the Premises and any reasonable reserves established for replacement or repair of any Common Area improvements or equipment with such reserves to be only for Operating Expenses to be incurred within the current Lease year and the next succeeding Lease year; (x) any and all levies, charges, fees and/or assessments payable to any applicable owner’s association or similar body; (xi) any barrier removal work or other required improvements, alterations or work to any portion of the Premises generally required under the ADA (defined below) (the “ADA Work”); provided, if such ADA Work is required under the ADA due to Tenant’s use of the Premises or any Alteration (defined below) made to the Premises by or on behalf of Tenant, then the cost of such ADA Work shall be borne solely by Tenant and shall not be included as part of the Operating Expenses; and (xii) the repairs and maintenance items set forth in Section 11.2 below.

              6.1.2 Operating Expense Exclusions. Notwithstanding anything to the contrary contained herein, for purposes of this Lease, the term “Operating Expenses” shall not include the following: (i) legal and auditing fees (other than those fees reasonably incurred in connection with the maintenance and operation of all or any portion the Premises); (ii) depreciation of the Building or any other improvements situated within the Premises; (iii) any items for which Landlord is actually reimbursed by insurance; (iv) costs of repairs or other work necessitated by fire, windstorm or other casualty (excluding any deductibles) and/or costs of repair or other work necessitated by the exercise of the right of eminent domain to the extent insurance proceeds or a condemnation award, as applicable, is actually received by Landlord for such purposes; provided, such costs of repairs or other work shall be paid by the parties in accordance with the provisions of Sections 25 and 26, below; (v) other than any interest charges for capital improvements referred to in Section 6.1.1(iv) hereinabove, any interest or payments on any financing for the Building or the Premises, interest and penalties incurred as a result of Landlord’s late payment of any invoice (provided that Tenant pays Operating Expenses and Tax Expenses to Landlord when due as set forth herein), and any bad debt loss, rent loss or reserves for same; (vi) costs associated with the investigation and/or remediation of Hazardous Materials (hereafter defined) present in, on or about any portion of the Premises, unless such costs and expenses are the responsibility of Tenant as provided in Section 27 hereof, in which event such costs and expenses shall be paid solely by Tenant in accordance with the provisions of Section 27 hereof; (vii) overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in the Premises to the extent the same exceeds the costs of such by unaffiliated third parties on a competitive basis; or any costs included in Operating Expenses representing an amount paid to a person, firm, corporation or other entity related to Landlord which is in excess of the amount which would have been paid in the absence of such relationship; and (viii) any payments under a ground lease or master lease.

     6.2      Tax Expenses. Tenant shall pay to Landlord all real property taxes applicable to the Premises. Prior to delinquency, Tenant shall pay any and all taxes and assessments levied upon Tenant’s Property (defined below in Section 10) located or installed in or about the Premises by, or on behalf of Tenant. To the extent any such taxes or assessments are not separately assessed or billed to Tenant, then Tenant shall pay the amount thereof as invoiced by Landlord. Tenant shall also reimburse and pay Landlord, as Additional Rent, within ten (10) days after demand therefor, one hundred percent (100%) of (i) any increase in real property taxes attributable to any and all Alterations (defined below in Section 10), Tenant Improvements, fixtures, equipment or other improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant, and (ii) taxes and assessments levied or assessed upon or with respect to the possession, operation, use or occupancy by Tenant of the Premises. The term “Tax Expenses” shall mean and include, without limitation, any form of tax and assessment (general, special, supplemental, ordinary or extraordinary), commercial rental tax, payments under any improvement bond or bonds, license fees, license tax, business license fee, rental tax, transaction tax or levy imposed by any authority having the direct or indirect power of tax (including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement district thereof) as against any legal or equitable interest of Landlord in the Premises or any other tax, fee, or excise, however described, including, but not limited to, any value added tax, or any tax imposed in substitution (partially or totally) of any tax previously included within the definition of real property taxes, or any additional tax the nature of which was previously included within the definition of real property taxes. The term “Tax Expenses” shall not include any franchise, estate, inheritance, net income, or excess profits tax imposed upon Landlord, or a penalty fee imposed as a result of Landlord’s failure to pay Tax Expenses when due.

     6.3      Payment of Expenses. Landlord shall estimate the Operating Expenses and Tax Expenses for the calendar year in which the Lease commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this estimated amount shall be paid by Tenant to Landlord, as Additional Rent, and thereafter on the first (1st) day of each month throughout the remaining months of such calendar year. Thereafter, Landlord may estimate such expenses for each calendar year during the Term of this Lease and Tenant shall pay one-twelfth (1/12th) of such estimated amount as Additional Rent hereunder on the first (1st) day of each month during such calendar year and for each ensuing calendar year throughout the Term of this Lease. Tenant’s obligation to pay the Operating Expenses and Tax Expenses shall survive the expiration or earlier termination of this Lease.

     6.4      Annual Reconciliation. By June 30th of each calendar year, Landlord shall furnish Tenant with an accounting of actual and accrued Operating Expenses and Tax Expenses. Within thirty (30) days of Landlord’s delivery of such accounting, Tenant shall pay to Landlord the amount of any underpayment. Notwithstanding the foregoing, failure by Landlord to give such accounting by such date shall not constitute a waiver by Landlord of its right to collect any underpayment by Tenant at any time. Landlord shall credit the amount of any overpayment by Tenant toward the next monthly installment(s) of rent falling due, or where the Term of the Lease has expired, refund the amount of overpayment to Tenant within thirty (30) days after such amount is determined. If the Term of the Lease expires prior to the annual reconciliation of expenses Landlord shall have the right to reasonably estimate such expenses, and if Landlord determines that there has been an underpayment, Landlord may deduct such underpayment from Tenant’s Security Deposit. Failure by Landlord to accurately estimate such expenses or to otherwise perform such reconciliation of expenses shall not constitute a waiver of Landlord’s right

to collect any of Tenant’s underpayment at any time during the Term of the Lease or at any time after the expiration or earlier termination of this Lease, except that any such underpayment not billed within twelve (12) months after the expiration or termination of the Lease shall be deemed waived.

     6.5    Audit. After delivery to Landlord of at least thirty (30) days prior written notice, Tenant, at its sole cost and expense through any accountant designated by it, shall have the right to examine and/or audit the books and records evidencing such costs and expenses for the previous one (1) calendar year, during Landlord’s reasonable business hours but not more frequently than once during any calendar year. Any such accounting firm designated by Tenant may not be compensated on a contingency fee basis. The results of any such audit (and any negotiations between the parties related thereto) shall be maintained strictly confidential by Tenant and its accounting firm and shall not be disclosed, published or otherwise disseminated to any other party other than to Landlord and its authorized agents. Landlord and Tenant each shall use its best efforts to cooperate in such negotiations and to promptly resolve any discrepancies between Landlord and Tenant in the accounting of such costs and expenses.

7. Utilities and Services

As of the Commencement Date, Tenant shall cause all of the Utility Expenses (hereinafter defined) for the Premises to be placed in Tenant’s name with the invoices sent directly to Tenant at the Premises. Tenant shall be responsible for the payment of all Utility Expenses. Tenant shall pay directly to the appropriate utility company or similar entity the cost of all water, sewer use, sewer discharge fees and sewer connection fees, gas, heat, electricity, refuse pickup, janitorial service, telephone, telecommunications and other utilities (collectively, the “Utility Expenses”) billed or metered separately to the Premises and/or Tenant during the Term of the Lease. Tenant shall also pay any and all assessments or charges for utility or similar purposes included within any tax bill for the Lot on which the Building is situated, including without limitation, entitlement fees, allocation unit fees and/or any similar fees or charges. At least quarterly and at such shorter intervals of time upon Landlord’s request, Tenant shall promptly deliver to Landlord written evidence of Tenant’s payment of the Utility Expenses. Tenant acknowledges that the Premises may become subject to the rationing of utility services or restrictions on utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing restrictions as may be imposed upon Landlord, Tenant, or the Premises, and Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by Tenant by reason of any such rationing or restrictions. Tenant further agrees to timely and faithfully pay, prior to delinquency, any amount, tax, charge, surcharge, assessment or imposition levied, assessed or imposed upon the Premises, or Tenant’s use and occupancy thereof by a public utility company, governmental agency, taxing authority or similar entity having jurisdiction thereof.

8. Late Charges

Any and all sums or charges set forth in this Section 8 are considered part of Additional Rent. Tenant acknowledges that late payment (the second day of each month or any time thereafter) by Tenant to Landlord of Rent and all other sums due hereunder, will cause Landlord to incur costs not contemplated by this Lease. Such costs may include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any note secured by any encumbrance against the Premises, and late charges and penalties due to the late payment of real property taxes on the Premises. Therefore, if any installment of Rent or any other sum payable by Tenant is not received by Landlord when due, Tenant shall promptly pay to Landlord a late charge, as liquidated damages, in an amount equal to seven percent (7%) of such delinquent amount plus interest on such delinquent amount at the rate equal to the prime rate plus three percent (3%) for every month or portion thereof that such sums remain unpaid. Notwithstanding the foregoing, Landlord waives the late charge for the first (1st) instance during the Term of this Lease in which Tenant fails to timely pay Rent. If Tenant delivers to Landlord a check for which there are not sufficient funds, Landlord may require Tenant to replace such check with a cashier’s check for the amount of such check and all other charges payable hereunder. The parties agree that this late charge and the other charges referenced above represent a fair and reasonable estimate of the costs that Landlord will incur by reason of such late payment by Tenant, excluding attorneys’ fees and costs. Acceptance of any late charge or other charges shall not constitute a waiver by Landlord of Tenant’s default with respect to the delinquent amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord for any other breach of Tenant under this Lease. If a late charge becomes payable for three (3) installments of Rent, then Landlord, at Landlord’s sole option, can either require the Rent be paid monthly in advance by cashier’s check or by electronic funds transfer.

9. Use of Premises

     9.1    Compliance with Laws, Recorded Matters, and Rules and Regulations. The Premises are to be used solely for the purposes and uses specified in the Basic Lease Information and for no other uses or purposes without Landlord’s prior written consent. Landlord’s consent shall not be unreasonably withheld or delayed so long as the proposed use (i) does not involve the use of Hazardous Materials other than as expressly permitted under the provisions of Section 27 below, (ii) does not require any additional parking spaces, and (iii) is compatible and consistent with the other uses then being made in other similar types of buildings in the vicinity of the Premises, as reasonably determined by Landlord. The use of the Premises by Tenant and its employees, representatives, agents, invitees, licensees, subtenants, customers or contractors (collectively, “Tenant’s Representatives”) shall be subject to, and at all times in compliance with, (a) any and all applicable laws, rules, codes, ordinances, statutes, orders and regulations as same exist from time to time throughout the Term of this Lease (collectively, the “Laws”), including without limitation, the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq., including, but not limited to Title III thereof, all regulations and guidelines related thereto and all requirements of Title 24 of the State of California (collectively, the “ADA”), (b) any and all documents, instruments, licenses, restrictions, easements or similar instruments, conveyances or encumbrances which are at any time, and from time to time, required to be made by or given by Landlord in any manner relating to the initial development of the Premises and/or the construction from time to time of any additional buildings or other improvements in the Premises, including without limitation any Tenant Improvements (collectively, the “Development Documents”), (c) any and all documents, easements, covenants, conditions and restrictions, and similar instruments,

together with any and all amendments and supplements thereto made from time to time each of which has been or hereafter is recorded in any official or public records with respect to the Premises or any portion thereof (collectively, the “Recorded Matters”), and (d) any and all rules and regulations set forth in Exhibit C hereto, any other reasonable rules and regulations promulgated by Landlord now or hereafter enacted relating to parking and the operation of the Premises and/or any portion thereof and any and all rules, restrictions and/or regulations imposed by any applicable owners association or similar entity or body (collectively, the “Rules and Regulations”). Landlord reserves to itself the right, from time to time, to grant, without the consent of Tenant, such easements, rights and dedications that Landlord deems reasonably necessary, and to cause the recordation of parcel or subdivision maps and/or restrictions, so long as such easements, rights, dedications, maps and restrictions, as applicable, do not materially and adversely interfere with Tenant’s operations in the Premises. Tenant agrees to sign any documents reasonably requested by Landlord to effectuate any such easements, rights, dedications, maps or restrictions. Tenant agrees to, and does hereby, assume full and complete responsibility to ensure that the Premises, exclusive of those portions of the Premises, if any, that are to be maintained by the Landlord pursuant to Sections 11.2 and 11.3 hereof, including without limitation, the Tenant Improvements, are in compliance with all applicable Laws throughout the Term of this Lease. Additionally, Tenant shall be solely responsible for the payment of all costs, fees and expenses associated with any modifications, improvements or other Alterations to the Premises and/or any portion thereof occasioned by the enactment of, or changes to, any Laws arising from Tenant’s particular use of the Premises or Alterations or other improvements made to the Premises regardless of when such Laws became effective. Tenant shall not initiate, submit an application for, or otherwise request, any land use approvals or entitlements with respect to the Premises or any portion thereof, including without limitation, any variance, conditional use permit or rezoning, without first obtaining Landlord’s prior written consent thereto, which consent may be given or withheld in Landlord’s sole discretion.

     9.2    Prohibition on Use. Tenant shall not use the Premises or permit anything to be done in or about the Premises nor keep or bring anything therein which will in any way increase the existing rate of or affect any policy of fire or other insurance upon the Premises or any of its contents, or cause a cancellation of any insurance policy. No auctions may be held or otherwise conducted in, on or about any portion thereof without Landlord’s prior written consent thereto. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of Landlord with respect to the Premises. The Premises shall not be used for any unlawful purpose. Tenant shall not cause, maintain or permit any private or public nuisance in, on or about any portion of the Premises including, but not limited to, any offensive odors, noises, or fumes. Tenant shall not damage or deface or otherwise commit or suffer to be committed any waste in, upon or about the Premises. Tenant shall not place or store, nor permit any other person or entity to place or store, any property, equipment, materials, supplies, personal property or any other items or goods outside of the Premises for any period of time. Tenant shall not permit any animals, including, but not limited to, any household pets, to be brought or kept in or about the Premises. Tenant shall not install any radio or television antenna, satellite dish, microwave, loudspeaker or other device on the roof or exterior walls of the Premises, except with the prior written approval of Landlord which may be given or withheld in Landlord’s reasonable discretion. Tenant shall not interfere with radio, telecommunication, or television broadcasting or reception from or in the Premises or elsewhere. Tenant shall place no loads upon the floors, walls, or ceilings in excess of the maximum designed load permitted by the applicable Uniform Building Code or which may damage the Premises. Tenant shall not place any harmful liquids in the drainage systems or dump or store waste materials, refuse or other such materials, or allow such materials to remain outside the Building area, except for any non-hazardous or non-harmful materials which may be stored in refuse dumpsters.

10. Alterations; and Surrender of Premises

     10.1    Alterations: Tenant shall be permitted to make, at its sole cost and expense, non-structural alterations and additions to the interior of the Premises without obtaining Landlord’s prior written consent, provided said alterations are not part of Tenant’s Wi-Fi Network (defined herein below), do not affect the Building systems and the cost of such alterations does not exceed Fifty Thousand Dollars ($50,000.00) each job and Seventy-five Thousand Dollars ($75,000.00) cumulatively each calendar year (the “Permitted Improvements”). Tenant, however, shall first notify Landlord of such Permitted Improvements so that Landlord may post a Notice of Non-Responsibility on the Premises. Except for the Permitted Improvements, Tenant shall neither install any signs, fixtures, or improvements, nor make or permit any other alterations or additions (individually, an “Alteration”, and collectively, “Alterations”) to the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld so long as any such Alteration does not affect the Building systems, structural integrity or structural components of the Premises or Building. If any such Alteration is expressly permitted by Landlord, Tenant shall deliver at least ten (10) days prior written notice to Landlord, from the date Tenant commences construction, sufficient to enable Landlord to post and record a Notice of Non-Responsibility. Tenant shall obtain all permits or other governmental approvals prior to commencing any work and deliver a copy of same to Landlord. All Alterations shall be (i) at Tenant’s sole cost and expense in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, such approval not to be unreasonably withheld, and shall be installed by a licensed, insured (and bonded, at Landlord’s option) contractor (reasonably approved by Landlord) in compliance with all applicable Laws, Development Documents, Recorded Matters, and Rules and Regulations and (ii) performed in a good and workmanlike manner. Landlord’s approval of any plans, specifications or working drawings for Tenant’s Alterations shall neither create nor impose any responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with any Laws. As Additional Rent, Tenant shall reimburse Landlord, within ten (10) days after demand, for reasonable actual legal, engineering, architectural, planning and other reasonable expenses incurred by Landlord in connection with Tenant’s Alterations, plus Tenant shall pay to Landlord a fee equal to two and one-half percent (2.5%) of the total cost of the Alterations. If Tenant makes any Alterations, Tenant shall carry “Builder’s All Risk” insurance, in an amount reasonably approved by Landlord and such other insurance as Landlord may reasonably require. All such Alterations shall be insured by Tenant in accordance with Section 12 of this Lease immediately upon completion. Tenant shall keep the Premises and the Lot on which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant. Tenant shall, prior to commencing any Alterations, (a) cause its contractor(s) and/or major subcontractor(s) to provide insurance as reasonably required by Landlord, and (b) provide such assurances to Landlord, including without limitation, waivers of lien, and if the work exceeds $100,000, surety company performance bonds as Landlord shall require to assure payment of the costs thereof to protect Landlord and the Project from and against any mechanic’s, materialmen’s or other liens.

               10.1.1 Wi-Fi Network: Without limiting the generality of the foregoing, in the event Tenant desires to install wireless intranet, Internet and communications network (“Wi-Fi Network“) in the Premises for the use by Tenant and its employees, then the same shall be subject to the provisions of this Section 10.1.1 (in addition to the other provisions of this Section 10). In the event Landlord consents to Tenant’s installation of such Wi-Fi Network, Tenant shall, in accordance with Section 10.2 below, remove the Wi-Fi Network from the Premises prior to the termination of the Lease. Tenant shall use the Wi-Fi Network so as not to damage the Building and Tenant hereby agrees to indemnify, defend and hold Landlord harmless from and against any and all claims, costs, damages, expenses and liabilities (including attorneys’ fees) arising out of Tenant’s failure to comply with the provisions of this Section 10.1.1, except to the extent same is caused by the gross negligence or willful misconduct of Landlord and which is not covered by the insurance carried by Tenant under this Lease (or which would not be covered by the insurance required to be carried by Tenant under this Lease). Should any interference occur, Tenant shall take all necessary steps as soon as reasonably possible and no later than three (3) calendar days following such occurrence to correct such interference. If such interference continues after such three (3) day period, Tenant shall immediately cease operating such Wi-Fi Network until such interference is corrected or remedied to Landlord’s satisfaction. Tenant acknowledges that Landlord has granted and/or may grant telecommunication rights to telecommunication service providers and in no event shall Landlord be liable to Tenant for any interference of the same with such Wi-Fi Network; provided, however, Landlord shall use commercially reasonable efforts to require that such providers install equipment that is compatible with and does not materially interfere with Tenant’s Wi-Fi Network. Landlord makes no representation that the Wi-Fi Network will be able to receive or transmit communication signals without interference or disturbance. Tenant shall (i) be solely responsible for any damage caused as a result of the Wi-Fi Network, (ii) promptly pay any tax, license or permit fees charged pursuant to any laws or regulations in connection with the installation, maintenance or use of the Wi-Fi Network and comply with all precautions and safeguards recommended by all governmental authorities, (iii) pay for all necessary repairs, replacements to or maintenance of the Wi-Fi Network, and (iv) be responsible for any modifications, additions or repairs to the Building systems or infrastructure which are required by reason of the installation or operation of Tenant’s Wi-Fi Network. Should Landlord be required to retain professionals to research any interference issues that may arise and to confirm Tenant’s compliance with the terms of this Section 10.1.1, Landlord shall retain such professionals at commercially reasonable rates, and Tenant shall reimburse Landlord within twenty (20) days following submission to Tenant of an invoice from Landlord, which costs shall not exceed $1,000 per year (except in the event of a default by Tenant hereunder). This reimbursement obligation is independent of any rights or remedies Landlord may have in the event of a breach of default by Tenant under this Lease.

     10.2    Surrender of Premises: At the expiration of the Term or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by acts of God, casualty, and normal wear and tear excepted), but with all interior walls cleaned, any carpets cleaned, all floors cleaned and waxed, all non-working light bulbs and ballasts replaced and all roll-up doors and plumbing fixtures in good condition and working order, and (b) in accordance with Section 27 hereof. Normal wear and tear shall not include any damage or deterioration that would have been prevented by proper maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease, or any damage or deterioration due to or associated with prolonged hours regularly exceeding twelve (12) hours per day, non-office use other than light manufacturing, unusually heavy people loads (defined as more than one person per two hundred (200) rentable square feet), unusually heavy utility use, unusually heavy floor loads, or other unusual occupancy factors. On or before the expiration or earlier termination of this Lease, Tenant shall remove (i) all of Tenant’s Property (defined below) and Tenant’s signage from the Premises and other portions of the Project, (ii) any Alterations Landlord may, by notice to Tenant given at the time of approval thereof, if Tenant requested at such time that Landlord indicate whether removal would be required or, if Tenant failed to make such request, then given not later than ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice shall be required), require Tenant, at Tenant’s expense, to remove, and (iii) the Removable TIs, to the extent Landlord has advised Tenant on or about the time that the Tenant Improvements were installed in the Premises that Tenant is to remove all or portions of the items comprising the Tenant Improvements (the “Removable TIs”), and Tenant shall repair any damage caused by all of such removal activities. “Tenant’s Property” means all equipment, trade fixtures, furnishings, all telephone, data, and other cabling and wiring (including any cabling and wiring associated with the Wi-Fi Network, if any) installed or caused to be installed by Tenant (including any cabling and wiring, installed above the ceiling of the Premises or below the floor of the Premises), inventories, goods and personal property of Tenant. Any of Tenant’s Property not so removed by Tenant as required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant’s expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord’s retention and disposition of such property; provided, however, Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. Landlord may elect to take responsibility to remove any such wiring or cabling installed above the ceiling or beneath the floors of the Premises, in which case Tenant shall pay Landlord for the actual cost incurred by Landlord therefor, (together with a five percent (5%) supervision/administration fee) within thirty (30) days after being billed for the same. All Tenant Improvements and Alterations except those which Landlord requires Tenant to remove, shall remain in the Premises as the property of Landlord. If the Premises are not surrendered at the expiration of the Term or earlier termination of this Lease, and in accordance with this Section 10 and Section 27 below, Tenant shall continue to be responsible for the payment of Rent (as the same may be increased pursuant to Section 20 below) until the Premises are so surrendered in accordance with said provisions. Tenant shall indemnify, defend and hold the Indemnitees (hereafter defined) harmless from and against any and all Claims (defined below) (x) arising from any delay by Tenant in so surrendering the Premises including, without limitation, any Claims made against Landlord by any succeeding tenant or prospective tenant founded on or resulting from such delay and (y) suffered by Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant. Notwithstanding anything to the contrary herein, Tenant shall, within twenty-four (24) hours after the expiration of this Lease, at Tenant’s expense and in compliance with the National Electric Code and other applicable laws, remove all electronic, fiber, phone and data cabling and related equipment that has been installed by or for the exclusive benefit of Tenant in or around the Premises (collectively, the “Cabling”); provided, however, that Tenant shall not remove such Cabling if Tenant receives a written notice from Landlord at least fifteen (15) days prior to the expiration of the Lease authorizing such Cabling to remain in place, in which event the Cabling shall be surrendered with the Premises upon the expiration of this Lease.

11. Repairs and Maintenance

     11.1    Tenant’s Repairs and Maintenance Obligations. Except for those portions of the Premises to be maintained by Landlord, as provided in Sections 11.2 and 11.3 below, Tenant shall, at its sole cost and expense, keep and maintain all parts of the Premises in good, clean and safe condition and repair, promptly making all necessary repairs and replacements, whether ordinary or extraordinary, with materials and workmanship of the same character, kind and quality as the original thereof, all of the foregoing in accordance with the applicable provisions of Section 10 hereof, and to the reasonable satisfaction of Landlord including, but not limited to, repairing any damage caused by Tenant or any of Tenant’s Representatives and replacing any property so damaged by Tenant or any of Tenant’s Representatives. Without limiting the generality of the foregoing, Tenant shall be solely responsible for promptly maintaining, repairing and replacing (a) all mechanical systems, heating, ventilation and air conditioning systems serving the Premises, unless maintained by Landlord, (b) all plumbing work and fixtures, (c) electrical wiring systems, fixtures and equipment, (d) all interior lighting (including, without limitation, light bulbs and/or ballasts) and exterior lighting adjacent to the Premises, (e) all glass, windows, window frames, window casements, skylights, interior and exterior doors, door frames and door closers, (f) all roll-up doors, ramps and dock equipment, including without limitation, dock bumpers, dock plates, dock seals, dock levelers and dock lights, (g) all tenant signage, (h) lifts for disabled persons serving the Premises, (i) sprinkler systems, fire protection systems and security systems, except to the extent maintained by Landlord, and (j) all partitions, fixtures, equipment, interior painting, interior walls and floors, and floor coverings of the Premises and every part thereof (including, without limitation, any demising walls contiguous to any portion of the Premises). Any such work shall be performed by licensed, insured and bonded (if required hereunder) contractors and subcontractors reasonably approved by Landlord. Additionally, Tenant shall be solely responsible for performance of the regular removal of trash and debris. Tenant shall have no right of access to or right to install any device on the roof of the Premises nor make any penetrations of the roof of the Premises without the express prior written consent of Landlord.

     11.2    Maintenance by Landlord. Subject to the provisions of Section 11.1, and further subject to Tenant’s obligation under Section 6 to reimburse Landlord, in the form of Additional Rent, for the cost and expense of the following described items, Landlord agrees to repair and maintain the following items: fire protection services; the roof and roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages the roof coverings, in which event Tenant shall pay all costs relating to the presence of such additional equipment); painting the exterior surfaces of the Building, the plumbing and mechanical systems serving the Premises; any rail spur and rail crossing; exterior painting of the Premises; and the parking areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas. Notwithstanding anything in this Section 11 to the contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage to any portion of the Premises caused by or created due to any act, omission, negligence or willful misconduct of Tenant or any of Tenant Representatives and to restore the Premises to the condition existing prior to the occurrence of such damage. If Landlord elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in connection therewith. Tenant shall promptly report, in writing, to Landlord any defective condition known to it which Landlord is required to repair, and failure to so report any such defect shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such condition.

     11.3    Landlord’s Repairs and Maintenance Obligations. Subject to the provisions of Sections 11.1, 25 and 26, and except for repairs rendered necessary by the intentional or negligent acts or omissions of Tenant or any of Tenant’s Representatives, Landlord agrees, at Landlord’s sole cost and expense, to (a) keep in good repair the structural portions of the floors, foundations and exterior perimeter walls of the Premises (exclusive of glass and exterior doors), and (b) replace the structural portions of the roof of the Premises (excluding the roof membrane).

     11.4    Tenant’s Failure to Perform Repairs and Maintenance Obligations. If Tenant, after notice from Landlord, refuses or neglects to repair and maintain the Premises and the other areas properly as required herein and to the reasonable satisfaction of Landlord, Landlord may, but without obligation to do so, at any time make such repairs or maintenance without Landlord having any liability to Tenant for any loss or damage that may accrue to Tenant’s Property or to Tenant’s business by reason thereof, except to the extent any damage is caused by the willful misconduct or gross negligence of Landlord or its authorized agents and representatives. If Landlord makes such repairs or maintenance, upon completion thereof Tenant shall pay to Landlord, as Additional Rent, Landlord’s costs and expenses incurred therefor. The obligations of Tenant hereunder shall survive the expiration of the Term of this Lease or the earlier termination thereof. Tenant hereby waives any right to repair at the expense of Landlord under any applicable Laws now or hereafter in effect with respect to the Premises.

     11.5    Tenant’s Ability to Perform Landlord’s Unperformed Obligations. Notwithstanding anything to the contrary contained in this Lease, if Landlord shall fail to perform any of the terms, provisions, covenants or conditions to be performed or complied with by Landlord under Section 11.2, 11.3, 25 and 26 of this Lease (such terms, provisions, covenants or conditions are referred to herein, collectively as “Landlord Repair Obligations”) after expiration of all applicable notice and cure periods for Landlord’s and any mortgagee’s benefit as set forth in Sections 21 and 31, respectively, then Tenant may, at Tenant’s option and risk, but without any obligation to do so, after delivery of an additional twenty (20) day prior written notice to Landlord, perform such Landlord Repair Obligations on Landlord’s behalf. If Tenant so performs any of such Landlord Repair Obligations hereunder, then Tenant will perform such Landlord Repair Obligations (1) in compliance with all applicable Laws, regulations and requirements to which Landlord would be subject under this Lease (if Landlord were performing such Landlord Repair Obligations), (2) in a good workmanlike manner using materials of a quality and grade at least equal to that in place as of the date of delivery of the Premises to Tenant, if applicable, and (3) in compliance with the terms and provisions of Section 10.1 hereof, as applicable. Tenant will promptly assign to Landlord any warranties or guaranties in respect of any Landlord Repair Obligations. If Tenant so performs any of such Landlord Repair Obligations hereunder, the full amount of the fair and reasonable costs and expenses incurred by Tenant shall be owing by Landlord to Tenant, and Landlord shall pay to Tenant the full undisputed amount thereof within thirty (30) days of Landlord’s receipt of Tenant’s written demand therefor together with reasonable evidence verifying the amount of such costs and expenses.

12. Insurance

     12.1    Types of Insurance. Tenant shall maintain in full force and effect at all times during the Term of this Lease, at Tenant’s sole cost and expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a carrier or carriers reasonably acceptable to Landlord and its lender which afford the following coverages: (i) worker’s compensation and employer’s liability, as required by law; (ii) commercial general liability insurance (occurrence form) providing coverage against any and all claims for bodily injury and property damage occurring in, on or about the Premises arising out of Tenant’s and Tenant’s Representatives’ use or occupancy of the Premises. Such insurance shall include coverage for blanket contractual liability, fire damage, premises and personal injury. Such insurance shall have a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence with a Three Million Dollar ($3,000,000) aggregate limit and excess/umbrella insurance in the amount of Three Million Dollars ($3,000,000). Tenant shall also maintain product liability and completed operations insurance coverage under a separate claims made policy. Such separate policy shall have a liability limit of not less than $3,000,000 and shall have a deductible of not more than $100,000. If Tenant has other United States locations which it owns or leases, the commercial general liability policy shall include an aggregate limit per location endorsement; (iii) comprehensive automobile liability insurance with a combined single limit of at least $1,000,000 per occurrence for claims arising out of any company owned automobiles; (iv) “all risk” or “special purpose” property insurance, including without limitation, sprinkler leakage, covering damage to or loss of any of Tenant’s Property and the Tenant Improvements located in, on or about the Premises, and in addition, coverage for earthquake and business interruption of Tenant, together with, if the property of any of Tenant’s invitees, vendors or customers is to be kept in the Premises, warehouser’s legal liability or bailee customers insurance for the full replacement cost of the property belonging to such parties and located in the Premises. Such insurance shall be written on a replacement cost basis (without deduction for depreciation) in an amount equal to one hundred percent (100%) of the full replacement value of the aggregate of the items referred to in this clause (iv); and (v) such other insurance or higher limits of liability as is then customarily required for similar types of buildings within the general vicinity of the Premises or as may be reasonably required by any of Landlord’s lenders.

     12.2    Insurance Policies. Insurance required to be maintained by Tenant shall be written by companies (i) licensed to do business in the State of California, (ii) domiciled in the United States of America, and (iii) having a “General Policyholders Rating” of at least A: VIII (or such higher rating as may be reasonably required by a lender having a lien on the Premises) as set forth in the most current issue of “A.M. Best’s Rating Guides.” Any deductible amounts under any of the insurance policies required hereunder shall not exceed Twenty-five Thousand Dollars ($25,000), except for products liability and completed operations where the deductible shall not exceed One Hundred Thousand Dollars ($100,000) and earthquake coverage where the deductible shall not exceed ten percent (10%) of the insured amount. Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, on the renewal date of each policy, furnish Landlord with certificates of renewal or “binders” thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to material modification except after thirty (30) days prior written notice to the parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days’ notice has been given to Landlord). Tenant shall have the right to provide insurance coverage which it is obligated to carry pursuant to the terms of this Lease under a blanket insurance policy, provided such blanket policy expressly affords coverage for the Premises and for Landlord as required by this Lease.

     12.3    Additional Insureds and Coverage. Each of Landlord, Landlord’s property management company or agent, and Landlord’s lender(s) having a lien against the Premises shall be named as additional insureds or loss payees (as applicable) under all of the policies required in Section 12.1(ii) and, with respect to the Tenant Improvements, in Section 12.1(iv) hereof. Additionally, all of such policies shall provide for severability of interest. All insurance to be maintained by Tenant shall, except for workers’ compensation and employer’s liability insurance, be primary, without right of contribution from insurance maintained by Landlord. Any umbrella/excess liability policy (which shall be in “following form”) shall provide that if the underlying aggregate is exhausted, the excess coverage will drop down as primary insurance. The limits of insurance maintained by Tenant shall not limit Tenant’s liability under this Lease. It is the parties’ intention that the insurance to be procured and maintained by Tenant as required herein shall provide coverage for any and all damage or injury arising from or related to Tenant’s operations of its business and/or Tenant’s or Tenant’s Representatives’ use of the Premises. Notwithstanding anything to the contrary contained herein, to the extent Landlord’s cost of maintaining insurance with respect to the Building is increased as a result of Tenant’s acts, omissions, Alterations, improvements, use or occupancy of the Premises, Tenant shall pay one hundred percent (100%) of, and for, each such increase as Additional Rent.

     12.4    Failure of Tenant to Purchase and Maintain Insurance. If Tenant fails to obtain and maintain the insurance required herein throughout the Term of this Lease, Landlord may, but without obligation to do so, purchase the necessary insurance and pay the premiums therefor. If Landlord so elects to purchase such insurance, Tenant shall promptly pay to Landlord as Additional Rent, the amount so paid by Landlord, upon Landlord’s demand therefor. In addition, Landlord may recover from Tenant and Tenant agrees to pay, as Additional Rent, any and all losses, damages, expenses and costs which Landlord may sustain or incur by reason of Tenant’s failure to obtain and maintain such insurance.

     12.5    Waiver of Subrogation. Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss of, or damage to, either parties’ property to the extent that such loss or damage is insured by an insurance policy required to be in effect at the time of such loss or damage. Each party shall obtain any special endorsements, if required by its insurer, whereby the insurer waives its rights of subrogation against the other party. This provision is intended to waive fully, and for the benefit of the parties hereto, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier.

     12.6    Landlord’s Insurance. Landlord shall maintain in full force and effect during the Term of this Lease, subject to reimbursement as provided in Section 6, policies of insurance which afford such coverages as are commercially reasonable and as is

consistent with other properties in Landlord’s portfolio. Notwithstanding the foregoing, Landlord shall obtain and keep in force during the Term of this Lease, as an item of Operating Expenses, a policy or policies in the name of Landlord, with loss payable to Landlord and to the holders of any mortgages, deeds of trust or ground leases on the Premises (“Lender(s)”), insuring loss or damage to the Building, including all improvements, fixtures (other than trade fixtures) and permanent additions. However, all Alterations, additions and improvements made to the Premises by Tenant (including the Tenant Improvements) shall be insured by Tenant rather than by Landlord. The amount of such insurance procured by Landlord shall be equal to at least eighty percent (80%) of the full replacement cost of the Building, including all improvements and permanent additions as the same shall exist from time to time, or the greater amount required by Lenders. Such policy or policies shall insure against all risks of direct physical loss or damage (so called “all risk”) (including, without limitation and at Landlord’s option, the perils of flood and earthquake), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. If any such insurance coverage procured by Landlord has a deductible clause, in the event of any casualty, the amount of such deductible shall be an item of Operating Expenses as so limited. Any deductible shall be in a commercially reasonable amount and the carrier shall have a rating of A-:VIII or better.

13. Limitation of Liability and Indemnity

Except to the extent of damage resulting from the sole active gross negligence or willful misconduct of Landlord or its authorized representatives, Tenant agrees to protect, defend (with counsel reasonably acceptable to Landlord) and hold Landlord and Landlord’s lenders, partners, members, property management company (if other than Landlord), agents, directors, officers, employees, representatives, contractors, successors and assigns and each of their respective partners, members, directors, heirs, employees, representatives, agents, contractors, heirs, successors and assigns (collectively, the “Indemnitees”) harmless and indemnify the Indemnitees from and against all liabilities, damages, demands, penalties, costs, claims, losses, judgments, charges and expenses (including reasonable attorneys’ fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) (collectively, “Claims”) arising from or in any way related to, directly or indirectly, (i) Tenant’s or Tenant’s Representatives’ use of the Premises , (ii) the conduct of Tenant’s business, (iii) from any activity, work or thing done, permitted or suffered by Tenant in or about the Premises, (iv) in any way connected with the Premises, the Alterations or with the Tenant’s Property therein, including, but not limited to, any liability for injury to person or property of Tenant, Tenant’s Representatives or third party persons, and/or (v) Tenant’s failure to perform any covenant or obligation of Tenant under this Lease. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease.

Except to the extent of damage resulting from the sole active gross negligence or willful misconduct of Landlord or its authorized representatives, to the fullest extent permitted by law, Tenant agrees that neither Landlord nor any of the Indemnitees shall at any time or to any extent whatsoever be liable, responsible or in any way accountable for any loss, liability, injury, death or damage to persons or property which at any time may be suffered or sustained by Tenant or by any person(s) whomsoever who may at any time be using, occupying or visiting the Premises. Tenant shall not, in any event or circumstance, be permitted to offset or otherwise credit against any payments of Rent required herein for matters for which Landlord may be liable hereunder except to the extent of any judgment obtained by Tenant that is not satisfied by Landlord within sixty (60) days after Landlord’s receipt of written notice from Tenant requesting satisfaction of such judgment. Landlord and its authorized representatives shall not be liable for any interference with light or air, or for any latent defect in the Premises.

14. Assignment and Subleasing

     14.1    Prohibition. Tenant shall not, without the prior written consent of Landlord, not to be unreasonably withheld, assign, mortgage, hypothecate, encumber, grant any license or concession, pledge or otherwise transfer this Lease or any interest herein, permit any assignment or other such transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or permit the use of the Premises by any persons other than Tenant and Tenant’s Representatives (all of the foregoing are sometimes referred to collectively as “Transfers” and any person to whom any Transfer is made or sought to be made is sometimes referred to as a “Transferee”). No consent to any Transfer shall constitute a waiver of the provisions of this Section 14, and all subsequent Transfers may be made only with the prior written consent of Landlord, which consent shall not be unreasonably withheld, but which consent shall be subject to the provisions of this Section 14.

     14.2    Request for Consent. If Tenant seeks to make a Transfer, Tenant shall notify Landlord, in writing, and deliver to Landlord at least thirty (30) days (but not more than one hundred eighty (180) days) prior to the proposed commencement date of the Transfer (the “Proposed Effective Date”) the following information and documents (the “Tenant’s Notice”): (i) a description of the portion of the Premises to be transferred (the “Subject Space”); (ii) all of the terms of the proposed Transfer including without limitation, the Proposed Effective Date, the name and address of the proposed Transferee, and a copy of the existing or proposed assignment, sublease or other agreement governing the proposed Transfer; (iii) current financial statements of the proposed Transferee certified by an officer, member, partner or owner thereof, and any such other information as Landlord may then reasonably require, including without limitation, audited financial statements for the previous three (3) most recent consecutive fiscal years; (iv) the Plans and Specifications (defined below), if any; and (v) such other information as Landlord may then reasonably require. Tenant shall give Landlord the Tenant’s Notice by registered or certified mail addressed to Landlord at Landlord’s Address specified in the Basic Lease Information. Within thirty (30) days after Landlord’s receipt of the Tenant’s Notice (the “Landlord Response Period”) Landlord shall notify Tenant, in writing, of its determination with respect to such requested proposed Transfer and the election to recapture as set forth in Section 14.5 below. If Landlord does not elect to recapture pursuant to the provisions of Section 14.5 hereof and Landlord does consent to the requested proposed Transfer, Tenant may thereafter assign its interests in and to this Lease or sublease all or a portion of the Premises to the same party and on the same terms as set forth in the Tenant’s Notice. If Landlord fails to respond to Tenant’s Notice within Landlord’s Response Period, then, after Tenant delivers to

Landlord fifteen (15) days’ written notice (the “Second Response Period”) and Landlord fails to respond thereto prior to the end of the Second Response Period, the proposed Transfer shall then be deemed approved by Landlord.

     14.3    Criteria for Consent. Tenant acknowledges and agrees that, among other circumstances for which Landlord could reasonably withhold consent to a proposed Transfer, it shall be reasonable for Landlord to withhold its consent where (a) Tenant is or has been materially and chronically in default of its obligations under this Lease beyond applicable notice and cure periods, as determined in Landlord’s reasonable discretion, (b) the use to be made of the Premises by the proposed Transferee is prohibited under this Lease or differs from the uses permitted under this Lease, (c) the proposed Transferee or its business is subject to compliance with additional requirements of the ADA beyond those requirements which are applicable to Tenant, unless the proposed Transferee shall (1) first deliver plans and specifications for complying with such additional requirements (the “Plans and Specifications”) and obtain Landlord’s written consent thereto, and (2) comply with all Landlord’s reasonable conditions contained in such consent, (d) the proposed Transferee does not intend to occupy a substantial portion of the Premises assigned or sublet to it, (e) Landlord reasonably disapproves of the proposed Transferee’s business operating ability or history, reputation or creditworthiness or the character of the business to be conducted by the proposed Transferee at the Premises, (f) the proposed Transferee is a governmental agency or unit, (g) the proposed Transfer would cause Landlord to violate another agreement or obligation to which Landlord is a party or otherwise subject, (h) Landlord otherwise reasonably determines that the proposed Transfer would have the effect of decreasing the value of the Premises or increasing the expenses associated with operating, maintaining and repairing the Premises, or (i) the proposed Transferee will use, store or handle Hazardous Materials (defined below) in or about the Premises of a type, nature or quantity not then acceptable to Landlord.

     14.4    Effectiveness of Transfer and Continuing Obligations. Prior to the date on which any permitted Transfer becomes effective, Tenant shall deliver to Landlord (i) a counterpart of the fully executed Transfer document, (ii) an executed Hazardous Materials Disclosure Certificate substantially in the form of Exhibit E hereto (the “Transferee HazMat Certificate”), and (iii) Landlord’s reasonable standard form of Consent to Assignment or Consent to Sublease, as applicable, executed by Tenant and the Transferee in which each of Tenant and the Transferee confirms its obligations pursuant to this Lease. Failure or refusal of a Transferee to execute any such reasonable consent instrument shall not release or discharge the Transferee from its obligation to do so or from any liability as provided herein. The voluntary, involuntary or other surrender of this Lease by Tenant, or a mutual cancellation by Landlord and Tenant, shall not work a merger, and any such surrender or cancellation shall, at the option of Landlord, either terminate all or any existing subleases or operate as an assignment to Landlord of any or all of such subleases. Each permitted assignee shall assume and be deemed to assume this Lease and shall be and remain liable jointly and severally with Tenant for payment of Rent and for the due performance of, and compliance with all the terms, covenants, conditions and agreements herein contained on Tenant’s part to be performed or complied with, for the Term of this Lease. No Transfer shall affect the continuing primary liability of Tenant (which, following assignment, shall be joint and several with the assignee), and Tenant shall not be released from performing any of the terms, covenants and conditions of this Lease. An assignee of Tenant shall become directly liable to Landlord for all obligations of Tenant hereunder, but no Transfer by Tenant shall relieve Tenant of any obligations or liability under this Lease whether occurring before or after such consent, assignment, subletting or other Transfer. The acceptance of any or all of the Rent by Landlord from any other person (whether or not such person is an occupant of the Premises) shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any Transfer. For purposes hereof, if Tenant is a business entity, direct or indirect transfer of fifty percent (50%) or more of the ownership interest of the entity (whether in a single transaction or in the aggregate through more than one transaction) shall be deemed a Transfer and shall be subject to all the provisions hereof; provided, the issuance of shares of Tenant on any national securities exchange (as defined in the Securities Exchange Act of 1934, as amended) shall not constitute a Transfer. Any and all options, first rights of refusal, tenant improvement allowances and other similar rights granted to Tenant in this Lease, if any, shall not be assignable by Tenant unless expressly authorized in writing by Landlord. Any transfer made without Landlord’s prior written consent, shall, at Landlord’s option, be null, void and of no effect, and shall, at Landlord’s option, constitute a material default by Tenant of this Lease. As Additional Rent hereunder, Tenant shall pay to Landlord each time it requests a Transfer, a fee in the amount of two thousand five hundred dollars ($2,500) and, in addition, Tenant shall promptly reimburse Landlord for actual legal and other expenses incurred by Landlord in connection with any actual or proposed Transfer.

     14.5    Recapture. If the Transfer (i) by itself or taken together with then existing or pending Transfers covers or totals, as the case may be, more than twenty-five percent (25%) of the rentable square feet of the Premises, or (ii) is for a term which by itself or taken together with then existing or pending Transfers is greater than fifty percent (50%) of the period then remaining in the Term of this Lease as of the time of the Proposed Effective Date, then Landlord shall have the right, to be exercised by giving written notice to Tenant, to recapture the Subject Space described in the Tenant’s Notice. If such recapture notice is given, it shall serve to terminate this Lease with respect to the proposed Subject Space, or, if the proposed Subject Space covers all the Premises, it shall serve to terminate the entire Term of this Lease, in either case, as of the Proposed Effective Date; provided, however, if Tenant elects a recapture, Tenant may withdraw Tenant’s Notice within ten (10) days after such election and there shall be no recapture and the Lease shall continue in full force and effect with Tenant as the tenant hereunder. However, no termination of this Lease with respect to part or all of the Premises shall become effective without the prior written consent, where necessary, of the holder of each deed of trust encumbering the Premises. If this Lease is terminated pursuant to the foregoing provisions with respect to less than the entire Premises, the Rent shall be adjusted on the basis of the proportion of rentable square feet retained by Tenant to the rentable square feet originally demised and this Lease as so amended shall continue thereafter in full force and effect.

     14.6    Transfer Premium. If Landlord consents to a Transfer, as a condition thereto, Tenant shall pay to Landlord monthly, as Additional Rent, at the same time as the monthly installments of Rent are payable hereunder, seventy-five percent (75%) of any Transfer Premium. The term “Transfer Premium” shall mean all rent, additional rent and other consideration payable by such Transferee which either initially or over the term of the Transfer exceeds the Rent or pro rata portion of the Rent, as the case may be, for such space reserved in the Lease after deducting from such excess Tenant’s reasonable expenses in connection with such Transfer, inclusive of brokerage commissions, attorneys’ fees, free rent and tenant improvement costs, incurred with respect to such Transfer.

     14.7    Waiver. Notwithstanding any Transfer, or any indulgences, waivers or extensions of time granted by Landlord to any Transferee, or failure by Landlord to take action against any Transferee, Tenant agrees that Landlord may, at its option, proceed against Tenant without having taken action against or joined such Transferee, except that Tenant shall have the benefit of any indulgences, waivers and extensions of time granted to any such Transferee.

     14.8    Affiliated Companies/Restructuring of Business Organization. The assignment or subletting by Tenant of all or any portion of this Lease or the Premises to (i) a parent or subsidiary of Tenant, or (ii) any person or entity which controls, is controlled by or under the common control with Tenant, or (iii) any entity which purchases all or substantially all of the assets of Tenant, or (iv) any entity into which Tenant is merged or consolidated (all such persons or entities described in clauses (i), (ii), (iii) and (iv) being sometimes herein referred to as “Affiliates”) shall not be deemed a Transfer under Section 14 (hence, the aforesaid events shall not be subject to obtaining Landlord’s prior consent; Landlord shall not have any right to receive any Transfer Premium in connection therewith; and Landlord shall not have the recapture rights described in Section 14.5 above), provided in all instances that:

               14.8.1 any such Affiliate was not formed as a subterfuge to avoid the obligations of this Section 14;

               14.8.2 Tenant shall give Landlord prior notice of any such assignment or sublease to an Affiliate;

               14.8.3 the successor Tenant has as of the effective date of any such assignment or sublease a tangible net worth and net assets, in the aggregate, computed in accordance with generally accepted accounting principles (but excluding goodwill as an asset), which is equal to or better than the tangible net worth and net assets, in the aggregate, of Tenant as of the Lease Date and as of the date of any such assignment or sublease;

               14.8.4 any such assignment or sublease shall be subject to all of the terms and provisions of this Lease, and such assignee or sublessee (i.e. any such Affiliate), other than in the case of an Affiliate resulting from a merger or consolidation as described in Section 14.8(iv) above, shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease; and

               14.8.5 Tenant and any guarantor shall remain fully liable for all obligations to be performed by Tenant under this Lease, except in the case of an Affiliate resulting from the acquisition of all or substantially all of the assets of Tenant described in Section 14.8(iii) or from a merger or consolidation as described in Section 14.8(iv) above.

15. Subordination

To the fullest extent permitted by law, this Lease, the rights of Tenant under this Lease and Tenant’s leasehold interest shall be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises, and (ii) the lien of any mortgage or deed of trust which may now or hereafter exist for which the Premises, ground leases or underlying leases or Landlord’s interest or estate in any of said items is specified as security. Tenant hereby acknowledges that as of the date on which Landlord and Tenant execute this Lease there is a deed of trust encumbering, in and in force against, the Premises (i.e. the Building) in favor of Redwood Capital Finance Company, LLC (the “Current Lender”). If Tenant so requests, within a reasonable period after the parties execute this Lease but in no event later than forty-five (45) days after such request, Landlord shall use commercially reasonable efforts to cause the Current Lender to execute a subordination, non-disturbance and attornment agreement substantially in the form of Exhibit I attached hereto, entitled “Subordination, Non-Disturbance and Attornment Agreement”. If Landlord at any time during the Term of this Lease causes the Premises and the Building to be encumbered by a new deed of trust or mortgage pursuant to which the beneficiary of such deed of trust or mortgage is a party or entity other than the Current Lender, the parties acknowledge and agree that the form of any non-disturbance and attornment agreement that may be requested to be executed and delivered by Tenant in connection therewith will not be the “Non-Disturbance and Attornment Agreement” attached to the Lease as Exhibit I. Notwithstanding the foregoing, Landlord or any such ground lessor, mortgagee, or any beneficiary shall have the right to require this Lease be superior to any such ground leases or underlying leases or any such liens, mortgage or deed of trust. If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall attorn to and become the Tenant of the successor in interest to Landlord, provided such successor in interest will not disturb Tenant’s use, occupancy or quiet enjoyment of the Premises if Tenant is not in material default of the terms and provisions of this Lease. The successor in interest to Landlord following foreclosure, sale or deed in lieu thereof shall not be: (a) liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) subject to any offsets or defenses which Tenant might have against any prior lessor; (c) bound by prepayment of more than one (1) month’s Rent, then not more than three months’ Rent; or (d) liable to Tenant for any Security Deposit not actually received by such successor in interest to the extent any portion or all of such Security Deposit has not already been forfeited by, or refunded to, Tenant. Landlord shall be liable to Tenant for all or any portion of the Security Deposit not forfeited by, or refunded to Tenant, until and unless Landlord transfers such Security Deposit to the successor in interest. Tenant covenants and agrees to execute (and acknowledge if required by Landlord, any lender or ground lessor) and deliver, within five (5) days of a demand or request by Landlord and in the form reasonably requested by Landlord, ground lessor, mortgagee or beneficiary, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. Tenant’s agreement to subordinate this Lease to any future ground or underlying lease or any future deed of trust or mortgage pursuant to the foregoing provisions of this Section 15 is conditioned upon Landlord delivering to Tenant from the lessor under such future ground or underlying lease or the holder of any such mortgage or deed of trust, a non-disturbance agreement agreeing, among other things, that Tenant’s right to possession of the Premises pursuant to the terms and conditions of this Lease shall not be disturbed provided Tenant is not in default under this Lease beyond any applicable notice and cure periods hereunder.

16. Right of Entry

Landlord and its agents shall have the right to enter the Premises at all reasonable times, upon reasonable prior notice, for purposes of inspection, exhibition, posting of notices, investigation, replacements, repair, maintenance and alteration. It is further agreed that Landlord shall have the right to use any and all means Landlord deems necessary to enter the Premises in an emergency. Landlord shall have the right to place “for rent” or “for lease” signs on the outside of the Premises, the Building and in the Common Areas. Landlord shall also have the right to place “for sale” signs on the outside of the Building and in the Common Areas. Tenant hereby waives any Claim from damages or for any injury or inconvenience to or interference with Tenant’s business, or any other loss occasioned thereby except for any Claim for any of the foregoing arising out of the sole active gross negligence or willful misconduct of Landlord or its authorized representatives. All of the foregoing shall be done in a manner which minimizes any material impact on Tenant’s use of the Premises.

17. Estoppel Certificate

Tenant shall execute (and acknowledge if required by any lender or ground lessor) and deliver to Landlord, within ten (10) days after Landlord provides such to Tenant, a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification), the date to which the Rent and other charges are paid in advance, if any, acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults as are claimed, and such other matters as Landlord may reasonably require. Any such statement may be conclusively relied upon by Landlord and any prospective purchaser or encumbrancer of the Premises. Tenant’s failure to deliver such statement within such time shall be conclusive upon the Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord’s performance; and (c) not more than one month’s Rent has been paid in advance.

18. Tenant’s Default

The occurrence of any one or more of the following events shall, at Landlord’s option, constitute a material default by Tenant of the provisions of this Lease:

     18.1    The abandonment of the Premises by Tenant or the vacation of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse;

     18.2    The failure by Tenant to make any payment of Rent, Additional Rent or any other payment required hereunder where such failure continues for three (3) business days after written notice to Tenant that said payment is due or past due; provided, any such written notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Sections 1161 et seq. and all similar or successor laws;

     18.3    The failure by Tenant to observe, perform or comply with any of the conditions, covenants or provisions of this Lease (except failure to make any payment of Rent and/or Additional Rent and any other payment required hereunder) and such failure is not cured within (i) thirty (30) days of the date on which Landlord delivers written notice of such failure to Tenant for all failures other than with respect to (a) Hazardous Materials (defined in Section 27 hereof), (b) Tenant making the repairs, maintenance and replacements required under the provisions of Section 11.1 hereof, or (c) the timely delivery by Tenant of a subordination, non-disturbance and attornment agreement (an “SNDA”), a counterpart of a fully executed Transfer document and a consent thereto (collectively, the “Transfer Documents”), an estoppel certificate and insurance certificates, (ii) ten (10) days of the date on which Landlord delivers written notice of such failure to Tenant for all failures in any way related to Hazardous Materials or Tenant failing to timely make the repairs, maintenance or replacements required by Section 11.1, and (iii) the time period, if any, specified in the applicable sections of this Lease with respect to subordination, assignment and sublease, estoppel certificates and insurance. However, Tenant shall not be in default of its obligations hereunder if such failure (other than any failure of Tenant to timely deliver an SNDA, the Transfer Documents, an estoppel certificate or insurance certificates, for which no additional cure period shall be given to Tenant) cannot reasonably be cured within such thirty (30) or ten (10) day period, as applicable, and Tenant promptly commences, and thereafter diligently proceeds with same to completion, all actions necessary to cure such failure as soon as is reasonably possible, but in no event shall the completion of such cure be later than sixty (60) days after the date on which Landlord delivers to Tenant written notice of such failure, unless Landlord, acting reasonably and in good faith, otherwise expressly agrees in writing to a longer period of time based upon the circumstances relating to such failure as well as the nature of the failure and the nature of the actions necessary to cure such failure. Any such written notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Sections 1161, et seq. and all similar or successor laws; or

     18.4    The making of a general assignment by Tenant for the benefit of creditors, the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant’s creditors seeking the rehabilitation, liquidation, or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing, the appointment of a receiver or other custodian to take possession of substantially all of Tenant’s assets or this leasehold which appointment is not vacated within sixty (60) days, Tenant’s insolvency or inability to pay Tenant’s debts or failure generally to pay Tenant’s debts when due, any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant’s assets, Tenant taking any action toward the dissolution or winding up of Tenant’s affairs, the cessation or suspension of Tenant’s use of the Premises, or the attachment, execution or other judicial seizure of substantially all of Tenant’s assets or this leasehold unless such attachment, execution or other judicial seizure is vacated within sixty (60) days.

19. Remedies for Tenant’s Default

     19.1    Landlord’s Rights. In the event of Tenant’s material default under this Lease, Landlord may terminate Tenant’s right to possession of the Premises by any lawful means in which case upon delivery of written notice by Landlord this Lease shall terminate on the date specified by Landlord in such notice and Tenant shall immediately surrender possession of the Premises to Landlord. In addition, the Landlord shall have the immediate right of re-entry whether or not this Lease is terminated, and if this right of re-entry is exercised following abandonment of the Premises by Tenant, Landlord may consider any of Tenant’s Property left on the Premises to also have been abandoned. No re-entry or taking possession of the Premises by Landlord pursuant to this Section 19 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant. If Landlord relets the Premises or any portion thereof, Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises or any part thereof, including, without limitation, broker’s commissions, expenses of cleaning, redecorating, and further improving the Premises and other similar costs (collectively, the “Reletting Costs”). Any and all of the Reletting Costs shall be fully chargeable to Tenant and shall not be prorated or otherwise amortized in relation to any new lease for the Premises or any portion thereof. Reletting may be for a period shorter or longer than the remaining term of this Lease. In no event shall Tenant be entitled to any excess rent received by Landlord. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord’s initiative to protect Landlord’s interest under this Lease shall not constitute a termination of Tenant’s right to possession. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord’s reasonable costs in so doing, with interest at the maximum rate permitted by law from the date of such expenditure.

     19.2    Damages Recoverable. If Tenant breaches this Lease and abandons the Premises before the end of the Term, or if Tenant’s right to possession is terminated by Landlord because of a breach or default under this Lease, then in either such case, Landlord may recover from Tenant all damages suffered by Landlord as a result of Tenant’s failure to perform its obligations hereunder, including without limitation, the unamortized cost of any Tenant Improvements constructed by or on behalf of Tenant pursuant to Exhibit B hereto to the extent Landlord has paid for such improvements, the unamortized portion of any broker’s or leasing agent’s commission incurred with respect to the leasing of the Premises to Tenant for the balance of the Term of the Lease remaining after the date on which Tenant is in default of its obligations hereunder, and all Reletting Costs, and the worth at the time of the award (computed in accordance with paragraph (3) of Subdivision (a) of Section 1951.2 of the California Civil Code) of the amount by which the Rent then unpaid hereunder for the balance of the Lease Term exceeds the amount of such loss of Rent for the same period which Tenant proves could be reasonably avoided by Landlord and in such case, Landlord prior to the award, may relet the Premises for the purpose of mitigating damages suffered by Landlord because of Tenant’s failure to perform its obligations hereunder; provided, however, that even though Tenant has abandoned the Premises following such breach, this Lease shall nevertheless continue in full force and effect for as long as Landlord does not terminate Tenant’s right of possession, and until such termination, Landlord shall have the remedy described in Section 1951.4 of the California Civil Code (Landlord may continue this Lease in effect after Tenant’s breach and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations) and may enforce all its rights and remedies under this Lease, including the right to recover the Rent from Tenant as it becomes due hereunder. The “worth at the time of the award” within the meaning of Subparagraphs (a)(1) and (a)(2) of Section 1951.2 of the California Civil Code shall be computed by allowing interest at the rate of ten percent (10%) per annum. Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179 (or any successor or substitute statute), or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. Tenant hereby waives for Tenant and for all those claiming under Tenant all rights now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease.

     19.3    Rights and Remedies Cumulative. The foregoing rights and remedies of Landlord are not exclusive; they are cumulative in addition to any rights and remedies now or hereafter existing at law, in equity by statute or otherwise, or to any equitable remedies Landlord may have, and to any remedies Landlord may have under bankruptcy laws or laws affecting creditors’ rights generally. In addition to all remedies set forth above, if Tenant materially defaults under this Lease and fails to cure such material default within applicable cure periods hereunder, all options granted to Tenant hereunder shall automatically terminate, unless otherwise expressly agreed to in writing by Landlord.

20. Holding Over

If Tenant holds over after the expiration of the Lease Term hereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Base Rent shall be payable at a monthly rate equal to one hundred fifty percent (150%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein. Landlord hereby expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Section 20 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all Claims resulting from such failure, including but not limited to, any Claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom.

21. Landlord’s Default

Landlord shall not be considered in default of this Lease unless Landlord fails within a reasonable time to perform an obligation required to be performed by Landlord hereunder. For purposes hereof, a reasonable time shall not be less than thirty (30) days after receipt by Landlord of written notice specifying the nature of the obligation Landlord has not performed; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days, after receipt of written notice, is reasonably necessary for its performance, then Landlord shall not be in default of this Lease if performance of such obligation is commenced within such thirty (30) day period and thereafter diligently pursued to completion.

22. Parking

Tenant may use the number of non-designated and non-exclusive parking spaces specified in the Basic Lease Information. Landlord shall exercise reasonable efforts to ensure that such spaces are available to Tenant for its use.

23. Transfer of Landlord’s Interest

If there is any sale or other transfer of the Premises by Landlord or any of Landlord’s interest therein, Landlord shall automatically be entirely released from all liability under this Lease after the effective date of such sale or transfer and Tenant agrees to look solely to such transferee for the performance of Landlord’s obligations hereunder after the date of such transfer. A ground lease or similar long term lease by Landlord of the Premises shall be deemed a sale within the meaning of this Section 23. Tenant agrees to attorn to such new owner provided such new owner does not disturb Tenant’s use, occupancy or quiet enjoyment of the Premises so long as Tenant is not in material default of any of the provisions of this Lease.

24. Waiver

No delay or omission in the exercise of any right or remedy of either party on any default by the other party shall impair such a right or remedy or be construed as a waiver. The subsequent acceptance of Rent by Landlord after default by Tenant of this Lease shall not be deemed a waiver of such default, other than a waiver of timely payment for the particular Rent payment involved, and shall not prevent Landlord from maintaining an unlawful detainer or other action based on such uncured breach. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Rent and other sums due hereunder shall be deemed to be other than on account of the earliest Rent or other sums due, nor shall any endorsement or statement on any check or accompanying any check or payment be deemed an accord and satisfaction; and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or other sum or pursue any other remedy provided in this Lease. No failure, partial exercise or delay on the part of the Landlord in exercising any right, power or privilege hereunder shall operate as a waiver thereof.

25. Casualty Damage

       25.1    Casualty. If the Premises or any part thereof [excluding any of Tenant’s Property, any Wi-Fi Network, any Tenant Improvements and any Alterations installed by or for the benefit of Tenant (collectively, the “Tenant’s FF&E”)] shall be damaged or destroyed by fire or other casualty, Tenant shall give immediate written notice thereof to Landlord. Within sixty (60) days after receipt by Landlord of such notice, Landlord shall notify Tenant, in writing, whether the necessary repairs can reasonably be made, as reasonably determined by Landlord: (a) within ninety (90) days; (b) in more than ninety (90) days but in less than one hundred eighty (180) days; or (c) in more than one hundred eighty (180) days, from the date of such notice.

                   25.1.1 Minor Insured Damage. If the Premises (other than the Tenant’s FF&E) are damaged only to such extent that repairs, rebuilding and/or restoration can be reasonably completed within ninety (90) days, this Lease shall not terminate and, provided that insurance proceeds are available and paid to Landlord to fully repair the damage and/or Tenant otherwise voluntarily contributes any shortfall thereof to Landlord, Landlord shall repair the Premises to substantially the same condition that existed prior to the occurrence of such casualty, except Landlord shall not be required to rebuild, repair, or replace any of Tenant’s FF&E. The Rent payable hereunder shall be abated proportionately from the date and to the extent Tenant vacates the affected portions of the Premises until any and all repairs required herein to be made by Landlord are substantially completed but such abatement shall only be to the extent (i) of the portion of the Premises which is actually rendered unusable and unfit for occupancy and only during the time Tenant is not actually using same, and (ii) Landlord receives rental abatement insurance proceeds therefor; provided if rental abatement insurance proceeds are not received as a result of Landlord’s failure to pay any premiums therefor, the receipt of such proceeds shall not be a condition to rent abatement pursuant to this sentence.

If Landlord fails to substantially complete such repairs within two hundred seventy (270) days after the date on which Landlord is notified by Tenant of the occurrence of such casualty [such 270-day period to be extended for delays caused by Tenant or any of Tenant’s Representatives (“Tenant Delays”) or any force majeure events, which events shall include, but not be limited to, acts or events beyond Landlord’s and/or its contractors’ control, acts of God, earthquakes, strikes, lockouts, riots, boycotts, casualties not caused by Landlord or Tenant, discontinuance of any utility or other service required for performance of the work, moratoriums, governmental delays in issuing permits, governmental agencies and weather, and the lack of availability or shortage of materials (“Force Majeure Delays”)], Tenant may within ten (10) business days after expiration of such two hundred seventy (270) day period (as same may be extended), terminate this Lease by delivering written notice to Landlord as Tenant’s exclusive remedy, whereupon all rights of Tenant hereunder shall cease and terminate ten (10) business days after Landlord’s receipt of such notice and Tenant shall immediately vacate the Premises and surrender possession thereof to Landlord.

                25.1.2 Insured Damage Requiring More Than 90 Days To Repair. If the Premises (other than the Tenant’s FF&E) are damaged only to such extent that (i) repairs, rebuilding and/or restoration can be reasonably completed, as reasonably determined by Landlord, in more than ninety (90) days but in less than one hundred eighty (180) days, and (ii) the reasonably estimated cost of such repairs, rebuilding or restoration exceeds twenty-five percent (25%) of the then replacement cost of the Building (as reasonably estimated by Landlord), then Landlord shall have the option of: (a) terminating the Lease effective upon making the determination of the extent of such damage, in which event the Rent shall be abated from the date of the occurrence of such damage, provided Tenant diligently proceeds to and expeditiously vacates the Premises (but, in all events Tenant must vacate and surrender the Premises to Landlord by no later than ten (10) business days thereafter or there shall not be any abatement of Rent until Tenant so vacates the Premises); or (b) electing to repair the Premises to substantially the same condition that existed prior to the occurrence of such casualty, provided insurance proceeds are available and paid to Landlord and Tenant otherwise voluntarily contributes any shortfall thereof to Landlord to fully repair the damage (except that Landlord shall not be required to rebuild, repair, or replace any of Tenant’s FF&E). The Rent payable hereunder shall be abated proportionately from the date and to the extent Tenant actually vacates the affected portions of the Premises until any and all repairs required herein to be made by Landlord are substantially completed but such abatement shall only be to the extent (i) of the portion of the Premises which is actually rendered unusable and unfit for occupancy and only during the time Tenant is not actually using same, and (ii) Landlord receives rental abatement insurance proceeds therefor; provided if rental abatement insurance proceeds are not received as a result of Landlord’s failure to pay any premiums therefor, the receipt of such proceeds shall not be a condition to rent abatement pursuant to this sentence. If Landlord fails to substantially complete such repairs within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of the occurrence of such casualty [such 180-day period to be extended for delays caused by Tenant or any of Tenant’s Representatives (“Tenant Delays”) or any force majeure events, which events shall include, but not be limited to, acts or events beyond Landlord’s and/or its contractors’ control, acts of God, earthquakes, strikes, lockouts, riots, boycotts, casualties not caused by Landlord or Tenant, discontinuance of any utility or other service required for performance of the work, moratoriums, governmental delays in issuing permits, governmental agencies and weather, and the lack of availability or shortage of materials (“Force Majeure Delays”)], Tenant may within ten (10) business days after expiration of such one hundred eighty (180) day period (as same may be extended), terminate this Lease by delivering written notice to Landlord as Tenant’s exclusive remedy, whereupon all rights of Tenant hereunder shall cease and terminate ten (10) business days after Landlord’s receipt of such notice and Tenant shall immediately vacate the Premises and surrender possession thereof to Landlord.

                25.1.3 Major Insured Damage. If the Premises (other than the Tenant’s FF&E) are damaged to such extent that repairs, rebuilding and/or restoration cannot be reasonably completed, as reasonably determined by Landlord, within one hundred eighty (180) days, then either Landlord or Tenant may terminate this Lease by giving written notice within twenty (20) days after notice from Landlord regarding the time period of repair. If either party notifies the other of its intention to so terminate the Lease, then this Lease shall terminate and the Rent shall be abated from the date of the occurrence of such damage, provided Tenant diligently proceeds to and expeditiously vacates the Premises (but, in all events Tenant must vacate and surrender the Premises to Landlord by no later than ten (10) business days thereafter or there shall not be any abatement of Rent until Tenant so vacates the Premises). If neither party elects to terminate this Lease, Landlord shall promptly commence and diligently prosecute to completion the repairs to the Premises, provided insurance proceeds are available and paid to Landlord to fully repair the damage or Tenant voluntarily contributes any shortfall thereof to Landlord (except that Landlord shall not be required to rebuild, repair, or replace any of Tenant’s FF&E). During the time when Landlord is prosecuting such repairs to substantial completion, the Rent payable hereunder shall be abated proportionately from the date and to the extent Tenant actually vacates the affected portions of the Premises until any and all repairs required herein to be made by Landlord are substantially completed but such abatement shall only be to the extent (i) of the portion of the Premises which is actually rendered unusable and unfit for occupancy and only during the time Tenant is not actually using same, and (ii) Landlord receives rental abatement insurance proceeds therefor; provided if rental abatement insurance proceeds are not received as a result of Landlord’s failure to pay any premiums therefor, the receipt of such proceeds shall not be a condition to rent abatement pursuant to this sentence.

                25.1.4 Damage Near End of Term. Notwithstanding anything to the contrary contained in this Lease except for the provisions of Section 25.3 below, if the Premises are substantially damaged or destroyed during the last year of then applicable term of this Lease, either Landlord or Tenant may, at their option, cancel and terminate this Lease by giving written notice to the other party of its election to do so within thirty (30) days after receipt by Landlord of notice from Tenant of the occurrence of such casualty. If either party so elects to terminate this Lease, all rights of Tenant hereunder shall cease and terminate ten (10) days after Tenant’s receipt or delivery of such notice, as applicable, and Tenant shall immediately vacate the Premises and surrender possession thereof to Landlord.

     25.2    Deductible and Uninsured Casualty. Tenant shall be responsible for and shall pay to Landlord, as Additional Rent, the deductible amounts under the insurance policies obtained by Landlord and Tenant under this Lease if the proceeds of which are used to repair the Premises as contemplated in this Section 25. If any portion of the Premises is damaged and is not fully covered by the aggregate of insurance proceeds received by Landlord and any applicable deductible, and Tenant does not voluntarily contribute any shortfall thereof to Landlord, or if the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Landlord or Tenant shall have the right to terminate this Lease by delivering written notice of termination to the other party within thirty (30) days after the date of notice to Tenant of any such event, whereupon all rights and obligations of Tenant shall cease and terminate hereunder, except for those obligations expressly provided for in this Lease to survive such termination of the Lease.

     25.3    Tenant’s Fault and Lender’s Rights. Notwithstanding anything to the contrary contained herein, if the Premises (other than Tenant’s FF&E) or any portion thereof is damaged by fire or other casualty not covered by insurance proceeds and resulting from the intentional acts or omissions of Tenant or any of Tenant’s Representatives, (i) the Rent shall not be diminished during the repair of such damage, (ii) Tenant shall not have any right to terminate this Lease due to the occurrence of such casualty or damage, and (iii) Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of all or any portion of the Premises caused thereby (including, without limitation, any deductible) to the extent such cost and expense is not covered by insurance proceeds. Notwithstanding

anything to the contrary contained herein, if the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within thirty (30) days after the date of notice to Tenant of any such event, whereupon all rights and obligations of Tenant shall cease and terminate hereunder, except for those obligations expressly provided for in this Lease to survive such termination of the Lease.

     25.4    Tenant’s Waiver. Landlord shall not be liable for any inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of use of any part of the Premises by Tenant or loss of Tenant’s Property, resulting in any way from such damage, destruction or the repair thereof, except that, Landlord shall allow Tenant a fair diminution of Rent during the time and to the extent the Premises are actually unusable and unfit for occupancy and Tenant is not using or otherwise occupying same as specifically provided above in this Section 25. With respect to any damage or destruction which Landlord is obligated to repair or may elect to repair, Tenant hereby waives all rights to terminate this Lease or offset any amounts against Rent pursuant to rights accorded Tenant by any law currently existing or hereafter enacted, including but not limited to, all rights pursuant to the provisions of Sections 1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code, as the same may be amended or supplemented from time to time.

26. Condemnation

If twenty-five percent (25%) or more of the Premises is condemned by eminent domain, inversely condemned or sold in lieu of condemnation for any public or quasi-public use or purpose (“Condemned”), then Tenant or Landlord may terminate this Lease as of the date when physical possession of the Premises is taken and title vests in such condemning authority, and Rent shall be adjusted to the date of termination. Tenant shall not because of such condemnation assert any claim against Landlord or the condemning authority for any compensation because of such condemnation, and Landlord shall be entitled to receive the entire amount of any award without deduction for any estate of interest or other interest of Tenant; provided, however, the foregoing provisions shall not preclude Tenant, at Tenant’s sole cost and expense, from obtaining any separate award to Tenant for loss of or damage to Tenant’s Property or for damages for cessation or interruption of Tenant’s business provided such award is separate from Landlord’s award and provided further such separate award does not diminish nor otherwise impair the award otherwise payable to Landlord. In addition to the foregoing, Tenant shall be entitled to seek compensation for the relocation costs recoverable by Tenant pursuant to the provisions of California Government Code Section 7262. If neither party elects to terminate this Lease, Landlord shall, if necessary, promptly proceed to restore the Premises, to substantially its same condition prior to such partial condemnation, allowing for the reasonable effects of such partial condemnation, and a proportionate allowance shall be made to Tenant, as solely determined by Landlord, for the Rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of such partial condemnation and restoration. Landlord shall not be required to spend funds for restoration in excess of the amount received by Landlord as compensation awarded.

27. Environmental Matters/Hazardous Materials

     27.1    Hazardous Materials Disclosure Certificate. Prior to executing this Lease, Tenant has delivered to Landlord Tenant’s executed initial Hazardous Materials Disclosure Certificate (the “Initial HazMat Certificate”), a copy of which is attached hereto as Exhibit E. Tenant covenants, represents and warrants to Landlord that the information in the Initial HazMat Certificate is true and correct and accurately describes the use(s) of Hazardous Materials which will be made and/or used on the Premises by Tenant. Tenant shall, commencing with the date which is one year from the Commencement Date and continuing every year thereafter, deliver to Landlord within twenty (20) days after written request by Landlord, an executed Hazardous Materials Disclosure Certificate (“the “HazMat Certificate”) describing Tenant’s then present use of Hazardous Materials on the Premises, and any other reasonably necessary documents as requested by Landlord. The HazMat Certificates required hereunder shall be in substantially the form attached hereto as Exhibit E.

     27.2    Definition of Hazardous Materials. As used in this Lease, the term Hazardous Materials shall mean and include (a) any hazardous or toxic wastes, materials or substances, and other pollutants or contaminants, which are or become regulated by any Environmental Laws; (b) petroleum, petroleum by products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos and asbestos containing material, in any form, whether friable or non-friable; (d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and lead-containing materials; (g) any other material, waste or substance displaying toxic, reactive, ignitable or corrosive characteristics, as all such terms are used in their broadest sense, and are defined or become defined by any Environmental Law (defined below); or (h) any materials which cause or threatens to cause a nuisance upon or waste to any portion of the Premises or any surrounding property; or poses or threatens to pose a hazard to the health and safety of persons on the Premises or any surrounding property. For purposes of this Lease, the term “Hazardous Materials” shall not include nominal amounts of ordinary household cleaners, office supplies and janitorial supplies which are not actionable under any Environmental Laws.

     27.3    Prohibition; Environmental Laws. Tenant shall not be entitled to use or store any Hazardous Materials on, in, or about any portion of the Premises without, in each instance, obtaining Landlord’s prior written consent thereto. If Landlord, in its sole discretion, consents to any such usage or storage, then Tenant shall be permitted to use and/or store only those Hazardous Materials that are necessary for Tenant’s business and to the extent disclosed in the HazMat Certificate and as expressly approved by Landlord in writing. Any such usage and storage may only be to the extent of the quantities of Hazardous Materials as specified in the then applicable HazMat Certificate as expressly approved by Landlord. In all events such usage and storage must at all times be in full compliance with any and all local, state and federal environmental, health and/or safety-related laws, statutes, orders, standards, courts’ decisions, ordinances, rules and regulations (as interpreted by judicial and administrative decisions), decrees, directives, guidelines, permits or permit conditions, currently existing and as amended, enacted, issued or adopted in the future which are or become applicable to Tenant or all or any portion of the Premises (collectively, the “Environmental Laws”). Tenant agrees that any changes to the type and/or quantities of Hazardous Materials specified in the most recent HazMat Certificate may be implemented only with the prior written consent of Landlord, which consent may be given or withheld in Landlord’s sole discretion. Tenant shall not be entitled nor permitted to install any tanks under, on or about the Premises for the storage of Hazardous Materials without the express written consent of Landlord, which may be given or withheld

in Landlord’s sole discretion. Landlord shall have the right at all times during the Term of this Lease to (i) inspect the Premises, (ii) conduct tests and investigations to determine whether Tenant is in compliance with the provisions of this Section 27 or to determine if Hazardous Materials are present in, on or about the Premises, and (iii) request lists of all Hazardous Materials used, stored or otherwise located on, under or about any portion of the Premises and/or the Common Areas. The cost of all such inspections, tests and investigations shall be borne by Tenant, if Landlord reasonably determines that Tenant or any of Tenant’s Representatives are directly or indirectly responsible in any manner for any contamination revealed by such inspections, tests and investigations. The aforementioned rights granted herein to Landlord and its representatives shall not create (a) a duty on Landlord’s part to inspect, test, investigate, monitor or otherwise observe the Premises or the activities of Tenant and Tenant’s Representatives with respect to Hazardous Materials, including without limitation, Tenant’s operation, use and any remediation related thereto, or (b) liability on the part of Landlord and its representatives for Tenant’s use, storage, disposal or remediation of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. The provisions of this Section shall not preclude (I) maintenance by Tenant of the existing generator and diesel storage tank on the Premises or (II) replacement of such tank with a larger tank; provided however that Tenant shall obtain Landlord’s prior approval of any such replacement, and all maintenance or replacement activities shall be performed in full compliance with all applicable laws, statutes, regulations and similar ordinances and directives.

     27.4    Tenant’s Environmental Obligations. Tenant shall give to Landlord immediate verbal and follow-up written notice of any spills, releases, discharges, disposals, emissions, migrations, removals or transportation of Hazardous Materials on, under or about any portion of the Premises or in any Common Areas; provided that Tenant has actual, implied or constructive knowledge of such event(s). Tenant, at its sole cost and expense, covenants and warrants to promptly investigate, clean up, remove, restore and otherwise remediate (including, without limitation, preparation of any feasibility studies or reports and the performance of any and all closures) any spill, release, discharge, disposal, emission, migration or transportation of Hazardous Materials arising from or related to the intentional or negligent acts or omissions of Tenant or Tenant’s Representatives such that the affected portions of the Premises and any adjacent property are returned to the condition existing prior to the appearance of such Hazardous Materials. Any such investigation, clean up, removal, restoration and other remediation shall only be performed after Tenant has obtained Landlord’s prior written consent, which consent shall not be unreasonably withheld so long as such actions would not potentially have a material adverse long-term or short-term effect on any portion of the Premises. Notwithstanding the foregoing, Tenant shall be entitled to respond immediately to an emergency without first obtaining Landlord’s prior written consent. Tenant, at its sole cost and expense, shall conduct and perform, or cause to be conducted and performed, all closures as required by any Environmental Laws or any agencies or other governmental authorities having jurisdiction thereof. If Tenant fails to so promptly investigate, clean up, remove, restore, provide closure or otherwise so remediate, Landlord may, but without obligation to do so, take any and all steps necessary to rectify the same and Tenant shall promptly reimburse Landlord, upon demand, for all costs and expenses to Landlord of performing investigation, clean up, removal, restoration, closure and remediation work. All such work undertaken by Tenant, as required herein, shall be performed in such a manner so as to enable Landlord to make full economic use of the Premises after the satisfactory completion of such work.

     27.5    Environmental Indemnity. In addition to Tenant’s obligations as set forth hereinabove, Tenant agrees to, and shall, protect, indemnify, defend (with counsel reasonably acceptable to Landlord) and hold Landlord and the other Indemnitees harmless from and against any and all Claims (including, without limitation, diminution in value of any portion of the Premises, damages for the loss of or restriction on the use of rentable or usable space, and from any adverse impact of Landlord’s marketing of any space within the Premises) arising at any time during or after the Term of this Lease in connection with or related to, directly or indirectly, the use, presence, transportation, storage, disposal, migration, removal, spill, release or discharge of Hazardous Materials on, in or about any portion of the Premises as a result (directly or indirectly) of the intentional or negligent acts or omissions of Tenant or any of Tenant’s Representatives. Neither the written consent of Landlord to the presence, use or storage of Hazardous Materials in, on, under or about any portion of the Premises nor the strict compliance by Tenant with all Environmental Laws shall excuse Tenant from its obligations of indemnification pursuant hereto. Tenant shall not be relieved of its indemnification obligations under the provisions of this Section 27.5 due to Landlord’s status as either an “owner” or “operator” under any Environmental Laws.

     27.6    Survival. Tenant’s obligations and liabilities pursuant to the provisions of this Section 27 shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord that the condition of all or any portion of the Premises is not in compliance with the provisions of this Lease with respect to Hazardous Materials due to any act or omission of Tenant or Tenant’s Representatives, including without limitation, all Environmental Laws at the expiration or earlier termination of this Lease, then Landlord may require Tenant to hold over possession of the Premises until Tenant can surrender the Premises to Landlord in the condition in which the Premises existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except for reasonable wear and tear, including without limitation, the conduct or performance of any closures as required by any Environmental Laws. The burden of proof hereunder shall be upon Tenant. For purposes hereof, the term “reasonable wear and tear” shall not include any deterioration in the condition or diminution of the value of any portion of the Premises in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant will be with Landlord’s consent, will not be terminable by Tenant in any event or circumstance and will otherwise be subject to the provisions of Section 20 of this Lease.

28. Financial Statements

Tenant and any permitted Transferee, for the reliance of Landlord, any lender holding or anticipated to acquire a lien upon any portion of the Premises or any prospective purchaser of any portion of the Premises within ten (10) days after Landlord’s request therefor, but not more often than once annually so long as Tenant is not in material default of this Lease, shall deliver to Landlord the then current audited financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available). If audited financial statements have not been prepared, Tenant and any permitted Transferee shall provide Landlord with unaudited financial statements and such other information, the type and form of which are acceptable to Landlord in Landlord’s reasonable discretion, which reflects the financial condition of Tenant and any permitted Transferee.

29. General Provisions

     29.1    Time. Time is of the essence in this Lease and with respect to each and all of its provisions in which performance is a factor.

     29.2    Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto.

     29.3    Recordation. Tenant shall not record this Lease or a short form memorandum hereof.

     29.4    Landlord Exculpation. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to the actual interest of Landlord and its present or future partners or members in the Building and any other assets of the Landlord entity, and Tenant agrees to look solely to Landlord’s interest in the Building and such other entity assets for satisfaction of any liability and shall not look to other assets of Landlord nor seek any recourse against the assets of the individual partners, members, directors, officers, shareholders, agents or employees of Landlord, including without limitation, any property management company of Landlord (collectively, the “Landlord Parties”). It is the parties’ intention that Landlord and the Landlord Parties shall not in any event or circumstance be personally liable, in any manner whatsoever, for any judgment or deficiency hereunder or with respect to this Lease. The liability of Landlord under this Lease is limited to its actual period of ownership of title to the Building.

     29.5    Severability and Governing Law. Any provisions of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provisions hereof and such other provision shall remain in full force and effect. This Lease shall be governed by, and construed in accordance with, the laws of the State of California.

     29.6    Attorneys’ Fees. In the event any dispute between the parties results in litigation or other proceeding, the prevailing party shall be reimbursed by the party not prevailing for all reasonable costs and expenses, including, without limitation, reasonable attorneys’ and experts’ fees and costs incurred by the prevailing party in connection with such litigation or other proceeding, and any appeal thereof. Such costs, expenses and fees shall be included in and made a part of the judgment recovered by the prevailing party, if any.

     29.7    Entire Agreement. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. This Lease and any side letter or separate agreement executed by Landlord and Tenant in connection with this Lease and dated of even date herewith contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises, shall be considered to be the only agreement between the parties hereto and their representatives and agents, and none of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein. There are no other representations or warranties between the parties, and all reliance with respect to representations is based totally upon the representations and agreements contained in this Lease. The parties acknowledge that (i) each party and/or its counsel have reviewed and revised this Lease, and (ii) no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation or enforcement of this Lease or any amendments or exhibits to this Lease or any document executed and delivered by either party in connection with this Lease.

     29.8    Warranty of Authority. On the date that Tenant executes this Lease, Tenant shall deliver to Landlord an original certificate of status for Tenant issued by the California Secretary of State or statement of partnership for Tenant recorded in the county in which the Premises are located, as applicable, and such other documents as Landlord may reasonably request with regard to the lawful existence of Tenant. Each person executing this Lease on behalf of a party represents and warrants that (1) such person is duly and validly authorized to do so on behalf of the entity it purports to so bind, and (2) if such party is a partnership, corporation or trustee, that such partnership, corporation or trustee has full right and authority to enter into this Lease and perform all of its obligations hereunder. Each party hereby warrants that this Lease is legal, valid and binding upon such party and enforceable against such party in accordance with its terms.

     29.9    Notices. All notices, demands, statements or communications (collectively, “Notices”) given or required to be given by either party to the other hereunder shall be in writing, shall be sent by United States certified or registered mail, postage prepaid, return receipt requested, or delivered personally (i) to Tenant at the Tenant’s Address set forth in the Basic Lease Information, or to such other place as Tenant may from time to time designate in a Notice to Landlord; or (ii) to Landlord at Landlord’s Address set forth in the Basic Lease Information, or to such other firm or to such other place as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given on the date of receipt or refusal on the return receipt or upon the date personal delivery is made.

     29.10    Joint and Several; Covenants and Conditions. If Tenant consists of more than one person or entity, the obligations of all such persons or entities shall be joint and several. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition.

     29.11    Confidentiality. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Tenant shall keep and maintain such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant’s financial, legal and space planning consultants or as otherwise required by Law.

     29.12    Landlord Renovations. Tenant acknowledges that Landlord may from time to time, at Landlord’s sole option and expense, subject to the other terms and conditions of this Lease, renovate, improve, develop, alter, or modify (collectively, the “Renovations”) portions of the Premises, and Common Areas, including without limitation, systems and equipment, roof, and structural portions of the same. In connection with such Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Premises, limit or eliminate access to portions of the Premises, including portions of the Common Areas, or perform work in the Premises, which work may create noise, dust or leave debris in or about the Premises; provided that Landlord shall use reasonable efforts to minimize interference with Tenant’s operations and to coordinate Renovations work with the Tenant by providing reasonable advance notice of same and the opportunity for Tenant to reasonably request a schedule change for such work if reasonably necessary to minimize such interference. Tenant hereby agrees that such Renovations and Landlord’s actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Except as otherwise provided herein, Landlord shall have no responsibility, or for any reason be liable to Tenant, for any direct or indirect injury to or interference with Tenant’s business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant’s Property, Alterations or improvements resulting from the Renovations or Landlord’s actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord’s actions in connection with such Renovations.

     29.13    Waiver of Jury Trial: The parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way related to this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Premises or the Common Area and/or any claim of injury, loss or damage.

     29.14    Submission of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant.

30. Signs

All signs and graphics of every kind visible from the exterior of the Premises shall be subject to Landlord’s prior written approval which shall not be unreasonably withheld, and shall be subject to and in compliance with all applicable Laws, Development Documents, Recorded Matters, Rules and Regulations, and Landlord’s sign criteria as same may exist from time to time. Tenant shall remove all such signs and graphics prior to the expiration or earlier termination of this Lease. Such installations and removals shall be made in a manner as to avoid damage or defacement of the Premises. Tenant shall repair any damage or defacement, including without limitation, discoloration caused by such installation or removal. Landlord shall have the right, at its option, to deduct from the Security Deposit such sums as are reasonably necessary to remove such signs and make any repairs necessitated by such removal. Notwithstanding the foregoing, in no event shall any neon, flashing or moving sign(s) be permitted hereunder. Tenant further agrees to maintain each such sign and graphics, as may be approved, in good condition and repair at all times.

31. Mortgagee Protection

Upon any default on the part of Landlord, Tenant will give written Notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises who has provided Tenant with notice of their interest together with an address for receiving Notice, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. If such default cannot be cured within such time period, then such additional time as may be necessary will be given to such beneficiary or mortgagee to effect such cure so long as such beneficiary or mortgagee has commenced the cure within the original time period and thereafter diligently pursues such cure to completion, in which event this Lease shall not be terminated while such cure is being diligently pursued. Tenant agrees that each lender to whom this Lease has been assigned by Landlord is an express third party beneficiary hereof. Tenant shall not make any prepayment of Rent more than one (1) month in advance without the prior written consent of each such lender. Tenant waives the collection of any deposit from such lender(s) or any purchaser at a foreclosure sale of such lender(s)’ deed of trust unless the lender(s) or such purchaser shall have actually received and not refunded the deposit. Tenant agrees to make all payments under this Lease to the lender with the most senior encumbrance upon receiving a direction, in writing, to pay said amounts to such lender and any such payment(s) shall satisfy Tenant’s payment obligation hereunder but solely with respect to the payment(s) so made. Tenant shall comply with such written direction to pay without determining whether an event of default exists under such lender’s loan to Landlord. If, in connection with obtaining financing for the Premises, Landlord’s lender shall request reasonable modification(s) to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not materially and adversely affect Tenant’s rights hereunder or the use, occupancy or quiet enjoyment of Tenant hereunder or increase Tenant’s payment or other obligations.

32. Warranties of Tenant

Tenant hereby warrants and represents to Landlord, for the express benefit of Landlord, that Tenant has undertaken a complete and independent evaluation of the risks inherent in the execution of this Lease and the operation of the Premises for the use permitted hereby, and that, based upon said independent evaluation, Tenant has elected to enter into this Lease and hereby assumes all risks with respect thereto. Tenant hereby further warrants and represents to Landlord, for the express benefit of Landlord, that in entering into this Lease, Tenant has not relied upon any statement, fact, promise or representation (whether express or implied, written or oral) not specifically set forth herein in writing and that any statement, fact, promise or representation (whether express or implied, written or oral) made at any time to Tenant, which is not expressly incorporated herein in writing, is hereby waived by Tenant.

33. Brokerage Commission

Landlord and Tenant each represents and warrants for the benefit of the other that it has had no dealings with any real estate broker, agent or finder in connection with the Premises and/or the negotiation of this Lease, except for the Broker(s) specified in the Basic Lease Information, and that it knows of no other real estate broker, agent or finder who is or might be entitled to a real estate brokerage commission or finder’s fee in connection with this Lease or otherwise based upon contacts between the claimant and such party. Each party shall indemnify and hold harmless the other from and against any and all liabilities or expenses arising out of claims made for a fee or commission by any real estate broker, agent or finder in connection with the Premises and this Lease other than Broker(s), if any, resulting from the actions of the indemnifying party. Unless expressly agreed to in writing by Landlord and Broker(s), no real estate brokerage commission or finder’s fee shall be owed to, or otherwise payable to, the Broker(s) for any renewals or other extensions of the initial Term of this Lease or for any additional space leased by Tenant other than the Premises as same exists as of the Lease Date. Tenant further represents and warrants to Landlord that Tenant will not receive (i) any portion of any brokerage commission or finder’s fee payable to the Broker(s) in connection with this Lease or (ii) any other form of compensation or incentive from the Broker(s) with respect to this Lease. Landlord shall pay all commissions due to the Broker(s) in connection with this Lease pursuant to a separate agreement.

34. Quiet Enjoyment

Landlord covenants with Tenant, upon the paying of Rent and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept, and during the periods that Tenant is not otherwise in default of any of the terms or provisions of this Lease, and subject to the rights of any of Landlord’s lenders, (i) that Tenant shall and may peaceably and quietly have, hold, occupy and enjoy the Premises and the Common Areas during the Term of this Lease, and (ii) neither Landlord, nor any successor or assign of Landlord, shall disturb Tenant’s occupancy or enjoyment of the Premises and the Common Areas. The foregoing covenant is in lieu of any other covenant express or implied.

35. Existing Furniture, Systems and Equipment

Throughout the Term of this Lease, Tenant shall have the right to use the furniture, fixtures and equipment currently located within the Premises and listed on Exhibit H attached hereto (collectively, the “FF&E”). Tenant acknowledges and agrees that the FF&E was acquired and used by the former tenant of the Premises, and Landlord has made no representations or warranties, express, implied or otherwise, regarding the condition or working order of the FF&E. Tenant confirms that it has had the reasonable opportunity to inventory and inspect the FF&E and hereby represents that (i) it accepts the FF&E “AS IS AND WITH ALL FAULTS”, and (2) it is satisfied that all items of FF&E listed on Exhibit H are currently located within the Premises and are hereby accepted by Tenant, subject to and in accordance with the terms of this Section 35. Tenant acknowledges and agrees that Landlord shall continue to own the FF&E, and Tenant shall acquire no ownership interest therein. Throughout the Term, Tenant shall be obligated to maintain, repair and safeguard the FF&E, and shall obtain and maintain Physical Damage Insurance with respect to the FF&E, covering “all risks” of physical loss or damage, for the full replacement cost value new without deduction for depreciation, as more particularly referenced in Section 12.1(iv) of this Lease. With the exception of ordinary wear and tear, Tenant shall promptly repair or replace any FF&E that becomes damaged, destroyed or for any reason is no longer located at the Premises, and shall keep a detailed log of any such repairs or replacements. All replacements shall be of substantially similar style and quality as the original items of FF&E so replaced. Tenant shall provide Landlord with a copy of such log upon request. In no event shall Landlord have any liability or responsibility with respect to the FF&E, and Landlord shall have no responsibility to repair or refurbish the FF&E at any time. At the expiration of the Term, Landlord and Tenant shall jointly inventory the FF&E then located within the Premises, and Tenant shall pay to Landlord, within thirty (30) days following the effective date of expiration or earlier termination of this Lease, an amount equal to the cost to repair or replace any items of the FF&E which are no longer located at the Premises, are of inferior style or quality as compared with the original FF&E, or which exhibit damage beyond ordinary wear and tear.

     IN WITNESS WHEREOF, this Lease is executed by the parties as of the Lease Date referenced on Page 1 of this Lease.

Tenant:

VNUS Medical Technologies, Inc., a Delaware corporation
By: /s/ Brian E. Farley	/s/ Timothy A. Marcotte
Its: President and CEO	11/15/05
Date: 11-15-05

By:	/s/ Charlene A. Friedman
Its: Secretary
Date: 11-15-05

Landlord:

LEGACY PARTNERS I SJ FONTANOSO, LLC,
a Delaware limited liability company,
Owner
By:	LEGACY PARTNERS COMMERCIAL, L.P.,
	a California limited partnership,
	as Property Manager and Agent for Owner
By:	LEGACY PARTNERS COMMERCIAL, INC.,
	General Partner
	By:	/s/ Debra Smith
	Its:	Debra Smith Executive Vice President
Date:	November 17, 2005

If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. The Lease must be executed by the president or vice-president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease.

Exhibit A
Premises

This exhibit, entitled “Premises”, is and shall constitute Exhibit A to that certain Lease Agreement dated November ___, 2005 (the “Lease”), by and between Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company (“Landlord”), and VNUS Medical Technologies, Inc., a Delaware corporation (“Tenant”), for the leasing of certain premises located at 5799 Fontanoso Way, San Jose, California 95138 (the “Premises”).

The Premises consist of the rentable square footage of space specified in the Basic Lease Information and has the address specified in the Basic Lease Information. The Premises consist of the Building specified in the Basic Lease Information.

Exhibit A, Page 1

Exhibit B
Tenant Improvements

This exhibit, entitled “Tenant Improvements”, is and shall constitute Exhibit B to that certain Lease Agreement dated November ___, 2005 (the “Lease”), by and between Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company (“Landlord”), and VNUS Medical Technologies, Inc., a Delaware corporation (“Tenant”), for the leasing of certain premises located at 5799 Fontanoso Way, San Jose, California (the “Premises”). The terms, conditions and provisions of this Exhibit B are hereby incorporated into and are made a part of the Lease. Any capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms as set forth in the Lease:

1. Tenant Improvements. Subject to the conditions set forth below, Landlord agrees to construct and install certain improvements (“Tenant Improvements”) in the Premises in accordance with the Approved Final Drawings (defined below) and pursuant to the terms of this Exhibit B.

2. Definition. “Tenant Improvements” as used in this Lease shall include only those interior improvements to be made to the Premises as specified in the Approved Final Drawings (defined below) and agreed to by Tenant and Landlord in accordance with the provisions hereof. “Tenant Improvements” shall specifically not include (i) any alterations, additions or improvements installed or constructed by Tenant, (ii) any of Tenant’s trade fixtures, racking, security equipment, equipment, furniture, furnishings, telephone and/or data equipment, telephone and/or data lines or other personal property (collectively, “FF&E”), and (iii) any supplemental fire protection improvements or equipment, including without limitation, in-rack fire sprinklers, hose racks, reels, smoke vents, and draft curtains (collectively, “Tenant’s Installations”).

3. Tenant’s Initial Plans; the Work. Tenant desires Landlord to perform certain Tenant Improvements in the Premises. The Tenant Improvements shall be in substantial accordance with the plan(s) and scope of work (collectively, the “Initial Plans”) which will be prepared by Legacy CDS, Inc. after the parties meet and confer to agree upon a scope of work immediately after execution of this Lease. Within fifteen (15) business days from the date Landlord and Tenant meet to discuss the scope of work, Landlord shall deliver to Tenant the Initial Plans. A copy of the Initial Plans shall be attached hereto as Schedule 1, as soon as practicable thereafter. Such work, as shown in the Initial Plans and as more fully detailed in the Approved Final Drawings (as defined and described in Section 4 below), shall be hereinafter referred to as the “Work”. Not later than five (5) business days after the Initial Plans are prepared and delivered to Tenant, Tenant or Tenant’s Representatives shall furnish to Landlord such additional plans, drawings, specifications and finish details as Landlord may reasonably request to enable Landlord’s architects and engineers, as applicable, to prepare mechanical, electrical and plumbing plans and to prepare the Final Drawings, including, but not limited to, a final telephone layout and special electrical connections, if any. All plans, drawings, specifications and other details describing the Work which have been, or are hereafter, furnished by or on behalf of Tenant shall be subject to Landlord’s approval, which approval shall not be unreasonably withheld. Landlord shall not be deemed to have acted unreasonably if it withholds its approval of any plans, specifications, drawings or other details or of any Change Request (hereafter defined in Section 11 below) because, in Landlord’s reasonable opinion, the work as described in any such item, or any Change Request, as the case may be: (a) is likely to adversely affect Building systems, the structure of the Building or the safety of the Building or its occupants; (b) might impair Landlord’s ability to furnish services to Tenant; (c) would increase the cost of operating the Building, with the exception of electrical utilities; (d) would violate any applicable governmental, administrative body’s or agencies’ laws, rules, regulations, ordinances, codes or similar requirements (or interpretations thereof); (e) contains or uses Hazardous Materials; (f) would adversely affect the appearance of the Building; (g) is prohibited by any ground lease affecting the Building and/or the Lot, any Recorded Matters or any mortgage, trust deed or other instrument encumbering the Building and/or the Lot; (h) is likely to be substantially delayed because of unavailability or shortage of labor or materials necessary to perform such work or the difficulties or unusual nature of such work; (i) is not, at a minimum, in accordance with Landlord’s Building Standards (defined below); or (j) would increase the Tenant Improvement Costs (defined in Section 9 below) by more than ten percent (10%) from the cost originally estimated and anticipated by the parties unless Tenant is willing to pay for such increased costs. The foregoing reasons, however, shall not be the only reasons for which Landlord may withhold its approval, whether or not such other reasons are similar or dissimilar to the foregoing. Neither the approval by Landlord of the Work or the Initial Plans or any other plans, specifications, drawings or other items associated with the Work nor Landlord’s performance, supervision or monitoring of the Work shall constitute any warranty or covenant by Landlord to Tenant of the adequacy of the design for Tenant’s intended use of the Premises. Tenant agrees to, and does hereby, assume full and complete responsibility to ensure that the Work and the Approved Final Drawings are adequate to fully meet the needs and requirements of Tenant’s intended operations of its business within the Premises and Tenant’s use of the Premises.

4. Final Drawings and Approved Final Drawings. If necessary for the performance of the Work, and to the extent not already included as part of the Initial Plans, Landlord shall prepare or cause to be prepared final working drawings and specifications for the Work (the “Final Drawings”) based on and consistent with the Initial Plans and the other plans, specifications, drawings, finish details or other information furnished by Tenant or Tenant’s Representatives to Landlord and approved by Landlord pursuant to Section 3 above. Tenant shall cooperate diligently with Landlord and Landlord’s architect, engineer and other representatives and Tenant shall furnish within five (5) business days after any request therefor, all information required by Landlord or Landlord’s architect, engineer or other representatives for completion of the Final Drawings. So long as the Final Drawings are substantially consistent with the Initial Plans, Tenant shall approve the Final Drawings within five (5) business days after receipt of same from Landlord. Tenant’s failure to approve or disapprove such Final Drawings within the foregoing five (5) business day time period, shall be conclusively deemed to be approval of same by Tenant. If Tenant reasonably disapproves of any matters included in the Final Drawings because such items are not substantially consistent with the Initial Plans, Tenant shall, within the aforementioned five (5) business day period, deliver to Landlord written notice of its disapproval and Tenant shall specify in such written notice, in sufficient detail as Landlord may reasonably require, the matters disapproved, the reasons for such disapproval, and the specific changes or revisions necessary to be made to the Final Drawings to cause such drawings to substantially conform to the Initial Plans. Any additional costs associated with such requested changes or revisions shall be included as part of the Tenant Improvement Costs (defined below). The foregoing procedure shall be followed by the parties until the Final Drawings are acceptable to both Landlord and Tenant. Landlord and Tenant shall indicate their approval of the Final Drawings by initialing each sheet of the Final Drawings and delivering to one another a true and complete copy of such

Exhibit B, Page 1

initialed Final Drawings (the “Approved Final Drawings”). A true and complete copy of the Approved Final Drawings shall be attached to the Lease as Exhibit B-1 and shall be made a part thereof. Any changes or revisions to the Approved Final Drawings requested by Tenant must first be approved by Landlord, which approval shall not be unreasonably withheld, subject to the provisions of Section 3 above. If Landlord approves such requested changes or revisions, Landlord shall cause the Approved Final Drawings to be revised accordingly and Landlord and Tenant shall initial each sheet of the Approved Final Drawings as revised and replace and attach a true and complete copy thereof to the Lease as Exhibit B-1. Landlord and Tenant hereby covenant to each other to cooperate with each other and to act reasonably in the preparation and approval of the Final Drawings and the Approved Final Drawings.

5. Performance of Work. As soon as practicable after Tenant and Landlord initial and attach to the Lease as Exhibit B-1 a true and complete copy of the Approved Final Drawings, Landlord shall submit the Approved Final Drawings to the governmental authorities having rights of approval over the Work and shall apply for the necessary approvals and building permits. Subject to the satisfaction of all conditions precedent and subsequent to its obligations under this Exhibit B, and further subject to the provisions of Section 10 hereof, as soon as practicable after Landlord or its representatives have received all necessary approvals and building permits, Landlord will put the Approved Final Drawings out for bid to several licensed, bonded and insured general contractors. The Tenant Improvements shall be constructed by a general contractor selected by Landlord (the “General Contractor”). Landlord shall commence construction, or cause the commencement of construction by the General Contractor, of the Tenant Improvements, as soon as practicable after selection of the General Contractor. Except as hereinafter expressly provided to the contrary, Landlord shall cause the performance of the Work using (except as may be stated or otherwise shown in the Approved Final Drawings) building standard materials, quantities and procedures then in use by Landlord (“Building Standards”).

6. Substantial Completion. Landlord shall cause the General Contractor to Substantially Complete (defined below) the Tenant Improvements in accordance with the Approved Final Drawings by the Anticipated Commencement Date of the Lease as set forth in Section 2 of the Lease (the “Completion Date”), subject to delays due to (a) acts or events beyond its control including, but not limited to, acts of God, earthquakes, strikes, lockouts, boycotts, casualties, discontinuance of any utility or other service required for performance of the Work, provided such discontinuance is not the result of Landlord’s failure to pay any utility or service invoice(s), moratoriums, governmental agencies, delays on the part of governmental agencies and weather, (b) the lack of availability or shortage of specialized materials used in the construction of the Tenant Improvements, (c) any matters beyond the control of Landlord, the General Contractor or any subcontractors, (d) any changes required by the fire department, building and/or planning department, building inspectors or any other agency having jurisdiction over the Building, the Work and/or the Tenant Improvements (except to the extent such changes are directly attributable to Tenant’s use or Tenant’s specialized tenant improvements, in which event such delays are considered Tenant Delays) (the events and matters set forth in Subsections (a), (b), (c) and (d) are collectively referred to as “Force Majeure Delays”), or (e) any Tenant Delays (defined in Section 7 below). The Tenant Improvements shall be deemed substantially complete on the date that the building officials of the applicable governmental agency(s) issues its final approval of the construction of the Tenant Improvements whether in the form of the issuance of a final permit, certificate of occupancy or the written approval evidencing its final inspection on the building permit(s), or the date on which Tenant first takes occupancy of the Premises, whichever first occurs (“Substantial Completion”, or “Substantially Completed”, or “Substantially Complete”). Tenant hereby acknowledges and agrees that the term “Substantial Completion” of the Tenant Improvements as used herein will not include the completion of any work associated with Tenant’s Installations, including without limitation, Tenant’s high-pile storage requirements, Tenant’s racking systems, and work related to any requirements of governmental and regulatory agencies with respect to any of Tenant’s Installations. If the Work is not deemed to be Substantially Completed on or before the scheduled Completion Date, (i) Landlord agrees to use reasonable efforts to Substantially Complete the Work as soon as practicable thereafter, (ii) the Lease shall remain in full force and effect, (iii) Landlord shall not be deemed to be in breach or default of the Lease or this Exhibit B as a result thereof and Landlord shall have no liability to Tenant as a result of any delay in occupancy (whether for damages, abatement of all or any portion of the Rent, or otherwise), and (iv) except in the event of any Tenant Delays, which will not affect the Commencement Date but will extend the Completion Date without any penalty or liability to Landlord, and notwithstanding anything to the contrary contained in the Lease, the Commencement Date and the Expiration Date of the term of the Lease (as defined in Section 2 of the Lease) shall be extended commensurately by the amount of time attributable to such Force Majeure Delays, and Landlord and Tenant shall execute a written amendment to the Lease evidencing such extensions of time, substantially in the form of Exhibit F to the Lease. Subject to the provisions of Section 10.2 of the Lease, the Tenant Improvements shall belong to Landlord and shall be deemed to be incorporated into the Premises for all purposes of the Lease, unless Landlord, in writing, indicates otherwise to Tenant.

7. Tenant Delays. There shall be no extension of the Commencement Date or Expiration Date of the term of the Lease (as otherwise permissibly extended in accordance with the provisions of Section 6 above) if the Work has not been Substantially Completed by the date the Tenant Improvements would otherwise have been Substantially Completed but for any delay attributable to Tenant and/or any of Tenant’s Representatives (collectively, “Tenant Delays”), including, but not limited to, any of the following described events or occurrences: (a) delays related to changes made or requested by Tenant to the Work and/or the Approved Final Drawings; (b) the failure of Tenant to furnish all or any plans, drawings, specifications, finish details or other information required under Sections 3 and 4 above; (c) the failure of Tenant to comply with the requirements of Section 10 below; (d) Tenant’s requirements for special work or materials, finishes, or installations other than the Building Standards or Tenant’s requirements for special construction or phasing; (e) any changes required by the fire department, building or planning department, building inspectors or any other agency having jurisdiction over the Building, the Work and/or the Tenant Improvements if such changes are directly attributable to Tenant’s use or Tenant’s specialized tenant improvements; (f) the completion of any work associated with Tenant’s Installations, including without limitation, Tenant’s high-pile storage requirements, Tenant’s racking systems, and work related to any requirements of governmental and regulatory agencies with respect to any of Tenant’s Installations; (g) the performance of any additional work pursuant to a Change Request that is requested by Tenant; (h) the performance of work in or about the Premises by any person, firm or corporation employed by or on behalf of Tenant, including, without limitation, any failure to complete or any delay in the completion of such work; and/or (i) any and all delays caused by or arising from acts or omissions of Tenant and/or Tenant’s Representatives, in any manner whatsoever, including, but not limited to, any and all revisions to the Approved Final Drawings. Any delays in the construction of the Tenant Improvements due to any of the events described above, shall in no way extend or affect the date on which Tenant is required to commence paying Rent under the terms of the Lease. It is the intention of the parties that all of such delays will be considered Tenant Delays for which

Exhibit B, Page 2

Tenant shall be wholly and completely responsible for any and all consequences related to such delays, including, without limitation, any costs and expenses attributable to increases in labor or materials.

8. Tenant Improvement Allowance. Landlord shall provide an allowance for the planning and construction of the Tenant Improvements for the Work to be performed in the Premises, as described in the Initial Plans and the Approved Final Drawings, in the amount of One Million Thirty Thousand One Hundred Fifty and 00/100 Dollars ($1,030,150.00) (the “Tenant Improvement Allowance”) based upon an allowance of Eleven and 00/100 Dollars ($11.00) per rentable square foot for 93,650 rentable square feet of the Premises to be improved, as described in the Initial Plans and the Approved Final Drawings; provided, upon the prior written approval of Landlord, a portion of the Tenant Improvement Allowance in the amount of Three Hundred Twenty-Three Thousand Eight Hundred Nine and 50/100 Dollars ($323,809.50) may be used by Tenant for FF&E to be installed in the Premises. Tenant shall not be entitled to any credit, abatement or payment from Landlord in the event that the amount of the Tenant Improvement Allowance specified above exceeds the sum of actual Tenant Improvement Costs and any Tenant Improvement Allowance amounts spent by Tenant for FF&E. Except with respect to FF&E, the Tenant Improvement Allowance shall only be used for tenant improvements typically installed by Landlord in research and development buildings. The Tenant Improvement Allowance shall be the maximum contribution by Landlord for the Tenant Improvement Costs and any Tenant Improvement Allowance amounts spent by Tenant for FF&E, and shall be subject to the provisions of Section 10 below.

9. Tenant Improvement Costs. The Tenant Improvements’ cost (the “Tenant Improvement Costs”) shall mean and include any and all costs and expenses of the Work, including, without limitation, all of the following:

     (a) All costs of preliminary space planning and final architectural and engineering plans and specifications (including, without limitation, the scope of work, all plans and specifications, the Initial Plans, the Final Drawings and the Approved Final Drawings) for the Tenant Improvements, and architectural fees, engineering costs and fees, and other costs associated with completion of said plans;

     (b) All costs of obtaining building permits and other necessary authorizations and approvals from the City of San Jose and other applicable agencies and jurisdictions;

     (c) All costs of interior design and finish schedule plans and specifications including as-built drawings;

     (d) All direct and indirect costs of procuring, constructing and installing the Tenant Improvements in the Premises, including, but not limited to, the construction fee for overhead and profit, the cost of all on-site supervisory and administrative staff, office, equipment and temporary services rendered by Landlord’s consultants and the General Contractor in connection with construction of the Tenant Improvements, and all labor (including overtime) and materials constituting the Work;

     (e) All fees payable to the General Contractor, architect and Landlord’s engineering firm if they are required by Tenant to redesign any portion of the Tenant Improvements following Tenant’s approval of the Approved Final Drawings; and

     (f) A construction management fee payable to Landlord in the amount of two and one-half percent (2.5%) of all direct and indirect costs of procuring, constructing and installing the Tenant Improvements, excluding the FF&E, in the Premises and the Building.

10. Excess Tenant Improvement Costs. The term “Excess Tenant Improvement Costs” as used herein shall mean and refer to the aggregate of (i) all costs related to any and all Change Requests/Change Orders, and (ii) the amount by which the sum of the actual Tenant Improvement Costs (exclusive of all costs referred to in item (i) above) and any Tenant Improvement Allowance amounts spent by Tenant for FF&E (the “Actual TI Costs”) exceed the Tenant Improvement Allowance, subject to the remaining provisions of this Section 10. Tenant shall pay to Landlord the Excess Tenant Improvement Costs within ten (10) days of Landlord’s delivery to Tenant of a written demand therefor together with a reconciliation of such costs. No Work shall be commenced until Tenant has fully complied with the preceding provisions of this Section 10. If Tenant fails to remit the sums so demanded by Landlord pursuant to this Section 10 within the time period required, Landlord may, at its option, declare Tenant in default under the Lease.

11. Change Requests. No changes or revisions to the Approved Final Drawings shall be made by either Landlord or Tenant unless approved in writing by both parties. Upon Tenant’s request and submission by Tenant (at Tenant’s sole cost and expense) of the necessary information and/or plans and specifications for any changes or revisions to the Approved Final Drawings and/or for any work other than the Work described in the Approved Final Drawings (“Change Requests”) and the approval by Landlord of such Change Request(s), which approval Landlord agrees shall not be unreasonably withheld, Landlord shall perform the additional work associated with the approved Change Request(s), at Tenant’s sole cost and expense, subject, however, to the following provisions of this Section 11. Prior to commencing any additional work related to the approved Change Request(s), Landlord shall submit to Tenant a written statement of the cost of such additional work and a proposed tenant change order therefor (“Change Order”) in the standard form then in use by Landlord. Tenant shall execute and deliver to Landlord such Change Order and shall pay the entire cost of such additional work in the following described manner, if and to the extent that such cost is Excess Tenant Improvement Costs. Any costs related to such approved Change Request(s), Change Order and any delays associated therewith, shall be added to the Tenant Improvement Costs and shall be paid for by Tenant as and with any Excess Tenant Improvement Costs as set forth in Section 10 above. The billing for such additional costs to Tenant shall be accompanied by evidence of the amounts billed as is customarily used in the business. Costs related to approved Change Requests and Change Orders shall include without limitation, any architectural or design fees, Landlord’s construction fee for overhead and profit in the amount of two and one-half percent (2.5%) of the costs of the Change Requests and Change Orders, the cost of all on-site supervisory and administrative staff, office, equipment and temporary services rendered by Landlord and/or Landlord’s consultants, and the General Contractor’s price for effecting the change. If Tenant fails to execute or deliver such Change Order, or to pay the costs related thereto to the extent such costs are Excess Tenant Improvement Costs, then Landlord shall not be obligated to do any additional work related to such approved Change Request(s) and/or Change Orders, and Landlord may proceed to perform only the Work, as specified in the Approved Final Drawings. Landlord shall equitably adjust the amount of the Tenant Improvement Costs for any deletions in the scope of the Work.

Exhibit B, Page 3

12. Termination. If the Lease is terminated prior to the Completion Date, for any reason due to the default of Tenant hereunder, in addition to any other remedies available to Landlord under the Lease, Tenant shall pay to Landlord as Additional Rent under the Lease, within five (5) days of receipt of a statement therefor, any and all costs incurred by Landlord and not reimbursed or otherwise paid by Tenant through the date of termination in connection with the Tenant Improvements to the extent planned, installed and/or constructed as of such date of termination, including, but not limited to, any costs related to the removal of all or any portion of the Tenant Improvements and restoration costs related thereto. Subject to the provisions of Section 10.2 of the Lease, upon the expiration or earlier termination of the Lease, Tenant shall not be required to remove the Tenant Improvements it being the intention of the parties that the Tenant Improvements are to be considered incorporated into the Building, with the exception of that portion of the Tenant Improvement Allowance used for FF&E, if any. Notwithstanding anything to the contrary contained herein, Landlord shall have the right to terminate the Lease, upon written notice to Tenant, if Landlord is unable to obtain a building permit for the Tenant Improvements within one hundred eighty (180) days from the date the Lease is signed by Tenant. From and after the date on which the Lease is terminated, Tenant and Landlord shall have no further rights, obligations or claims with respect to each other arising from the Lease, except for those obligations of Tenant and Landlord under the Lease which expressly survive and continue after the termination or expiration of the Lease.

13. Tenant Access. Landlord, in Landlord’s reasonable discretion and upon receipt of a written request from Tenant, may grant Tenant a license to have access to the Premises prior to the Completion Date to allow Tenant to do other work required by Tenant to make the Premises ready for Tenant’s use and (the “Tenant’s Pre-Occupancy Work”). It shall be a condition to the grant by Landlord and continued effectiveness of such license that:

     (a) Tenant shall give to Landlord a written request to have such access not less than five (5) business days prior to the date on which such proposed access will commence (the “Access Notice”). The Access Notice shall contain or be accompanied by each of the following items, all in form and substance reasonably acceptable to Landlord: (i) a detailed description of and schedule for Tenant’s Pre-Occupancy Work; (ii) the names and addresses of all contractors, subcontractors and material suppliers and all other representatives of Tenant who or which will be entering the Premises on behalf of Tenant to perform Tenant’s Pre-Occupancy Work or will be supplying materials for such work, and the approximate number of individuals, itemized by trade, who will be present in the Premises; (iii) copies of all contracts, subcontracts, material purchase orders, plans and specifications pertaining to Tenant’s Pre-Occupancy Work; (iv) copies of all licenses and permits required in connection with the performance of Tenant’s Pre-Occupancy Work; (v) certificates of insurance (in amounts satisfactory to Landlord and with the parties identified in, or required by, the Lease named as additional insureds) and instruments of indemnification against all claims, costs, expenses, penalties, fines, and damages which may arise in connection with Tenant’s Pre-Occupancy Work; and (vi) assurances of the ability of Tenant to pay for all of Tenant’s Pre-Occupancy Work.

     (b) Such pre-term access by Tenant and Tenant’s employees, agents, contractors, consultants, workmen, mechanics, suppliers and invitees shall be subject to scheduling by Landlord.

     (c) Tenant’s employees, agents, contractors, consultants, workmen, mechanics, suppliers and invitees shall fully cooperate, work in harmony and not, in any manner, interfere with Landlord or Landlord’s agents or representatives in performing the Work and any additional work pursuant to approved Change Orders. If at any time any such person representing Tenant shall not be cooperative or shall otherwise cause or threaten to cause any such disharmony or interference, including, without limitation, labor disharmony, and Tenant fails to immediately institute and maintain corrective actions as directed by Landlord, then Landlord may revoke such license upon twenty-four (24) hours’ prior written notice to Tenant.

     (d) Any such entry into and occupancy of the Premises or any portion thereof by Tenant or any person or entity working for or on behalf of Tenant shall be deemed to be subject to all of the terms, covenants, conditions and provisions of the Lease, excluding only the covenant to pay Rent. Landlord shall not be liable for any injury, loss or damage that may occur to any of Tenant’s Pre-Occupancy Work made in or about the Premises or to any property placed therein prior to the commencement of the term of the Lease, the same being at Tenant’s sole risk and liability. Tenant shall be liable to Landlord for any damage to any portion of the Premises, the Work or the additional work related to any approved Change Orders caused by Tenant or any of Tenant’s employees, agents, contractors, consultants, workmen, mechanics, suppliers and invitees. In the event that the performance of Tenant’s Pre-Occupancy Work causes extra costs to be incurred by Landlord or requires the use of other Building services, Tenant shall promptly reimburse Landlord for such extra costs and/or shall pay Landlord for such other Building services at Landlord’s standard rates then in effect, if and to the extent that such costs are Excess Tenant Improvement Costs.

14. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar as they are applicable, in whole or in part, to this Exhibit B, are hereby incorporated herein by reference, and specifically including all of the provisions of Section 29 of the Lease. In the event of any conflict between the terms of the Lease and this Exhibit B, the terms of this Exhibit B shall prevail. Any amounts payable by Tenant to Landlord hereunder shall be deemed to be Additional Rent under the Lease and, upon any default in the payment of same, Landlord shall have all rights and remedies available to it as provided for in the Lease.

Exhibit B, Page 4

Exhibit C
Rules & Regulations

This exhibit, entitled “Rules & Regulations”, is and shall constitute Exhibit C to that certain Lease Agreement dated for reference purposes as of November                     , 2005 (the “Lease”), by and between Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company (“Landlord”), and VNUS Medical Technologies, Inc., a Delaware corporation (“Tenant”), for the leasing of certain premises located at 5799 Fontanoso Way, San Jose, California 95138 (the “Premises”). The terms, conditions and provisions of this Exhibit C are hereby incorporated into and are made a part of the Lease. Any capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms as set forth in the Lease:

1.    Subject to Section 30 of the Lease, no advertisement, picture or sign of any sort shall be displayed on or outside the Premises or the Building without the prior written consent of Landlord. Landlord shall have the right to remove any such unapproved item without Notice and at Tenant’s expense.

2.    Tenant shall park motor vehicles in those general parking areas, as designated by Landlord, except for loading and unloading. Tenant shall not regularly park motor vehicles in designated parking areas after the conclusion of normal daily business activity.

3.    Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord without the prior written consent of Landlord.

4.    All window coverings installed by Tenant and visible from the outside of the Building require the prior written approval of Landlord.

5.    Subject to Section 27 of the Lease, Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance or any flammable or combustible materials in or around the Premises or the Building.

6.    Tenant shall not alter any lock or install any new locks or bolts on any door at the Premises without the prior consent of Landlord.

7.    No person shall go on the roof without Landlord’s permission.

8.    Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building, to such a degree as to be objectionable to Landlord, shall be placed and maintained by Tenant, at Tenant’s expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration.

9.    All goods, including material used to store goods, delivered to the Premises shall be immediately moved into the Premises and shall not be left in parking or receiving areas overnight. Tenant shall not store or permit the storage or placement of goods, merchandise, pallet or equipment of any sort outside of the Premises or Building. No displays or sales of merchandise are allowed in the parking lots.

10.    Tractor trailers which must be unhooked or parked with dolly wheels beyond the concrete loading areas must use steel plates or wood blocks under the dolly wheels to prevent damage to the asphalt paving surfaces. No parking or storing of such trailers will be permitted in the auto parking areas of the Premises or on streets adjacent thereto.

11.    Forklifts which operate on asphalt paving areas shall not have solid rubber tires and shall only use tires that do not damage the asphalt.

12.    Tenant is responsible for the storage and removal of all trash and refuse. All such trash and refuse shall be contained in suitable receptacles and stored behind screened enclosures at locations approved by Landlord.

13.    Tenant shall not permit any animals, including, but not limited to, any household pets, to be brought or kept in the Premises.

14.    Tenant shall not permit (i) any motor vehicles to be washed in any portion of the Premises, and (ii) any mechanical work or maintenance of motor vehicles to be performed in any portion of the Premises.

Exhibit C, Page 1

Exhibit E
Hazardous Materials Disclosure Certificate

Your cooperation in this matter is appreciated. Initially, the information provided by you in this Hazardous Materials Disclosure Certificate is necessary for the Landlord (identified below) to evaluate and finalize a lease agreement with you as Tenant. After a lease agreement is signed by you and the Landlord (the “Lease Agreement”), on an annual basis in accordance with the provisions of Section 27 of the signed Lease Agreement, you are to provide an update to the information initially provided by you in this certificate. The information contained in the initial Hazardous Materials Disclosure Certificate and each annual certificate provided by you thereafter will be maintained in confidentiality by Landlord subject to release and disclosure as required by (i) any lenders and owners and their respective environmental consultants, (ii) any prospective purchaser(s) of all or any portion of the property on which the Premises are located, (iii) Landlord to defend itself or its lenders, partners or representatives against any claim or demand, and (iv) any laws, rules, regulations, orders, decrees, or ordinances, including, without limitation, court orders or subpoenas. Any and all capitalized terms used herein, which are not otherwise defined herein, shall have the same meaning ascribed to such term in the signed Lease Agreement. Any questions regarding this certificate should be directed to, and when completed, the certificate should be delivered to:

Landlord: Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company
	c/o Legacy Partners Commercial, Inc.
	4000 East Third Avenue, Suite 600
	Foster City, California 94404-4805
	Attn:
	Phone: (650) 571-2200

Name of (Prospective) Tenant: VNUS Medical Technologies, Inc., a Delaware corporation

Mailing Address: 5799 Fontanoso Way, San Jose, California 95138

Contact Person, Title and Telephone Number(s): Timothy Marcotte (408) 473-1177

Contact Person for Hazardous Waste Materials Management and Manifests and Telephone Number(s):
Timothy Marcotte (408) 473-1177

Address of (Prospective) Premises: 5799 Fontanoso Way, San Jose, California 95138

Length of (Prospective) Initial Term: Ninety-six (96) months

1. General Information:

     Describe the initial proposed operations to take place in, on, or about the Premises, including, without limitation, principal products processed, manufactured or assembled services and activities to be provided or otherwise conducted. Existing Tenants should describe any proposed changes to on-going operations.

2. Use, Storage and Disposal of Hazardous Materials

     2.1    Will any Hazardous Materials be used, generated, stored or disposed of in, on or about the Premises? Existing Tenants should describe any Hazardous Materials which continue to be used, generated, stored or disposed of in, on or about the Premises.

Wastes		Yes o		No o
Chemical Products	Yes o		No o
Other		Yes o		No o
If Yes is marked, please explain:

     2.2    If “Yes” is marked in Section 2.1, attach a list of any Hazardous Materials to be used, generated, stored or disposed of in, on or about the Premises, including the applicable hazard class and an estimate of the quantities of such Hazardous Materials at any given time; estimated annual throughput; the proposed location(s) and method of storage (excluding nominal amounts of ordinary household cleaners and janitorial supplies which are not regulated by any Environmental Laws); and the proposed location(s) and method of disposal for each Hazardous Material, including, the estimated frequency, and the proposed contractors or subcontractors. Existing Tenants should attach a list setting forth the information requested above and such list should include actual data from on-going operations and the identification of any variations in such information from the prior year’s certificate.

3. Storage Tanks and Sumps

     3.1    Is any above or below ground storage of gasoline, diesel, petroleum, or other Hazardous Materials in tanks or sumps proposed in, on or about the Premises? Existing Tenants should describe any such actual or proposed activities.

             Yes o                     No o

Exhibit E, Page 1

If yes, please explain:

4. Waste Management

     4.1    Has your company been issued an EPA Hazardous Waste Generator I.D. Number? Existing Tenants should describe any additional identification numbers issued since the previous certificate.

             Yes o                     No o

     4.2    Has your company filed a biennial or quarterly reports as a hazardous waste generator? Existing Tenants should describe any new reports filed.

             Yes o                     No o

     If yes, attach a copy of the most recent report filed.

5. Wastewater Treatment and Discharge

     5.1    Will your company discharge wastewater or other wastes to:

storm drain?	sewer?
surface water?	no wastewater or other wastes discharged.

     Existing Tenants should indicate any actual discharges. If so, describe the nature of any proposed or actual discharge(s).

     5.2    Will any such wastewater or waste be treated before discharge?

              Yes o                     No o

     If yes, describe the type of treatment proposed to be conducted. Existing Tenants should describe the actual treatment conducted.

6. Air Discharges

     6.1    Do you plan for any air filtration systems or stacks to be used in your company’s operations in, on or about the Premises that will discharge into the air; and will such air emissions be monitored? Existing Tenants should indicate whether or not there are any such air filtration systems or stacks in use in, on or about the Premises which discharge into the air and whether such air emissions are being monitored.

              Yes o                     No o

If yes, please describe:

     6.2    Do you propose to operate any of the following types of equipment, or any other equipment requiring an air emissions permit? Existing Tenants should specify any such equipment being operated in, on or about the Premises.

Spray booth(s)	Incinerator(s)
Dip tank(s)	Other (Please describe)
Drying oven(s)	No Equipment Requiring Air Permits

If yes, please describe:

7. Hazardous Materials Disclosures

     7.1    Has your company prepared or will it be required to prepare a Hazardous Materials management plan (“Management Plan”) pursuant to Fire Department or other governmental or regulatory agencies’ requirements? Existing Tenants should indicate whether or not a Management Plan is required and has been prepared.

              Yes o                     No o

     If yes, attach a copy of the Management Plan. Existing Tenants should attach a copy of any required updates to the Management Plan.

Exhibit E, Page 2

     7.2    Are any of the Hazardous Materials, and in particular chemicals, proposed to be used in your operations in, on or about the Premises regulated under Proposition 65? Existing Tenants should indicate whether or not there are any new Hazardous Materials being so used which are regulated under Proposition 65.

             Yes o                     No o

If yes, please explain:

8. Enforcement Actions and Complaints

     8.1    With respect to Hazardous Materials or Environmental Laws, has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees or has your company received requests for information, notice or demand letters, or any other inquiries regarding its operations? Existing Tenants should indicate whether or not any such actions, orders or decrees have been, or are in the process of being, undertaken or if any such requests have been received.

               Yes o                     No o

     If yes, describe the actions, orders or decrees and any continuing compliance obligations imposed as a result of these actions, orders or decrees and also describe any requests, notices or demands, and attach a copy of all such documents. Existing Tenants should describe and attach a copy of any new actions, orders, decrees, requests, notices or demands not already delivered to Landlord pursuant to the provisions of Section 27 of the signed Lease Agreement.

     8.2    Have there ever been, or are there now pending, any lawsuits against your company regarding any environmental or health and safety concerns?

               Yes o                     No o

     If yes, describe any such lawsuits and attach copies of the complaint(s), cross-complaint(s), pleadings and all other documents related thereto as requested by Landlord. Existing Tenants should describe and attach a copy of any new complaint(s), cross-complaint(s), pleadings and other related documents not already delivered to Landlord pursuant to the provisions of Section 27 of the signed Lease Agreement.

     8.3    Have there been any problems or complaints from adjacent Tenants, owners or other neighbors at your company’s current facility with regard to environmental or health and safety concerns? Existing Tenants should indicate whether or not there have been any such problems or complaints from adjacent Tenants, owners or other neighbors at, about or near the Premises.

               Yes o                     No o

     If yes, please describe. Existing Tenants should describe any such problems or complaints not already disclosed to Landlord under the provisions of the signed Lease Agreement.

9. Permits and Licenses

     9.1    Attach copies of all Hazardous Materials permits and licenses including a Transporter Permit number issued to your company with respect to its proposed operations in, on or about the Premises, including, without limitation, any wastewater discharge permits, air emissions permits, and use permits or approvals. Existing Tenants should attach copies of any new permits and licenses as well as any renewals of permits or licenses previously issued.

The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials Disclosure Certificate is being delivered in connection with, and as required by, Landlord in connection with the evaluation and finalization of a Lease Agreement and will be attached thereto as an exhibit; (B) that this Hazardous Materials Disclosure Certificate is being delivered in accordance with, and as required by, the provisions of Section 27 of the Lease Agreement; and (C) that Tenant shall have and retain full and complete responsibility and liability with respect to any of the Hazardous Materials disclosed in the HazMat Certificate notwithstanding Landlord’s/Tenant’s receipt and/or approval of such certificate. Tenant further agrees that none of the following described acts or events shall be construed or otherwise interpreted as either (a) excusing, diminishing or otherwise limiting Tenant from the requirement to fully and faithfully perform its obligations under the Lease with respect to Hazardous Materials, including, without limitation, Tenant’s indemnification of the Indemnitees and compliance with all Environmental Laws, or (b) imposing upon Landlord, directly or indirectly, any duty or liability with respect to any such Hazardous Materials, including, without limitation, any duty on Landlord to investigate or otherwise verify the accuracy of the representations and statements made therein or to ensure that Tenant is in compliance with all Environmental Laws; (i) the delivery of such certificate to Landlord and/or Landlord’s acceptance of such

Exhibit E, Page 3

certificate, (ii) Landlord’s review and approval of such certificate, (iii) Landlord’s failure to obtain such certificate from Tenant at any time, or (iv) Landlord’s actual or constructive knowledge of the types and quantities of Hazardous Materials being used, stored, generated, disposed of or transported on or about the Premises by Tenant or Tenant’s Representatives. Notwithstanding the foregoing or anything to the contrary contained herein, the undersigned acknowledges and agrees that Landlord and its partners, lenders and representatives may, and will, rely upon the statements, representations, warranties, and certifications made herein and the truthfulness thereof in entering into the Lease Agreement and the continuance thereof throughout the term, and any renewals thereof, of the Lease Agreement.

I (print name)                                         , acting with full authority to bind the (proposed) Tenant and on behalf of the (proposed) Tenant, certify, represent and warrant that the information contained in this certificate is true and correct.

(Prospective) Tenant:

By:

Title:

Date:

Exhibit E, Page 4

Exhibit F
First Amendment to Lease Agreement
Change of Commencement Date

This First Amendment to Lease Agreement (the “Amendment”) is made and entered into to be effective as of                     ,20     ,by and between Legacy Partners I SJ Fontanoso, LLC, a Delaware limited liability company (“Landlord”), and VNUS Medical Technologies, Inc., a Delaware corporation (“Tenant”), with reference to the following facts:

Recitals

A.    Landlord and Tenant have entered into that certain Lease Agreement dated November ___, 2005 (the “Lease”), for the leasing of certain premises containing approximately 93,650 rentable square feet of space located at 5799 Fontanoso Way, San Jose, California 95138 (the “Premises”), as such Premises are more fully described in the Lease.

B.    Landlord and Tenant wish to amend the Commencement Date of the Lease.

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

     1.    Recitals: Landlord and Tenant agree that the above recitals are true and correct.

     2.    Commencement Date: The Commencement Date of the Lease shall be                                         .

     3.    Expiration Date: The last day of the Term of the Lease (the “Expiration Date”) shall be                     .

     4.    Base Rent: The dates on which the Base Rent will be adjusted are:

for the period                      to                      the monthly Base Rent shall be $                    ;

for the period                      to                      the monthly Base Rent shall be $                    ;and

for the period                      to                      the monthly Base Rent shall be $                    .

     5.    Effect of Amendment: Except as modified herein, the terms and conditions of the Lease shall remain unmodified and continue in full force and effect. In the event of any conflict between the terms and conditions of the Lease and this Amendment, the terms and conditions of this Amendment shall prevail.

     6.    Definitions: Unless otherwise defined in this Amendment, all terms not defined in this Amendment shall have the meaning set forth in the Lease.

     7.    Authority: Subject to the provisions of the Lease, this Amendment shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors and assigns. Each party hereto and the persons signing below warrant that the person signing below on such party’s behalf is authorized to do so and to bind such party to the terms of this Amendment.

     8.    Incorporation: The terms and provisions of the Lease are hereby incorporated in this Amendment.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written.

Tenant:

VNUS Medical Technologies, Inc.,
a Delaware corporation

By:

Its:

Date:

By:

Its:

Date:

Exhibit F, Page 1

Landlord:

Legacy Partners I SJ Fontanoso, LLC,
a Delaware limited liability company,
Owner

By:	LEGACY PARTNERS COMMERCIAL, L.P.,
	a California limited partnership,
	as Property Manager and Agent for Owner
By:	LEGACY PARTNERS COMMERCIAL, INC.,
	General Partner
	By:
	Debra Smith
	Its: Executive Vice President
Date:

If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. The Lease must be executed by the president or vice-president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease.

Exhibit F, Page 2

Exhibit G

N/A

Exhibit G, Page 1

Exhibit H
Furniture, Fixtures and Equipment

Exhibit H, Page 1

Exhibit I
Subordination, Non-Disturbance and Attornment Agreement

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

Redwood Capital Finance Company, LLC
1960 East Grand Avenue, Suite 400
El Segundo, California 90245
Attention: William R. Lindsay

Space above this line for Recorder’s use.

SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT

THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (“Agreement”) is made and entered into as of                           , 200     , by and between REDWOOD CAPITAL FINANCE COMPANY, LLC a Delaware limited liability company (“Lender”), and                                         (“Tenant”).

RECITALS:

     A.    Pursuant to the Loan Agreement (as defined below), Lender has made, or has agreed to make, a loan (“Loan”) to the owner of the Property,                                         (“Borrower”), evidenced by, among other things, a promissory note executed, or to be executed, by Borrower in favor of Lender in the principal amount of the Loan (as amended from time to time, the “Note”).

     B.    The Note and certain other obligations of Borrower under the Loan are, or will be, secured by, among other things, a Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing executed, to be executed, by Borrower in favor of Lender (as amended from time to time, the “Deed of Trust”). The Deed of Trust, is to be recorded or on or about the date of recordation of this Agreement and encumbers Borrower’s interest in certain real property situated in the City of                     , County of                     , State of                                         , and more particularly described on Exhibit A attached hereto (the “Property”). In connection with the Loan, Borrower and Lender have executed a Loan Agreement (“Loan Agreement”), and Borrower has executed the other documents and instruments which, together with the Loan Agreement, are described in the Loan Agreement as the “Loan Documents.”

     C.    Pursuant to that certain Lease, dated                     , Tenant leases the portion of the Property known as                                         (“Premises”).

     D.    As a condition to making the Loan, Lender requires that Tenant subordinate the Lease to the Deed of Trust and the lien thereof, subject to the terms and conditions of this Agreement, and agree to attorn to Lender as provided below. Tenant is willing to provide such subordination and attornment on the terms and conditions contained in this Agreement. Unless otherwise defined herein, capitalized terms used in this Agreement shall have the same meanings as in the Lease.

NOW, THEREFORE, for valuable consideration, Tenant and Lender agree as follows:

     1.    SUBORDINATION. Tenant hereby agrees in favor of Lender:

             (a)    The rights, interests, lien and charge of Lender under the Deed of Trust and the other Loan Documents, and all modifications, extensions, renewals or replacements thereof, as to the Note and all other obligations now or hereafter secured thereby, including any additional advances thereunder, and all modifications, extensions, renewals or replacements thereof, shall unconditionally and at all times be and remain prior and superior with respect to the Property to the rights, interests, lien and charge of Tenant under the Lease, and all modifications, extensions, renewals or replacements thereof. Notwithstanding the foregoing subordination as to any subsequent modifications, renewals, extensions or replacements of the Deed of Trust, the Note, the other Loan Documents or the other obligations secured thereby, including any additional advances thereunder, Tenant agrees to execute, acknowledge and deliver to Lender from time to time such further subordination and/or other agreements as Lender may request in order to confirm the continuing priority and superiority of the Deed of Trust and the other Loan Documents over the Lease;

             (b)    Lender would not make the Loan without this agreement to subordinate;

             (c)    This Agreement shall be the whole agreement and only agreement with regard to the subordination of the Lease to the lien of the Deed of Trust and shall supersede and cancel, but only insofar as would affect the priority between the Deed of Trust and the Lease, any prior agreements as to such subordination, including, without limitation, those provisions, if any, contained in the Lease which provide for the subordination of the Lease to a deed or deeds of trust or to a mortgage or mortgages;

             (d)    Lender, in making disbursements pursuant to the Note, the Deed of Trust or the Loan Agreements, is under no obligation or duty to, nor has Lender represented that it will, see to the application of such proceeds by the person or persons to whom Lender

Exhibit I, Page 1

disburses such proceeds, and any application or use of such proceeds for purposes other than those provided for in such agreement or agreements shall not defeat this agreement to subordinate in whole or in part; and

          (e)    Tenant intentionally and unconditionally waives, relinquishes and subordinates all of Tenant’s right, title and interest in and to the Property to the lien of the Deed of Trust and understands that in reliance upon, and in consideration of, this waiver, relinquishment and subordination, specific loans and advances are being and will be made by Lender and, as part and parcel thereof, specific monetary and other obligations are being and will be entered into which would not be made or entered into but for such reliance upon this waiver, relinquishment and subordination.

     2.    NONDISTURBANCE. Lender will not join Tenant as a party in any Foreclosure (defined below) unless the joinder is necessary to pursue Lender’s remedies under the Deed of Trust, and provided that such joinder shall not result in the termination of the Lease or disturb Tenant’s possession of the Premises. In the event of a Foreclosure, Lender agrees that the leasehold interest of Tenant under the Lease shall not be terminated by reason of the Foreclosure, but rather the Lease shall continue in full force and effect, and Lender shall recognize and accept Tenant as tenant under the Lease subject to the provisions of the Lease except as otherwise provided below; provided that, if Tenant shall then be in default under the Lease beyond any notice, grace or cure period, at Lender’s option, the Lease shall be terminated by reason of the Foreclosure and Lender shall have no obligation to Tenant under the Lease. As used in this Agreement, “Foreclosure” means any nonjudicial or judicial foreclosure of the Deed of Trust, or any deed or other transfer in lieu thereof.

     3.    ATTORNMENT. In the event of a transfer of Borrower’s interest in the Property to a Purchaser (as defined below), the Lease shall continue in full force and effect and Tenant agrees to attorn to the Purchaser as its landlord under the Lease and to be bound by all of the provisions of the Lease for the balance of the term thereof; provided that the Purchaser shall not be:

             (a)    Liable for any act or omission of any Prior Landlord (as defined below) or subject to any offsets or defenses which Tenant might have against any Prior Landlord;

             (b)    Liable for the return of any rental security deposit, or bound by any payment of rents, additional rents or other sums which Tenant may have paid more than one month in advance to any Prior Landlord, except to the extent such sums are actually received by Purchaser;

Exhibit I, Page 2

          (c)    Bound by any amendment to the Lease made without the prior written consent of Lender;

          (d)    Liable for obligations under the Lease, the cost of which exceed the value of its interest in the Property, or for obligations which first accrue after Purchaser has sold or otherwise transferred its interest in the Property;

          (e)    Obligated to install, construct or pay for any tenant or other improvements or alterations to or on the Premises or Property; bound to restore the Premises or Property after a casualty for a cost in excess of any insurance proceeds received by Lender with respect to such casualty; or bound to restore the Premises or Property after a taking in condemnation for a cost in excess of the portion of any condemnation award made specifically for that purpose; bound by any restriction on competition beyond the Property;

          (f)    Bound by any notice of termination, cancellation or surrender of the Lease made without the prior written consent of Lender, except as otherwise provided in the Lease;

          (g)    Bound by any option to purchase, right of first offer to purchase or right of first refusal to purchase with respect to the Property or any portion thereof;

          (h)    Liable for the breach of any representation or warranty made by Prior Landlord in the Lease; or

          (i)    Liable for any indemnity obligation of Prior Landlord contained in the Lease, except with respect to the Purchaser’s acts or omissions.

This attornment shall be immediately effective and self-operative, without the execution of any further instrument, upon Purchaser’s acquisition of Borrower’s interest in the Property. As used in this Agreement, “Purchaser” means any transferee, including Lender, of Borrower’s interest in the Property pursuant to a Foreclosure and the successors and assigns of such transferee, and “Prior Landlord” means any landlord, including Borrower, under the Lease prior in time to Purchaser.

     4.    NOTICE TO TENANT. After written notice is given to Tenant by Lender, that Borrower is in default under the Loan and that the rentals under the Lease are required to be paid to Lender pursuant to the terms of the Deed of Trust, Tenant shall thereafter pay to Lender all rent and all other sums due Borrower under the Lease.

     5.    NOTICE TO LENDER AND RIGHT TO CURE. Tenant shall provide written notice to Lender of any default by Borrower under the Lease or any other act or omission by Borrower under the Lease which could give Tenant the right to terminate the Lease and/or abate or make a deduction from amounts payable by Tenant under the Lease, which notice may be a copy of Tenant’s notice to Borrower, and Tenant agrees that no notice of termination of the Lease and no notice of abatement of or deduction from rent shall be effective unless Lender shall have received written notice of the default, act or omission giving rise to such termination, abatement or rent deduction and shall have failed to cure such default, act or omission within thirty (30) days after receipt of such notice to cure such default, act or omission or if such default, act or omission cannot be cured within thirty (30) days, shall have failed within thirty (30) days after receipt of such notice to commence and thereafter diligently pursue any action necessary to cure such default, act or omission to completion, including, without limitation, any action to obtain possession of the Property. Notwithstanding the foregoing, Lender shall have no obligation to cure any such default, act or omission. Tenant shall give such notice to Lender at its address set forth below or at such other address as Lender shall specify from time to time.

     6.    NOTICES. Any notice or other communication required or permitted to be given pursuant to the provisions of this Agreement shall either be personally delivered, sent by registered or certified U.S. mail, return receipt requested, postage prepaid, or sent by a nationally recognized private courier service, and shall be addressed to the parties as follows:

TENANT:
LENDER:	REDWOOD     CAPITAL     FINANCE     COMPANY,     LLC
	1960 East Grand Avenue, Suite 400
	El Segundo, California 90245
	Attention: William R. Lindsay

Any such notice shall be effective upon delivery or attempted delivery.

Exhibit I, Page 3

     7.    MISCELLANEOUS. This Agreement shall be binding upon and inure to the benefit of Lender and Tenant and their respective successors and assigns. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California. This Agreement is the entire agreement of the parties and supersedes any prior agreement with respect to its subject matter, and no provision of this Agreement may be waived or modified except in a writing signed by all parties. If any lawsuit, arbitration or other proceeding is brought under this Agreement, the prevailing party shall be entitled to recover the reasonable fees and costs of its attorneys in such proceeding. If any provision of this Agreement is held to be invalid or unenforceable in any respect, this Agreement shall be construed without such provision. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same document. Each party represents and warrants to the other party that this Agreement is a valid and binding agreement of such party and the person(s) executing this Agreement on their behalf have the authority to do so.

Exhibit I, Page 4

IN WITNESS WHEREOF, Lender and Tenant have duly executed this Agreement as of the date first above written.

LENDER:	REDWOOD CAPITAL FINANCE COMPANY, LLC
	a Delaware limited liability company
	By
	Name:
	Title

STATE OF COLORADO	)
	)	ss.
COUNTY OF	)

     The foregoing instrument was acknowledged before me this            day of           , 200     , by                                        .

     IN WITNESS WHEREOF, I hereunto set my hand and official seal.

	Notary Public
My commission expires:

TENANT:

By

Name:

Title

STATE OF	)
	)	ss.
COUNTY OF	)

     The foregoing instrument was acknowledged before me this            day of           , 200     , by                                        .

     IN WITNESS WHEREOF, I hereunto set my hand and official seal.

	Notary Public
My commission expires:

Exhibit I, Page 5

EXHIBIT “A”

To Subordination, Non-Disturbance and Attornment Agreement

LEGAL DESCRIPTION OF PROPERTY

Exhibit I, Page 6

Addendum One
Option to Extend the Term

This Addendum One (the “Addendum”) is incorporated as a part of that certain Lease Agreement dated November ___, 2005 (the “Lease”), by and between LEGACY PARTNERS I SJ FONTANOSO, LLC, a Delaware limited liability company (“Landlord”), and VNUS Medical Technologies, Inc., a Delaware corporation (“Tenant”), for the leasing of certain premises located at 5799 Fontanoso Way, San Jose, California 95138 (the “Premises”). Any capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms as set forth in the Lease.

1.    Grant of Extension Option. Subject to the provisions, limitations and conditions set forth in Paragraph 5 below, Tenant shall have an Option (“Option”) to extend the initial term of the Lease for five (5) years (the “Extended Term”).

2.    Tenant’s Option Notice. Tenant shall have the right to deliver written notice to Landlord of its intent to exercise this Option (the “Option Notice”). If Landlord does not receive the Option Notice from Tenant on a date which is neither more than three hundred sixty-five (365) days nor less than one hundred eighty (180) days prior to the end of the initial term of the Lease, all rights under this Option shall automatically terminate and shall be of no further force or effect. Upon the proper exercise of this Option, subject to the provisions, limitations and conditions set forth in Paragraph 5 below, the initial term of the Lease shall be extended for the Extended Term.

3.    Establishing the Initial Monthly Base Rent for the Extended Term. The initial monthly Base Rent for the Extended Term shall be equal to ninety-five percent (95%) of the then Fair Market Rental Rate, as hereinafter defined. As used herein, the “Fair Market Rental Rate” payable by Tenant for the Extended Term shall mean the Base Rent for the highest and best use for comparable space at which non-equity tenants, as of the commencement of the lease term for the Extended Term, will be leasing non-sublease, non-equity, unencumbered space comparable in size, location and quality to the Premises for a comparable term, which comparable space is located in other comparable first-class buildings in the vicinity of the Building, taking into consideration all out-of-pocket concessions generally being granted at such time for such comparable space, including the condition and value of existing tenant improvements in the Premises. The Fair Market Rental Rate shall include the periodic rental increases that would be included for space leased for the period of the Extended Term.

If Landlord and Tenant are unable to agree on the Fair Market Rental Rate for the Extended Term within ten (10) days of receipt by Landlord of the Option Notice for the Extended Term, Landlord and Tenant each, at its cost and by giving notice to the other party, shall appoint a competent and impartial commercial real estate broker (hereinafter “broker”) with at least five (5) years’ full-time commercial real estate brokerage experience in the geographical area of the Premises to set the Fair Market Rental Rate for the Extended Term. If either Landlord or Tenant does not appoint a broker within ten (10) days after the other party has given notice of the name of its broker, the single broker appointed shall be the sole broker and shall set the Fair Market Rental Rate for the Extended Term. If two (2) brokers are appointed by Landlord and Tenant as stated in this paragraph, they shall meet promptly and attempt to set the Fair Market Rental Rate. In addition, if either of the first two (2) brokers fails to submit their opinion of the Fair Market Rental Rate within ten (10) days after selection of the second broker, then the single Fair Market Rental Rate submitted shall automatically be the initial monthly Base Rent for the Extended Term and shall be binding upon Landlord and Tenant. If the two (2) brokers are unable to agree within ten (10) days after the second broker has been appointed, they shall attempt to select a third broker, meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) brokers are given to set the Fair Market Rental Rate. If the two (2) brokers are unable to agree on the third broker, either Landlord or Tenant by giving ten (10) days’ written notice to the other party, can apply to the Presiding Judge of the Superior Court of the county in which the Premises is located for the selection of a third broker who meets the qualifications stated in this paragraph. Landlord and Tenant each shall bear one-half (¹/2) of the cost of appointing the third broker and of paying the third broker’s fee. The third broker, however selected, shall be a person who has not previously acted in any capacity for either Landlord or Tenant. Within fifteen (15) days after the selection of the third broker, the third broker shall select one of the two Fair Market Rental Rates submitted by the first two brokers as the Fair Market Rental Rate for the Extended Term. The determination of the Fair Market Rental Rate by one, two, or three brokers shall be binding upon Landlord and Tenant.

In no event shall the monthly Base Rent for any period of the Extended Term be less than the highest monthly Base Rent charged during the initial term of the Lease. Upon determination of the initial monthly Base Rent for the Extended Term in accordance with the terms outlined above, Landlord and Tenant shall immediately execute an amendment to this Lease. Such amendment shall set forth among other things, the initial monthly Base Rent for the Extended Term and the actual commencement date and expiration date of the Extended Term. Tenant shall have no other right to extend the term of the Lease under this Addendum unless Landlord and Tenant otherwise agree in writing.

4.    Condition of Premises and Brokerage Commissions for the Extended Term. If Tenant timely and properly exercises this Option, in strict accordance with the terms contained herein: (1) Tenant shall accept the Premises in its then “As-Is” condition and, accordingly, Landlord shall not be required to perform any additional improvements to the Premises; and (2) Tenant hereby agrees that it will be solely responsible for any and all brokerage commissions and finder’s fees payable to any broker now or hereafter procured or hired by Tenant or who otherwise claims a commission based on any act or statement of Tenant (“Tenant’s Broker”) in connection with the Option. Tenant hereby further agrees that Landlord shall in no event or circumstance be responsible for the payment of any such commissions and fees to Tenant’s Broker, and Tenant shall indemnify, defend and hold Landlord free and harmless against any liability, claim, judgment, or damages with respect thereto, including attorneys’ fees and costs.

5.    Limitations On, and Conditions To, Extension Option. This Option is personal to Tenant and may not be assigned, voluntarily or involuntarily, separate from or as part of the Lease. At Landlord’s option, all rights of Tenant under this Option shall terminate and be of no force or effect if any of the following individual events occur or any combination thereof occur: (1) Tenant has been in material and chronic default at any time during the initial term of the Lease, as determined in Landlord’s reasonable discretion, or is in default of any provision of the

Addendum One, Page 1

Lease on the date Landlord receives the Option Notice; and/or (2) Tenant has assigned its rights and obligations under all or part of the Lease or Tenant has subleased all or part of the Premises except as permitted in Section 14.8; and/or (3) Tenant has failed to exercise properly this Option in a timely manner in strict accordance with the provisions of this Addendum; and/or (4) Tenant no longer has possession of all or any part of the Premises under the Lease, or if the Lease has been terminated earlier, pursuant to the terms and provisions of the Lease.

6.    Time is of the Essence. Time is of the essence with respect to each and every time period described in this Addendum.

Addendum One, Page 2

EX-10.19

exv10w19

EX-10.20

EXHIBIT 10.20

DISTRIBUTOR AGREEMENT

This Distributor Agreement is made, effective as of the 24^th day of January 2006 (the “Effective Date”), by and among Medtronic USA, Inc. (“Medtronic”) and VNUS Medical Technologies, Inc. (“VNUS”).

RECITALS

     a)    Medtronic. Medtronic is a Minnesota corporation with its principal place of business at 710 Medtronic Parkway, Minneapolis, MN 55432-5604. Medtronic is a leading manufacturer of medical technologies including products, therapies and services used to treat conditions such as heart disease, neurological disorders, and vascular illnesses. The maintenance of Medtronic’s reputation as the industry leader in performance and quality is a material element of this Agreement.

     b)    VNUS. VNUS is a Delaware corporation, with its principal place of business at 2200 Zanker Road, Suite F, San Jose, CA 95131. VNUS is in the business of manufacturing and selling products for minimally invasive treatment of venous disease. VNUS has an existing marketing and sales force which can economically and effectively address the Market Segment (as defined below).

NOW, THEREFORE, the parties agree as follows:

I. DEFINITIONS

Whenever the following terms appear capitalized in this Agreement they shall have the indicated meanings.

1.1    Market Segment and Territory. The terms “Market Segment” and “Territory” shall have the meanings described on Schedule 1.1, attached hereto and may be revised from time to time as mutually agreed in writing by Medtronic and VNUS.

1.2    Product(s). The terms “Product” or “Products” shall mean those Products described in Schedule 1.2 as amended from time to time (the “Products”).

1.3    User Warranty. The term “User Warranty” shall mean the written Medtronic warranty or disclaimer of warranty which accompanies the Product when sold to a customer as such warranty is established or revised by Medtronic from time to time, including all restrictions and limitations on damages and remedies.

1.4    Customer. The term “Customer” shall mean any potential or existing customer of Product in the Market Segment in the Territory except those existing Medtronic accounts that decline to be converted to VNUS accounts pursuant to Sections 2.5 and 2.6.

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II. APPOINTMENT OF DISTRIBUTOR

2.1    Appointment of VNUS as Distributor. Subject to the terms and conditions of this Agreement, Medtronic hereby appoints VNUS, and VNUS accepts such appointment, as Medtronic’s authorized exclusive distributor with the exclusive right (even as to Medtronic but subject to Sections 2.5 and 2.6 below) to promote, market, sell, and distribute Products in the Market Segment in the Territory. The parties acknowledge and agree that VNUS shall not sublicense any of its rights or obligations to distribute Products in the Territory.

2.2    Term. Subject to the termination provisions in Article 9, VNUS’ appointment shall be effective as of the Effective Date and shall continue for an initial term of five (5) years (the “Initial Term”). This Agreement will automatically renew for two (2) additional twelve (12) month terms (“Renewal Terms”) unless either party has given the other party written notice at least one hundred twenty (120) days prior to the end of either the Initial Term or the first Renewal Term that it intends to not renew the Agreement; provided, however, Medtronic may only give notice of non-renewal if VNUS fails to satisfy its Minimum Annual Quota pursuant to Section 3.15. As used in this Agreement, the Initial Term and any Renewal Term shall collectively be referred to as the “Term”.

2.3    Products. If Medtronic decides to cease manufacture and sale of any particular Product, Medtronic may delete such Product from Schedule 1.2, provided (i) Medtronic provides VNUS with at least ninety (90) days prior written notice of such proposed removal of a particular Product from Schedule 1.2, and (ii) such Product does not represent ten percent (10%) or more of VNUS’ averaged unit sales during the six consecutive months immediately preceding Medtronic’s written notice to VNUS of such proposed removal. Notwithstanding the removal of a particular Product from Schedule 1.2, VNUS shall have the right to continue selling its existing inventory of any such removed Product. At any time Medtronic may offer to add new products to those authorized for promotion and distribution by VNUS, and VNUS may elect whether or not to accept such new product (in which instance Schedule 1.2 shall be amended to add such new Product). Without limiting the foregoing, Medtronic shall promptly notify VNUS of any new U-CLIP technology-related products that are in development (or that otherwise become available to Medtronic) and are applicable for use in the Market Segment and Territory, and in accordance with the foregoing provision, VNUS may elect whether or not to accept such new product (in which instance Schedule 1.2 shall be amended to add such new Product). If VNUS elects not to accept such Product, Medtronic may, in its sole discretion, market such Product or seek and retain other distributors for such Product.

2.4    Direct Sales to New Customers. If Medtronic receives orders or requests for Products from New Customers, Medtronic will refer such Customers to VNUS for the sale. Sales by VNUS to Customers using Products in the Territory but outside the Market Segment (such as cardiac, bariatric and other non-vascular applications) will not be included in the total sales by VNUS for purposes of determining whether VNUS has met the Minimum Annual Quota pursuant to Section 3.15 for the period in which the sale is made.

2.5    Medtronic Limited Right to Sell in Market Segment. Notwithstanding VNUS’ appointment as the exclusive distributor of Product, Medtronic may sell Products in the Market Segment in the Territory if such Products are sold as part of a kit or other combination with another Medtronic product for use in a procedure in which the other Medtronic product is used. Medtronic may also sell Products in the Market Segment in the Territory solely to those existing Medtronic accounts that decline to be

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converted to VNUS accounts pursuant to Section 2.6. Except for Medtronic’s limited foregoing right, Medtronic shall not sell in the Market Segment in the Territory any Products, either alone or in combination, that are used in arterial-venous access grafts (AVG), arterial-venous access fistulas (AVF), and peripheral bypass procedures.

2.6    Existing Medtronic Accounts. Medtronic shall, upon execution of this Agreement, provide to VNUS in writing a list of existing Medtronic accounts for Products that are within the VNUS Market Segment and Territory as defined in Schedule 1.1. It is understood and agreed by the Parties that VNUS shall affirmatively contact these accounts and offer to convert them to VNUS accounts.

III. DISTRIBUTOR’S RESPONSIBILITIES

     Subject to the other terms and conditions of this Agreement, VNUS shall perform the following responsibilities:

3.1    Promote and Sell. VNUS shall use commercially reasonable efforts to promote, sell and support the Products in the Market Segment in the Territory. Without limiting the generality or extent of the foregoing, VNUS and anyone acting on its behalf shall not knowingly make any false or misleading statements with regard to the Products of Medtronic or any of its competitors. All representations and claims that VNUS or any of its representatives makes with respect to the Products shall be fully consistent with all Medtronic labeling and shall conform to any commercially reasonable policies or guidelines that Medtronic may from time to time reasonably establish for its Products and inform VNUS in writing thereof.

3.2    Clinical Trials. Upon obtaining prior written approval from Medtronic, not to be unreasonably withheld or delayed, VNUS may conduct and participate in the design, implementation, analysis and publication of all studies and clinical trials associated with the Product(s) in the Market Segment in the Territory.

3.3    Facility and Staff. VNUS shall maintain a place of business sufficient to carry out its duties hereunder in a manner consistent with the standards commonly required of a company that sells medical devices of commercial potential similar to the Products. VNUS shall also maintain a trained sales staff that is (i) capable of promoting and selling the Products in a manner consistent with all applicable laws and regulations, (ii) trained on the use and function of the Products, and (iii) skilled and experienced in selling medical devices to the medical practice areas in which the Products are used within the Market Segments and the Territory. To assure that VNUS possesses thorough knowledge on the safe and effective use of the Products, VNUS shall participate in Product training courses as reasonably requested by it or by Medtronic pursuant to Section 4.4 below.

3.4    Inventory. VNUS shall maintain an inventory of Products reasonably necessary to fill its forecasted sales under this Agreement. To assure the effectiveness and quality of the Products, Medtronic may establish, and inform VNUS in writing of, reasonable policies or guidelines with regard to the rotation, storage, or shelf life of Products. VNUS shall use commercially reasonable efforts to comply with all such policies or guidelines and shall properly dispose of any Products (consistently with all applicable laws and regulations concerning waste and the environment) which are not useable as a result of the application of such policies or guidelines. Such policies may include a requirement for minimum

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remaining shelf life at the time such Product is delivered to a Customer. In no event shall Medtronic be responsible to accept return of or reimburse VNUS as a result of any Product which becomes unusable due to the expiration of such minimum shelf life; provided, however, the foregoing limitation shall not apply to any Product that has a shelf life less than six (6) months when received by VNUS from Medtronic. All returned Products shall be dealt with pursuant to Medtronic’s Returned Inventory Policy which is attached hereto as Schedule 3.4, as amended from time to time.

3.5    Product In-Service. VNUS shall perform post-sale delivery, instruction, and training to Customers in a manner that is consistent with commercially reasonable standards or guidelines which Medtronic may from time to time establish and inform VNUS in writing thereof.

3.6    No Modification of Products. VNUS shall sell the Products only in the form, condition and packaging as provided or approved by Medtronic. VNUS shall not alter, modify or change any Product or its package without Medtronic’s prior written consent.

3.7    User Warranty Delivery to Customer. VNUS shall deliver to each of the Customers the User Warranty furnished by Medtronic with each Product, as revised from time to time.

3.8    Credit/Finance. VNUS shall make full payment to Medtronic of the purchase price for each shipment of Product and of any other payment obligations it owes to Medtronic when due. VNUS shall initially be granted credit terms of **** from date of receipt of invoice for its purchase of Product. Such credit terms are contingent upon VNUS’ continued material compliance with all of its monetary obligations to Medtronic. If, at any time in the reasonable opinion of Medtronic, VNUS’ creditworthiness has materially deteriorated, Medtronic may modify or terminate such credit terms; provided that such modification or termination shall not apply to any order which has been previously accepted by Medtronic.

3.9    Device Tracking. VNUS shall maintain a system to track each Product in accordance with applicable law, including 21 CFR 821, as amended, and such other reasonable requirements as Medtronic may from time to time establish with respect to Product tracking. Such system will, at a minimum, be able to track a Product to its final destination and shall have procedures in place which facilitate locating each Product shipped in the event customer notifications or product modifications are required. By the 15th of each calendar month during the term of this Agreement, VNUS shall provide Medtronic with a written report identifying all Products which were placed in service the preceding calendar month (“Product Tracking Report”). Such Product Tracking Report shall be in the form requested by Medtronic but at a minimum shall include the name of the Customer, the specific address where the Product was delivered, the date the Product was delivered, the serial number (if any), model and Product name. The tracking system and the records documenting the tracking shall be subject to audit by Medtronic at reasonable times upon reasonable notice. Upon termination or expiration of this Agreement, VNUS shall, at Medtronic’s request, deliver all then current records to Medtronic relating to the location of Products sold by VNUS in the Market Segment in the Territory.

3.10    Customer Complaints, Incident Reports, and Recalls. VNUS shall use diligent, commercially reasonable efforts to resolve all Customer complaints that relate solely to the quality of services provided by VNUS in connection with Products. VNUS shall refer all complaints relating to Products and all requests for service to Products to the Medtronic Product Complaint Coordinator at ****, or such other number as Medtronic may from time to time designate in writing to

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VNUS. Medtronic shall resolve all such complaints and requests for service as soon as practicable using diligent, commercially reasonable efforts. VNUS shall immediately report to Medtronic any incident of which VNUS becomes aware that involves or may involve the failure or malfunction of a Product or might constitute a reportable event under 21 CFR Section 803 (Medical Device Reporting). Medtronic as the manufacturer of the Products shall be solely responsible for all medical device reporting to regulatory agencies with respect to the Products. In the event either party has reason to believe that one or more of the Products might be the subject of a recall or withdrawal from distribution, such party shall immediately notify the other. Any decision as to whether or not to initiate a recall or product replacement or product enhancement in accordance with Section 4.5, shall be Medtronic’s, in its sole discretion. If such recall is required because of the negligent act or wrongful omission of VNUS, then the costs and expenses of such recall shall be reimbursed by VNUS to Medtronic. VNUS shall provide, at Medtronic’s expense, assistance reasonably requested by Medtronic in connection with any reporting, recall, legal, or regulatory matter relating to the Products. If VNUS in good faith disagrees in writing with Medtronic’s decision not to withdraw or recall the Product, then VNUS may discontinue its distribution of such Product under this Agreement until the issue is resolved.

3.11    Restriction on Sales of Competitive Products.

a.) Restriction. VNUS, including without limitation its employees, officers, and agents, shall not sell, handle, promote, or be involved, directly or indirectly, in the offering for sale, promotion, or manufacture of any product which may be used in creating anastomoses or vascular approximation in the Territory (such product, a “Competitive Product”). If VNUS, upon Medtronic’s offer, elects to add a new Product to Schedule 1.2, VNUS shall have ninety (90) days after such amendment to cease distributing any Competitive Product to the new Product added to Schedule 1.2. Failure by VNUS to abide by the terms of this Section 3.11 shall be deemed a material failure of VNUS’ obligations under this Agreement; provided, however, VNUS may cure such failure immediately by ceasing to sell, distribute, and promote such Competitive Product.

b.) Duration of Restriction. The restriction contained in this Section shall continue for ****; provided, however, that if this Agreement is terminated by VNUS for Medtronic’s Breach under Section 9.1(c), the restriction shall end upon termination of the Agreement.

3.12    Accessories and Other Supplies. VNUS shall sell only Medtronic approved accessories, supplies and consumables for use with the Products. VNUS may seek Medtronic’s approval to sell other accessories, and such approval shall not to be unreasonably withheld.

3.13    Compliance with Laws and Medtronic Policies. VNUS recognizes that compliance with all applicable laws and maintaining a high standard of ethical behavior in the conduct of its activities under the Agreement is an essential requirement of this Agreement. VNUS, therefore, agrees as follows:

     (a) To comply with all applicable laws, rules, and regulations in its activities relating to the marketing, promotion, and sale of Products, including without limitation, those promulgated by the U.S. Food and Drug Administration as applicable to the Products,

     (b) To conduct all activities under this Agreement in accordance with the provisions of the Medtronic Code of Conduct and U.S. Business Conduct Standards attached hereto as Schedule 3.13 (the

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“Medtronic Compliance Requirements”) as amended from time to time by Medtronic with written notice to VNUS,

     (c) To require its employees who interact with customers who purchase Products, or who are in a position to influence customer purchasing decisions regarding Products, to complete training on the Medtronic Compliance Requirements, and

     (d) To provide Medtronic access to VNUS’ relevant books and records relating to the sale of Products for the sole purpose of verifying VNUS’ compliance with the requirements of this Article 3, provided, such access shall be conducted after reasonable prior notice by Medtronic to VNUS during VNUS’ ordinary business hours and shall not be more frequent than twice during any calendar year.

Failure to comply with any requirement of this Article shall be deemed a material breach of this Agreement by VNUS and shall entitle Medtronic to terminate this Agreement in accordance with Section 9.1(b).

3.14    Exclusive Source for Medtronic Products. VNUS shall only sell Products obtained directly from Medtronic to Customers; that is, VNUS may not sell any new or used Product that has been obtained from any source other than Medtronic.

3.15    Purchase Quota. During the Term, VNUS shall purchase the minimum annual requirements specified in Schedule 3.15 (the “Minimum Annual Quota”), provided that Medtronic supplies on a timely basis the amounts of Product ordered by VNUS. The Minimum Annual Quota will be allocated over the applicable year in minimum quarterly amounts also specified in Schedule 3.15 (the “Minimum Quarterly Quota”). Subject to Section 5.6 and the remaining terms of this Section 3.15, if VNUS fails to purchase the Minimum Annual Quota in any contract year or the Minimum Quarterly Quota for any two consecutive quarters (whether or not the quarters are in the same contract year), that failure shall be deemed a material breach of the Agreement and Medtronic shall have the right to terminate this Agreement upon ninety (90) days written notice to VNUS; provided that VNUS may cure the breach within the ninety (90) day notice period by paying Medtronic an amount equal to **** of the amount by which VNUS failed to meet the applicable Minimum Quota. Waiver by Medtronic of its right to terminate this Agreement under this Section 3.15 in any one or more instance shall not be deemed a waiver of such right for any subsequent failure by VNUS to meet the Minimum Annual Quota or the Minimum Quarterly Quota. The parties agree that for **** of this Agreement, the Minimum Annual Quota will increase at a rate of **** year-over-year.

3.16    Product Sales Outside Market Segment or Territory. If VNUS receives orders or requests for Products from customers outside the Territory and Market Segment, VNUS will refer such customers to Medtronic for the sale. During the Term, VNUS shall not sell Products outside the Market Segment or Territory without Medtronic’s prior written consent which may be granted in Medtronic’s sole discretion.

3.17    Business Review. A VNUS representative shall meet quarterly with Vice President, Sales for Medtronic Cardiac Surgery (or such other person designated by Medtronic) to report on and discuss sales and operations during the prior quarter and discuss future objectives, plans and strategies.

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IV. MEDTRONIC’S RESPONSIBILITIES

     Subject to the other terms and conditions of this Agreement, Medtronic shall undertake to perform the following responsibilities:

4.1    Manufacture and Provide Products. Medtronic shall use commercially reasonable efforts to manufacture (or have manufactured) the Products and shall supply the Products to VNUS, subject to availability, upon the terms and conditions of this Agreement. Products shall, at the time of delivery to VNUS, (i) have been manufactured in accordance with the specifications and all applicable laws and regulations including without limitation all FDA regulations and QSR and cGMP (as applicable); (ii) be sterile; (iii) have the standard minimum shelf life customarily applicable to such Products when sold by Medtronic; and (iv) be packaged in accordance with the Product labeling provisions of Section 4.2. Upon VNUS’ reasonable request, Medtronic shall provide access to Medtronic’s facilities that manufacture and distribute the Product; such access shall be conducted after reasonable prior notice by VNUS to Medtronic during Medtronic’s ordinary business hours and shall not be more frequent than twice during an annual period.

4.2    Product Labeling. All Product labeling shall be mutually acceptable to both parties and shall be in compliance with all Medtronic policies and all applicable laws and regulations. In order to minimize the potential for cross-selling in the Market Segment in the Territory, Products shall be labeled and packaged as VNUS product with VNUS look and styling, including different part numbers and statements that the Products were manufactured by Medtronic for distribution by VNUS.

4.3    Promotional Materials. Medtronic shall provide to VNUS such sales literature, advertising and promotional materials, and other information, programs, and sales support by VNUS in selling the Products. Notwithstanding the foregoing, VNUS may develop and/or use unique promotional materials and sales tools other than those supplied by Medtronic, provided VNUS has received Medtronic’s prior written approval, such approval not to be unreasonably withheld. Medtronic agrees to review all marketing and promotional materials within ten (10) business days after initial receipt from VNUS. If editing changes or approval are not received within the aforementioned period, Medtronic’s approval will be deemed granted. VNUS shall comply with applicable Medtronic policies with regard to the use of Medtronic’s copyright notice. Other than the cost for materials provided by Medtronic pursuant to this section, VNUS will be responsible for all expenses associated with its advertising and promotion of the Products, unless otherwise agreed to in writing prior to the expenditure.

4.4    Training and Support. Medtronic shall offer such general and specialized sales and technical training, materials and support as necessary to adequately train all appropriate VNUS personnel. The costs and expenses of training VNUS representatives shall be ****. Such clinical and technical support shall be provided by Medtronic to VNUS personnel at reasonable locations of VNUS’ choice, and shall include at a minimum (a) **** of technical and Product training of appropriate VNUS personnel during **** of this Agreement; (b) an additional **** of follow up training during the subsequent ****; and (c) appropriate training as the parties mutually determine is necessary for any and all new Products.

4.5    Product Changes. Medtronic may, at any time, modify, alter, change, or improve a Product. Any such change shall be effective sixty (60) days after Medtronic provides VNUS with a written notice

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to that effect however changes to a Product based upon requirements under applicable federal law or regulation shall not be subject to a sixty (60) day notice requirement.

4.6    Sales outside the Market Segment and Territory. Except as provided in Sections 2.5 and 2.6, in the event that either party becomes aware that Products are being sold or have been sold at any time within the previous six (6) month period by Medtronic or its distributors, licensees or agents in the Market Segment in the Territory, such party shall provide the other party with written notice of such sales activity. Medtronic shall cease such sales activity in the Market Segment and in the Territory within thirty (30) days of such notice. Within sixty (60) days of the foregoing written notice, Medtronic will compensate VNUS in an amount equal to **** of the sale price of all such products in the Market Segment in the Territory. Likewise, in the event that either party becomes aware that Products are being sold or have been sold at any time within the previous six (6) month period by VNUS outside the Market Segment and Territory, such party will provide written notice to the other party of any such VNUS sales activity outside of the Market Segment and Territory. VNUS shall cease such activity within thirty (30) days. Within sixty (60) days of the foregoing notice, VNUS will compensate Medtronic in an amount equal to **** of the sale price of all such products outside the Market Segment and Territory.

V. ORDERING; DELIVERY AND ACCEPTANCE

5.1    Initial Stocking Order. VNUS shall be entitled to purchase a one-time initial stocking order of Products at a **** discount off of the Product Transfer Price set forth in Schedule 6.1.

5.2    Purchase Orders. VNUS shall order Products from Medtronic by submitting written purchase orders identifying the number(s) and type(s) of Products ordered, the requested delivery date(s) and any additional information required to enable Medtronic to fill the order. All orders for Products will be pursuant to such standard terms as the parties may establish from time to time at the prices set forth in Section 6.1 below. All orders for Products will be subject to acceptance by Medtronic, provided Medtronic will not unreasonably reject any purchase order for Products that meet this Section 5.2 and is for a quantity of Products not in excess of **** of VNUS’ most recent forecast pursuant to Section 5.5. Medtronic will accept or reject each such order submitted by VNUS within ten (10) business days after receipt of the order. Accepted orders will be non-cancelable. For clarity, any documents submitted to Medtronic in addition to Medtronic’s standard terms are for informational purposes only and are not part of the terms of sale.

5.3    Delivery. Medtronic shall use commercially reasonable efforts to deliver accepted orders for Products on time pursuant to the purchase order. However, in no event shall Medtronic be responsible for any loss or damage which is claimed to have been caused by a delay in shipping an order, whether or not Medtronic may have been advised of the possibility of such loss or damages. Medtronic shall not be responsible for any loss or damage which is claimed to have been caused by a delay in shipping an order, whether or not Medtronic may have been advised of the possibility of such loss or damages, provided Medtronic performed its manufacture and delivery obligations with commercially reasonable care. Medtronic shall ship Product by a commercially reasonable carrier of VNUS’ choice. All Products shall be shipped to VNUS FOB (Incoterms 2000) Medtronic’s distribution facility. Title and risk of loss shall transfer to VNUS upon delivery of Product to the carrier for transport to VNUS.

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5.4    Inspection and Rejection.

     (a) Returned Goods. If any Product does not conform to the order or is defective at the time it was shipped to VNUS then VNUS may return the defective Product to Medtronic within thirty (30) days of receipt by VNUS; provided that VNUS (i) notifies Medtronic or such agent as Medtronic may designate, (ii) describes the defect or non-conformity, (iii) obtains approval for return in accordance with Schedule 5.4, and (iv) complies with such other return instructions as Medtronic may reasonably require. Upon receiving return authorization VNUS may ship the defective or non-conforming Product to the Medtronic location authorized by Medtronic, properly labeled, freight prepaid, and fully insured at face value. Subject to Medtronic’s right to verify that the Product was defective or non-conforming at the time of shipment to VNUS, Medtronic shall, at VNUS’ option, either replace the Product and reimburse VNUS for its out of pocket shipping and insurance expenses or refund the purchase price paid for by VNUS for the Product involved. In the event that VNUS elects replacement, Medtronic shall supply such replacement Product at no additional cost within fifteen (15) days of Medtronic’s receipt of such Product. In no event shall Medtronic be responsible to replace or refund for any Product (a) that has been damaged by abuse or misuse, (b) for which any unauthorized service or repair was performed or attempted, (c) that was repossessed, (d) has been used as a demonstration unit, or (e) was damaged by or during transport to VNUS. The repair and replacement provided for in this section shall be VNUS’ sole and exclusive remedy for any claim relating to any alleged defect or nonconformity in the Products. In the case of Product having latent defect(s) that are not reasonably detectable at the time of acceptance, VNUS may reject such Product by giving written notice to Medtronic of VNUS’ rejection of such Product within ten (10) days after discovery of such defects, but such notice may in no event be later than one (1) year after receipt of such shipment.

     (b) Notwithstanding anything to the contrary in Section 5.4(a), Medtronic shall not be responsible for replacing or refunding any Product (i) that has been damaged in transit by VNUS’ carrier or by abuse or misuse by VNUS or its agent or customer, (ii) for which any unauthorized service or repair was performed or attempted, (iii) that was re-processed, (iv) has been used as a demonstration unit, or (e) was damaged by or during transport to VNUS. The repair and replacement provided for in this Section 5.4 shall be VNUS’ sole and exclusive remedy for any claim relating to any alleged defect or nonconformity in the Products, but subject to Article 10.

5.5    Forecasts. VNUS will provide Medtronic with a **** month rolling non-binding forecast of Product purchases on a **** basis by ****.

5.6    Failure to Supply. If Medtronic fails to supply on a timely basis any material amounts of Product(s) ordered by VNUS, the parties shall confer in good faith to solve the supply problem and Medtronic shall use its best efforts to cure such problem and to keep VNUS informed on a regular basis until such cure is implemented. If Medtronic is forced to allocate production and distribution of the Products among its various distributors and customers, Products will be allocated to VNUS in a share proportional to that percentage of Medtronic’s total sales of the Product, which VNUS’ sales comprised in the preceding twelve (12) month period, with the exception of the initial twelve month period of this Agreement, which proportion shall be determined on the basis of projected twelve (12) month sales. If, as a result of such allocation, VNUS is unable to purchase on a timely basis the Minimum Annual Quota or Minimum Quarterly Quota (as applicable), the applicable Quota will be reduced by the amount of bona fide orders from VNUS that Medtronic is unable to fill.

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VI. PRICE AND RESALE TERMS

6.1    Product Transfer Pricing. For all orders of Product other than the initial stocking order pursuant to Section 5.1 above, Medtronic will charge VNUS the current list price for the Products, less the discount set forth on Schedule 6.1 (the result, the “Product Transfer Price”). The current list price for the Products is attached hereto in Schedule 6.1. All Product pricing information, including list price, distributor discount, and Product Transfer Prices, shall be deemed Confidential Information under this Agreement. The Product Transfer Prices set forth on Schedule 6.1 shall be applicable for **** following the Effective Date. After ****, the Parties agree that the Product Transfer Price may increase once every **** months for the remaining term of the Agreement, at a maximum rate of **** ..

     (a) Increased Product Transfer Prices will not apply to purchase orders accepted by Medtronic before the effective date of the price increase unless such orders provide for delivery more than thirty (30) days after the date of acceptance of the order. ****.

     (b) All listed Product Transfer Prices are exclusive of delivery charges, freight, insurance, state and local use, sales and similar taxes. When such charges apply they may appear as separate items on Medtronic invoices.

6.2    Resale Price. VNUS retains the sole and exclusive right to establish the prices at which it distributes and resells the Products in the Market Segment in the Territory, in its sole discretion.

VII. WARRANTY; DISCLAIMER; LIMITATION OF LIABILITY

7.1    Mutual Representation and Warranties. Each of Medtronic and VNUS represents and warrants to the other that as of the Effective Date (a) it has the full corporate power to enter into and perform this Agreement; and (b) this Agreement constitutes a legal, valid and binding obligation.

7.2    Medtronic Representations and Warranties. Medtronic represents, warrants, and covenants that:

     (a) at the time of shipment, Product supplied by Medtronic hereunder (i) shall meet the specifications provided by Medtronic for such Product, (ii) shall not be adulterated or misbranded within the meaning of the U.S. Federal Food, Drug and Cosmetic Act (the “Act”), and (iii) shall be manufactured in accordance with QSR and cGMP (as applicable) and as defined by the Act;

     (b) as of the Effective Date, (i) Medtronic has not granted any rights to any third party to promote or sell Products in the Market Segment in the Territory, and (ii) all Products listed on Schedule 1.2 have been approved by the FDA for sale and distribution in the Territory; and

     (c) during the Term, (i) neither Medtronic nor its affiliates shall, nor shall they cause, license, or permit others to, promote, license, sell or cause to be sold Products within the Market Segment in the Territory, except to the extent permitted under Section 2.6 hereto, and (ii) Medtronic shall obtain and

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maintain all necessary approvals and clearances for all Products that are promoted and/or sold by VNUS in the Market Segment in the Territory.

7.2    VNUS Representations and Warranties. VNUS represents, warrants, and covenants that it will direct its sales and marketing personnel to promote and/or sell Products for use solely in the Market Segment in the Territory.

7.3    User Warranty. The User Warranty, attached hereto as Schedule 7.3, is the only warranty granted by Medtronic to a Customer of a Product covering such Product. Medtronic will provide a copy of the User Warranty with each Product sold hereunder to which it applies. In addition, Medtronic may supply VNUS with point-of-sale copies of the User Warranty for pre-sale disclosure to prospective users. VNUS shall comply with all applicable federal or state laws relating to disclosure of product warranties and limitations, including but not limited to those of the Federal Trade Commission. NO WARRANTY OTHER THAN THE USER WARRANTY IS EXPRESSED OR IMPLIED BY MEDTRONIC. MEDTRONIC SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. The User Warranty shall be deemed to commence on the earlier of (1) the date VNUS delivered the Product to the Customer as reported to Medtronic in the monthly Product Tracking Report or (2) six (6) months from the date on which the Product was received by VNUS from Medtronic.

VIII. INTELLECTUAL PROPERTY

8.1    Rights to Intellectual Property. Except as expressly set forth in Section 8.2 below, VNUS shall have no right or license under this Agreement to utilize any information, know-how, proprietary data, trademarks, or patent rights which VNUS may have or may secure in the future relating to any of the Products, except as may be incidental only to the marketing, promotion, distribution and/or sale of the Products and the right to use such Products by VNUS’ Customers. VNUS may not reproduce any copyrighted material of Medtronic without the prior written consent of Medtronic.

8.2    Trademark Use. Subject to the terms and conditions of this Agreement, including with limitations of this Section 8.2 below, Medtronic hereby grants to VNUS a non-exclusive license under the Medtronic logos, trademarks, and service marks that appear on the Products or in any Medtronic-furnished marketing collateral specific to the Products (“Medtronic Marks”) in the Territory solely to market and promote the Products to the Market Segment in the Territory for the Term. VNUS shall not use Medtronic’s name, or any other similar name or any other trademark of Medtronic except in advertising, pamphlets, or other materials promoting the Products. VNUS may label the Products with the statement “Manufactured by Medtronic for Distribution by VNUS.” All such materials referencing Medtronic or Products must be approved in writing by Medtronic prior to their use or dissemination, such approval not to be unreasonably withheld. VNUS may not use Medtronic’s name or any of Medtronic’s trademarks in its corporate or business name, or in any other manner which Medtronic deems adverse to its interests. Use of any Medtronic trademark or trade name associated with the Products may be done only in accordance with usage guidelines as established by Medtronic from time to time. Upon the termination of VNUS’ appointment it shall immediately discontinue any further use or display of Medtronic trademarks, trade names or any mark or name (except as to sales of remaining inventory of Products as permitted in Section 9.3). VNUS shall notify Medtronic if it becomes aware of any unauthorized use of Medtronic trademarks or trade names or of the use of any mark or name which might

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confuse the public.

IX. TERMINATION

9.1    Termination. This Agreement may be terminated prior to the expiration of its Term pursuant to any of the following provisions:

     (a) Failure to Satisfy Minimum Annual Quota or Minimum Quarterly Quota.

          (i) Subject to Section 3.15, and only after giving effect to any payment by VNUS to Medtronic pursuant to such Section 3.15, if VNUS does not satisfy the applicable Minimum Annual Quota or the Minimum Quarterly Quota for two consecutive quarters (but provided such inability was not caused by Medtronic failing to timely supply Products ordered by VNUS), Medtronic shall have the right to terminate the Agreement.

     (b) Breach of Agreement. If either party materially fails to perform an obligation or condition of this Agreement (other than VNUS’ failure to satisfy the Minimum Annual Quota and/or the Minimum Quarterly Quota) and fails to cure such default within sixty (60) days of receipt of written notice of such default from the other party specifying the nature of such default, then the party giving the notice may terminate this Agreement by sending a separate written notice of termination to the defaulting party. Any material violation of any material law or regulation applicable to this Agreement or any violation of the Medtronic Code of Conduct or U. S. Business Conduct Standards shall be deemed an incurable breach. In the event of a breach that cannot reasonably be cured within sixty (60) days of receipt of written notice of a breach, then the alleged breaching party shall have such additional time as necessary not to exceed an additional thirty (30) days (for a total of ninety [90] days) to cure the breach if the alleged breaching party (i) during such sixty (60) day period has submitted a plan, that if successfully carried out, would be effective in curing such breach, and has commenced execution of such plan, and (ii) diligently pursues such plan thereafter.

     (c) Bankruptcy. Either party may terminate this Agreement effective immediately upon delivery of written notice to the other party, if the other party (i) ceases to actively conduct its business, (ii) files a voluntary petition for bankruptcy or has filed against it an involuntary petition for bankruptcy, (iii) makes a general assignment for the benefit of its creditors, or (iv) applies for the appointment of a receiver or trustee for substantially all of its property or assets or permits the appointment of any such receiver or trustee who is not discharged within thirty (30) days of such appointment.

9.2    Effect of Termination. Upon the effective date of termination or expiration of VNUS’ appointment for any reason, VNUS shall immediately cease to be an authorized Medtronic distributor (except as to sales of remaining inventory of Products as permitted in Section 9.3 below) and there shall be nothing payable by either party except as may be due as a result of prior sales and these shall be paid as they become due. Either party may, at its option, cancel any outstanding orders for purchase which have not been shipped by the effective date of the termination. All obligations with respect to Confidentiality, return of intellectual property and other obligations which by their nature are continuing shall survive the termination of this Agreement. Neither party shall be liable to the other for damages of any kind resulting from or caused by said termination, including, but not limited to, damages related to losses through commitments on obligation or leases, loss of investment, or present or prospective profits,

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inability to meet obligations, or any other causes or reasons whatsoever.

9.3    Repurchase/Sale of Inventory. Upon any termination of this Agreement, Medtronic shall have the right, exercisable in its sole discretion, to buy back from VNUS all or any of the Products owned by VNUS on the date of termination. The price Medtronic shall pay for the Products will be ****. Products repurchased from VNUS by Medtronic pursuant to this Section 9.3 shall be shipped promptly by VNUS as instructed by Medtronic, at Medtronic’s commercially reasonable expense, to a location specified by Medtronic. For a period not to exceed six (6) months from the date of termination, VNUS may in its sole discretion, sell or otherwise properly dispose of any Products which are not purchased by Medtronic, provided such sales and disposal are performed in accordance with the terms set forth in this Agreement.

9.4    Return of Materials. Upon termination of its appointment, VNUS shall immediately return to Medtronic all promotional and other Product related materials previously provided by Medtronic to VNUS (except for a reasonable quantity as needed by VNUS to sell the remaining inventory of Products, as permitted in Section 9.3). If VNUS has paid Medtronic for any of the materials returned, Medtronic shall reimburse VNUS the purchased price of such returned materials to the extent, and only to the extent that such materials are currently useable by Medtronic.

9.5    Non-solicitation. For a period of twelve (12) months after expiration or termination of this Agreement for whatever reason, VNUS will not solicit for employment, directly or through a third party agent, or hire any person who was a Medtronic Cardiac Surgery employee during the twelve months preceding the termination date of this Agreement. For a period of twelve (12) months after expiration or termination of this Agreement for whatever reason, Medtronic’s Cardiac Surgery business unit will not solicit for employment, directly or through a third party agent, or hire any person who was an employee of VNUS during the twelve (12) months preceding the termination date of this Agreement. Nothing contained in this Agreement will prevent either party from hiring any employee of the other party if the employee’s application for employment was in response to an advertisement of general circulation and such employee was not solicited by the hiring party directly or through a third party agent.

X. INDEMNITIES

10.1    Medtronic’s Indemnification. Medtronic shall indemnify, defend and hold harmless VNUS and each of its subsidiaries, officers, directors, employees, shareholders and distributors from and against and in respect of any and all assessments, losses, damages, liabilities, interest and penalties, costs and expenses (including, without limitation, reasonable legal fees and disbursements incurred in connection therewith and in seeking indemnification therefore, and any amounts or expenses required to be paid or incurred in connection with any action, suit, proceeding, claim, appeal, demand, assessment or judgment) finally awarded (“Indemnifiable Losses”), resulting from, arising out of, or imposed upon or incurred by any person to be indemnified hereunder by reason of any third party demands, claims, suits, actions or causes of action against such person based upon: (i) any breach of representation, warranty, covenant or agreement by Medtronic under this Agreement, (ii) Product Liability Damages with respect to the Products, or (iii) other negligence or intentional misconduct of Medtronic, provided that in no event shall Medtronic be liable for matters for which VNUS is responsible under Section 10.2 below or for punitive or exemplary damages. Medtronic shall maintain product liability insurance or self-insurance in such amounts as ordinary good business practice for its type of business would make advisable and shall upon

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request provide VNUS with evidence of this coverage. “Product Liability Damages” means any liability, claim or expense, including but not limited to reasonable attorneys’ fees and medical expenses, arising in whole or in part out of claims of third parties for personal injury or loss of or damage to property relating to or arising out of the Products, whether based on strict liability in tort, negligent manufacture of product, or any other allegation of liability arising directly from the design, testing, manufacture, packaging, labeling (including instructions for use), or sale of the Products.

10.2    VNUS’ Indemnification. VNUS shall indemnify, defend and hold harmless Medtronic and each of its subsidiaries, officers, directors, employees, shareholders and suppliers from and against and in respect of any and all Indemnifiable Losses resulting from, arising out of, or imposed upon or incurred by any person to be indemnified hereunder by reason of any third party demands, claims, suits, actions or causes of action against such person based upon: (i) any breach of representation, warranty, covenant or agreement by VNUS under this Agreement, (ii) product claims whether written or oral, made or alleged to be made, by VNUS in its advertising, publicity, promotion, or sale of any Products where such product claims were not provided by or approved by Medtronic, (iii) negligent handling by VNUS of the Products or changes, additions or modifications to the Products by VNUS, (iv) Product Liability Damages with respect to the Products to the extent they are caused by the negligent or intentionally wrongful acts of VNUS, (v) Product Liability Damages caused by non-Medtronic products sold by VNUS, or (vi) other negligence or intentional misconduct of VNUS; provided that in no event shall VNUS be liable for matters for which Medtronic is responsible under Section 10.1 above or for punitive or exemplary damages. VNUS shall maintain liability insurance or self-insurance in such amounts as ordinary good business practice for its type of business would make advisable and shall provide Medtronic with evidence of this coverage.

10.3    Procedure. If a claim by a third party is made and a party (the “Indemnitee”) intends to claim indemnification under this Article 10, the Indemnitee shall promptly notify the other party (the “Indemnitor”) in writing of any claim in respect of which the Indemnitee or any of its subsidiaries, directors, officers, employees, shareholders, suppliers or distributors intends to claim such indemnification and the Indemnitor shall have sole control of the defense and/or settlement thereof, provided that the Indemnitee may participate in any such proceeding with counsel of its choice at its own expense. The indemnity agreement in this Article 10 shall not apply to amounts paid in settlement of any Indemnifiable Losses if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if adversely prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 10, but the omission to so deliver written notice to the Indemnitor shall not relieve the Indemnitor of any liability that it may otherwise have to any Indemnitee other than under this Article 10. If the Indemnitor fails to provide defense of the claim, and diligently defend or settle the same, the Indemnitee may defend or settle the claim without prejudice to its rights to indemnification hereunder. The Indemnitee under this Article 10, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives and provide full information in the investigation of any Indemnifiable Losses covered by this indemnification.

10.4    Patent. Medtronic shall indemnify, defend and hold harmless VNUS from any cost, expense, liability or damage to the extent that it is based upon a claim that any Product purchased or sold by VNUS infringes a patent of the United States (or the manufacture or use of such Product infringes such a patent); provided that VNUS shall promptly notify Medtronic of such claim, permit Medtronic to assume control

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of the defense of such claim, and fully cooperate in the defense of such claim. If the use or sale of a Product is enjoined by order or settlement, then Medtronic shall have the option to (1) procure for VNUS the right to continue using or selling the Product, (2) replace the Product with a non-infringing Product or to modify the Product, (3) modify the Product so it becomes non-infringing, or (4) accept return of the infringing Product and grant VNUS a credit for VNUS’ purchase price of such Product. The foregoing shall be the entire liability of Medtronic for patent infringement by Products furnished hereunder.

THIS SECTION 10.4 STATES MEDTRONIC’S TOTAL RESPONSIBILITY AND LIABILITY, AND THE VNUS’ SOLE REMEDY, FOR ANY ACTUAL OR ALLEGED INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT BY ANY PRODUCT DELIVERED HEREUNDER OR ANY PART THEREOF. THIS ARTICLE IS IN LIEU OF AND REPLACES ANY OTHER EXPRESS, IMPLIED OR STATUTORY WARRANTY AGAINST INFRINGEMENT. IN NO EVENT SHALL MEDTRONIC BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM ANY SUCH INFRINGEMENT.

10.5    LIMITATION OF LIABILITY

     IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY ARISING OUT OF THIS AGREEMENT, AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN. NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS SECTION, THE LIMITATIONS OF LIABILITY SET FORTH IN THIS SECTION SHALL NOT APPLY TO (i) CLAIMS ARISING UNDER ARTICLE 8 (INTELLECTUAL PROPERTY) OR (ii) THIRD PARTY CLAIMS FOR PERSONAL INJURY, DEATH OR PHYSICAL DAMAGE TO PROPERTY WHICH ARE SUBJECT TO THE INDEMNIFICATION PROVISIONS OF ARTICLE 10.1 OR 10.2.

XI. CONFIDENTIAL INFORMATION

11.1    Definition. A party’s “Confidential Information” is defined as any information of one party (the “Disclosing Party”) that is disclosed to the other party (the “Receiving Party”), including without limitation, technical product data, business plans, product pricing, sales goals, marketing information and other information not generally available to the public. Notwithstanding anything to the contrary in this Agreement, Confidential Information does not include information that (a) is already known by the Receiving Party at the time of disclosure by evidence of such Receiving Party’s written records; (b) becomes, through no act or fault of the Receiving Party, publicly known; (c) is received by the Receiving Party without restriction on the Receiving Party’s disclosure or use, from a third party which itself had no obligation to keep such information confidential; or (d) is independently developed by the Receiving Party without access or reference to the Confidential Information of the Disclosing Party.

11.2    Restrictions. Each party shall maintain in confidence any Confidential Information received

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from the other party or, in the case of Medtronic, of any of its suppliers or purchasers during the Term and shall not publish, disseminate, or disclose such Confidential Information except to the extent necessary to carry out its duties hereunder without the express written permission of the Disclosing Party. Each Receiving Party shall use at least the same degree of care to protect the Confidential Information of the Disclosing Party as it does to protect its own Confidential Information and in all cases shall use commercially reasonable efforts to protect such information. This obligation of confidentiality shall expire five (5) years after the termination or expiration of this Agreement.

11.3    Exceptions. A party may disclose Confidential Information of the other party to the extent required to be disclosed by a court or governmental agency pursuant to a statute, regulation, or valid order; provided, however, that the Receiving Party first notifies the Disclosing Party and gives the Disclosing Party the opportunity to seek a protective order, or to contest such required disclosure.

11.3    Return of Confidential Information. All Confidential Information shall be returned to the Disclosing Party at the request of the Disclosing Party upon the termination or expiration of this Agreement.

XII. GENERAL PROVISIONS

12.1    Independent Contractor Relationship. VNUS is and shall remain an independent contractor and is not and shall not be deemed to be an employee, joint venturer, partner, or franchisee of Medtronic for any purpose. Accordingly, VNUS shall be exclusively responsible for the manner in which it performs its duties under this Agreement and for the profitability or lack thereof of its activities under this Agreement. All financial obligations associated with VNUS’ business are the sole responsibility of VNUS. VNUS does not have, and shall not represent itself as having, any right or authority to obligate or bind Medtronic in any manner whatsoever.

12.2    Waivers. Failure of either party at any time to require strict performance of the other party of the provisions of this Agreement shall not act as a waiver of such provisions, nor shall the waiver of a breach of the Agreement by either party constitute a waiver of such provision for any subsequent breach.

12.3    Entire Agreement and Modifications. This Agreement, together with its schedules, exhibits and addendums, if any, contains the entire and only agreement between the parties with respect to the sale and purchase of Medtronic products. Any representations or terms and conditions not incorporated in this Agreement shall not be binding upon either party. No attempted modification of this Agreement shall be binding upon either party unless in writing and signed in the same manner as the original Agreement. If any provision of this Agreement is held to be invalid, it shall not affect the enforceability of the remaining provisions.

12.4    Assignment. VNUS may not transfer, assign, nor delegate the rights or the duties of this Agreement without the prior written consent of Medtronic. Notwithstanding the foregoing, either party may assign its rights and obligations under this Agreement with the prior written consent of the non-assigning party, such consent not to be unreasonably withheld or delayed, to any person or entity with which such party is merged or by which it is acquired or which purchases all or substantially all of its assets or stock; provided, if the non-assigning party does not give its consent, this Agreement is automatically terminated at the time of the merger, acquisition, or sale, as applicable.

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12.5    Governing Law. This Agreement and the relationship between the parties shall be governed by the laws of the State of New York, without giving effect to its conflicts of law provisions.

12.6    Dispute Resolution. All disputes and disagreements between the parties arising out of or relating to any provision of this Agreement or the breach, termination, or validity thereof, shall be resolved in accordance with the following provisions:

a)	For any dispute that cannot be resolved in the normal course of business, the parties shall attempt in good faith to resolve such dispute by negotiation between senior level executives who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this Agreement. Any party may give the other party written notice that a dispute has not been resolved in the normal course of business.
b)	Any dispute which has not been resolved within a reasonable time by negotiation under subsection (a), above, shall be resolved through binding arbitration in accordance with the Center for Public Resources Non-Administered Arbitration Rules in effect on the date of this Agreement. Unless the parties agree otherwise, the arbitration shall be conducted by three independent and impartial arbitrators who shall be appointed by CPR in accordance with CPR’s rules governing the arbitration. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. 1-16. The place of arbitration shall be New York County, New York, USA and shall be conducted in the English language. The arbitrators are not empowered to make any award in excess of compensatory damages and each party hereby irrevocably waives any right to recover such damages with respect to any dispute resolved by arbitration. Any judicial proceeding to enforce a decision of the arbitrators under this Agreement shall be instituted and conducted in U.S. District Court in New York County, New York, U.S.A.
c)	The statute of limitations of the State of New York applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder.
d)	All negotiations pursuant to this Section 12.6 are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence.

12.7    Force Majeure. If the performance of any obligation of this Agreement except for the payment of money is prevented, restricted, or interfered with by reason of strike, labor dispute, natural disaster, war, the acts of government or any other cause outside the reasonable control of the parties, then the party so affected shall give prompt notice to the other party and shall be excused from such performance to the extent made necessary by such event.

12.8    Notices. Any notice required or permitted by this Agreement shall be in writing and shall be sent by prepaid registered or certified mail, return receipt requested, internationally recognized courier or personal delivery, or by fax with confirming letter mailed under the conditions described above in each case addressed to the other party at the address shown below or at such other address for which such party give notice hereunder. Such notice shall be deemed to have been given when delivered:

If to Medtronic:

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Medtronic USA, Inc.
7601 Northland Drive North
Minneapolis, MN 55428
Attn: VP and General Manager, Cardiac Surgery

With a copy to:

Medtronic USA, Inc.
7601 Northland Drive North
Minneapolis, MN 55428
Attn: VP and Senior Counsel, Cardiac Surgery

If to VNUS:

VNUS Medical Technologies, Inc.
2200 Zanker Road, Suite F
San Jose, CA 95131
Attn: Chief Financial Officer

12.9    Counterparts. This Agreement may be executed in counterparts, each of which will be considered an original, but all of which together will constitute the same instrument.

Signature Page to Follow

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first written above.

MEDTRONIC, INC.	VNUS MEDICAL TECHNOLOGIES, INC.
/s/ Clifton W. Owens	/s/ R. McCrae
Name	Name
Vice President & General Manager RST	VP, Bus. Dev. & Mfg.
Title	Title
January 24, 2006	1/25/06
Date	Date
Attachments: Schedules

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SCHEDULE 1.1

MARKET SEGMENT & TERRITORY

Market Segment
All vascular surgery procedures.

Exclusions: All non-vascular surgical procedures.

Territory
Entire United States

Exclusions:
Markets outside the United States

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SCHEDULE 1.2

U-CLIP™ PRODUCTS

UCLIP™ Anastomotic Devices
All U-CLIP™ 2 - pack configurations are shipped as 24 packs per carton, all 8 - pack configurations are shipped as 18 packs per carton.
Product Order		U-CLIP™ Count
Number	Product Description	(clips per carton)
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****

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****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
****	****	****
UCLIP™ Anastomotic Miscellaneous Products
****	****	****

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SCHEDULE 3.13

MEDTRONIC CODE OF CONDUCT
AND
U.S. BUSINESS CONDUCT STANDARDS

(attached)

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****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

Compliance With The Law	2
Employee Responsibility	2
Improper Payments	2
Customer Relationships	2
Fair Dealing	3
Recordkeeping	3
Antitrust/Competition	4
Export Controls, Economic Sanctions,
and International Boycotts	4
Conflict of Interest	4
Insider Trading	5
Intellectual Property and Confidential Information	5
Corporate Opportunities	6
Protection and Proper Use of Company Assets	6
Clinical and Regulatory Affairs	6
Quality	6
Environmental Management	6
Safety and Health	7
Productive Work Environment	7
Political Activity	7
People Acting on Behalf of Medtronic	7
Government, Analyst, and Media Inquiries	7
Code of Ethics For Senior Financial Officers	7

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

Medtronic’s reputation throughout the world for legal, moral, and ethical behavior is one of our most valuable assets. This reputation has been built upon a policy of strict compliance with the law and the conduct of the business with the highest standards of moral and ethical behavior. Medtronic’s Mission Statement and our code of business conduct (the “Code”) provide the guidance essential to the successful global operation of Medtronic. Together, they reflect our shared values and our collective commitment to Medtronic’s standards.

The Code is intended to inform employees of their legal and ethical obligations to Medtronic and our customers. Given the legal and regulatory complexity of the markets in which we do business, the Company has also distributed Business Conduct Standards which set forth legal compliance requirements on a local country basis. In addition, Medtronic’s Chief Executive Officer, Chief Financial Officer, Corporate Controller and Treasurer are subject to additional policies set forth in Medtronic’s Code of Ethics for Senior Financial Officers, which is part of this Code.

Each supervisor and manager is responsible for ensuring employee understanding and compliance with the Code and applicable Business Conduct Standards. Key management employees will be required each year to confirm that they are not aware of unreported violations of the Code or the relevant Business Conduct Standards and to ensure that appropriate training on Code responsibilities has been properly communicated to each management employee under their direction.

No Code or Business Conduct Standards can cover every possible business situation which may arise in the complex regulatory environment in which Medtronic operates. If you have any doubts or concerns regarding the Code or any conduct, please review these issues with your local management or Medtronic Legal Counsel. You may also contact the Chief Compliance Officer or use the “Compliance Line” described in the Code.

Medtronic considers compliance with this Code to be vital. The Company’s reputation for quality products and high standards and our passion for the Medtronic Mission Statement can only be maintained by consistently honest and ethical dealings. All employees of Medtronic and its subsidiaries around the world must adhere to this Code and the applicable Business Conduct Standards.

Arthur D. Collins, Jr.

Chairman and CEO

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

COMPLIANCE WITH THE LAW

Medtronic and its employees shall comply with all applicable laws and regulations. If it is not possible for Medtronic to participate successfully in any business segment in any part of the world while complying with this policy, Medtronic will not participate in that business segment.

EMPLOYEE RESPONSIBILITY

Employees are expected to know and follow the laws of each relevant market in which Medtronic does business. Employees are also expected to comply with the provisions of this Code and the relevant Business Conduct Standards. Managers are expected to ensure such compliance. It is the responsibility of every employee to promptly bring violations and suspected violations of the Code to the attention of the Company, through management, Medtronic Legal Counsel, or the Chief Compliance Officer, or by using the Medtronic Compliance Line described below. Employees at all levels are prohibited from retaliating against or threatening anyone for reporting or supplying information about a policy or conduct concern.

Medtronic has established and will maintain a written program to ensure compliance with the law and with these and other policies the Company may adopt. The program consists, among other things, of the Medtronic Code and Business Conduct Standards, training programs, annual Certifications of Compliance to be completed by key personnel, periodic audit, and a Compliance Line. The toll-free Compliance Line is available to all employees to report conduct believed to be in violation of the Code or any applicable Business Conduct Standards. Information transmitted through the Compliance Line will be investigated thoroughly and the identity of the source will be maintained in confidence, unless otherwise required by law. Enclosed is a wallet-sized card, which includes the U.S. Compliance Line number as well as access codes for countries outside the U.S. where such a line is permitted.

Adherence to all laws and regulations in the countries in which we operate, and to the policies in this Code as well as the Business Conduct Standards, is a condition of employment for every Medtronic employee. Violations could expose the employee and Medtronic to civil and criminal liability and could harm the Company’s reputation and competitive position. Violations will be dealt with promptly and may result in disciplinary measures up to and including the termination of employment.

Although the Code and Business Conduct Standards provide a framework to guide business conduct, they do not cover every situation. Please contact Medtronic Legal Counsel if you need assistance in understanding or interpreting them. The Audit Committee will consider any request for a waiver of any provision of this Code for executive officers. Only the Board of Directors or the Audit Committee may approve a waiver for executive officers. Waivers will be granted only in exceptional circumstances and will be promptly disclosed as required by law.

IMPROPER PAYMENTS

No bribes, kickbacks, or other payments for illegal purposes shall be made to or for the benefit of government employees or officials, customers, or others. This policy extends not only to direct payments, but also to indirect payments made in any form through consultants or other third parties.

CUSTOMER RELATIONSHIPS

No benefit will be given to a customer with an explicit or implicit requirement to use or purchase Medtronic products. “Customer” is used throughout these policies to mean any person or entity that is in a position to purchase or influence a decision to purchase Medtronic products. Certain discounts, rebates, free products, demos, equipment loaners, and warranty services furnished in the ordinary course of business are permitted, provided such benefits comply with local Business Conduct Standards.

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

Donations, Gifts, and Business Courtesies

Donations to customers or organizations closely affiliated with customers shall entail a benefit to society and shall be made to promote better health care, demonstrate good corporate citizenship, or serve a genuine educational function. Such donations must comply with local Business Conduct Standards.

The giving of gifts is generally prohibited. An exception is made in some countries for gifts which are modest in amount, recognized as a custom of the trade, and which could in no way cause Medtronic to be embarrassed or obligated. All gifts must comply with local Business Conduct Standards.

Business courtesies such as meals, transportation, and entertainment provided to a customer must be modest in amount and related to a legitimate business purpose (e.g., explanation or demonstration of Medtronic products, application of products, service capabilities, or training). Such courtesies must be in compliance with local Business Conduct Standards.

Payments to Customers

Medtronic may compensate customers for consulting, research and other services rendered, and reasonable costs incurred where the services have value to Medtronic and are rendered for fair market value. Such arrangements must be in writing in a form approved by the Medtronic Legal Department and must comply with local Business Conduct Standards.

Medtronic has a responsibility to provide instruction, education, and training on the safe and effective use of its products to health care providers. If Medtronic provides honoraria or reimbursement of travel, living, or meal expenses to participants, the amount must be reasonable and in compliance with local Business Conduct Standards.

Medtronic may, under some circumstances, underwrite the cost of continuing medical education conferences or professional meetings (e.g., registration fees, travel, living, and meal expenses). The laws regarding this type of support are complicated and such payments are not allowed in every country. In some countries, payments can be made only to the sponsor of the event or the institution of the attendee. All such payments must comply with local Business Conduct Standards.

FAIR DEALING

All employees should deal fairly with Medtronic’s customers, suppliers, competitors and employees. No one should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing practice.

RECORDKEEPING

Medtronic entities will maintain accurate Company records and accounts in order to ensure legal and ethical business practices and to prevent fraudulent activities. Finance managers for Medtronic businesses, including subsidiaries worldwide, have the responsibility to express their independent views to, and raise any significant issues with, the Chief Financial Officer.

Records and accounts must be complete and not misleading. All Company accounting records, and the reports produced from those records, must be kept and presented in accordance with all applicable laws and relevant accounting standards.

No undisclosed or unrecorded funds or assets of Medtronic may be maintained for any purpose. No more than one set of books may be maintained and no false or artificial entries may be made in any accounts.

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

ANTITRUST/COMPETITION

Antitrust laws in the U.S. and competition laws outside the U.S. exist to ensure free and open competition in the marketplace, a principle that Medtronic fully supports. Violation of these laws can result in civil liability and criminal penalties for Medtronic and its employees.

These laws are complex and, consequently, employees may not take any collaborative action with a competitor, or take any action that could have an improper anti-competitive effect, without prior advice from Medtronic Legal Counsel. Examples of prohibited conduct include:

• Agreements or understandings with competitors, either directly or through others, to fix prices, divide customers or territories, or restrict sales;

• Exchange of pricing or other proprietary information with competitors; and

• Illegal tying, illegal price discrimination or refusals to deal.

Medtronic management is expected to maintain basic familiarity with the principles and purposes of the antitrust laws as they apply to Medtronic business, and to abstain from any activities that might violate or create any appearance of intention to violate such laws. Medtronic employees are expected to understand the antitrust principles that apply to their activities. All employees are to seek guidance from Medtronic Legal Counsel in any circumstances where doubt exists.

EXPORT CONTROLS, ECONOMIC SANCTIONS, AND INTERNATIONAL BOYCOTTS

Medtronic must comply with export control and economic sanctions laws of the United States, as well as those of other countries in which it does business. These laws restrict transfers, exports, and sales of products or technical data from the United States to certain prescribed countries and persons as well as re-exports of certain such items from one non-U.S. location to another. They also prohibit or restrict other business and financial dealings with certain countries, governments, and parties. Medtronic and its employees are required to comply with these laws without exception. These laws are complicated and employees should contact Medtronic’s Export/Import Compliance Manager and/or Medtronic Legal Counsel whenever a question arises.

In addition, U.S. law prohibits cooperation with certain boycotts imposed by some countries against others and further requires that any request in furtherance or support of such boycotts be reported to the U.S. Government. The most notable of these is the Arab boycott of Israel. Medtronic employees may not cooperate with any prohibited boycotts and must report any request for cooperation immediately to management, the Medtronic Export/Import Compliance Manager, and/or Medtronic Legal Counsel.

CONFLICT OF INTEREST

Medtronic employees owe a duty of undivided business loyalty to the Company. This duty is breached when an employee engages in activities that cause a conflict of interest. Conflicts of interest may arise when considerations of gain or benefit to an employee or an employee’s immediate family members conflict with or appear to conflict with the employee’s obligation to serve Medtronic’s best interest or the employee’s ability to perform company work objectively and effectively. Anything that would be

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

a conflict of interest for an employee may also be a conflict of interest if it involves an immediate family member. Conflicts of interest can take many forms, not all of which can be addressed by this Code.

The following are examples of conflicts of interest:

• Consulting with or employment by a competitor, supplier, or customer of Medtronic;

• Holding a substantial equity, debt, or other financial interest in any competitor, supplier, or customer;

• Having a financial interest in any transaction involving the purchase or sale by Medtronic of any products, materials, equipment, services, or property, other than through Company-sponsored programs;

• Using employees, materials, equipment or other assets of Medtronic for any unauthorized purpose; or

• Accepting any cash, gifts, entertainment, or benefits that are more than modest in value from any competitor, supplier, or customer.

A manager must approve acceptance of any benefit of more than modest value from a competitor, supplier, or customer.

Each employee is responsible for avoiding conflicts of interest as well as the appearance of such conflicts. Employees who are unsure whether they are involved in a conflict of interest or whether an action might create a conflict of interest should discuss the issue with their manager or with Medtronic Legal Counsel. A conflict of interest or potential conflict of interest may sometimes be resolved or avoided if it is appropriately disclosed and approved.

However, in other instances, disclosure may not be sufficient and Medtronic may require that the conduct be stopped or that actions taken be reversed where possible.

INSIDER TRADING

All Medtronic employees are prohibited from engaging in insider trading. Insider trading is trading in Medtronic stock while aware of confidential information about the Company that could, if it became public, affect the stock price. Disclosure of any information to another person, such as a spouse or friend, which would enable them to gain a trading benefit not available to the general public, is prohibited as well. Similar restrictions apply to trading in the stock of other companies using confidential information that an employee has access to because of his or her employment. This conduct is illegal and could subject the employee and Medtronic to civil liability and criminal penalties.

INTELLECTUAL PROPERTY AND CONFIDENTIAL INFORMATION

Medtronic invests substantial resources in developing proprietary intellectual property and confidential information. Confidential information is information that is not generally known or readily available to others. Medtronic protects its intellectual property by seeking patent, trademark, or trade secret protection. It protects its confidential information by taking precautions to prevent inappropriate disclosure or loss of such information.

Medtronic respects the intellectual property of others. Early in the product development cycle, Medtronic conducts patent searches to avoid infringing patents of others and, when necessary, makes design changes or seeks licenses.

Confidential information is critical to Medtronic’s competitive advantage. This includes technical know-how and data, trade secrets, business plans, marketing and sales programs, and sales figures,

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

as well as information relating to mergers and acquisitions, stock splits, divestitures, licensing activities, and changes in senior management. Confidential information also includes personal information about Medtronic employees, such as salaries, benefits, and information contained in personnel files. Confidential information must not be shared with others outside Medtronic except pursuant to approved business relationships; nor may Medtronic employees accept confidential information from third parties, including competitors, without the authorization of Medtronic Legal Counsel.

CORPORATE OPPORTUNITIES

Employees may not take for personal use opportunities that are discovered through the use of corporate property, information or position, nor may they use corporate property, information or position for their own personal gain or to compete with Medtronic. Employees have a duty to advance Medtronic’s interests when the opportunity to do so arises.

PROTECTION AND PROPER USE OF COMPANY ASSETS

All employees should protect Medtronic’s assets and promote their efficient use. Theft, carelessness and waste have a direct impact on Medtronic’s profitability. All Medtronic assets should be used for legitimate business purposes. Incidental and occasional personal use of Medtronic assets such as computers, telephones and supplies is permitted.

CLINICAL AND REGULATORY AFFAIRS

Medtronic products are heavily regulated by governmental agencies, health ministries, and other regulatory authorities worldwide. Every employee is responsible for compliance with worldwide product regulation requirements, including marketing approvals, conduct of

clinical studies, good manufacturing practice requirements and standards, design controls, labeling and advertising controls, and any other product regulations and controls promulgated by government agencies. Each employee is responsible for reporting any significant issues to management and/or the Chief Regulatory Officer. Regulatory affairs managers have the responsibility to express their independent views to, as well as raise any significant issues with, the Chief Regulatory Officer. Medtronic is committed to maintaining an open, constructive and professional relationship with regulators on matters of regulatory policy, submissions, compliance, and product performance.

QUALITY

Medtronic is committed to producing the highest quality medical devices in the interest of patient safety and to maintain its reputation for excellence through Customer-Focused Quality. Medtronic will comply with all laws and regulations regarding the safety and efficacy of its products and the standards for its manufacturing plants.

Each employee is responsible for reporting any concerns that relate to a compromise of quality to management and/or the Chief Quality Officer. Quality Managers for Medtronic businesses, including subsidiaries worldwide, have the responsibility to express their independent views to, as well as raise any significant quality issues with, the Chief Quality Officer.

ENVIRONMENTAL MANAGEMENT

Medtronic is committed to doing business in an environmentally responsible manner and will strive to improve its performance to benefit its employees, customers, communities, shareholders, and the environment. All employees are responsible for making sure that Medtronic’s business is conducted in compliance with all applicable laws and in a way that is protective of the environment.

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

SAFETY AND HEALTH

Medtronic is committed to a safe, healthy work environment that is in compliance with all applicable laws and regulations. All employees are expected to develop a pro-active, cooperative attitude toward issues of health and safety throughout the Company.

PRODUCTIVE WORK ENVIRONMENT

Medtronic is committed to a productive work environment. Key elements for developing such an environment include freedom from harassment in any form, a culture that recognizes and appreciates the advantages of a diverse work force, and a decision process which seeks to ensure that all employees are treated with dignity and respect.

Discrimination on the basis of race, religion, gender, color, ethnic or national origin, age, disability, sexual preference, or marital status will not be allowed. This includes discrimination in hiring, training, advancement, compensation, discipline, and termination. Harassment, such as racial or sexual harassment, will not be tolerated and should be reported to the appropriate manager or Human Resources Representative.

POLITICAL ACTIVITY

Medtronic supports your right to participate actively in the political process. However, you must have written approval in advance from the Medtronic Chief Executive Officer or General Counsel for solicitations made during work hours or on Medtronic property on behalf of any political party, candidate committee or other election fund. No corporate funds, or other corporate assets, may be contributed directly to any political party, political committee, or candidate for public office at the federal level, or at the state level unless permitted by law, with the exception of funds used to administer the corporate political action committee.

PEOPLE ACTING ON BEHALF OF MEDTRONIC

Medtronic expects its independent dealers, distributors and agents to comply with the policies set out in this Code. The Medtronic manager responsible for any such relationship must ensure that the terms of the relationship are set out in a written agreement, provide a copy of the Code, and require compliance with the Code in all dealings on Medtronic’s behalf. Promoting or engaging in any practices that violate the principles of this Code may result in termination of the relationship.

GOVERNMENT, ANALYST, AND MEDIA INQUIRIES

Medtronic must be made aware of any inquiries from the government, the financial/analyst community, or the media so that it can properly and thoroughly respond. If a Medtronic employee is contacted by a representative of a governmental agency seeking an interview or making a non-routine request for documents, that employee should immediately contact Medtronic Legal Counsel so that appropriate arrangements can be made to fully comply with the Company’s legal obligations. All inquiries from the financial/ analyst community should be referred to Investor Relations. All media inquiries should be referred to Corporate Media Relations in the U.S. or to the authorized person or department outside the U.S.

CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS

In addition to being bound by all other provisions of this Code of Conduct, the Chief Executive Officer (CEO), the Chief Financial Officer, Treasurer, Corporate Controller, and other senior financial officers performing similar functions who have been identified by the CEO (collectively, the “Senior Financial Officers”) are subject to additional specific policies (collectively, the “Code of Ethics for Senior Financial Officers”). The Code of Ethics for Senior Financial Officers

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Code of Conduct

governs a number of areas including disclosures of material information that affect the disclosures made by the Company in its public filings; reporting of internal financial control deficiencies or fraud of which these Senior Financial Officers become aware; violations of securities laws; and conflicts of interest between personal and business relationships. The Code of Ethics for Senior Financial Officers is an addendum to the Medtronic Code of Conduct and may be found at http://www.medtronic.com/corporate_governance/ code_ethics.html.

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Code of Conduct

The Medtronic Mission

To contribute to human welfare by application of biomedical engineering
in the research, design, manufacture, and sale of instruments or appliances
that alleviate pain, restore health, and extend life.

To direct our growth in the areas of biomedical engineering where we display
maximum strength and ability; to gather people and facilities that tend to
augment these areas; to continuously build on these areas through
education and knowledge assimilation; to avoid participation in areas
where we cannot make unique and worthy contributions.

To strive without reserve for the greatest possible reliability and quality in
our products; to be the unsurpassed standard of comparison and to be
recognized as a company of dedication, honesty, integrity, and service.

To make a fair profit on current operations to meet our obligations,
sustain our growth, and reach our goals.

To recognize the personal worth of employees by providing an employment
framework that allows personal satisfaction in work accomplished,
security, advancement opportunity, and means to share in
the company’s success.

To maintain good citizenship as a company.

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

VISIT THE COMPLIANCE WEBSITE ON THE MEDTRONIC INTRANET AT
http://mitintra.corp.medtronic.com/cci/index.htm

To order copies of this booklet, send an e-mail to productlit@medtronic.com.
Provide your name, mail stop and cost center number.
Include the number of copies you are ordering.

United States of America	Asia-Pacific	Canada
Medtronic Neurological	Medtronic International, Ltd.	Medtronic of Canada Ltd.
710 Medtronic Parkway	Suite 1602 16/F	6733 Kitimat Road
Minneapolis, MN 55432-5604	Manulife Plaza	Mississauga, Ontario L5N 1W3
USA	The Lee Gardens, 33 Hysan Avenue	Canada
Internet: www.medtronic.com	Causeway Bay	Tel. 1-905-826-6020
Tel. 763-505-5000	Hong Kong	Fax 1-905-826-6620
Fax 763-505-1000	Tel. 852-2891-4456
Toll-free 1-800-328-0810	Fax 852-2891-6830
Europe
Medtronic Europe Sarl	Australia
Route du Molliau 31	Medtronic Australasia Pty. Ltd.
Case Postale	Unit 4/446 Victoria Road
1131 Tolochenaz	Gladesville NSW 2111	UC200004136d EN
Switzerland	Australia	© Medtronic, Inc. 2005
Internet: www.medtronic.co.uk	Tel. 02-9879-5999	All Rights Reserved
Tel. +41-21-803-8000	Fax 02-9879-5100	Printed in USA
Fax +41-21-803-8099	Toll-free 1-800-251-760	July 2005

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Medtronic U.S. Business Conduct Standards — 2004
Customer Relationships

Standard #1

General Provisions

No Medtronic employee or agent may offer or give a benefit to a Customer with an explicit or implicit requirement to use or purchase Medtronic products, or as a reward for prior use or purchase of Medtronic products.

Scope of Standards. These Standards are mandatory for interactions involving a transfer of anything of value from Medtronic to a Customer (a “Customer Interaction”). If you are unsure about the legality of a Customer Interaction or the Customer Interaction is not specifically allowed by these Standards, you must consult with Medtronic Legal Counsel before entering into it. All Medtronic employees and agents must comply with these Standards, the Medtronic Code of Conduct and applicable law, including, for example, the antitrust, securities, FDA and export control laws. Standards 1-8 do not apply to relationships with individual patients or to relationships with entities that are not in the business of providing health care services or affiliated with such entities.

Standards are Country-Specific. These Standards apply to interactions with Customers who work in the U.S. Other country-specific Standards can be found at the Compliance site on the Medtronic Intranet. The Standards of the country where the Customer works apply to that Customer. Customer Interactions with Customers (whether U.S. or O.U.S.-based) who work or perform services outside of the U.S. require notice to the area Medtronic Legal Counsel (or responsible area corporate paralegal), followed by approval of an area Medtronic Vice President. If the Customer Interaction is the primary responsibility of management outside of the U.S., but is with a U.S. physician or for services performed by an individual or organization within the U.S., notice to the U.S. business legal department followed by approval of a U.S. Medtronic Vice President is required.

“Customer” means any person or entity in a position to purchase, lease, recommend, use, or arrange for the purchase or lease of or prescribe Medtronic products. Gifts, payments or other benefits given to persons employed by a Customer or to a close family member of a Customer are attributed to the Customer. Likewise, gifts, payments or other benefits that are given in the name of a Customer or to an organization

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affiliated with a Customer are attributed to the Customer. An organization is “affiliated” with a Customer if it is controlled by or under common control with the Customer, or if the Customer is on the Board of the organization, receives material compensation from, or has an investment interest in the organization.

“Medtronic Vice President,” “Medtronic Corporate Vice President” and “Medtronic Legal Counsel.” References throughout the Standards to a “Medtronic Vice President” mean any Vice President of Medtronic, Inc. A list of the “Medtronic Corporate Vice Presidents” is on the Medtronic Compliance website. References to “Medtronic Legal Counsel” are to the Medtronic-employed lawyers providing services to the businesses and geographies.

Compliance with Standards is required. All Medtronic employees and agents involved in Customer Interactions are expected to know and comply with these Standards and with any interpretive guidance given to them by Medtronic (e.g., by a Medtronic Manager (“Manager”) or Medtronic Legal Counsel). Managers are responsible for ensuring compliance. Violations of the Standards could expose the employee and Medtronic to civil and criminal liability. Adherence to the Standards is a condition of employment for every employee and violations will be dealt with promptly and may result in disciplinary measures up to and including the termination of employment.

Each business must develop and implement appropriate procedures for disciplining employees who violate the Standards and for responding to violations by agents. These discipline policies are subject to review and approval by the Medtronic General Counsel. Each business must also ensure that all personnel involved in Customer Interactions receive mandatory training on the Standards at a level appropriate to their position.

If an employee is in doubt about the meaning or application of a Standard, the employee should contact a Manager or Medtronic Legal Counsel. If an employee is concerned that others may be engaging in, or requiring that the employee engage in, conduct that is inconsistent with these Standards, the employee should discuss the concern with a Manager or Medtronic Legal Counsel or contact the Compliance Line at 800-488-3125.

If the Company is restricted from doing something, so are its agents and employees. If these Standards restrict Medtronic’s interactions with a Customer, Medtronic employees and agents are likewise restricted, even if no request for reimbursement is made of the Company. Agents of Medtronic that interact with Customers on Medtronic’s behalf must be contractually required to adhere to these Standards.

Payments to Customers may only be made by the Company. Only the Company can make payments to, or on behalf of, or reimburse a Customer and only by Company

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check or wire transfer. Any payment for travel expenses incurred by a Customer (e.g., lodging, meals, or transportation) must be paid directly to the vendor (e.g., the hotel or airline) whenever practical. When reimbursement is made to the Customer, original receipts or other supporting documentation is required. When a Customer is expected to pay out-of-pocket for reimbursable travel expenses, the Customer should be provided with modest per-diem spending guidelines in advance. Neither the Company nor any Medtronic employee or agent may ever provide cash or a personal check to a Customer.

Exceptions or amendments. In circumstances where conduct prohibited by these Standards does not implicate underlying legal or ethical concerns, it may be appropriate to grant infrequent, fact-specific exceptions. Exceptions must comply with all legal and regulatory requirements and require the specific written approval of both a Medtronic Corporate Vice President and Medtronic Legal Counsel. Amendments to the Standards require the approval of the Medtronic General Counsel.

Limits on meals and hospitality. Meals or other hospitality permitted under these Standards must be modest in value and subordinate in time and focus to the purpose of the interaction. Except as provided under Standard 6 (Consulting), Medtronic-funded hospitality is limited to modest meals and receptions. Medtronic may not pay for, contribute to, or hold parties for Customers for the purpose of celebrating a non-business event, such as a holiday. Medtronic may not pay for meals, receptions, other hospitality, or travel or lodging for a spouse or other guest of a Customer.

Limits on travel. Travel provided for Customers outside of the 48 contiguous states (the “Continental U.S.”), other than travel to the Continental U.S. originating outside of the Continental U.S. or travel within a state located outside of the Continental U.S., must be approved by a Medtronic Corporate Vice President. Such travel may be allowed only if the location is necessary to accomplish the purpose of the trip (e.g., to bring Customers to a specialized lab when similar facilities are not available in the Continental U.S.), or if most of the anticipated attendees do not live in the Continental U.S. but do live convenient to the proposed location. Except as provided under Standard 6 (Consulting), Medtronic-provided travel is limited to coach class travel.

Limits on lodging. The locations of any Medtronic-sponsored business meeting, Training and Education session, or consulting meeting must be modest and selected based upon program requirements and convenience of attendees. Any lodging provided to a Customer must be provided at an “Approved Medtronic Customer Meeting Facility” or at a hotel with a rate no higher than an Approved Medtronic Customer Meeting Facility for that locale. A list of the Approved Medtronic Customer Meeting Facilities will be maintained by the Medtronic Corporate Event Planners in conjunction with the Medtronic Corporate Legal Department and is available on the Medtronic Compliance website.

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No lodging may be provided at a resort or Resort Location. “Resort Locations” are areas, other than major metropolitan areas, known primarily as recreation or vacation destinations (e.g., ski, golf, beach, spa, fishing, vineyard, horseback-riding, hunting or fishing destinations, such as Aspen, Pebble Beach, Naples, or Napa Valley). If a business unit with headquarters located in a Resort Location sponsors a meeting for its Customers, and for the convenience of its staff or Customers locates the meeting convenient to its headquarters, the Resort Location restriction does not apply, unless the hotel is located on, or immediately adjacent to, a resort property (e.g., beside a golf course or beach, on the grounds of a vineyard or at the foot of a ski hill).

Oversight. The Medtronic Executive Committee will include compliance issues as an agenda item at least quarterly. Each Business President, Geography President, and Business General Manager is responsible for ensuring that: 1) compliance issues are addressed at least quarterly at their staff meetings or by a committee composed of high-level management and the chief financial and legal officers for their business unit, at which a summary of the issues along with their disposition is reviewed and a copy of the disposition is sent to the Medtronic General Counsel; 2) that a comprehensive plan is in place to ensure that these issues are addressed throughout their organizations, including policies and procedures requiring appropriate documentation, monitoring, and retrospective review of activities governed by these Standards; and 3) all appropriate personnel receive appropriate training on the Standards.

Key management employees will be required to complete annual Certifications of Compliance in which they confirm that they are not aware of unreported violations of the Medtronic Code of Conduct or the Business Conduct Standards.

Accuracy in reporting reimbursement-related information. Any product-related cost or charge information (other than direct billings) provided by Medtronic to a government agency that may be used for the purpose of setting reimbursement rates must be reviewed by Medtronic Legal Counsel before it is reported to the agency.

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Medtronic U.S. Business Conduct Standards

Standard #2

Free or Reduced Charge Products: Discounts, Credits and Rebates, Samples, Demos, Loaners and Warranties

Discounts furnished in the ordinary course of business are permitted, provided that they comply with this Standard.

Scope of Standard. This Standard addresses “Discounts” (reductions from list price of the amount charged for Medtronic products, including free items, credits and rebates) as well as accessories, samples, demos, trial-period loans, product with no independent value, and warranties.

Discounts not permitted:

• Rebates paid in cash rather than by check;

• Signing and conversion bonuses;

• Discounts earned on products covered by a federal health care program, but applied to products that are not covered by the program;

• Discounts available when a product is covered by private payors, but not available when it is covered by a federal health care program; and

• Credits earned on trade-ins, in excess of the fair market value of the item that is traded.

Legal review required. Prior review by Medtronic Legal Counsel is required for Discount programs:

• That are based on Medtronic’s “share of an account” or involving “exclusivity” or “sole vendor requirements”;

• That result in the reduction of the product price below cost;

• That are conditioned on the purchase of a package or bundle containing products that are not all the same;

• That involve multiple items with variable discount rates;

• That may not be applied at the discretion of the Customer (i.e., that require the discount be applied for a particular purpose, for example, to fund the acquisition

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	of another product, or to support a research or education program), except credits restricted to the purchase of more of the same product;
•	That involve Discounts paid prior to the purchase of the products on which they are earned;
•	That are in a form other than a Discount taken at the time of sale as a reduction in the invoice price, or a Discount paid later as a rebate or a credit for the same type of item;
•	That extend for more than one year; or
•	That involve products with “No independent value,” as described below.

Prior review by Medtronic Legal Counsel is also required when:

• Paying unreimbursed medical expenses in connection with a warranty obligation (such payment must be provided solely for the benefit of the patient and can only be made to a Customer on a patient’s behalf);

• Free product is provided for analysis under a Consulting Agreement, or as part of a clinical trial or research project, to ensure that the underlying arrangement is consistent with Standard 6 (Consulting) and the value of the free product to the Customer is considered in setting fair market value compensation;

• Entering into an agreement with a group purchasing or similar organization; or

• Giving, loaning or consigning Medtronic products without charge except when the product is provided:

– pursuant to a warranty;

– while equivalent Medtronic product is being repaired;

– as a replacement as the result of regulatory action, to eliminate the risk of failure, or for product that is accidentally damaged; or

– consistent with the requirements set forth below under “Samples,” “Demos,” “Accessories,” or “Indigent patients.”

Samples. A limited number (per evaluating physician) of free product samples may be given to permit evaluation of products by Customers who are unfamiliar with the product. No-charge loaners may also be provided in the same circumstances, but only for a reasonable evaluation period.

Demos. Demonstration (functional or mock-up) products not for sale or use in patients may be given free of charge, provided they are labeled “Not for Human Use.”

“Accessories” are single-use or disposable items (e.g., lead introducers and batteries) that facilitate the use or operation of Medtronic products purchased by a Customer. Accessories may be provided free of charge only if they may be given without charge under another provision of Standard 2, or they are of nominal value (i.e., less than $100), are not eligible for separate reimbursement under any federal health care program, are provided to any given Customer only occasionally, and are equally available at no charge to all Customers.

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Indigent patients. Consistent with Standard 3 (Donations) and with any Medtronic policies on Indigent patients, products may be given to Indigent patients when the doctor or facility will not receive payment for the product or associated procedures.

Products with no independent value. Medtronic may give or lend products without charge that are ancillary to and facilitate the use or operation of Medtronic products purchased by a Customer (e.g., product-specific tools). These products must not have any value independent of the primary product and must not be of personal use to the Customer. The recipient must acknowledge receipt, and, in the case of a loan, ownership by Medtronic. Products do not qualify as having “no independent value” if they are sometimes sold to Customers by Medtronic or any other manufacturer.

Documentation. Product sold or given to a Customer with more than a nominal list price, other than Demos, must be invoiced.

• Disclosure. Discount terms must be set at the time of sale and reflected in a written agreement. When the amount of the Discount is known at the time of sale, the net price of each discounted item must be fully disclosed in writing to the Customer on the invoice. Otherwise, the invoice must make clear reference to another document provided to the Customer that explains the Discount terms, including its allocation among the invoiced products. Each invoice for discounted product must include the notation that the price is net of any Discount. Where the actual Discount is not known at the time of sale (e.g., in the case of a volume rebate), the invoice should include a statement that the purchase price may be subject to a Discount, and, when the Discount becomes known, a written statement should be issued to the Customer noting the Discount and relating the Discount back to the original invoice(s). Additional disclosures may be required in connection with Discount programs designated above as requiring legal review.

• Medicare reporting notification. The invoice must state that the Customer may be obligated to report the Discount to Medicare, Medicaid or other federal health care programs.

• Sample-specific requirements. Invoices for sample product must indicate that the product is provided at “no charge” and contain language similar to the words “Customer should not seek reimbursement for this product.”

• Warranty-specific requirements. The invoice must accurately report the price reduction of the item (including any free item) that was obtained as part of the warranty and inform the Customer of its reporting obligations under federal law. In circumstances where eligibility for a price reduction under a warranty may be determined after the time of sale (at which time a warranty credit is issued), the invoice must accurately report the potential that additional price reductions may apply and inform the Customer of its reporting obligations. When the value of the warranty credit becomes known, Medtronic must provide the Customer with documentation of the warranty credit.

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• Leases. Any product leased or lent to a Customer, with or without charge, with more than a nominal list price must be the subject of a written lease agreement accurately stating all material terms of the lease (in the case of relatively low-value items, such as programmers, a letter from Medtronic setting forth the material terms and conditions upon which the item is lent is sufficient).

Finance Department responsibilities. Business Shared Services and the Finance Department for the applicable Medtronic business must ensure that invoicing and documentation of any Discounts or other arrangements described in this Standard are in accordance with these requirements and Medtronic financial policies.

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Medtronic U.S. Business Conduct Standards

Standard #3

Donations to Customers or Organizations Closely Affiliated With Customers

Donations to Customers or organizations affiliated with Customers are permitted only if the donation is intended to benefit society and promote better health care, demonstrate good corporate citizenship, or serve a genuine educational function, and, except in rare instances, only where the recipient is a tax-exempt charity.

“Donations” are contributions made by Medtronic to support a charitable purpose, and may be made only to a tax-exempt charity, or, in rare instances, to individuals engaged in a genuine charitable mission (“Charities”). Donations may not be linked, implicitly or explicitly, to an agreement to use, order, recommend or refer for Medtronic products or used to reward prior purchases. Donations may not result in a personal benefit to a Customer, as opposed to supporting a charitable purpose. Product donations for use outside of the U.S. must not violate any export control law.

Payments by Medtronic in return for items or services, and research grants or other payments made to entities that are not Charities, should be evaluated under Standard 6 (Consulting) or Standard 8 (Medical Conferences). Donations made to a charity to sponsor or support attendance at conferences must also meet the requirements of Standard 8.

Support of education. Donations that meet the requirements of Standard 3 may be made for educational purposes, including:

• Supporting an endowed chair at an academic institution;

• Subsidizing the education of fellows participating in fellowship programs with an academic affiliation;

• Subsidizing medical congresses and conferences; and

• Educating the public on health care topics.

Support of research. Donations that meet the requirements of Standard 3 may be made to support specific scientific research projects. These might include, for example, donations to support basic scientific research. Support for research connected to Medtronic therapies normally should be addressed under Standard 6 (Consulting).

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Other permissible purposes. Donations that meet all of the requirements of Standard 3 may be made for other genuine philanthropic and charitable purposes that demonstrate good corporate citizenship and represent a benefit to society; for example, support of activities directed at providing services or products to Indigent patients (see Standard 2 [Discounts]).

Fundraising events. Support of fundraising events is only permitted where at least a portion of the donation qualifies for a charitable tax deduction. Sponsorship of either Customer participation in (e.g., the entrance fee to a charitable golf tournament), or Customer attendance at (e.g., tickets for a charitable gala), fundraising events is prohibited, except where the participants or attendees are selected by the donee or where the event involves only a meal or reception and qualifies as a business courtesy under Standard 5 (Business Courtesies).

“Infrastructure” support. Monetary donations may not be made to a Customer to support construction or renovation of Customer facilities, or to equip Customer facilities. However, Medtronic may purchase tickets to, or sponsor, a qualifying fundraising event (see above) even if the proceeds are designated for such purposes, and Medtronic may make donations of Medtronic equipment to support a charitable purpose. If the transfer of equipment is not to a charity and for a charitable purpose, the limitations in Standard 2 (Discounts) apply.

Support for lobbying. Donations that meet all other requirements of Standard 3 are permitted even when the recipient will apply some or all of the donation for lobbying activities. However, prior review by the Washington Government Affairs Office is required to ensure that these initiatives are consistent with Medtronic’s legislative goals and are likely to be effective.

Mechanics of payment. Donations may be made only through wire transfer to the recipient’s official bank accounts or through Medtronic check made payable to the official name of the Charity. Reimbursement for monetary donations made through the use of expense reports is expressly prohibited.

Transmittal letter. A transmittal letter from Medtronic clearly explaining the purpose of the donation must be sent prior to or with the donation. The transmittal letter must be approved by Medtronic Legal Counsel or, if the payment is less than $2,500, be in a form that has been approved by Medtronic Legal Counsel and used without material modification.

Approval process. Each business unit must establish a process for receiving, reviewing and acting on all charitable donation proposals according to pre-established criteria consistent with Standard 3. Personnel that are part of the sales organization

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may not be involved in this process except to respond to Customers’ questions about where to submit an application for a donation. Budgets for donations may not reside in the sales organization.

All donations that exceed $1,000 or the equivalent fair market value must have prior approval of a Medtronic Vice President. Donations that exceed $15,000 or the equivalent fair market value must be approved by a Corporate Vice President.

Required documentation. The disposition of each request for a donation must be documented. Also, all donations (whether of monetary or non-monetary items such as products or equipment) must be supported by documentation demonstrating that: 1) the recipient is a Charity (this will normally require evidence of the entity’s tax-exempt status); 2) the donation will be used for an appropriate purpose (described above); 3) the amount of the donation is appropriate for the proposed purpose (e.g., not in excess of the anticipated costs of a proposed project or event); and 4) the donation has been received by the Charity (i.e., a receipt or acknowledgment from the recipient, or, if specified in the transmittal letter stating the purpose of the donation, a canceled check).

Research grant requests must be accompanied by an explanation of the purpose of the research, a detailed research protocol or other appropriate documentation, and a detailed budget or description of how the requested funds will be applied. Educational grant requests must be accompanied by a detailed explanation of the particular educational program involved, including date, place, and program description, and a detailed budget or description of how the requested funds will be applied.

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Medtronic U.S. Business Conduct Standards

Standard #4

Gifts

The giving or accepting of gifts is generally prohibited. An exception is made for: 1) occasional modest gifts, but only if the gift benefits patients or serves a genuine educational function; and 2) minimal-value, branded promotional items related to the Customer’s work or benefiting patients.

Value, frequency and purpose of gifts. Gifts must benefit patients or serve a genuine educational function. Except for medical textbooks and anatomical models, the fair market value of any gift may not exceed $100. Gifts from any business unit, having a per-Customer aggregate value in excess of $300 per year, are prohibited. In no event may gifts be given in the form of cash, cash equivalents, or gift certificates, other than gift certificates for a specifically identified item. Gifts that do not benefit patients or serve a genuine educational function, such as food, flowers, wine, or other refreshments, are prohibited. Gifts to public employees (e.g., public university, public hospital or VA physicians, administrators or other employees) are generally prohibited by the rules of those institutions, and Medtronic must not give any gifts that violate these rules. It is the responsibility of the involved employee and the employee’s Manager to determine the appropriateness of the type and amount of gift given in each circumstance. Samples and other transactions described under Standard 2 (Discounts) should be considered under that Standard rather than under this Standard. Gifts given in exchange or appreciation for services should be treated as compensation and must conform to Standard 6 (Consulting). Gifts may not be given as a “thank you” for the purchase of product.

Minimal-value, branded, promotional items. It is also occasionally permissible to give minimal-value, branded, promotional items related to the Customer’s work or for the benefit of patients. Examples include pens and notepads. Items such as golf balls and tee shirts are not related to the Customer’s work or patient benefit, and are prohibited.

Documentation. The description and purpose of gifts should be documented and approved on an expense report or comparable authorization process. Expenses for gifts must be clearly identified as such and coded as directed by Finance.

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Medtronic U.S. Business Conduct Standards

Standard #5

Business Courtesies

Business Courtesies provided to a Customer in the context of a business meeting are limited to meals, receptions, transportation and lodging, and must be modest in amount and related to a legitimate business purpose.

Permissible business purpose. A “Business Meeting” is a meeting held for one of the following business purposes: 1) explaining the features, use or other important aspects of Medtronic products; 2) understanding the product-related service, or other concerns, needs or demands of a Customer; 3) explaining the services and terms available from Medtronic; or 4) negotiating contracts and sales terms.

Permissible Business Courtesies. The term “Business Courtesies” includes any meals, receptions, transportation, lodging or entertainment provided to a Customer by Medtronic. This Standard limits the Business Courtesies that Medtronic may provide in connection with a Business Meeting to occasional modest meals and receptions incurred during the Business Meeting and travel and lodging as provided below. No other Business Courtesies may be extended in connection with a Business Meeting. A Medtronic employee must be present during any meal or reception and the setting must be consistent with the business purpose. Unless the courtesy may be extended under another Standard (see below), if there is no permissible business purpose for the meeting (i.e., the meeting is not a Business Meeting) or if there is no Medtronic employee in attendance, the courtesy is a prohibited gift under Standard 4 (Gifts).

Courtesies in other contexts. For guidance relating to courtesies (i.e., any meal, reception, transportation, lodging or entertainment) extended to Customers in connection with Consultant Meetings, see Standard 6; Medtronic-sponsored Training and Education, see Standard 7; or third-party medical conferences, see Standard 8.

Payment for travel, lodging and meals. If a Customer is asked to travel to an out-of-town Business Meeting for Medtronic’s convenience, in addition to the meals and receptions described above, Medtronic may cover modest travel (ground transportation and airfare), lodging and meals associated with the trip as provided in Standard 1 (General Provisions). These trips are appropriate only if they are to Medtronic’s offices

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or to other function-appropriate locations selected by Medtronic because of practical concerns, or because of cost savings to Medtronic. Examples of appropriate reasons for trips are plant tours and product demonstrations (where the product is not reasonably portable) when there is a real and substantial business need for such a tour or demonstration.

Documentation of Business Courtesies. The description and business purpose of all Business Meetings, along with the nature and amount of any Business Courtesies, the full names of those in attendance, including the employment, agency or staff affiliation of any individual Customer, must be documented and approved on an expense report or other appropriate authorization process.

Value and frequency of Business Courtesies. Each business unit must develop, with the approval of the Business President and Medtronic Legal Counsel, general, per-individual Customer, per-day spending limits for meals and receptions that are modest in amount. Each business unit must also determine appropriate limits on frequency or aggregate spending. For administrative convenience, nominal expenses (less than $25), and expenses incurred in connection with activities governed by other Standards may be excluded from these limits.

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****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Medtronic U.S. Business Conduct Standards

Standard #6

Consulting, Research, and Advisory Arrangements

Medtronic may compensate Customers for consulting, research and other services rendered, and reasonable costs incurred, where the services have value to Medtronic and are paid at no more than fair market value. Such arrangements must be in writing in a form approved by Medtronic Legal Counsel and comply with local Business Conduct Standards.

Purpose and payment. Agreements with Customers may be entered into only for services for which there is a legitimate Medtronic need. Clinical trials, including post-market or outcomes studies, must be based on a demonstrable need for data (e.g., for product approval, reimbursement, or supplemental efficacy claims). Payments to support studies sponsored by Customer-consultants (“Consultants”) are permissible if the outcome of the proposed study is likely to be of use to Medtronic (see Standard 3 for charitable donations to support research). Consultants contracting with Medtronic must be well qualified, in terms of available facilities and education or experience. Compensation may not exceed the fair market value of services provided, and may not be extended to the Consultant as a reward for prior business or as an inducement for future business. Compensation must be structured on a measurable basis, such as payment based on a daily, hourly or per-project rate, deliverables or milestones.

Approval process. Each business must establish mechanisms that require oversight and approval by personnel qualified to arrange and evaluate the proposed arrangement according to criteria consistent with Standard 6. Personnel in the sales organization may be involved in this process only to the extent necessary to supply information about contractor qualifications or interest. Budgets for Standard 6 arrangements may not reside in the sales organization. Members of the sales organization may not deliver payment to Consultants.

Form of agreements. Agreements with Customers for the provision of services (e.g., training, educating, consulting, research, clinical study, focus group, and physician advisory board) must: 1) be entered into prior to the start of the services and, without exception, prior to payment; 2) be in writing and signed by the parties; 3) be approved by Medtronic Legal Counsel, or, where the aggregate annual payment under the

 15

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

agreement is less than $2,500, be in a form which has been approved by Medtronic Legal Counsel and used without modification; and 4) specify the services to be provided, the term of the agreement, the method of payment, and any obligation to reimburse for travel, lodging, and other related expenses. Each agreement must specify a mechanism to verify that the required services are performed (e.g., periodic progress reports or a final written study report). Each business unit must develop an effective mechanism for substantiating that contracted services were provided (e.g., Manager review or internal spot assessments), or that there is a documented, legitimate reason that the services were not provided. A businessperson outside of the sales organization must ensure that the agreement is carried out in accordance with its terms. Consulting agreements should comply with the personal services safe harbor to the extent practicable. Agreements providing for services on an as-needed basis with payment prior to receipt of services are prohibited.

Required documentation. Files on all Consulting agreements must be maintained by the business unit and must include the written agreement, rate of compensation, the basis for selecting the Consultant (including the Consultant’s particular qualifications) and setting the compensation, and need for the services. Each Consultant must represent and acknowledge in writing that they have properly notified, and have received all necessary permissions from, all required parties (e.g., hospital, employer, and regulators) if those parties are not signatories to the agreement.

Limits on use of Customer-Consultants. Consultants who are health care professionals may not be paid to recommend the sale, lease or use of Medtronic products. They may be paid to speak, write and provide Training and Education on Medtronic products and related disease states. They may also provide technical expertise on behalf of Medtronic. For example, they may be involved in advocacy efforts with payors for reimbursement of Medtronic products. In any case, they are required to disclose their affiliation with Medtronic prior to providing services.

Medtronic may also jointly put on events with health care professionals (“co-marketing events”) at which the professional promotes his or her own practice (possibly along with discussion of disease states and therapies) at the same time that Medtronic promotes its therapies. For such co-marketing events, Medtronic’s support should never exceed its fair portion of the event costs. Since the health care professional’s contribution to the event is normally the time that he or she spends preparing and speaking, Medtronic should not pay the health care professional an honorarium or fee for his or her time, except in the case of an exception, see Standard 1 (General Provisions).

Regardless of the value of the contract, whenever a Consultant who is a health care professional is contracted to speak to potential Customers or referral sources about a Medtronic product, the agreement must be approved by Medtronic Legal Counsel to ensure that it requires appropriate disclosure of any conflict of interest and appropriate limitations on the scope of contracted activities.

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****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Approval process. A U.S. Medtronic Vice President must sign all Consultant agreements initiated within the U.S. For agreements with O.U.S. individuals or institutions, see Standard 1 (General Provisions). Delegation of this responsibility can only be made with the approval of the Medtronic General Counsel.

Consultant meetings. All Consultant services must be performed pursuant to written consulting agreements. Consequently, Consultants invited to meetings to perform consulting services must have written consulting agreements in effect describing the services to be provided at the meeting. Medtronic personnel with a bona fide interest in, and in a position to use, the advice given by the Consultants must be in attendance at each Consultant meeting. Securing consulting services must be the purpose of the meeting. Meals and hospitality should not compete with, or take precedence over, the purpose of the meeting. Copies of the agenda and minutes of any Consultant meeting must be maintained in each of the attending Consultants’ files (mentioned above) and the agenda for group meetings must be reviewed by Medtronic Legal Counsel prior to issuing invitations.

• Meals and hospitality. Medtronic may provide Consultants with modest meals, receptions, lodging, ground transportation and other hospitality in connection with a Consultant meeting. Hospitality beyond meals, receptions, travel and lodging, may be offered only on days during which at least five hours of bona fide Consultant meetings are scheduled. Each business unit must develop, with the approval of the Business President and Medtronic Legal Counsel, general per-Consultant, per-day spending limits on meals and hospitality extended in this context.

• Travel and lodging. The locations of meetings with Consultants must meet the criteria set out in Standard 1 (General Provisions). Medtronic may pay for reasonable travel costs for Consultants in connection with a Consultant meeting, which may exceed coach class if necessary to secure a Consultant’s services. Medtronic may not pay for the travel or other expenses (including the cost of meals, receptions and other hospitality) of guests of Consultants, or of any other person who is not a bona fide contributor to the meeting.

Payment. The appropriate Business President, Area President or Business General Manager shall ensure that there is an approved written, executed agreement, and that there is evidence of performance of the agreement prior to payment for services. Payments must be made by check or wire transfer to the official name and address or account of the party contracting with Medtronic.

 17

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Medtronic U.S. Business Conduct Standards

Standard #7

Training and Education Concerning Medtronic Products

Medtronic has a responsibility to make available instruction, education, and training on the safe and effective use of its products to health care providers. If Medtronic provides reimbursement of travel, living, or meal expenses to participants in connection with training and education, the amount must be reasonable and in compliance with local Business Conduct Standards.

Training and Education meetings. Medtronic may provide Training and Education to Customers to explain the safe and effective use of Medtronic products (“Training and Education”) to persons who could benefit from it. Training and Education will normally be provided by Medtronic rather than a third party, and includes: 1) training on how to use or implant a Medtronic product; 2) training on indications or therapies appropriate for use of a Medtronic product, including education regarding product-related disease states and the appropriate use of the product in the continuum of care; and 3) training on the quality, properties, and/or design characteristics of a Medtronic product, to the extent that such training provides health care professionals information on how to use that product safely and effectively.

Training and Education must be the purpose for the program. Meals and receptions should not compete with, or take precedence over, the educational program. Except on a travel day, Training and Education should not be less than five hours for each program day. All Training and Education must be adequately documented, including the agenda and a report on the costs, participants, and faculty.

Oversight responsibilities. Each business unit is responsible for setting up and maintaining a review and approval process for the Training and Education programs it sponsors. The review process must include the course content, agenda (covering all events from arrival to departure) and faculty.

Location of meetings. The locations for Medtronic-sponsored Training and Education must be consistent with Standard 1 (General Provisions) and must be limited to the Continental U.S., except when all of the attendees live in a U.S. state or territory outside of the Continental U.S. Programs requiring “hands-on” training in surgical procedures

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should be held at Bakken Educational Centers, surgical training facilities, medical institutions or other facilities appropriate for such purposes. Medtronic manufacturing or Medtronic R&D facilities satisfying all of the criteria outlined in this paragraph may be appropriate locations.

Travel, lodging, meals and hospitality. Medtronic may pay for reasonable travel and lodging costs incurred by attendees, consistent with Standard 1 (General Provisions). Medtronic may provide attendees with modest meals and receptions in connection with a Training and Education program. Medtronic may not pay for the travel or other expenses for guests of attendees, or for any other person who does not have a bona fide professional interest in the information being shared at the meeting. Each business unit must develop, with the approval of the Business President and Medtronic Legal Counsel, general per-Customer, per-day spending limits on meals and receptions extended in this context.

Reimbursement support programs. Medtronic may support accurate and responsible billing for products and related procedures to Medicare and other payors and cost-effective use of Medtronic products, by providing Customers with: 1) information about the economically efficient use of Medtronic products (e.g., explaining where the product can most efficiently be used in the continuum of care and how the product can be offered in a cost-effective manner); 2) coverage, coding and billing information regarding Medtronic products or related services or procedures; and 3) technical or other support intended to aid in the appropriate and efficient use or installation of Medtronic products.

Medtronic may not provide general practice management advice of material value to Customers without charging fair market value. For example, except in exchange for fair market value, it is not permissible to provide personnel or services to a Customer in situations that relieve the Customer of hiring such personnel or purchasing such services. It is also not appropriate to provide customized advice that is not product-focused.

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****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Medtronic U.S. Customer Relationship Standards.

Standard #8

Medical Conferences, Congresses and Professional Meetings Sponsored by Organizations Other than Medtronic

Medtronic has an interest in building awareness and understanding of its products and related disease states through support for third-party scientific forums. For these purposes, Medtronic may underwrite the cost of such third-party conferences or meetings and may subsidize the attendance of health care professionals-in-training. Such payments must comply with local Business Conduct Standards.

Qualifying conferences. Medtronic may support the following categories of events (collectively “Conferences”) consistent with Standard 8:

• Nationally or regionally recognized meetings. Medtronic may support nationally or regionally recognized, bona fide, independent, educational, scientific or policy-making conferences, congresses and professional meetings that have a relationship to Medtronic businesses or products.

• Grand Rounds. A subsidy may be made to the institution sponsoring “Grand Rounds,” as that term is normally understood, if: 1) the subsidy is made pursuant to a written agreement that specifies the topics to be addressed; 2) the topics are related to the therapies, uses or indications for a Medtronic product; and 3) the subsidy does not exceed the normal and customary expenses associated with the conduct of the Grand Rounds.

• Scientifically valuable roundtables or discussion groups. A subsidy may be made to support high-caliber, scientifically valuable roundtables, panels or discussion groups directed at advancing the state of medical knowledge about Medtronic therapies or meaningfully addressing disease states or technology of interest to Medtronic.

Permissible subsidies. Subsidies may be provided to the Conference sponsor to reduce overall Conference costs, support modest meals or receptions, or allow attendance by medical students, residents, fellows, or other health care professionals-

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with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

in-training (see selection requirements under “Scholarships” below). While Medtronic funds may be applied to pay costs and expenses associated with faculty selected and retained by the Conference sponsor, no payments may be made by Medtronic directly to faculty, and the selection of faculty must be at the sole discretion of the sponsor. Payment or subsidy of transportation or other expenses related to spouses or other guests of attendees is not permitted.

Required documentation. Medtronic may only support a Conference where the sponsor has submitted an agenda demonstrating that the Conference or a portion thereof is dedicated to education on Medtronic products or related disease states. There must also be an appropriate fee charged of attendees for any CME or CEU credits granted.

If a meeting is sponsored by a Customer, Medtronic must also confirm and document that the meeting will be held at a modest location, that hospitality will also be modest, and that the net meeting costs will be equal or greater than the sum of all subsidies (from Medtronic or another party). If a focus of the meeting is promotional rather than scientific, it must also comply with the requirements of Standard 6 (Consulting) for co-marketing events. If Medtronic sponsors the meeting, Standard 7 (Training and Education on Medtronic Products) applies.

Scholarships to health care professionals-in-training. Subsidies for attendance at Conferences by medical students, residents, fellows, or other health care professionals-in-training may be provided to bona fide training institutions as well as the Conference sponsor. In both cases, the selection of subsidized attendees shall be at the discretion of the institution or sponsor.

Medtronic-provided meals and receptions. Medtronic may host modest meals and receptions as part of a Conference. Such events should not compete with or take precedence over the educational portion of the Conference. Off-agenda interactions between Medtronic and a select group of attendees should be treated under Standard 5 (Business Courtesies) if they are business meetings or Standard 7 if they involve Training and Education on Medtronic products.

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SCHEDULE 3.15

ANNUAL AND QUARTERLY QUOTA

Individual Clips	Year-1*	Year-2**	Year-3***
Annual Quota	****	****	****
Minimum Annual Quota	****	****	****

Year One Individual Clips	Year-1*
	Q1#	Q2	Q3	Q4	Total
Quarter Split	****	****	****	****	****
Quota	****	****	****	****	****
Minimum Quota	****	****	****	****	****

Year Two Individual Clips	Year-2**
	Q1	Q2	Q3	Q4	Total
Quarter Split	****	****	****	****	****
Quota	****	****	****	****	****
Minimum Quota	****	****	****	****	****

*Year 1: Mar 1, 2006 to April 30, 2007
**Year 2: May 1, 2007 to April 30, 2008
***Year 3: May 1, 2008 to April 30, 2009

#Q1 of Calendar Year 2006 shall be defined as the period beginning March 1, 2006 and ending July 31, 2006.

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SCHEDULE 5.4

MEDTRONIC RETURNED INVENTORY POLICY

Returned Products

1. Authorization must be obtained from Medtronic Customer Service before the return of any product.

2. A Returned Goods Authorization (RGA) number will be given to you and must be clearly identified on the carton of any returned product.

a. Information required for an RGA number includes the product catalog number and quantity of product to be returned, the reason for the return, the customer P.O. number, the Medtronic invoice number, and the date of invoice.

b. RGA number will be valid for 30 days from date of issuance. If product is not returned within 30 days, RGA will be canceled.

c. Product must be returned to Medtronic in proper storage cartons.

3. Freight on all returned products must be prepaid.

4. Credit schedule for returned product:

a. Product shipped in error by Medtronic will receive full credit, including freight.

b. Product received by the customer in a damaged condition may be returned for full credit or replacement, upon approval of a Medtronic Representative, within (5) working days from the date of receipt by the customer.

c. All other product returned within 90 days of invoice date in saleable condition will be subject to a 20% reprocessing fee. Except end-user complaints, which are a result of product not meeting specifications.

d. Products not eligible for return will not receive credit, this includes:

• Product returned without an RGA number

• Product returned more than 90 days after invoice date

• Product that has deteriorated due to improper storage, handling, abuse or other causes beyond the control of Medtronic

• Product opened or used by the customer

• Product that has been sterilized by the customer

• Special order or custom product

• Product past expiration date

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SCHEDULE 6.1

U-CLIP ™ PRODUCTS AND PRICING

U-CLIP™ Anastomotic Device

All U-CLIP™ 2-pack configurations are shipped as 24 packs per carton, all 8-pack configurations are shipped as 18 packs per carton.

Product Order

U-CLIP™

Carton

Distributor

Number

Product Description

Count

List Price

Discount

Transfer Price

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****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

****	*	***	*	***	*	***	*	***	*	***
UCLIP™ Anastomotic Miscellaneous Products
****	*	***	*	***	*	***	*	***	*	***

 Page 26

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

SCHEDULE 7.3

USER WARRANTY

Page 27

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1.	Needle
2.	Flexible Member
3.	Transition (Light Blue)
4.	Slide Release Sleeve (Metallic)
5.	Clip
6.	Stopper
7.	Silver Ball

Explanation of symbols on package labeling

	Sterilized Using Irradiation
	Do Not Reuse
	Use By
	Lot Number
	Attention, See Instructions for use
	Manufacturer
	Quantity
	For US Audiences Only
	Nonpyrogenic

Important: These instructions provide guidance to the experienced surgeon using the U-CLIPÔ Device, sizes B140, B160, and B180. This is not a reference to surgical clipping and suturing technique. Please read the following information carefully. Failure to properly follow the instructions may result in serious patient injury.

Indications: The U-CLIPÔ Device is intended for endoscopic and nonendoscopic soft tissue and prosthetic material approximation and/or attachment and the creation of anastomoses in blood vessels, grafts, and other tubular structures.

Device Description: See Figure 1. Each clip is individually applied to the anastomotic, attachment, or approximation site.

Instructions for Use for the U-CLIPÔ Device
(Use of magnification is recommended.)

1.	Grasp needle and lift clip from package.
2.	If using laparoscopically, gently grasp the middle of the flexible member and push through the port (10 mm or larger). Check for visual damage or pre-release of the clip prior to use. If the clip appears damaged, remove, discard, and use another clip.
3.	Pierce the tissue in the desired location with the needle (Figure 2). The clip can be used in a single or double bite fashion.
4.	Pull the needle until the tissue to be approximated rests completely inside the clip. The tissue should fill approximately 3/4 of the space between clip arms (Figure 3).
5.	Orient the clip so that the entire release sleeve (metallic tube), both ends of the clip, and the silver ball are visible. Position the clip so that tissue is fully contained between the clip arms and both clip arms are visible (Figure 4).
6.	To deploy the clip, gently hold the release sleeve (metallic tube) at the junction of the sleeve and transition zone (light blue) with graspers. With a second grasper, gently hold the visible end of the clip. Pull on the release sleeve while putting counter tension on the clip (Figure 5). The clip will release from the needle assembly and automatically close, holding the tissue and/or prosthetic material in place (Figure 6).
7.	When extracting the needle assembly during a laparoscopic procedure, grasp the flexible member away from the needle and pull back through the port (10 mm or larger).
8.	Discard needle assembly appropriately.
9.	Repeat steps 1 through 8 to complete tissue approximation (Figure 7). After completion of the tissue approximation, check for undesirable tissue approximation or leaks and place additional clips as necessary.

Note: If necessary to remove a clip, utilize standard surgical instruments by grasping the larger, distal end of the clip and then pulling away from the tissue.

CONTRAINDICATIONS

• Do not use for tubal ligation.

WARNING

• Failure to follow instructions may contribute to intraoperative and postoperative failure of the anastomosis, attachment, or approximation, resulting in serious patient injury.

PRECAUTIONS

• Caution: Federal Law (USA) restricts this device to sale by or on the order of a physician.

• The U-CLIPÔ Device is designed and intended for single use only: DO NOT RESTERILIZE OR REUSE.

• Do not use if package is damaged or opened, if product is accidentally contaminated before use, or if beyond expiration date.

• Do not hold the metallic release sleeve while manipulating the clip.

• When using needle drivers, do not apply excessive force directly on the clip.

• If the clip appears damaged, do not use. Discard or return to Medtronic.

• If using robotic needle drivers, do not “bottom out” needle drivers on flexible member.

• If the clip is inadvertently straightened during handling, discard and use a new clip.

• Use extra caution when working with gauze to avoid entangling the clips.

• Care should be exercised when removing clips, as tissue damage may occur.

ADVERSE EFFECTS
•    None known.

**** Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

THE FOLLOWING DISCLAIMER OF WARRANTY APPLIES TO UNITED STATES CUSTOMERS ONLY:

DISCLAIMER OF WARRANTY

ALTHOUGH THE U-CLIPÔ DEVICE, HEREAFTER REFERRED TO AS “PRODUCT” HAS BEEN MANUFACTURED UNDER CAREFULLY CONTROLLED CONDITIONS, MEDTRONIC HAS NO CONTROL OVER THE CONDITIONS UNDER WHICH THIS PRODUCT IS USED. MEDTRONIC, THEREFORE DISCLAIMS ALL WARRANTIES, BOTH EXPRESS AND IMPLIED, WITH RESPECT TO THE PRODUCT, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MEDTRONIC SHALL NOT BE LIABLE TO ANY PERSON OR ENTITY FOR ANY MEDICAL EXPENSES OR ANY DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES CAUSED BY ANY USE, DEFECT, FAILURE OR MALFUNCTION OF THE PRODUCT, WHETHER A CLAIM FOR SUCH DAMAGES IS BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE. NO PERSON HAS ANY AUTHORITY TO BIND MEDTRONIC TO ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE PRODUCT.

The exclusions and limitations set out above are not intended to, and should not be construed so as to, contravene mandatory provisions of applicable law. If any part or term of this Disclaimer of Warranty is held to be illegal, unenforceable or in conflict with applicable law, by a court of competent jurisdiction, the validity of the remaining portions of this Disclaimer of Warranty shall not be affected, and all rights and obligations shall be construed and enforced as if this Disclaimer of Warranty did not contain the particular part or term held to be invalid.

THE FOLLOWING DISCLAIMER OF WARRANTY APPLIES TO CUSTOMERS OUTSIDE THE UNITED STATES:

DISCLAIMER OF WARRANTY

ALTHOUGH THE U-CLIPÔ DEVICE, HEREAFTER REFERRED TO AS “PRODUCT” HAS BEEN CAREFULLY DESIGNED, MANUFACTURED AND TESTED PRIOR TO SALE, THE PRODUCT MAY FAIL TO PERFORM ITS INTENDED FUNCTION SATISFACTORILY FOR A VARIETY OF REASONS. THE WARNINGS CONTAINED IN THE PRODUCT LABELING PROVIDE MORE DETAILED INFORMATION AND ARE CONSIDERED AN INTEGRAL PART OF THIS DISCLAIMER OF WARRANTY. MEDTRONIC, THEREFORE, DISCLAIMS ALL WARRANTIES, BOTH EXPRESS AND IMPLIED, WITH RESPECT TO THE PRODUCT. MEDTRONIC SHALL NOT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES CAUSED BY ANY USE, DEFECT OR FAILURE OF THE PRODUCT, WHETHER THE CLAIM IS BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE.

The exclusions and limitations set out above are not intended to, and should not be construed so as to, contravene mandatory provisions of applicable law. If any part or term of this Disclaimer of Warranty is held by any court of competent jurisdiction to be illegal, unenforceable or in conflict with applicable law, the validity of the remaining portion of the Disclaimer of Warranty shall not be affected, and all rights and obligations shall be construed and enforced as if this Disclaimer of Warranty did not contain the particular part or term held to be invalid.

Europe	Americas
Europe/Africa/Middle East	Latin America
Headquarters	Medtronic Latin America
Medtronic Europe Sàrl	3750 NW 87th Avenue, Suite 700
Route du Molliau 31	Miami, FL 33178
Case Postale	USA
CH-1131 Tolochenaz	Tel. 305-500-9328
Switzerland	Fax 786-709-4244
Internet: www.medtronic.co.uk
Tel. 41-21-802-7000
Fax 41-21-802-7900	Canada
	Medtronic of Canada Ltd.
	6733 Kitimat Road
Medtronic E.C. Authorized	Mississauga, Ontario L5N 1W3
Representative	Canada
Medtronic B.V.	Tel. 905-826-6020
Earl Bakkenstraat 10	Fax 905-826-6620
6422 PJ Heerlen	Toll-free in Canada:
The Netherlands	1-800-268-5346
Tel. 31-45-566-8000
Fax 31-45-566-8668
	United States
Asia-Pacific
	Manufacturer:
	Medtronic, Inc.
Japan	710 Medtronic Parkway
Medtronic Japan	Minneapolis, MN 55432-5604
Solid Square West Tower 6F	USA
580 Horikawa-cho, Saiwai-ku	Internet: www.medtronic.com
Kawasaki, Kanagawa 210-0913	Tel. 1-763-514-4000
Japan	Fax 1-763-514-4879
Tel. 81-44-540-6112	Toll-free in the USA:
Fax 81-44-540-6200	1-800-328-2518
	(24-hour consultation)
Australia
Medtronic Australasia Pty. Ltd.
Unit 4/446 Victoria Road
Gladesville NSW 2111
Australia	©Medtronic, Inc. 2005
Tel. 61-2-9879-5999	All Rights Reserved
Fax 61-2-9879-5100
	00LS1970.00
Asia
Medtronic International Ltd.
Suite 1602 16/F, Manulife Plaza
The Lee Gardens, 33 Hysan Avenue
Causeway Bay
Hong Kong
Tel. 852-2891-4068
Fax 852-2591-0313

**** Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EX-10.21

EXHIBIT 10.21

ADDENDUM

This ADDENDUM is made and entered into this 24^th day of January, 2006, and amends the Distributor Agreement (“Agreement”) entered into by and between Medtronic, Inc. (“Medtronic”) and VNUS Medical Technologies, Inc. (“VNUS”) effective January 24, 2006.

The parties hereby agree to amend the Agreement as hereinafter set forth.

Section XIII. **** Trial shall be added to the Agreement as follows:

XIII. **** Trial. Medtronic shall complete the **** Trial (the “Trial”) currently underway by collecting and validating the long term data for submission of the Trial results in the form of a paper to the **** or a peer-reviewed publication of substantially similar esteem. Medtronic and VNUS hereby agree to share equally the total cost of completion of the Trial, which is estimated to be ****, plus or minus ****.

It is agreed by the parties that if the costs of completing the Trial exceed or are lower than the forecasted amount of $****, Medtronic will adjust the last payment required to be made by VNUS; provided, however, in no case shall VNUS be responsible for an amount greater than **** of the forecasted amount; i.e., no more than ****.

With reasonable notice to Medtronic and subject to patient consent, VNUS shall have the right to audit the clinical data and review the process of completing the Trial. VNUS may opt-out of this Article 13 and compensate Medtronic half of the costs actually incurred in completing the Trial to the point of opting-out.

VNUS shall have the right but not an obligation to review financial data related to the completion of the Trial.

Except to the extent provided above, the remaining terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Addendum to be executed on the date first written above.

MEDTRONIC, INC.	VNUS MEDICAL TECHNOLOGIES, INC.
/s/ Clifton W. Owens	/s/ R. McCrae
Name	Name:
Vice President & General Manager RST	VP, Bus. Dev. & Mfg
Title	Title:
January 24, 2006	1/25/06
Date	Date:

****Certain confidential information contained in this document, marked with 4 asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EX-21

EXHIBIT 21

SUBSIDIARIES OF VNUS MEDICAL TECHNOLOGIES, INC.

	STATE OR JURISDICTION
NAME	OF INCORPORATION
VNUS Medical Technologie GmbH	Germany

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-119946) of VNUS Medical Technologies, Inc. of our report dated March 14, 2006 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
San Jose, California
March 14, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Brian E. Farley, certify that:

     1. I have reviewed this annual report on Form 10-K of VNUS Medical Technologies, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ BRIAN E. FARLEY
	Brian E. Farley
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Date: March 14, 2006

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Timothy A. Marcotte, certify that:

     1. I have reviewed this annual report on Form 10-K of VNUS Medical Technologies, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ TIMOTHY A. MARCOTTE
	Timothy A. Marcotte
	Vice President and Chief Financial Officer
	(Principal Financial Officer)
Date: March 14, 2006

EX-32

EXHIBIT 32

     The following certifications are being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238. These certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Certification of Principal Executive Officer

     Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of VNUS Medical Technologies, Inc., a Delaware corporation (the “Company”), hereby certifies, to his knowledge, that:

     (i) the accompanying annual report on Form 10-K of the Company for the period ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ BRIAN E. FARLEY
	Brian E. Farley
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Dated: March 14, 2006

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Certification of Principal Financial Officer

     Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of VNUS Medical Technologies, Inc., a Delaware corporation (the “Company”), hereby certifies, to his knowledge, that:

     (i) the accompanying annual report on Form 10-K of the Company for the period ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ TIMOTHY A. MARCOTTE
	Timothy A. Marcotte
	Vice President and Chief Financial Officer
	(Principal Financial Officer)
Dated: March 14, 2006

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.