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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, 2007
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.)

5799 Fontanoso Way, San Jose, California (Address of principal executive offices)		95138 (Zip Code)

Registrant’s telephone number, including area code:

(408) 360-7200

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
Name of Each Exchange on which Registered:
The NASDAQ Stock Market LLC

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

None

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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 $83.2 million on June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter.

As of March 6, 2008, 15,776,647 shares of the registrant’s common stock, par value $0.001, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts II and III of this report incorporate information by reference from the registrant’s definitive proxy statement for its annual meeting of stockholders, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2007.

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 2E 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,” “projects,” “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 may differ materially from expected results based on a number of factors affecting our business, including, among other things, changing competitive markets, clinical trial data and regulatory conditions; and continued market acceptance of the ClosureFAST catheter; customer and physician preferences; changes in reimbursement levels established by governmental and third-party payors; the ability of the Company to protect its patent position; the effectiveness of advertising and other promotional campaigns; and overall economic and market conditions. The reader is cautioned not to unduly rely on these forward-looking statements. We expressly disclaim any intent or obligation to update these forward-looking statements 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. 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 300,000 patients have been treated using our Closure^® system since 1999, with nearly 100,000 of these patients treated in 2007.

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 high 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 the VNUS Closure system represents a significant advance over vein stripping and also provides significant advantages over endovenous laser ablation, or EVL. The Closure procedure effectively treats venous reflux disease and painful varicose veins, is minimally invasive, can be used in an outpatient or physician office setting, and allows patients to quickly resume normal activities. Moreover, the Closure procedure is supported by a

significant amount of clinical data. For example, 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. Three additional randomized clinical trials have subsequently produced favorable results as well, and the five year follow-up results from our multi-center patient registry were published in the Journal of Vascular Surgery in 2005. References to over 80 published medical articles and book chapters about our product and its clinical performance can be found at our website at www.vnus.com/navigation/clinicallibrary.htm.

In February 2007, we began the market introduction of our ClosureFAST^tm catheter. We believe that this is a significant advancement of the Closure procedure. Our multicenter clinical trial results indicate that the ClosureFAST catheter allows for faster procedure times, and produces vein occlusion rates of approximately 96% which are higher than historical results produced by our ClosurePLUS^tm catheter up to one year. In 2007 we sponsored a multicenter randomized comparative trial of our ClosureFAST catheter versus laser ablation which found that the ClosureFAST catheter produced fewer complications, and less pain and tenderness than treatment with laser.

As of March 1, 2008, our Closure procedure was accepted by the policies of over 140 health insurers, representing over 220 million covered lives in the United States. We sell our Closure system in the United States through our direct sales organization and market our Closure system through a direct sales force in Germany, the United Kingdom and France and in other international markets through distributors.

Corporate Background

Our principal offices are located at 5799 Fontanoso Way, San Jose, California 95138 and our telephone number is (408) 360-7200. We were incorporated in Delaware in January 1995. 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, as well as our Code of Conduct and Business Ethics, Corporate Governance Guidelines, Insider Trading Policy and Audit Committee, Compensation Committee and Governance and Nominating Committee Charters are available through our website (www.vnus.com under the “Investor Relations” section) free of charge. Our filings with the Securities and Exchange Commission, or SEC, are posted as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

The terms VNUS^®, Closure^® and VNUS Closure^® are our registered trademarks. The terms ClosurePLUS^tm, ClosureFAST^tm, RFGPlus^tm, ClosureRFS^tm as well as our current logo, are our trademarks. Veinlite^® is a registered trademark of Translite, LLC.

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.

Venous Reflux Market

Based on published population studies, approximately 25 million people in the United States suffer from symptomatic venous reflux disease. Using our sales data and estimates of competitor sales, we estimate that approximately 235,000 saphenous vein procedures were performed in the U.S. in 2007. We estimate that 195,000 of these procedures involved minimally invasive treatments utilizing our Closure catheter or other companies’ laser products.

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 3.0 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 and ligation surgery, 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, vein stripping surgeries are currently performed, with approximately 40,000 per year performed in the United States and 700,000 per year in 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 energy heat damages the vein by directly

perforating the vein, or indirectly, through boiling the blood and producing steam. The optical fiber is withdrawn while laser energy is delivered, inducing thermal damage and 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 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 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 prior to the introduction of our ClosureFAST catheter, was approximately 10 minutes faster to perform than our procedure using our ClosurePLUS catheter, which takes 40 to 60 minutes for experienced users. However, based upon clinical data to-date, we believe that the ClosureFAST catheter allows for procedure times at least as fast as endovenous laser. Newer EVL consoles featuring different wavelengths from earlier models have recently been introduced that may have the potential to reduce pain and bruising complications compared to earlier EVL systems, but use slower pullback rates than earlier EVL systems. Limited 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, such as radiofrequency ablation. With the introduction of our ClosureFAST catheter, we believe the improved ease-of-use and substantially faster procedure speed gained with the catheter, combined with rapid and mild patient recovery, make the ClosureFAST catheter an attractive alternative to EVL.

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 or devices into a vein to 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 either the physician’s office or as a hospital outpatient procedure, in both cases using local anesthesia to numb the leg before treatment. The procedure currently is commonly performed both in the office and hospital settings. We expect to see continuing movement towards the Closure procedure being more commonly performed in a physician’s office.

Physicians generally instruct their patients to walk regularly for several days after our Closure procedure has been performed and return within approximately 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 ClosureFAST catheter versus EVL, patients treated using our Closure system exhibited less pain, tenderness, and bruising.

	•	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 ClosureFAST catheter and EVL showed our Closure procedure exhibited fewer complications than EVL. Our multi-center clinical trial of our new ClosureFAST catheter showed a 96.2% accumulative vein occlusion rate at one year using ultrasound imaging. By comparison, earlier studies of the previous generations of the Closure catheter produced a vein occlusion rate of 87% at one year follow-up in our multi-center clinical registry.


	•	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 treatment 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.

	•	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 minimally invasive, it results in little or no scarring compared to vein stripping.

We believe the primary disadvantage of our Closure procedure versus treatment using EVL is that our Closure catheter is more expensive than the EVL optical fiber.

Clinical Results

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

Prospective Clinical Trial of our ClosureFAST catheter

In April 2006, we initiated a multicenter prospective clinical trial of the ClosureFAST catheter and interim results of the ongoing European trial of the ClosureFAST catheter were published in the Journal of Vascular Surgery in January 2008. This publication showed follow up results up to six months after treatment with a vein occlusion rate of 96.6% at both three and six month follow up involving 198 treated limbs at three months and 74 limbs at six months. There were no serious adverse events. More recent data from this trial were presented in February 2008 at the American Venous Forum meeting by Prof. Thomas Proebstle, M.D. of Heidelberg, Germany. Dr. Proebstle reported on 295 patient limbs treated with procedure times as measured from insertion of the catheter to completion of treatment and catheter removal averaging 15.9 minutes. Vein occlusion efficacy was reported as 96.7% in 223 limbs examined one year after treatment. No serious adverse events were reported. Minor complications included redness in 2.0%, skin pigmentation in 2.4%, subcutaneous bleeding in 1.4%, tenderness (phlebitis) in 1.0% and nerve injury resulting in localized numbness in 3.4% of treated limbs. There were no reports of blood clots or deep vein thrombosis in the European trial.

ClosureFAST Procedure Versus Endovenous Laser Treatment

In 2007, we sponsored the Recovery Trial, a multicenter prospective randomized comparative clinical trial of the ClosureFAST catheter and endovenous laser ablation. After treatment, patients were examined 2, 7, 14, and 30 days after treatment in order to determine how well the patients recovered after treatment. In February 2008, Raymond Makhoul, M.D. of Richmond, Virginia reported interim results at the American Venous Forum meeting. Thirty limbs were treated with the ClosureFAST catheter and 32 limbs were treated with EVL. Analysis of the interim data showed that vein occlusion was achieved in all treated limbs and that procedure times between the ClosureFAST catheter and EVL were similar with catheter-in-to-catheter-out times averaging 13.4 minutes for patients treated with the ClosureFAST catheter and 15.4 minutes for EVL. Interim results presented also showed that patients treated with the ClosureFAST catheter experienced less post-procedure pain, bruising and tenderness than EVL. Adverse results such as blood clot, inflammation and tenderness, skin redness, subcutaneous bleeding, or nerve injury resulting in localized numbness were seen in one patient (3.3%) treated with the ClosureFAST catheter compared to 38% of patients treated with EVL.

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.

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%

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.

In addition to the EVOLVeS trial, three small single-center randomized trials were independently performed by third parties comparing our Closure procedure to vein stripping. These trials 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 or better quality of life than vein stripping patients. Other clinical outcomes in these trials showed no significant differences between the treatment groups.

Clinical Registry of the Closure Procedure

In 1998, we established an ongoing clinical registry to which more than 30 centers worldwide have contributed data. In 2005, 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.

Single-Center Studies of Our Closure Procedure

The largest independent single center study of our Closure procedure was published in the May 2007 issue of the Journal of Vascular Surgery. This trial of 682 limbs concluded that treatment with our Closure catheter results in the clinical improvement of symptoms and helps in the healing of venous ulcers. Two other 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 procedure. 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 (FDA) will take any adverse action with respect to the incidents identified in this report. However, if the FDA 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, and compression stockings.

Disposable Endovenous Catheters

ClosureFAST Catheter

Our proprietary disposable endovenous ClosureFAST catheter was designed to be a next generation replacement for our previous ClosurePLUS catheter, offering both a faster and simpler endovenous ablation procedure while maintaining the procedural and patient benefits of the original ClosurePLUS procedure.

The design of the ClosureFAST catheter includes a 7 cm heating element or coil which contacts the vein wall and uniformly heats to a localized depth to limit damage to the surrounding tissue. With ClosureFAST, ’segmental ablation’ is used to serially treat 7 cm segments using 20 seconds to heat, shrink and occlude the vein, with no energy delivered during the brief ’re-indexing’ or repositioning of the catheter between vein segments to be treated. Based upon the multi-center clinical trial of the ClosureFAST catheter, we believe that leaving the catheter stationary while heating and ablating the vein wall provides more consistent therapeutic heating of the vein wall and improved efficacy compared to our previous ClosurePLUS catheter. Also, stationary heating of the vein wall avoids the potential of overly fast pullback of the catheter by the physician, which has been reported in clinical studies to result in lower rates of effectiveness.

A temperature sensor located at the distal portion of the catheter measures and transmits the temperature 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 ClosureFAST catheter has a hollow center, or lumen, which allows fluid delivery and the use of a standard guide wire.

ClosurePLUS Catheter

Our ClosurePLUS catheter is used to deliver RF energy to heat the walls of the 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. During the procedure, the catheter is slowly withdrawn along the length of the vein in a ’continuous pullback’ approach. 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 ClosurePLUS catheter also has a hollow center, or lumen, which allows fluid delivery and the use of a standard guide wire.

ClosureRFS^tm Device for Treatment of Perforator and Tributary Veins

In 2005, we introduced the ClosureRFS device. This device is intended to broaden the clinical applicability of our VNUS Closure system to include the treatment of incompetent perforator veins and tributary veins connected to the greater saphenous vein. This device is compatible with our RF generator, is intended to treat smaller diameter veins, is shorter in length and smaller in diameter than either our ClosureFAST or ClosurePLUS catheters, and the electrodes located at the tip do not expand.

RFGPlus Generator

The VNUS RFGPlus^tm RF generator delivers energy to the catheter and continuously monitors the treatment 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. An operating system software upgrade was distributed in the first quarter of 2007 to allow existing RFGPlus generators to recognize and operate all VNUS disposable devices and catheters for the treatment of venous reflux. This includes the new ClosureFAST catheter, as well as our ClosurePLUS catheter and ClosureRFS device. The RF generator is a table top unit with 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 and the power used during treatment, as well as advisories to the physician to provide helpful guidance during the procedures, including information that informs the physician if the energy delivery element is 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. In 2007, we launched four additional accessory products including ClosureFAST accessory products.

Seasonality

Historically, we have experienced lower sequential sales of our disposable endovenous catheters and RF generators in the first and third quarters compared to the second and fourth quarters. We believe this seasonality has 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. In 2007, we noted this same seasonality effect in the first quarter of the year, but did not experience it in the third quarter of the year. We expect that the historical seasonality effect in 2008 will be consistent with our experience prior to 2007.

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, 2007, consisted of 62 employees. We also have a direct sales presence in Germany and France through our German subsidiary. In January 2007, we also established a direct sales presence in the United Kingdom. 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 seventeen countries in Europe, nine countries in Asia and ten countries in the rest of the world. We may enter into additional distribution agreements after a market-by-market analysis.

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


	•	We educate and train physicians interested in performing our Closure procedure. We also educate experienced physicians in the use of our Closure procedure for treatments in 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, advertising materials, brochures and patient testimonials designed to help physicians educate both patients and referring physicians on the many benefits of our Closure procedure.

	•	We assist physicians by communicating with insurance companies to expand coverage and by providing our clinical data to counter any procedure authorization denials by payors.

	•	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 direct-to-consumer initiatives to encourage patients to contact physicians regarding our Closure procedure. We seek to educate potential patients through television and print media advertising, public relations, and the internet. Our website provides information to patients and physicians interested in our Closure procedure and our ClosureFAST catheter and features a physician locator which facilitates patients being able to locate physicians in their area who offer the Closure procedure.

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 140 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 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 RF and laser ablation of venous reflux and became effective at the beginning of 2005. In 2008, the national average payment by Medicare to physicians under the Medicare fee schedule is $1,900 when our Closure procedure is performed in the physician’s office, which is lower than the 2007 rate of $2,071 due to Centers for Medicare and Medicaid Services, or CMS, adjustments to portions of the RVU payment methodology for the Medicare Physician Fee Schedule that went into effect on January 1, 2008. The rate of reimbursement for the Closure procedure in 2008 is $255 more than the national average Medicare rate paid for laser ablation in the physician’s office. By comparison, the difference was $222 in 2007 and $175 in 2006. If our Closure procedure is performed in a hospital, the Medicare national average payment to physicians is $324, which is similar to the rate established for laser ablation, which is $327. When our Closure procedure is performed on a Medicare patient in the hospital, the hospital will receive a national average payment of $2,714 as reimbursement for the Closure procedure, which is $579 higher than the 2007 rate of $2,135, and is $1,068 higher than the 2008 reimbursement rate for laser ablation, which is $1,646. The rate difference reflected a change to a lower ambulatory payment class group for the laser ablation codes. Consideration was given to disposable median cost and other resources used in delivery based on claims data submitted to CMS Hospital Outpatient from January 1, 2007 to December 31, 2007.

We estimate that approximately 10% to 15% 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 healthcare payment systems include both government sponsored healthcare and private insurance. Currently, our Closure procedure is covered and reimbursed by British National Health Service and 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 Germany and France. 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.

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.

Business Development

Our business development focus is on adding additional vein products that can be marketed using our direct sales force to vascular surgeons, general surgeons, interventionalists and phlebologists.

In July 2006, we entered into a distribution agreement with TransLite, LLC under which we were granted rights to distribute the Veinlite product line in the United States. The Veinlite products provide visualization of superficial veins for use in sclerotherapy procedures, vein mapping and venous access. The products also offer a unique feature set, are portable, cost-effective and easy-to-use. This product line is complementary to our other venous care products.

Manufacturing

We currently manufacture, package and label our disposable catheters within our facility in San Jose, California. We outsource the manufacture of our RF generators. We believe that our 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. 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 validated using 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 FDA. For sale of products in the European Community, our

products and quality structure are required to be compliant to the current standard, ISO 13845:2003 for medical devices. Prior to receiving certification under ISO 13485:2003, 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 ClosureFAST and ClosureRFS products and some of our accessory products are also CE marked.

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 expired in February 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 FDA’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. 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, 2007, we had 33 issued U.S. patents and 39 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, 2007, we had 27 foreign patents providing protection in Australia, New Zealand, Singapore, Russia, South Korea, China and Europe, and other foreign jurisdictions, and we had 31 pending foreign patent applications, many of which relate to our Closure technology, in Europe, Japan, China, Canada and other foreign jurisdictions.

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, 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. 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 U.S. patents.

Competition

Within the market for the treatment of venous reflux disease, we compete primarily against companies that market 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, for the most part, 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 has extensive long-term data, is routinely taught to new surgeons and has remained relatively unchanged for the past 50 years. Vein stripping is declining in usage in the United States due to the acceptance of endovenous vein ablation. However, vein stripping remains the principal treatment for saphenous vein reflux in Europe.

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., Sciton, 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. Prior to the introduction of the ClosureFAST catheter, procedure time with a laser system was approximately five to ten minutes shorter than treatment with the ClosurePLUS catheter. With the introduction of our ClosureFAST catheter, procedure time between RF and laser are approximately equivalent. However, the optical fiber used in EVL costs less than our ClosureFAST catheter.

Additionally, physicians have used foam sclerotherapy to treat great saphenous reflux. Similar to sclerotherapy, in this procedure the physician combines air or carbon dioxide with a sclerosant solution to create a foam for injection into the refluxing saphenous vein. The FDA 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 FDA, in 2006 resumed a clinical trial of foam sclerotherapy in the U.S.

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;

	•	cost effectiveness;

	•	ease-of-use and speed of procedure for physicians;

	•	product quality;

	•	sales and marketing capability;

	•	acceptance by leading physicians;

	•	the publication of peer-reviewed clinical studies;

	•	approval of reimbursement by healthcare payors;

	•	patent protection.

Government Regulation

The products we manufacture and market are subject to regulation by the FDA as well as other federal, state and foreign laws and regulations.

United States

Our products are regulated in the United States as medical devices by the FDA 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 FDA. The FDA can also impose restrictions on the sale, distribution or use of devices at the time of their clearance or approval, or subsequent to marketing.

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 premarket notification to the FDA 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, the date of enactment of the Medical Device Regulations. The FDA is required by law to respond to a 510(k) premarket notification within 90 days of submission, but the response may be a request for additional information or data, sometimes including clinical data. In addition, if the FDA believes the device is not substantially equivalent to a legally marketed predicate product, the device may be declared as Not Substantially Equivalent. That determination would require the company to file a Pre-Market Approval (PMA) to the FDA to obtain product approval (please see the Premarket Approval Pathway section).

After a device receives 510(k) clearance or PMA approval 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 an additional 510(k) clearance or could require a PMA supplement. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination that a new clearance or approval is not required for a particular modification, the FDA may require the manufacturer to cease marketing and/or recall the modified device until the proper 510(k) clearance or PMA is obtained. Also, in these circumstances, we may be subject to significant regulatory and civil fines or penalties. We have made and plan to continue to make additional product enhancements to our Closure system devices that we believe do not require new 510(k) clearances. We have used the Special 510(k) submission option to obtain FDA clearance on products that have undergone minor modifications, as well as the traditional 510(k) clearance process for more substantial changes.

Premarket Approval Pathway. A PMA application must be submitted if a device cannot be cleared through the 510(k) process. The pre-market approval process is much more demanding than the 510(k) premarket notification process. A PMA application must be supported by extensive data and information including, but not limited to, technical, preclinical, human clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. After the FDA determines that a PMA application is complete, the FDA accepts the application and begins an in-depth review of the submitted information. The FDA, by law, has 180 days to review an accepted PMA 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 PMA 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 FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and an Institutional Review Board, or IRB, overseeing the clinical trial. If the product is deemed a “non-significant risk” device under FDA 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 FDA’s Good Clinical Practice requirements. We, the FDA 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 FDA 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 FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

	•	FDA notification of product corrections or removal and recalls.

We are also subject to medical device reporting, or MDR, regulations that require us to report to the FDA if our products cause or contribute to a death or serious injury or if they malfunction. As of December 31, 2007, our products were used to treat approximately 300,000 patients and we have submitted 114 medical device reports. In 52 cases, a thrombus, or blood clot, was noticed at varying lengths of time after our Closure procedure was performed. In 17 cases, the patient developed a pulmonary embolism, 13 of which related to the Company’s ClosurePLUS catheter, and 4 related to the Company’s ClosureFAST catheter. We are aware of three patient deaths following treatment with our catheter, all of which are believed to be a result of pulmonary embolism. We have reported all MDR events to the FDA via the MDR process. 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 applicable regulatory requirements could result in an enforcement action by the FDA, which could include any of the sanctions set forth below. 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 business, product sales and profitability.

We place a significant priority on clinical training and creating the best possible experience for doctors and patients using the Closure system. On August 6, 2007, as a result of a localized incidence of thrombus extensions, we issued a letter to doctors changing the instructions for use of the ClosureFAST catheter advising them to place the tip 2 cm below the saphenofemoral junction versus the previous 1.5 to 2 cm recommendation. We also informed the FDA of this action, which they classified as a Class II recall for administrative reasons. This was a corrective field action involving a change in procedure technique for doctors and did not involve the return of any product. We subsequently assessed the effectiveness of this modification to the procedure technique and found the number of reports of thrombus extension declined to a very low level since the issuance of the letter.

Advertising and promotion of medical devices are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Some promotional activities for FDA-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.

We have registered with the FDA 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, announced or unannounced facility inspections by the FDA and the Food and Drug Branch of the California Department of Health Services, and these inspections may include the manufacturing facilities of certain subcontractors. Failure to comply with applicable regulatory requirements can result in an enforcement action by the FDA, 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(s) or pre-market approvals of new products;


	•	withdrawing 510(k) clearances that are already granted; and/or

	•	criminal prosecution.

Both the FDA and the Food and Drug Branch of the California Department of Health Services have inspected our facility and Quality System. No significant findings of non-compliance were found during inspection. We cannot assure you that we can maintain the same level of regulatory compliance in the future at our facility.

Current 501(k) Clearances. We have received 510(k) clearances to market our VNUS Closure system, VNUS ClosurePLUS catheter, VNUS ClosureRFS device, VNUS ClosureFAST catheter, and VNUS RFGPlus RF generator. Our VNUS VarEx phlebectomy instruments are exempt from the pre-market notification requirements.

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, known as a Notified Body, reviews our product documentation to permit CE marking. Our Closure system was CE marked in 1998. Our ClosureFAST and RFS family of products and some 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 13485:2003 standard. Maintenance of the CE mark, our license to ship into the European Union and other international jurisdictions, requires us to continually demonstrate that we are in compliance with these regulations and standards.

The European Community has regulations similar to that of the FDA 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 49 countries. Modifications to the approved products may require new regulatory submission in 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 in any country. Our Closure system can also be marketed in several other countries that do 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 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).

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, 2007, we had 294 employees, consisting of 38 in research and development, clinical research and regulatory affairs, 119 in manufacturing and quality control, 98 in sales and marketing and 39 in general and administrative functions. From time to time we also employ independent contractors.

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 does not continue to achieve 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, RFGPlus, in the fourth quarter of 2004, and a new generation Closure catheter, ClosureFAST, in the first quarter of 2007. 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. Our revenues could be negatively impacted for a number of reasons including:


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

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

	•	the failure of our Closure system to meet physicians’ 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

	•	price reductions of our Closure catheters due to market pressure.

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.

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 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., Sciton, 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 or sales and marketing.

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, since the first quarter of 2005, we have 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 and annual results.

As of December 31, 2007, we had an accumulated deficit of approximately $48.5 million. While we were profitable in 2005, we had a net loss in 2006 and 2007. We intend to increase operating expenses in 2008 in areas

such as research and development and sales and marketing. Also, fluctuations in our quarterly and annual results of operations have and will continue to result from numerous factors, including:


	•	physician and patient acceptance of our products and procedures;

	•	cost of manufacturing our Closure system;

	•	the effect of competition from existing and new products and procedures;

	•	fluctuations in the demand for our products, including seasonal demand, the timing of orders received and the timing of new product introductions;

	•	our ability to recognize revenue from the sales of our products;

	•	our ability to protect our intellectual property rights and defend against third party challenges;

	•	our ability to hire and train key personnel, including management, sales and technical personnel;

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

	•	delays or interruptions in manufacturing and shipping of our products, which may result from our dependence on third-party suppliers;

	•	the results of future clinical trial data, including long-term randomized trial data;

	•	litigation, including patent litigation, product liability claims and securities litigation;

	•	the quality of products we sell;

	•	failure to comply with current government regulations and announcements of changes in government regulations affecting us or our competitors;

	•	failure to obtain or maintain regulatory approvals and clearances to market our products;

	•	our ability to train physicians in performing our Closure procedure; and

	•	fluctuations in the international markets where we sell our products.

These factors, some of which are not within our control, may cause the price of our common stock to fluctuate substantially. If our quarterly or annual 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 or annual 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 in the foreseeable future as we continue to expand our sales and marketing, manufacturing and product development activities.

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.

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.

Continued use of our Closure system by the medical community is unlikely to be maintained if physicians do not receive sufficient reimbursement from payors for performing our Closure procedure. Our Closure procedure is reimbursed by private healthcare insurance, managed care payors and Medicare. Many private payors use reimbursement amounts benchmarked off of amounts determined by the CMS which administers the Medicare program, as a guideline in setting their reimbursement policies. CMS reduced the amount of reimbursement for endovenous vein ablation in 2007 and 2008 for procedures performed in the office. Further 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. In January 2007, CMS announced its revised payment methodology for Medicare reimbursement of physician fees in the office setting, to be phased in over the next four years. As a result, Medicare payment of physician fees for performing the Closure procedure in the office and hospital settings will decrease through 2010. We are unable to predict whether CMS will make additional revisions to Medicare payments or whether private healthcare insurers will establish payment rates similar to 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 international sales.

Our manufacturing operations are dependent upon third-party suppliers, some of whom are sole-source, 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 generator. While the initial term of the supply agreement with Byers Peak expired in February 2007, the contract continues indefinitely until terminated by either party upon 180 days’ notice. 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 FDA’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:


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

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.

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:


	•	actions by institutional or other large stockholders;

	•	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;

	•	our results of operations and financial performance; and

	•	general economic, industry and market conditions.

In particular, if our existing stockholders, for example, institutional or other large stockholders, sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell large numbers of shares of common stock, the market price of our common stock could decline significantly. 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 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 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 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.

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 continuing 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 and in portions of Europe. 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, in particular our sales force, we may be unable to grow our business.

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 choose not to purchase our Closure system and insurers may choose not 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.

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, 2007 and December 31, 2006, 7% 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 some of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our revenue could decline or 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;

	•	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.

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 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.

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 FDA 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.

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

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 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 FDA and numerous other federal, state and foreign governmental authorities. FDA 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 FDA’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 FDA enforces its Quality System Regulations through periodic unannounced inspections. 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 or halted and our business could be harmed.

We are also subject to medical device reporting, or MDR, regulations that require us to report to the FDA if our products cause or contribute to a death or serious injury or if they malfunction. As of December 31, 2007, we have submitted 114 medical device reports. In 52 cases, a thrombus, or blood clot, was noticed at varying lengths of time after our Closure procedure was performed. In 17 cases, the patient developed a pulmonary embolism, 13 of which related to the Company’s ClosurePLUS catheter, and 4 related to the Company’s ClosureFAST catheter. We are aware of three patient deaths following treatment with our catheter, all of which are believed to be a result of pulmonary embolism. We have reported all MDR events to the FDA via the MDR process. 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 applicable regulatory requirements could result in an enforcement action by the FDA, which could include any of the sanctions set forth below. 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 business, 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.

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. During 2007, five of our officers resigned. 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.

If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial statements could be materially impacted.

The primary objective of most of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, a majority of our marketable investments are investment grade, liquid, short-term fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition of the U.S. financial sector. With the current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with these investments.

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 ClosureRFS 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 ClosureRFS 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;

	•	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 FDA’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 FDA 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 FDA regulations, unless exempt, the FDA 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 FDA 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 FDA 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.

Although we have obtained 510(k) clearance from the FDA 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 FDA requires every manufacturer to make this determination in the first instance, but the FDA 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 FDA may not agree with our decisions regarding whether new clearances or approvals are required. If the FDA 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 FDA 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 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 FDA and other applicable regulations, and the FDA determines that our promotional materials or training constitutes promotion of an unapproved use, the FDA 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 us from improving our products or selling our existing products, which would harm our business.

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. 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. 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 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 number and timing of acquisitions and other strategic transactions;

	•	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 FDA and other regulatory clearance of our products and products in development; 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 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 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*

Our principal corporate office and manufacturing facility is located in a 93,650 square foot facility on Fontanoso Way in San Jose, California. The Company completed its move to this facility effective June 30, 2006 from its previous location on Zanker Road in San Jose, California. The Company’s lease on the Fontanoso facility will expire in February of 2014. We believe that this facility is adequate for our current and future needs. The Company also leases sales offices located in Southhampton, England and Weinstadt, Germany. The Southhampton, England lease expires in 2009. The Weinstadt, Germany lease is cancellable at any quarter end with a minimum of three months notice.


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 certain U.S. patents. 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. On October 30, 2006, a claims construction hearing was held, and on November 20, 2006, the Court issued its Order Construing Claims. In October 2007, the Court denied numerous motions for summary judgment, clearing the way for the case to proceed to trial. The original trial commencement date of October 2007 was postponed due to Court schedule delays and a new trial start date has been set for June 2008.

We are also involved from time to time in other legal proceedings arising in the ordinary course of its business. While there can be no assurances as to the ultimate outcome of any litigation involving us, management does not believe any pending legal proceeding will result in a judgment or settlement that would have a material adverse effect on our consolidated financial position, results of operations or cash flows.


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, 2007.

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 January 1, 2006 through December 31, 2007, as reported by The NASDAQ Stock Market.


	High		Low

Year Ended December 31, 2007
First Quarter	$	10.71	$	8.38
Second Quarter	$	15.54	$	9.92
Third Quarter	$	16.03	$	12.24
Fourth Quarter	$	16.19	$	12.90
Year Ended December 31, 2006
First Quarter	$	9.09	$	7.33
Second Quarter	$	8.38	$	6.98
Third Quarter	$	8.20	$	5.97
Fourth Quarter	$	8.96	$	6.46

As of February 29, 2008, there were approximately 171 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 into 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, 2007.

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 $54.0 million.

The net proceeds from our initial public offering have been invested primarily 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. We have, and intend to continue to use, our net proceeds for sales and marketing activities, for research and development activities, and for working capital and general corporate purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business. We have no present understandings, commitments or agreements to enter into any material acquisitions or investments.


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 Annual Report on Form 10-K. The statements of operations data for the years ended December 31, 2007, 2006 and 2005 and the balance sheet data as of December 31, 2007 and 2006, are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The statements of operations data for the years ended December 31, 2004 and 2003, and the balance sheet data as of December 31, 2005, 2004 and 2003 are derived from our audited financial statements that are not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of our operating results or financial position to be expected in the future.


	Years Ended December 31,
	2007			2006			2005		2004		2003
	(In thousands, except per share data)

Consolidated Statements of Operations Data:
Net revenues	$	70,904		$	51,681		$	49,170	$	38,166	$	21,838
Cost of revenues		25,706			17,284			12,311		9,542		6,311

Gross profit		45,198			34,397			36,859		28,624		15,527

Operating expenses:
Sales and marketing		25,311			22,343			20,173		16,235		11,997
Research and development		9,444			7,422			3,815		4,540		3,513
General and administrative		19,340			15,402			9,025		5,200		2,772

Total operating expenses		54,095			45,167			33,013		25,975		18,282

(Loss) income from operations		(8,897	)		(10,770	)		3,846		2,649		(2,755	)
Interest income and other, net		3,451			3,471			1,779		439		171

(Loss) income before provision for income taxes		(5,446	)		(7,299	)		5,625		3,088		(2,584	)
Provision for income taxes		78			33			275		222		—

Net (loss) income before cumulative effect of change in accounting principle		(5,524	)		(7,332	)		5,350		2,866		(2,584	)
Cumulative effect of change in accounting principle, net of tax		—			73			—		—		—

Net (loss) income after cumulative effect of change in accounting principle	$	(5,524	)	$	(7,259	)	$	5,350	$	2,866	$	(2,584	)

Basic net (loss) income per share	$	(0.36	)	$	(0.48	)	$	0.37	$	0.73	$	(1.97	)

Diluted net (loss) income per share	$	(0.36	)	$	(0.48	)	$	0.35	$	0.23	$	(1.97	)

Shares used in computing basic net (loss) income per share		15,390			15,047			14,652		3,946		1,309

Shares used in computing diluted net (loss) income per share		15,390			15,047			15,466		12,368		1,309


	December 31,
	2007			2006			2005			2004			2003
	(In thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents	$	39,269		$	38,917		$	46,797		$	68,566		$	11,711
Short-term investments	$	24,067		$	28,996		$	25,718			—			—
Working capital	$	71,001		$	70,859		$	77,362		$	70,681		$	12,713
Total assets	$	86,490		$	85,833		$	85,339		$	77,972		$	17,789
Total liabilities	$	13,001		$	11,085		$	5,817		$	5,664		$	3,548
Total accumulated deficit	$	(48,533	)	$	(43,082	)	$	(35,823	)	$	(41,173	)	$	(44,039	)
Total stockholders’ equity	$	73,489		$	74,748		$	79,522		$	72,308		$	14,241


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, 2007, and our financial condition at December 31, 2007 and 2006. 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 may differ materially from expected results based on a number of factors affecting our business, including, among other things, changing competitive markets, clinical trial data and regulatory conditions; continued market acceptance of the Closure system; customer and physician preferences; changes in reimbursement levels established by governmental and third-party payors; the ability of the Company to protect its patent position; the effectiveness of advertising and other promotional campaigns; and overall economic and market conditions. The reader is cautioned not to unduly rely on these forward-looking statements. The cautionary statements made in Part 1, “Forward-Looking Statements” should be read as applying to all related forward-looking statements wherever they appear in this report.

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. 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 300,000 patients have been treated using our Closure system since 1999. In the first quarter of 2006, we fully launched our ClosureRFS family of products, which can be used for perforator vein ablation. In February 2007, we began the market introduction of our ClosureFAST catheter. We believe that this is a significant advancement of the Closure procedure in the field of minimally invasive treatment of venous reflux.

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.

For the year ended December 31, 2007, we generated net revenues of $70.9 million and net loss of $5.5 million. As of December 31, 2007, we have incurred cumulative losses of approximately $48.5 million. From inception to September 30, 2003 we were not profitable. We were profitable beginning in the last quarter of 2003 through 2005. We incurred net losses in 2006 and through the third quarter of 2007. During the fourth quarter of 2007, we were profitable. We incurred a net loss for the fiscal year ended 2007.

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 140 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 73%, 14% and 13% of our net revenues, respectively, in 2007. At the end of April 2007, we completed a software upgrade that was promoted in the third quarter of 2006 that enabled our RF generator to function with all VNUS disposable catheters and devices for the treatment of venous reflux, including the ClosureFAST catheter released during the first quarter of 2007. The delivery of the software upgrade in March and April of 2007 allowed us to recognize $1.9 million of revenue primarily during the first two quarters of 2007, which had been previously deferred beginning in August 2006.

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 single customer accounting for 10% or more of our net revenues or accounts receivable in the years ended December 31, 2007, 2006 and 2005.

Financial Operations Overview

Net Revenues. We derive our net revenues from the sale of disposable endovenous catheters and devices, RF generators and accessory products. Our large installed base of RF generators facilitates a recurring revenue stream from the sale of disposable catheters.

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, warranty, inventory reserves and share-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, clinical training and share-based compensation.

Research and Development Expenses. Research and development expenses consist primarily of personnel expenses, supplies, materials and other expenses associated with product development, expenses associated with preclinical and clinical studies and share-based compensation.

General and Administrative Expenses. General and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration, professional fees and share-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. 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 sell our disposable catheters 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. We also sell RF generators to third-party leasing companies in the United States. These third party leasing companies provide long-term lease financing to end-users. We do not provide such long-term lease financing to end-users.

We recognize revenues from the sale of our products in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, when persuasive evidence of an arrangement exists, title has transferred, our price is fixed or determinable and collectibility is reasonably assured. For an arrangement with multiple deliverables, we recognize revenue in accordance with Emerging Issues Task Force (“EITF”) No. 00-21, Revenue Arrangements with Multiple Deliverables with revenues allocated among the different elements, and in accordance with EITF No. 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.

Where software is more than incidental to the product or the arrangement, the Company recognizes revenues for those products in accordance with SOP No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9,

Software Revenue Recognition with Respect to Certain Agreements. The Company recognizes revenues when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, collection of the related receivable is probable. Where software is incidental to the product or arrangement, the Company recognizes revenues from the sale of those products in accordance with SAB No. 104.

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, cost being determined on a first in first out basis. 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.

Warranty. At the time we recognize revenues, we establish a reserve 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. In addition, from time to time, specific warranty reserves are made for specific technical problems. 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 reserve has been based, our gross profit could be adversely affected.

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 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. 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 are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Effective January 1, 2007, we adopted Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income

Taxes-an interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, research and experimentation tax credits, state taxes, and historical operating losses. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Share-Based Compensation Expense. We account for share-based compensation in accordance with SFAS No. 123R. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-Scholes model requires various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the Black-Scholes model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The adoption of SFAS No. 159 is not anticipated to have a material effect on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not anticipated to have a material effect on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not anticipated to have a material effect on our consolidated financial statements.

Results of Operations

The following table sets forth our results of operations expressed as percentages of net revenues, for the years ended December 31, 2007, 2006 and 2005:


	Years Ended December 31,
	2007			2006			2005

Net revenues		100.0	%		100.0	%		100.0	%
Cost of revenues		36.3			33.4			25.0

Gross profit		63.7			66.6			75.0
Operating expenses:
Sales and marketing		35.7			43.2			41.0
Research and development		13.3			14.4			7.8
General and administrative		27.3			29.8			18.3

Total operating expenses		76.3			87.4			67.1

(Loss) income from operations		(12.6	)		(20.8	)		7.9
Interest income and other, net		4.9			6.7			3.6

(Loss) income before provision for income taxes		(7.7	)		(14.1	)		11.5
Provision for income taxes		0.1			—			0.6

Net (loss) income before cumulative effect of change in accounting principle		(7.8	)		(14.1	)		10.9
Cumulative effect of change in accounting principle, net of tax		—			0.1			—

Net (loss) income after cumulative effect of change in accounting principle		(7.8	)%		(14.0	)%		10.9	%

Net Revenues by Period

The following table sets forth our net revenues for the fiscal years ending 2007, 2006 and 2005, and the percentage change between periods.


	Years Ended December 31,
	2007		2006		% Change		2006		2005		% Change
	(Dollars in thousands)

Net Revenues	$	70,904	$	51,681		37%	$	51,681	$	49,170		5%

Net revenues increased in 2007 as compared to 2006 primarily due to the following:


	•	increased catheter sales in both units and dollars due to increased demand for the ClosureFAST catheter, offset by a lower average sales price;

	•	increased RF generator sales in both units and dollars, primarily due to international expansion and recognition of $1.9 million in deferred revenue relating to the software upgrade promoted at the end of 2006 with delivery commencing at the end of the first quarter 2007; and

	•	increased accessory sales in both dollars and units.

Net revenues increased in 2006 as compared to 2005 primarily due to the following:


	•	increased unit sales of catheters and generators partially offset by reduced average sales price for both and the deferral of $1.9 million of generator sales due to the undelivered software upgrade; and

	•	increased accessory sales coupled with the limited launch of the ClosureRFS product line.

We expect net revenues to continue to increase in 2008 as a result of continued market acceptance of our ClosureFAST catheter in both domestic and international markets.

Net Revenues by Product

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, 2007, 2006 and 2005:


	Years Ended December 31,
	2007			2006			2005

Catheters and devices		73	%		81	%		76	%
RF generators		14	%		8	%		18	%
Accessories		13	%		11	%		6	%

		100	%		100	%		100	%

We derive our net revenues from the sale of disposable endovenous catheters and devices, RF generators and accessory products. Our large installed base of RF generators facilitates a recurring revenue stream from the sale of disposable catheters. We manufacture, package and label our disposable endovenous catheters and devices and outsource the manufacture of our RF generators and accessory products. We have several competitors selling a laser-based alternative to our Closure system, and we believe that competitive pressures have increased modestly over the last twelve months. We believe that the reasons for the increased competitive pressures include pricing and the number of competitors in the market. We expect that the competitive pressures on our business will continue for the foreseeable future.

Net Revenues by Geographic Region as a Percentage of Net Revenues

The following table sets forth the percentage of net revenues from domestic and international sales for the years ended December 31, 2007, 2006, and 2005:


	Years Ended December 31,
	2007			2006			2005

United States		93	%		96	%		96	%
Europe & Other		7	%		4	%		4	%

		100	%		100	%		100	%

We market our Closure system through a direct sales organization in the United States and France and subsidiaries in Germany and the United Kingdom. We also market and sell our products through distributors throughout the world. In 2007, we experienced an increase in net revenues as a percentage of total net revenues from sources outside the U.S., primarily due to the addition of a direct sales presence in the United Kingdom in 2007. We expect our net revenues derived from sales outside the United States to increase in 2008 primarily related to international expansion.

Gross Profit by Period

The following table sets forth our gross profit for the fiscal years ending 2007, 2006 and 2005, and the percentage change between periods:


	Years Ended December 31,
	2007		2006		% Change		2006		2005		% Change
	(Dollars in thousands)

Gross Profit	$	45,198	$	34,397		31%	$	34,397	$	36,859		−7%

Gross profit margin for 2007 was approximately 63.7% compared with approximately 66.6% for 2006 and 75.0% for 2005.

The overall decrease in gross profit margin in 2007 compared to 2006 was primarily due to:


	•	lower margin of ClosureFAST catheters, which were introduced by the Company in the first quarter of 2007, as compared to ClosurePLUS catheters, due to initial manufacturing inefficiencies associated with launching a new product; and

	•	increases in inventory reserves primarily related to inventory balances on hand in excess of forecasted demand.

The overall decrease in gross profit margin in 2006 compared to 2005 was primarily due to:


	•	lower sales of higher margin RF generators, due in part to the deferral of $1.9 million of RF generators sales in 2006 related to the software upgrade promoted at the end of 2006 and delivered in 2007;

	•	increases in manufacturing overhead in 2006 due to costs of our new facility; and

	•	increases in compensation costs in 2006 related to the adoption of SFAS No. 123R.

Assuming we are able to meet forecasted manufacturing efficiency targets associated with ClosureFAST catheter production and do not experience reductions in average sales price, we expect gross margins for 2008 to range from 66.0% to 67.5%.

Operating Expenses by Period


	Years Ended December 31,
	2007		2006		% Change		2006		2005		% Change
	(Dollars in thousands)

Sales and marketing	$	25,311	$	22,343		13%	$	22,343	$	20,173		11%
Research and development		9,444		7,422		27%		7,422		3,815		95%
General and administrative		19,340		15,402		26%		15,402		9,025		71%

	$	54,095	$	45,167		20%	$	45,167	$	33,013		37%

Operating Expense Summary

Overall operating expenses increased $8.9 million in 2007 as compared to 2006, primarily due to:


	•	an increase of $6.2 million due to increased headcount and related expense (including share-based compensation);

	•	an increase of $2.5 million in legal expense related to our on-going patent litigation;

	•	an increase of $476,000 in trade show and travel related expenses;

	•	an increase of $400,000 in direct marketing and advertising expenses;

	•	an increase of $225,000 in spending on clinical studies expenses; partially offset by


	•	a decrease of $861,000 in facility-related expenses due to the termination of the lease agreement for our previous facility in the second quarter of 2007; and

	•	a decrease of $300,000 in legal and other professional fees, primarily associated with filings, patent and trademark registration.

Overall operating expenses increased $12.2 million in 2006, as compared to 2005, primarily due to:


	•	an increase of $7.0 million due to increased headcount and related expense (including share-based compensation);

	•	an increase of $2.7 million in legal expense related to our ongoing patent litigation;

	•	an increase of $2.0 million in consulting, materials and clinical trial costs related to new products, including our ClosureFAST catheter;

	•	an increase of $1.1 million in facility costs for our new corporate headquarters;

	•	an increase of $847,000 of restructuring charges from the relocation of our corporate headquarters;

	•	an increase of $414,000 in trade show and travel related expenses; partially offset by

	•	a decrease of $1.0 million in consulting and professional services primarily related to the initial implementation of SOX 404 requirements in 2005;

	•	a decrease of $338,000 in training and literature costs; and

	•	a decrease of $189,000 expenses that were charged to product cost to support improvement in the manufacturability of existing products.

Sales and Marketing Expenses

Sales and marketing expenses increased $3.0 million in 2007 as compared to 2006, primarily due to:


	•	an increase of $2.1 million due to increased commissions from higher sales, increases in headcount and related expense (including share-based compensation);

	•	an increase of $476,000 in trade show and travel related expenses; and

	•	an increase of $400,000 in direct marketing and advertising expenses.

Sales and marketing expenses increased $2.2 million in 2006 as compared to 2005, primarily due to:


	•	an increase of $2.1 million due to increased headcount and related expense (including share-based compensation);

	•	an increase of $419,000 in facility costs for our new corporate headquarters allocated to sales and marketing; partially offset by

	•	a decrease of $338,000 in training and literature costs.

We expect sales and marketing expenses to increase in absolute dollars in 2008 but to decrease as a percentage of net revenues as compared to 2007.

Research and Development Expenses

Research and development expenses increased $2.0 million in 2007 as compared to 2006, primarily due to:


	•	an increase of $1.8 million due to increased headcount and related expense (including share-based compensation); and

	•	an increase of $225,000 in spending on clinical studies.

Research and development expenses increased $3.6 million in 2006 as compared to 2005, primarily due to:


	•	an increase of $2.0 million in consulting, materials and clinical trial costs related to new products, including our ClosureFAST catheter;

	•	an increase of $1.4 million due to increased headcount and related expense (including share-based compensation); and

	•	an increase of $398,000 in facility costs for our new corporate headquarters allocated to research and development; partially offset by

	•	a decrease of $189,000 expenses that were charged to product cost to support improvement in the manufacturability of existing products.

We expect research and development expenses to increase in absolute dollars in 2008 but to decrease as a percentage of net revenues as compared to 2007.

General and Administrative Expenses

General and administrative expenses increased $3.9 million in 2007 as compared to 2006, primarily due to:


	•	an increase of $2.3 million due to increased headcount and related expense (including share-based compensation);

	•	an increase of $2.5 million in legal expense related to our on-going patent litigation;

	•	an increase of $378,000 in bank fees and bad debt expenses; partially offset by

	•	a decrease of $861,000 in facility related expenses due to the termination of the lease agreement for our previous facility in the second quarter of 2006; and

	•	a decrease of $300,000 in legal and other professional fees, primarily associated with filing patent and trademark registration.

General and administrative expenses increased $6.4 million in 2006 as compared to 2005, primarily due to:


	•	an increase of $3.5 million due to increased headcount and related expense (including share-based compensation);

	•	an increase of $2.7 million in legal and other professional fees, primarily associated with the Company’s on-going patent litigation;

	•	an increase of $847,000 of restructuring charges from the relocation of our corporate headquarters;

	•	an increase of $331,000 in facility costs for our new corporate headquarters allocated to general and administrative; partially offset by

	•	a decrease of $1.0 million in consulting and professional services primarily related to the initial implementation of SOX 404 requirements in 2005.

We expect general and administrative expenses to be lower in absolute dollars and as a percentage of net revenues in 2008 as compared with 2007.

Interest Income and Other Income (Expense), Net

Interest income and other, net, remained relatively unchanged in 2007 when compared to 2006 at $3.5 million. The changes in interest income and other, net, in 2007 as compared to 2006, were primarily the result of:


	•	a decrease of $208,000 in interest and other income primarily related to lower cash and short-term investment balances and declining interest rates; partially offset by

	•	an increase of $168,000 in currency related transaction gains primarily due to the weakening dollar against the Euro and the British Pound.

Interest income and other, net, increased by $1.7 million in 2006 as compared to 2005, primarily due to:


	•	an increase of $1.3 million in interest and other income; and

	•	an increase of $355,000 in currency related transaction gains.

We expect interest income and other net to increase in 2008 primarily due to anticipated increased cash and short-term investments balances as a result of anticipated increases in sales.

Provision for Income Taxes

We have significant net operating loss (“NOL”) and tax credit carryforwards. The $78,000 and $33,000 provisions for income taxes in 2007 and 2006, respectively, primarily represent the estimated foreign and state income taxes payable which could not be offset by NOL and tax credit carryforwards. We expect to use NOL and other tax carryforward amounts to the extent taxable income is earned in the future. At December 31, 2007, we had federal NOL carryforwards of approximately $38.1 million and state NOL carryforwards of approximately $17.8 million. The federal NOL carryforwards expire in various periods from 2018 through 2027 and the state NOL carry forwards expire in various periods from 2012 through 2027. We have federal and state research tax credit carryforwards of approximately $0.8 million and $1.0 million, respectively. The federal research credits expire in various periods through 2027 and the state research credits can be carried forward indefinitely. We also have federal and state AMT credit carryforwards of approximately $181,000 and $25,000, respectively. The AMT credits carry 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. 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, 2007. 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,
	2007			2006			$ Change			2006			2005			$ Change

Cash and cash equivalents	$	39,269		$	38,917		$	352		$	38,917		$	46,797		$	(7,880	)
Short-term investments	$	24,067		$	28,996		$	(4,929	)	$	28,996		$	25,718		$	3,278
Working capital	$	71,001		$	70,859		$	142		$	70,859		$	77,362		$	(6,503	)
Net cash (used in) provided by operating activities	$	(5,727	)	$	(165	)	$	(5,562	)	$	(165	)	$	3,750		$	(3,915	)
Net cash provided by (used in) investing activities	$	3,940		$	(7,912	)	$	11,852		$	(7,912	)	$	(26,669	)	$	18,757
Net cash provided by financing activities	$	2,156		$	197		$	1,959		$	197		$	1,150		$	(953	)

We incurred net losses from inception through December 31, 2007 of $48.5 million. We currently invest our cash and cash equivalents in several 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 and commercial paper. Since inception, we have financed our operations primarily through private sales of 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.

Cash flows from operating activities

Net cash used in operating activities increased $5.6 million in 2007 as compared to 2006 primarily due to:


	•	an increase of $3.4 million in inventories, as the Company continues to build inventory in response to increased customer demand;

	•	an increase of $1.7 million in accounts receivable primarily due to increased sales offset by improved customer collections;

	•	a decrease of $3.8 million in deferred revenue primarily due to deferral of RF generators sales in 2006 relating to the software upgrade promoted at the end of 2006, but not delivered until 2007; and

	•	a decrease of $433,000 in deferred share-based compensation; partially offset by

	•	an increase of $3.9 million in accrued compensation and benefits.

Net cash used in operating activities increased $3.9 million in 2006 as compared to 2005 primarily due to:


	•	an increase of $12.6 million in net loss; partially offset by

	•	an increase of $1.8 million in deferred share-based compensation;

	•	a decrease of $1.3 million in inventory;

	•	an increase of $2.2 million in deferred revenue;

	•	an increase of $1.7 million in other long term liabilities; and

	•	an increase of $1.1 million in prepaids, other assets, accounts payable and other accrued liabilities.

Cash flows from investing activities

Net cash provided by investing activities increased $11.9 million in 2007 as compared to 2006 primarily due to:


	•	a decrease of $4.2 million in cash used to purchase of short-term investments;

	•	an increase of $4.0 million in proceeds from the sale of short-term investments; and

	•	a decrease of $3.6 million from the purchase of property and equipment.

Net cash used in investing activities decreased by $18.8 million in 2006 as compared to 2005, primarily due to:


	•	an increase of $21.8 million in cash used to purchase of short-term investments;

	•	an increase of $44.3 million in proceeds from the sale of short-term investments; and

	•	an increase of $3.8 million from the purchase of property and equipment.

Cash flows from financing activities

Net cash provided by financing activities increased by $2.0 million in 2007 as compared to 2006 primarily due to:


	•	an increase of $2.3 million in the proceeds from the exercise of stock options; and

	•	an increase of $345,000 in the amount of employee payroll taxes withheld and paid on behalf of employees related to the release of restricted stock units on a net issuance basis.

Net cash provided by financing activities decreased by $1.0 million in 2006 as compared to 2005 primarily due to a decrease in the proceeds from the exercise of stock options.

Other Factors Affecting Liquidity and Capital Resources

We expect that sales and marketing and research and development expenses will increase in absolute dollars in connection with the growth of our business. 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 number and timing of acquisitions and other strategic transactions. 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 FDA and other regulatory clearances of our products and products in development; the effects of competing technological and market developments; and the costs associated with being a public company.

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, 2007.

Contractual Obligations and Capital Expenditure Requirements

The following table summarizes our contractual obligations as of December 31, 2007:


	Payments due by Period
Contractual Obligations and			Less than		1-3		3-5		More than
Capital Expenditure Requirements	Total		1 Year		Years		Years		5 Years
	(In thousands)

Operating lease obligations	$	6,997	$	941	$	2,255	$	2,361	$	1,440
Inventory purchase commitments		2,809		2,809		—		—		—
Other purchase commitments		608		608		—		—		—

Total	$	10,414	$	4,358	$	2,255	$	2,361	$	1,440

On March 14, 2007, we entered into a Lease Termination Agreement (“Termination Agreement”), effective as of March 9, 2007 with the landlord of our former office space at 2200 Zanker Road in San Jose, California (the “Lease”). The Lease expired on June 30, 2007. We paid approximately $256,000 in March 2007 and were not required to pay any further rent and other charges owed under the Lease after the effective date of the Termination Agreement. We received $385,000, the full amount of our security deposit previously paid under the Lease plus interest, less amounts due for March rent through the termination date and other amounts to which Landlord was entitled to apply the security deposit pursuant to the terms of the Lease in March 2007.


Item 7A:	*Quantitative and Qualitative Disclosures about Market Risk*

To date, substantially all of our sales have been denominated in U.S. dollars. Approximately 5% of sales revenue for 2007 was denominated in currencies other than U.S. dollars. Accordingly, we believe that there is currently no material exposure of our sales revenue to risk from changes in foreign currency exchange rates.

While our reporting currency is the U.S. dollar, a portion of our assets (primarily deposit accounts) are denominated in foreign currency. As a result, we are exposed to foreign exchange risk as our results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and foreign currencies. If a foreign currency depreciates against the U.S. dollar, the value of a portion of our earnings and assets as expressed in our U.S. dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. The impact of an aggregate decline of 10% in foreign currency exchange rates relative to the U.S. dollar on our results of operations and financial position would not be material.

Our exposure to interest rate risk at December 31, 2007 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 money market funds. 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. Additionally, an immediate 10% change in interest rates would not have a material adverse impact on our future operating results and cash flows.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of VNUS Medical Technologies, Inc. and subsidiaries:

In our opinion, the consolidated financial statements listed in the index under item 15(a)(1) present fairly, in all material respects, the financial position of VNUS Medical Technologies, Inc. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 7 to the consolidated financial statements, effective January 1, 2006, the Company changed the manner in which it accounts for share-based compensation.

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 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 13, 2008

VNUS MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
	2007			2006
	(In thousands,
	except share data)

ASSETS
Current assets:
Cash and cash equivalents	$	39,269		$	38,917
Short-term investments		24,067			28,996
Accounts receivable, net of allowance for doubtful accounts of $355 and $284, respectively		11,456			8,246
Inventories		5,793			2,798
Prepaid expenses and other current assets		1,421			1,443

Total current assets		82,006			80,400
Property and equipment, net		4,354			4,651
Other assets		130			782

Total assets	$	86,490		$	85,833


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,366		$	1,340
Accrued compensation and benefits		6,040			2,708
Other accrued liabilities		1,571			2,979
Deferred revenue		1,028			2,514

Total current liabilities		11,005			9,541
Other long-term liabilities		1,996			1,544

Total liabilities		13,001			11,085

Commitments and contingencies (Note 6)
Stockholders’ equity:
Convertible preferred stock: $0.001 par value; 10,000,000 authorized; none issued and outstanding at December 31, 2007 and December 31, 2006, respectively		—			—
Common stock: $0.001 par value; 56,666,666 authorized, 15,702,880 and 15,130,598 issued and outstanding at December 31, 2007 and 2006, respectively		15			15
Additional paid-in capital		122,009			117,964
Deferred share-based compensation		(23	)		(144	)
Accumulated other comprehensive income (loss)		21			(5	)
Accumulated deficit		(48,533	)		(43,082	)

Total stockholders’ equity		73,489			74,748

Total liabilities and stockholders’ equity	$	86,490		$	85,833

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

VNUS MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2007			2006			2005
	(In thousands, except per share data)

Net revenues	$	70,904		$	51,681		$	49,170
Cost of revenues		25,706			17,284			12,311

Gross profit		45,198			34,397			36,859

Operating expenses:
Sales and marketing		25,311			22,343			20,173
Research and development		9,444			7,422			3,815
General and administrative		19,340			15,402			9,025

Total operating expenses		54,095			45,167			33,013

(Loss) income from operations		(8,897	)		(10,770	)		3,846
Interest income		3,061			3,148			1,852
Other income (expense), net		390			323			(73	)

(Loss) income before provision for income taxes		(5,446	)		(7,299	)		5,625
Provision for income taxes		78			33			275

Net (loss) income before cumulative effect of change in accounting principle		(5,524	)		(7,332	)		5,350
Cumulative effect of change in accounting principle, net of tax		—			73			—

Net (loss) income after cumulative effect of change in accounting principle	$	(5,524	)	$	(7,259	)	$	5,350

Net (loss) income per share (see Note 2):
Basic
(Loss) income per share before cumulative change in accounting principle	$	(0.36	)	$	(0.49	)	$	0.37
Cumulative effect of change in accounting principle, net of tax		—			0.01			—

Basic net (loss) income per share	$	(0.36	)	$	(0.48	)	$	0.37

Diluted
(Loss) income per share before cumulative change in accounting principle	$	(0.36	)	$	(0.49	)	$	0.35
Cumulative effect of change in accounting principle, net of tax		—			0.01			—

Diluted net (loss) income per share	$	(0.36	)	$	(0.48	)	$	0.35

Shares used in computing basic net (loss) income per share		15,390			15,047			14,652
Shares used in computing diluted net (loss) income per share		15,390			15,047			15,466

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

VNUS MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)


											Accumulated
					Additional			Deferred			Other						Total
					Paid-In			Share-Based			Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital			Compensation			Income (Loss)			Deficit			Equity
					(In thousands, except share and per share data)

Balances at December 31, 2004		14,371,439	$	14	$	114,698		$	(1,231	)	$	—		$	(41,173	)	$	72,308
Exercise of stock options		528,550		1		1,149			—			—			—			1,150
Deferred share-based compensation for stock option grants		—		—		10			(10	)		—			—			—
Deferred share-based 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 share-based compensation		—		—		—			614			—			—			614
Tax benefit on exercise of employee stock options		—		—		88			—			—			—			88
Components of other comprehensive income (loss) Unrealized loss on short-term investments		—		—		—			—			(50	)		—			(50	)
Net income		—		—		—			—			—			5,350			5,350

Total comprehensive income																		5,300

Balances at December 31, 2005		14,899,989		15		117,924			(2,544	)		(50	)		(35,823	)		79,522

Exercise of stock options		164,883		—		197			—			—			—			197
Exercise of stock warrants		21,928		—		—			—			—			—			—
Common stock issued for restricted stock units (RSUs)		43,798		—		(127	)		—			—			—			(127	)
Deferred share compensation for RSUs		—		—		(2,005	)		2,005			—			—			—
Fair value of options issued for services		—		—		10			—			—			—			10
Cancellation of options		—		—		(43	)		43			—			—			—
Share-based compensation for stock options		—		—		1,400			244			—			—			1,644
Share-based compensation for RSUs		—		—		608			181			—			—			789
Cumulative effect of change in accounting principle		—		—					(73	)		—			—			(73	)
Components of other comprehensive income (loss) Unrealized gain on short-term Investments		—		—		—			—			45			—			45
Net loss		—		—		—			—			—			(7,259	)		(7,259	)

Total comprehensive loss																		(7,214	)

Balances at December 31, 2006		15,130,598		15		117,964			(144	)		(5	)		(43,082	)		74,748

Cumulative adjustment for FIN 48		—		—		—			—			—			73			73
Exercise of stock options		484,029		—		2,628			—			—			—			2,628
Common stock issued for restricted stock units		88,253		—		(472	)		—			—			—			(472	)
Cancellation of options		—		—		(41	)		41			—			—			—
Share-based compensation for stock options		—		—		1,100			80			—			—			1,180
Share-based compensation for RSUs		—		—		830			—			—			—			830
Components of other comprehensive income (loss) Unrealized gain on short-term investments		—		—		—			—			43			—			43
Cumulative translation adjustment		—		—		—			—			(17	)		—			(17	)
Net loss		—		—		—			—			—			(5,524	)		(5,524	)

Total comprehensive loss																		(5,499	)

Balances at December 31, 2007		15,702,880	$	15	$	122,009		$	(23	)	$	21		$	(48,533	)	$	73,489

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

VNUS MEDICAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2007			2006			2005
	(In thousands)

Cash flows from operating activities:
Net (loss) income	$	(5,524	)	$	(7,259	)	$	5,350
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,199			1,103			634
Provision for excess and obsolete inventory		565			298			174
Impairment of long-lived assets		—			181			—
Share-based compensation and amortization		2,010			2,443			676
Tax benefit on exercise of employee stock options		—			—			88
Cumulative effect of change in accounting principle		—			(73	)		—
Allowance for doubtful accounts		205			44			216
Warranty reserve		3			283			35
Change in operating assets and liabilities:
Accounts receivable		(3,414	)		(1,672	)		(1,317	)
Inventories		(3,560	)		(132	)		(1,445	)
Prepaid expenses and other current assets		22			(209	)		(588	)
Other long-term assets		652			51			(191	)
Accounts payable		1,026			107			(9	)
Accrued compensation and benefits		3,804			(112	)		(389	)
Other accrued liabilities		(1,810	)		875			514
Deferred revenue		(1,486	)		2,292			77
Other long-term liabilities		581			1,615			(75	)

Net cash (used in) provided by operating activities		(5,727	)		(165	)		3,750

Cash flows from investing activities:
Purchase of short-term investments		(52,101	)		(56,261	)		(34,468	)
Sale of short-term investments		57,073			53,028			8,700
Purchase of property and equipment		(1,032	)		(4,679	)		(901	)

Net cash provided by (used in) investing activities		3,940			(7,912	)		(26,669	)

Cash flows from financing activities:
Proceeds from the exercise of stock options for common stock		2,628			324			1,150
Employees’ taxes withheld and paid for restricted stock		(472	)		(127	)		—

Net cash provided by financing activities		2,156			197			1,150

Net increase (decrease) in cash and cash equivalents		369			(7,880	)		(21,769	)
Effect of foreign exchange rates		(17	)		—			—
Cash and cash equivalents at the beginning of the year		38,917			46,797			68,566

Cash and cash equivalents at the end of the period	$	39,269		$	38,917		$	46,797

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

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 —	The Company

VNUS Medical Technologies, Inc. (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. In late 1998, the Company introduced its Closure^® system in Europe. In late 1999, the Company introduced its Closure system in the United States. In 2005, the Company introduced the ClosureRFS^tm line of products for the minimally invasive treatment of perforator and tributary vein reflux. The Company introduced the ClosureFAST^tm catheter for the minimally invasive treatment of venous reflux disease in the United States in the first quarter of 2007, and internationally in the second quarter of 2007.

The Company was incorporated in Delaware on January 4, 1995. 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 subsidiaries. All intercompany transactions have been eliminated in consolidation.

Foreign Currency Translation. We transact business in various foreign currencies. In general, the functional currency of a foreign operation is the local country’s currency except for our German subsidiary, whose functional currency is the United States dollar. Non-functional currency monetary balances are re-measured into the functional currency of the subsidiary with any related gain or loss recorded in other income, net, in the accompanying consolidated statements of operations. Assets and liabilities of operations outside the United States, for which the functional currency is the local currency, are translated into United States dollars using fiscal year-end exchange rates. Revenue and expenses are translated at the average exchange rates in effect during each fiscal month during the year. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets.

For the years ended 2007, 2006 and 2005 foreign currency transaction gains or losses included in other income, net, in the accompanying consolidated statements of operations were $376,000 gain, $208,000 gain and $148,000 loss, respectively.

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.

Reclassifications. Certain amounts in the 2006 and 2005 financial statements have been reclassified to conform with the 2007 presentation.

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. Basic net income (loss) per share excludes the dilutive effect of potential stock including stock

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

options and 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.

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,
	2007			2006			2005

Numerator:
Net (loss) income available to common stockholders	$	(5,524	)	$	(7,259	)	$	5,350

Denominator:
Weighted average common shares outstanding used in computing basic net (loss) income per share		15,390			15,047			14,652
Effect of dilutive securities:
Stock options, restricted stock units, and deferred share-based compensation		—			—			814

Total shares, diluted		15,390			15,047			15,466

Net (loss) income per common share:
Basic	$	(0.36	)	$	(0.48	)	$	0.37
Diluted	$	(0.36	)	$	(0.48	)	$	0.35

The following outstanding employee stock options were excluded from the computation of diluted net income per share as they had an antidilutive effect (in thousands):


	Year Ended December 31,
	2007		2006		2005

Stock options		1,179		1,634		214
Restricted stock units		538		398		—

Total		1,717		2,032		214

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, 2007, 2006 and 2005, the Company held its cash and cash equivalents in checking accounts, money market accounts and investment accounts with several financial institutions. Some accounts exceeded FDIC insurance limits. Certain accounts were held with financial institutions outside the United States of America in Western European countries.

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). 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.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Inventories. Inventories are 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.

Shipping and Handling Costs In accordance with the Emerging Issues Task Force (“EITF”) issue 00-10, Accounting for Shipping and Handling Fees and Costs, the Company includes shipping and handling revenues in net sales and shipping and handling costs in cost of goods sold.

Property and Equipment. Property and equipment are stated at cost. Depreciation and amortization 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.

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 certain 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.

The Company recognizes revenues from the sale of its products in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, when persuasive evidence of an arrangement exists, title has transferred, the seller’s price is fixed or determinable and collectibility is reasonably assured. For an arrangement with multiple deliverables, the Company recognizes product sales in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables, with revenues allocated among the different elements, and in accordance with EITF No. 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.

Where software is more than incidental to the product or the arrangement, the Company recognizes revenues for those products in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Agreements. The Company recognizes revenues when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, collection of the related receivable is probable. Where software is incidental to the product or arrangement, the Company recognizes revenues from the sale of those products in accordance with SAB No. 104.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 of product returns within the warranty period and the cost to repair or replace the equipment. In addition, from time to time, specific warranty accruals are made for specific technical problems.

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, 2007, 2006 and 2005 were $664,000, $262,000 and $321,000 respectively.

Cumulative Effect of a Change in Accounting Principle. Upon the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R on January 1, 2006, the Company elected to adopt the modified prospective transition method of SFAS No. 123R, Share-Based Payment, except for those options that were measured using the minimum value method under SFAS No. 123, Accounting for Stock-Based Compensation, for which the Company applied the prospective transition method. The impact of the adoption has resulted in an adjustment for the cumulative effect of a change in accounting principle.

Accordingly, during the year ended December 31, 2006, the Company recorded stock-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS No. 123. Previously reported amounts have not been restated. The cumulative effect, through December 31, 2005, was a decrease in stock-based compensation expense and a corresponding increase to equity of $73,000 to reflect the application of the estimated forfeiture rates to deferred stock-based compensation related to the intrinsic value of restricted stock units granted in 2005.

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.

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

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not anticipated to have a material effect on our consolidated financial statements.

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.

VNUS MEDICAL TECHNOLOGIES, INC.

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.


Note 4 —	Short-Term Investments

The following table summarizes the Company’s short-term investments at December 31, 2007 and 2006 (in thousands):


	December 31, 2007
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value

Corporate debt securities	$	8,704	$	1	$	—	$	8,705
Commercial paper		15,325		37		—		15,362

Total short-term investments	$	24,029	$	38	$	—	$	24,067


	December 31, 2006
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

Corporate debt securities	$	8,504	$	—	$	(14	)	$	8,490
Asset backed securities		1,997		—				$	1,997
Commercial paper		18,500		9		—		$	18,509

Total short-term investments	$	29,001	$	9	$	(14	)	$	28,996

Gross realized gains and gross realized losses on available-for-sale securities were immaterial during the twelve months ended December 31, 2007, 2006 and 2005. The estimated fair values of short-term investments were based on their contractual maturity of one year or less at December 31, 2007.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 5 —	Balance Sheet Components


	December 31,
	2007			2006
	(In thousands)

Inventories
Raw material and sub-assemblies	$	3,007		$	1,212
Finished goods		2,254			1,344
Radio-frequency generators		532			242

	$	5,793		$	2,798

Property and equipment, net(1)
Furniture and fixtures	$	390		$	367
Computer and office equipment		1,427			1,274
Software		1,036			906
Laboratory equipment		1,934			1,181
Leasehold improvements		2,999			2,884
Assets not ready to be placed in service		150			296

		7,936			6,908
Less accumulated depreciation and amortization		(3,582	)		(2,257	)

Property and equipment, net	$	4,354		$	4,651

Other accrued liabilities
Accrued expenses	$	520		$	1,524
Accrued taxes		392			585
Accrued warranty		72			204
Accrued restructuring		—			352
Other accrued liabilities		587			314

	$	1,571		$	2,979


(1)		All long-lived assets are located in the United States of America.


Note 6 —	Commitments and Contingencies

Product Warranty Commitment. 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 reserve is based upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the equipment. In addition, from time to time, specific warranty accruals are made for specific technical problems including software bugs, component or other manufacturing defects. Costs are estimated and accrued for specific warranty issues in the period in which the warranty issue becomes known to management and the costs are reasonably estimable. The increase in the warranty reserve during the year ended December 31, 2006 was for the estimated costs of a field update of the RF generator’s embedded software for use with existing catheters and devices which was provided in

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

early 2007. The Company’s warranty reserve is included in other accrued liabilities and changes during the reporting periods are as follows (in thousands):


	Balance at		Additions		Warranty			Balance at
	Beginning of		to Warranty		Reserve			End of
	Period		Reserve		Utilized			Period

Year ended December 31, 2007	$	204	$	3	$	(135	)	$	72
Year ended December 31, 2006	$	34	$	283	$	(113	)	$	204
Year ended December 31, 2005	$	43	$	35	$	(44	)	$	34

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 certain U.S. patents. 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. On October 30, 2006, a claims construction hearing was held, and on November 20, 2006, the Court issued its Order Construing Claims. In October 2007, the Court denied numerous motions for summary judgment, clearing the way for the case to proceed to trial. The original trial commencement date of October 2007 was postponed due to Court schedule delays and a new trial date has been set for June 2008.

The Company is also involved in other legal proceedings arising in the ordinary course of its business. While there can be no assurances as to the ultimate outcome of any litigation involving the Company, management does not believe any pending legal proceeding will result in a judgment or settlement that would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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, 2007, 2006 and 2005 was $1.2 million, $1.4 million, and $869,000, 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. As of June 30, 2006, the Company completed the move of its headquarters and manufacturing operations to this facility, which consists of 93,650 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 lease provides 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.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2007, future minimum lease payments are as follows (in thousands):


Year Ending December 31,	Operating Leases

2008	$	941
2009		1,115
2010		1,140
2011		1,163
2012		1,198
2013 and thereafter		1,440

	$	6,997

Under the terms of the Fontanoso lease, the landlord provided an allowance for the planning and construction of tenant improvements in the amount of $1.0 million, which were 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 was recorded as leasehold improvements at the inception of the lease term. Leasehold improvements are depreciated over the lease term, or the estimated lives of the improvements, whichever is shorter.

In connection with the relocation from the previous Zanker facility in 2006, costs of $847,000 associated with exiting the Zanker facility, including an impairment charge of $179,000 for the value of leasehold improvements and furniture and fixtures which were abandoned at the old facility, were recorded in general and administrative expenses during the year ended December 31, 2006.

Changes to the Company’s restructuring accrual in 2007 and 2006 are as follows (in thousands):


							Write-offs of
	Accrued Lease			Accrued			Impaired Leasehold
	Payments, Net of			Realtor			Improvements and			Total Facility
	Rent Deferral			Commission			Other Fixed Assets			Exit Charge

Facility exit charge recorded in 2006	$	650		$	18		$	179		$	847
Payments		(298	)		(18	)		(179	)		(495	)

Balance, December 31, 2006		352			—			—			352
Payments		(352	)		—			—			(352	)

Balance, December 31, 2007	$	—		$	—		$	—		$	—

The fair value of the liability for the Zanker facility was determined based on the remaining lease payments due under the contract, less the portion that would still be used by the Company for storage for the remainder of the lease period. The Company did not offset these lease payments by estimated sublease rental income. Management concluded that subleasing the Zanker facility was not probable.

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, 2007, the Company had approximately $3.4 million in purchase commitments for the next twelve months with suppliers, of which $2.8 million was inventory related.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company relies on Byers Peak, Inc. to manufacture its RF generators. The initial term of the supply agreement with Byers Peak expired in February 2007, however, the contract continues indefinitely until terminated by either party upon 180 days’ notice. 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 7 —	Share-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, Share-Based Payment. SFAS No. 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, share-based compensation expense is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company has no awards with market conditions. The Company previously applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Shares Issued to Employees, and related Interpretations and provided the required pro-forma disclosures of SFAS No. 123, Accounting for Share-Based Compensation.

The Company awards a limited number of stock options and warrants to non-employees. Non-cash share-based expense from options and warrants issued to non-employees is accounted for in accordance with the provisions of EITF 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, the non-cash share-based expense is recognized 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. In 2007, 2006 and 2005, the Company recorded non-employee share compensation expense of $0, $10,000 and $62,000, respectively.

Prior to the adoption of SFAS No. 123R

Prior to the adoption of SFAS No. 123R, the Company provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Share-Based Compensation — Transition and Disclosures.

The pro-forma information for the years ended December 31, 2005 was as follows (in thousands except per share data):


	Year Ended
	2005

Net income, as reported	$	5,350
Deduct: Share-based compensation expense determined under fair value based method, net of tax		(1,938	)

Pro forma net income	$	3,412

Weighted average number of shares used in per share calculation:
Basic		14,652
Diluted		15,218
Pro forma net income per share:
Basic	$	0.23
Diluted	$	0.22

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pro forma disclosures for the year ended December 31, 2006 and 2007 are not presented because share-based employee compensation was accounted for under SFAS No. 123R during this period. Additionally, the share-based employee compensation determined under SFAS No. 123 fair value method for the year ended December 31, 2005 have been adjusted to exclude the effect of the options granted prior to the Company’s initial public offering in October 2004, as those options were expensed using the minimum value method.

The weighted average per share fair value of options granted in the year ended December 31, 2005 was $6.39.

Impact of the adoption of SFAS No. 123R

The Company elected to adopt the modified prospective application method as provided by SFAS No. 123R, except for those options that were measured using the minimum value method under SFAS No. 123, for which the Company has adopted the prospective transition method. Under the modified prospective application, prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense, net of estimated forfeitures, for awards outstanding at the effective date will be recognized over the remaining service period.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS No. 123R-C, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS No. 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R. There was no tax benefit realized upon exercise of stock options for the years ended December 31, 2007 and 2006.

During the year ended December 31, 2006, the Company recorded a cumulative adjustment for share-based compensation costs to expense the amount that would have been recognized had the fair value method been applied since the effective date of SFAS No. 123, to adjust for application of a forfeiture rate to restricted stock unit awards granted during 2005. The previously reported amounts were not restated.

The following table sets forth the total share-based compensation expense resulting from stock options and non-vested stock awards included in the Company’s Consolidated Statements of Operations since the adoption of SFAS No. 123R (in thousands):


	Years Ended December 31,
	2007		2006

Cost of revenues	$	124	$	182
Sales and marketing		467		886
Research and development		336		276
General and administrative		1,083		1,099

Total share-based compensation	$	2,010	$	2,443

As of December 31, 2007, $5.9 million of total unrecognized share-based compensation expense net of forfeitures related to non-vested options and awards is expected to be recognized over the respective vesting terms of each award through 2008 to 2011.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation Assumptions

The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables.

The weighted average estimated fair value of options granted during the twelve month periods ended December 31, 2007, December 31, 2006 and December 31, 2005, were calculated under the Black-Scholes model, using the following weighted-average assumptions:


	Years Ended
	2007	2006	2005

Risk free interest rates	3.52% - 4.84%	4.55% - 5.00%	3.71% - 4.45%
Expected life in years	4.85-5.25	5.25-6.25	3.7
Dividend yield	—	—	—
Volatility	79.7%-86.9%	63.8%-96.2%	51.59%

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123R, SAB No. 107 and the Company’s prior period pro forma disclosures of net earnings, including share-based compensation. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. In connection with the adoption of SFAS No. 123R, the Company reassessed its valuation technique and related assumptions.

Expected volatility used in fiscal 2007 and 2006 was determined using the historical volatility of the Company’s common stock and the historical volatility of a number of peer companies to approximate expected volatility over the expected term of the options. Prior to the adoption of SFAS No. 123R, the Company used the historical volatility of its common stock after its initial public offering in October 2004 in deriving the expected volatility assumption.

The expected term of employee options granted was determined in the first three quarters of 2006 based on SAB No. 107’s simplified method for estimating expected term and represents the period of time that options granted are expected to be outstanding. For the fourth quarter of 2006 and throughout 2007, the Company determined the expected term of employee options granted based upon a blended average of the Company’s historical experience and historical experience of a number of peer companies. Prior to the adoption of SFAS No. 123R, the Company was estimating the expected term based on its historical exercise and post-vesting cancellation experience. The risk-free interest rate for periods within the contractual life of the option is based on the monthly average risk-free zero-coupon interest rate that corresponds to the expected term.

The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future.

The Company has used forfeiture rates in its calculation of share-based compensation expense for the twelve months ending December 31, 2007 and 2006, depending on the stratification of the optionees, based on historical experience over the term. Share-based compensation expense recognized in the Consolidated Statement of Operations for the twelve month period ending December 31, 2007 and 2006 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If pre-vesting forfeitures occur in the future, the Company will true up expense related to such forfeitures as the forfeitures occur. In the Company’s pro forma information required under SFAS No. 123 for the periods prior to fiscal 2007, the Company accounted for forfeitures as they occurred.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of each restricted stock unit award is estimated on the date of grant based on the closing price of the Company’s stock. Share-based compensation expense related to RSUs is recognized over the requisite service period, adjusted for forfeiture rates depending on the stratification of the awardees.

Equity Incentive Program

In 1995, the Company established the 1995 Stock Option 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, as amended, 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 stockholders 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, 2007, 628,033 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 and permits employees to surrender a portion of their RSU shares to pay for taxes.

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 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

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

not be deemed to have occurred simply by virtue of a change of control, the fact that the Company becomes a subsidiaries of another entity or the Company’s status changing from publicly-traded to privately-held, as a result of the change of control.

In 2007, the Board of Directors approved a modification to the Amended Equity Incentive Plan with respect to non-employee director compensation. The modification provided that each new non-employee director shall be granted an initial option upon appointment or election to the Board of Directors to purchase 18,000 shares of Common Stock and an initial grant of 6,000 restricted stock units, which vest in three equal, yearly installments so that the option and restricted stock units are fully vested three years after the grant date. Each non-employee director is also automatically granted an option to purchase 9,000 shares of our Common Stock as well as 3,000 restricted stock units at each annual meeting of stockholders as of which such director continues to serve that is at least six months after the director’s initial option and restricted stock unit grant. These additional options and restricted stock units vest in four (4), equal, consecutive, quarterly installments so that such options and restricted stock units are fully vested one year after the grant date.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the combined activity under the equity incentive plans for the indicated periods:


	Shares
	Available			Options Outstanding					RSUs Outstanding
	for Future			Number of			Weighted Average		Number of
	Grant			Options			Exercise Price per Share		RSUs

Balances at December 31, 2004		887,684			1,679,722		$	2.86		—
Authorized		595,999			—			—		—
Expired		(273	)		—			—		—
Granted		(1,021,218	)		771,939			11.38		249,279
Options exercised		—			(528,550	)		2.18		—
Terminated/cancelled		210,486			(203,466	)		5.36		(7,020	)

Balances at December 31, 2005		672,678			1,719,645			6.60		242,259
Authorized		605,223			—			—		—
Expired		(3,118	)		—			—		—
Granted		(539,843	)		228,666			7.52		311,177
Options exercised		—			(164,883	)		1.19		—
Restricted stock unit releases		—			—			—		(43,798	)
RSU releases surrendered for taxes		18,098			—			—		(18,098	)
Terminated/cancelled		242,758			(149,336	)		10.19		(93,422	)

Balances at December 31, 2006		995,796			1,634,092			6.94		398,118
Authorized		628,033			—			—		—
Expired		(3,431	)		—			—		—
Granted		(778,157	)		278,017			12.27		500,140
Options exercised		—			(484,029	)		5.44		—
Restricted stock unit releases		—			—			—		(88,253	)
RSU releases surrendered for taxes		37,963			—			—		(37,963	)
Terminated/cancelled		482,917			(248,934	)		9.89		(233,983	)

Balances at December 31, 2007		1,363,121			1,179,146		$	8.20		538,059

The intrinsic value of in-the-money options and restricted stock units was approximately $7.5 million and $7.8 million respectively, as of December 31, 2007. The intrinsic value of exercisable in-the-money options was approximately $6.2 million as of December 31, 2007. The aggregate intrinsic value of the options and restricted stock units outstanding at December 31, 2007 represents the total pretax intrinsic value, based on the Company’s closing stock price of $14.52 per share as of December 31, 2007, which would have been received by the grant holders, had all option holders with in-the-money options exercised their options as of that date and if all restricted stock units were vested as of December 31, 2007.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Options outstanding and currently exercisable by exercise price at December 31, 2007 are as follows:


	Options Outstanding
			Weighted Average		Options Exercisable
	Number of		Remaining		Number of		Weighted Average
Exercise Prices	Outstanding		Contractual Life		Options		Exercise Price
			(In years)

$ 0.608- 0.714		15,296		1.51		15,296	$	0.656
$ 1.500- 1.500		218,648		4.61		218,648	$	1.500
$ 3.000- 6.960		124,462		6.43		109,832	$	3.226
$ 7.020- 7.170		139,711		7.08		106,335	$	7.157
$ 7.230-10.000		126,723		8.15		56,893	$	8.357
$10.080-10.860		179,288		7.26		137,948	$	10.734
$10.900-12.210		152,994		8.86		55,742	$	11.738
$12.250-13.800		127,024		7.86		73,034	$	12.879
$14.080-15.000		88,500		9.25		24,313	$	14.915
$15.500-15.500		6,500		9.75		63	$	15.500

		1,179,146		7.12		798,104	$	6.726

The table above does not include outstanding restricted stock units of 538,059.

The weighted average grant date fair value of options granted during the twelve months ended December 31, 2007 and 2006 were $8.48 and $5.06 per share, respectively. The total intrinsic value of options exercised during the twelve months ended December 31, 2007 was approximately $3.8 million. The total cash received as a result of stock option exercises during the twelve months ended December 31, 2007 was approximately $2.6 million. In connection with these exercises, there were no tax benefits realized by the Company for the twelve months ended December 31, 2007.

Restricted Stock Units

As of December 31, 2005, the Company had a deferred share-based compensation balance of $2.1 million related to grants of restricted stock units prior to the adoption of SFAS No. 123R. Upon adoption of SFAS No. 123R, the deferred share-based compensation balance was eliminated against the additional paid-in capital account. The Company also recorded a cumulative forfeiture adjustment in the twelve months ended December 31, 2006 related to the restricted stock units granted in the fourth quarter of 2005 of $73,000.

During the years ended December 31, 2007 and 2006, the Company granted 500,140 and 311,177 restricted stock units to certain officers and employees, respectively. The value of the restricted stock units was based on the closing market price of the Company’s common stock on the date of each award. The total grant date fair value of the restricted stock units granted during the twelve months ended December 31, 2007 and 2006 was approximately $6.1 million and $2.5 million, respectively, that will be recognized over the vesting periods in the next four years.


Note 8 —	Income Taxes

At December 31, 2007, the Company had net operating loss, or NOL, carryforwards of approximately $38.1 million and $17.8 million for federal and state jurisdictions, respectively, available to reduce future taxable income. The federal NOL carryforwards expire in various periods beginning 2018 through 2027 and the state NOL carry forwards expire in various periods from 2012 through 2027. The Company had federal and state research tax credit carryforwards of approximately $0.8 million and $1.0 million, respectively. The federal research credits expire in various periods through 2027 and the state research credits can be carried forward indefinitely. The

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

company also had federal and state AMT credit carryforwards of $181,000 and $25,000, respectively. The AMT credits carry 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,
	2007			2006			2005

U.S. federal statutory tax rate		(35.00	)%		(35.00	)%		35.00	%
State income taxes, net of federal benefit		(5.20	)%		(5.09	)%		5.58	%
Meals/entertainment and other permanent adjustments		1.27	%		0.88	%		1.57	%
Change in valuation allowance		33.61	%		33.30	%		(47.35	)%
Amortization of book share-based compensation		5.85	%		6.37	%		4.77	%
AMT tax credit not benefited		—			—			2.69	%
Other		0.91	%		—			2.64	%

		1.44	%		0.46	%		4.90	%

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


	December 31,
	2007			2006

Net operating loss carryovers	$	13,128		$	12,313
Tax credits		1,740			2,569
Accruals, allowances and reserves		1,951			415
Capitalization & cost recovery		742			996
Share-based compensation		129			279
Other		(114	)		(4	)

Net deferred tax assets		17,576			16,568
Valuation allowance		(17,576	)		(16,568	)

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. Approximately $143,000 of these deferred tax assets pertain to certain net operating loss carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these loss carryforwards are accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision.

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.

The Company adopted the provisions of Financial Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $73,000 benefit for a reduction in the liability for unrecognized income tax benefits.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	2007

Balance at January 1, 2007	$	969
Additions for tax positions related to 2007		278

Balance at December 31, 2007	$	1,247

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of January 1, 2007 and December 31, 2007, the Company had approximately $8,000 and $14,000 of accrued interest related to uncertain tax positions, respectively.

The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is $21,000 as of the January 1, 2007 adoption date and December 31, 2007.

The Company’s only major tax jurisdictions are the United States and Germany. The tax years 1995 through 2007 remain open and subject to examination by the appropriate governmental agencies in the U.S. and the tax years 2004 through 2007 remain open and subject to examination by the appropriate governmental agencies in Germany.


Note 9 —	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 SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, 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.


	Year Ended December 31,
	2007			2006			2005

United States		93	%		96	%		96	%
Europe and Other		7	%		4	%		4	%

		100	%		100	%		100	%


	Year Ended December 31,
	2007			2006			2005

Catheters and devices		73	%		81	%		76	%
RF generators		14	%		8	%		18	%
Accessories		13	%		11	%		6	%

		100	%		100	%		100	%


Note 10 —	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. Contributions by the Company (approved or payable) through December 31, 2007 totaled $275,000. The Company made no contribution during 2006 and 2005.

VNUS MEDICAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 11 —	Selected Quarterly Financial Data (unaudited)

The following tables present the Company’s operating results for each of the eight quarters ending December 31, 2007. 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. ’07		Sept. ’07			June ’07			Mar. ’07			Dec. ’06			Sept. ’06			June ’06			Mar. ’06
						(In thousands except per share data)
									(Unaudited)

Net revenues	$	20,571	$	17,495		$	17,189		$	15,649		$	13,322		$	11,919		$	13,089		$	13,351
Gross profit	$	13,530	$	10,754		$	10,359		$	10,555		$	8,562		$	7,574		$	8,827		$	9,434
Income (loss) from operations	$	67	$	(3,092	)	$	(3,055	)	$	(2,817	)	$	(2,963	)	$	(3,437	)	$	(3,071	)	$	(1,299	)
Net (loss) income before cumulative effect of change in accounting principle	$	908	$	(2,166	)	$	(2,312	)	$	(1,954	)	$	(2,010	)	$	(2,524	)	$	(2,214	)	$	(584	)
Net (loss) income after cumulative effect of change in accounting principle	$	908	$	(2,166	)	$	(2,312	)	$	(1,954	)	$	(2,010	)	$	(2,524	)	$	(2,214	)	$	(511	)
Net income (loss) per share:
Basic	$	0.06	$	(0.14	)	$	(0.15	)	$	(0.13	)	$	(0.13	)	$	(0.17	)	$	(0.15	)	$	(0.03	)
Diluted	$	0.05	$	(0.14	)	$	(0.15	)	$	(0.13	)	$	(0.13	)	$	(0.17	)	$	(0.15	)	$	(0.03	)


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

None.


Item 9A.	*Controls and Procedures*

We maintain “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rules 13a-15(e) and 15d-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. 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2007.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of 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. The 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 timely reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the 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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment management concluded that, as of December 31, 2007, our internal control over financial reporting was effective based on these criteria.

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.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

We previously reported a material weakness in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934), which was described in Item 9A and Management’s Report on Internal Control Over Financial Reporting in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which we filed on March 30, 2007. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

During the first three quarters of the year ended December 31, 2007, we reported on Form 10-Q significant changes made to our internal control over financial reporting to address our previously reported material weakness. During the fourth quarter, management completed testing to assess the effectiveness of its remedial measures and based on that testing has concluded in the fourth quarter that the previously reported material weakness no longer exists as of December 31, 2007.

A discussion of the changes reported on Form 10-Q in previous quarters and their impact on our previously reported material weakness is included below. The following previously reported material weakness no longer exists as of December 31, 2007:

Expense Cut-off and Proper Statement of Accrued Liabilities — We completed the remediation of the aforementioned material weakness in our internal control over financial reporting; we (i) implemented a process to enhance the review of open purchase orders and review invoices and receipts after the end of each reporting period to ensure proper recording of accrued expenses and open purchase order commitments and (ii) implemented additional training for the financial staff. During the fourth quarter of 2007, management concluded that the remedial measures described above were sufficient such that a material weakness surrounding expense cut-off and proper statement of accrued liabilities no longer exists as of December 31, 2007.


Item 9B.	*Other Information*

None.

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
Consolidated Balance Sheets at December 31, 2007 and December 31, 2006		51
Consolidated Statements of Operations for Each of the Years in the Three Year Period Ended December 31, 2007		52
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for Each of the Years in the Three Year Period Ended December 31, 2007		53
Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 2007		54
Notes to Consolidated Financial Statements		55
2. Financial Statement Schedule:
Schedule II — Valuation and Qualifying Accounts		79
3. Exhibit Index

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 3.1 to the Company’s Report on Form 8-K dated March 3, 2008).
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).
10.1#		Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated March 21, 2007).
10.2#		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).
10.3#		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).
10.4#		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).
10.5#		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).
10.6#		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).
10.7#		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).


Exhibit
Number		Description

10.8		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).
10.9		Lease Agreement by and between Legacy Partners I SJ Fontanoso, LLC and VNUS Medical Technologies, Inc., dated November 15, 2005 (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K, dated March 14, 2006).
10.10#		Form of Stock Option Award Grant Notice and Option Award Agreement under the VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K dated March 30, 2007).
10.11#		Offer Letter, dated as of October 10, 2007, by and between VNUS Medical Technologies, Inc. and Kirti Kamdar (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 4, 2007).
10.12#		Separation Agreement and Release, dated as of April 3, 2007, by and between VNUS Medical Technologies, Inc. and Scott Cramer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 6, 2007).
10.13#		Offer Letter, dated as of March 19, 2007, by and between VNUS Medical Technologies, Inc. and William A. Franklin (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 6, 2007).
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.

(b) Exhibits.

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

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 13, 2008

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.



/s/ BRIAN E. FARLEY Brian E. Farley	President, Chief Executive Officer and Director (Principal Executive Officer)	Date: March 13, 2008

/s/ PETER OSBORNE Peter Osborne	Vice President and Chief Financial Officer (Principal Financial Officer)	Date: March 13, 2008

/s/ W. JAMES FITZSIMMONS W. James Fitzsimmons	Director	Date: March 13, 2008

/s/ KATHLEEN D. LAPORTE Kathleen D. Laporte	Director	Date: March 13, 2008

/s/ EDWARD W. UNKART Edward W. Unkart	Director	Date: March 13, 2008

/s/ LORI M. ROBSON, PH.D. Lori M. Robson, Ph.D.	Director	Date: March 13, 2008

/s/ MICHAEL J. COYLE Michael J. Coyle	Director	Date: March 13, 2008

/s/ GREGORY T. SCHIFFMAN Gregory T. Schiffman	Director	Date: March 13, 2008

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 3.1 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 Report on Form 8-K dated March 3, 2008).
10.1#		Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated March 21, 2007).
10.2#		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).
10.3#		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).
10.4#		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).
10.5#		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).
10.6#		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).
10.7#		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).
10.8		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).
10.9		Lease Agreement by and between Legacy Partners I SJ Fontanoso, LLC and VNUS Medical Technologies, Inc., dated November 15, 2005 (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K, dated March 14, 2006).
10.10#		Form of Stock Option Award Grant Notice and Option Award Agreement under the VNUS Medical Technologies, Inc. Amended and Restated 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K dated March 30, 2007).
10.11#		Offer Letter, dated as of October 10, 2007, by and between VNUS Medical Technologies, Inc. and Kirti Kamdar (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 4, 2007).
10.12#		Separation Agreement and Release, dated as of April 3, 2007, by and between VNUS Medical Technologies, Inc. and Scott Cramer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 6, 2007).
10.13#		Offer Letter, dated as of March 19, 2007, by and between VNUS Medical Technologies, Inc. and William A. Franklin (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 6, 2007).
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.


		Page

PART I
FORWARD LOOKING STATEMENTS			2
Item 1.	Business		2
Item 1A.	Risk Factors		18
Item 1B.	Unresolved Staff Comments		32
Item 2.	Properties		32
Item 3.	Legal Proceedings		32
Item 4.	Submission of Matters to a Vote of Security Holders		32

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		33
Item 6.	Selected Consolidated Financial Data		35
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		48
Item 8.	Consolidated Financial Statements and Supplementary Data		49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		74
Item 9A.	Controls and Procedures		74
Item 9B.	Other Information		75

PART III
Item 10.	Directors and Executive Officers of the Registrant		75
Item 11.	Executive Compensation		75
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		75
Item 13.	Certain Relationships and Related Transactions		75
Item 14.	Principal Accountant Fees and Services		75

PART IV
Item 15.	Exhibits and Financial Statement Schedules		76
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


*	$100 invested on 10/20/04 in stock or on 9/30/04 in index-including reinvestment of dividends. Fiscal year ending December 31.


Item 8:	*Consolidated Financial Statements and Supplementary Data*


	Balance at							Balance at
	Beginning							End
	of Period		Additions		Write-offs			of Period
	(In thousands)

Allowance for Doubtful Accounts Year Ended:
December 31, 2005	$	195		216		(103	)	$	308
December 31, 2006		308		44		(68	)		284
December 31, 2007		284		205		(134	)		355
Allowance for Excess and Obsolete Inventory Year Ended:
December 31, 2005	$	31		174		(50	)	$	155
December 31, 2006		155		298		(63	)		390
December 31, 2007		390		565		(39	)		916
Allowance for Deferred Tax Assets Year Ended:
December 31, 2005	$	15,323		—		(938	)	$	14,385
December 31, 2006		14,385		2,183		—			16,568
December 31, 2007		16,568		1,008		—			17,576



	/s/ PETER OSBORNE
	Peter Osborne
	Vice President and Chief Financial Officer (Principal Financial Officer)