10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

OR

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

Commission File Number 000-52045

Volcano Corporation

(Exact name of registrant as specified in its charter)

Delaware	33-0928885
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
3661 Valley Centre Drive, Suite 200 San Diego, CA	92130
(Address of principal executive offices)	(Zip Code)

(800) 228-4728

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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  ¨	Accelerated filer  þ	Non-accelerated filer  ¨	Smaller reporting company  ¨
		(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  ¨    No  þ

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

Class	Outstanding at April 30, 2009
Common stock, $0.001 par value	48,307,669

VOLCANO CORPORATION

Quarterly Report on Form 10-Q for the quarter ended March 31, 2009

Index

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	a. Consolidated Balance Sheets at March 31, 2009 and December 31, 2008	3
	b. Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008	4
	c. Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2009	5
	d. Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008	6
	e. Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 6.	Exhibits	29
Signatures		30

EX-10.2

EX-31.1

EX-31.2

EX-32.1

EX-32.2

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VOLCANO CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	March 31, 2009			December 31, 2008
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	106,532		$	100,949
Short-term available-for-sale investments		37,360			48,941
Accounts receivable, net		35,984			41,795
Inventories		31,147			28,936
Prepaid expenses and other current assets		4,736			5,869
Total current assets		215,759			226,490
Restricted cash		288			327
Property and equipment, net		31,874			30,007
Intangible assets, net		14,648			15,636
Goodwill		901			842
Other non-current assets		1,959			2,177
Total assets	$	265,429		$	275,479
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	14,174		$	14,867
Accrued compensation		10,084			12,690
Accrued expenses and other current liabilities		8,833			10,745
Deferred revenues		5,224			5,872
Short-term debt		—			151
Current maturities of long-term debt		58			57
Total current liabilities		38,373			44,382
Long-term debt		20			34
Deferred license fee from a related party		813			875
Other		648			456
Total liabilities		39,854			45,747
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at March 31, 2009 and December 31, 2008.		—			—
Common stock, par value of $0.001; 250,000 shares authorized at March 31, 2009 and December 31, 2008; 48,262 and 47,883 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		48			48
Additional paid-in capital		340,888			337,063
Accumulated other comprehensive loss		(3,444	)		(3,076	)
Accumulated deficit		(111,917	)		(104,303	)
Total stockholders’ equity		225,575			229,732
Total liabilities and stockholders’ equity	$	265,429		$	275,479

See notes to unaudited consolidated financial statements.

3

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended March 31,
	2009			2008
Revenues	$	48,959		$	36,647
Cost of revenues		20,649			13,629
Gross profit		28,310			23,018
Operating expenses:
Selling, general and administrative		25,080			22,059
Research and development		8,769			5,637
In-process research and development		—			175
Amortization of intangibles		1,052			773
Total operating expenses		34,901			28,644
Operating loss		(6,591	)		(5,626	)
Interest income		301			1,833
Interest expense		(2	)		(4	)
Exchange rate (loss) gain		(1,128	)		1,679
Loss before provision for income taxes		(7,420	)		(2,118	)
Provision for income taxes		194			208
Net loss	$	(7,614	)	$	(2,326	)
Net loss per share—basic and diluted	$	(0.16	)	$	(0.05	)
Shares used in calculating net loss per share—basic and diluted		48,032			47,030

See notes to unaudited consolidated financial statements.

4

VOLCANO CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

				Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2008	47,883	$	48	$	337,063	$	(104,303	)	$	(3,076	)	$	229,732
Issuance of common stock under equity plans, net of shares repurchased	379		—		1,134								1,134
Employee stock-based compensation cost					2,637								2,637
Non-employee stock-based compensation cost					54								54
Comprehensive loss													—
Net loss							(7,614	)					(7,614	)
Foreign currency translation adjustments										(280	)		(280	)
Unrealized net loss on available-for-sale investments										(88	)		(88	)
Total comprehensive loss													(7,982	)
Balance at March 31, 2009	48,262	$	48	$	340,888	$	(111,917	)	$	(3,444	)	$	225,575

See notes to unaudited consolidated financial statements.

5

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2009			2008
Operating activities
Net loss	$	(7,614	)	$	(2,326	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		3,404			2,220
Accretion of investment discount, net		127			(245	)
Non-cash stock-based compensation expense		2,715			2,061
Loss (gain) on foreign exchange		1,128			(1,679	)
Loss on disposal of long-lived assets		98			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		5,432			3,139
Inventories		(2,325	)		(1,019	)
Prepaid expenses and other assets		1,319			99
Accounts payable		(791	)		(1,402	)
Accrued compensation		(2,574	)		(899	)
Accrued expenses and other liabilities		(1,090	)		563
Deferred revenues		(674	)		335
Net cash (used in) provided by operating activities		(845	)		847
Investing activities
Purchase of short-term available-for-sale securities		(20,540	)		(41,516	)
Sale or maturity of short-term available-for-sale securities		31,907			52,400
Capital expenditures		(4,199	)		(2,074	)
Cash paid for acquisitions		(699	)		(975	)
Cash paid for other intangibles		(64	)		(29	)
Proceeds from sale of long-lived assets		—			8
Net cash provided by investing activities		6,405			7,814
Financing activities
Repayment of short-term debt		(151	)		—
Repayment of long-term debt		(14	)		(80	)
Proceeds from sale of common stock under employee stock purchase plan		998			767
Proceeds from exercise of common stock options		539			231
Repurchases of common stock		(403	)		—
Release of restricted cash		32			—
Net cash provided by financing activities		1,001			918
Effect of exchange rate changes on cash and cash equivalents		(978	)		80
Net increase in cash and cash equivalents		5,583			9,659
Cash and cash equivalents, beginning of period		100,949			122,913
Cash and cash equivalents, end of period	$	106,532		$	132,572
Supplemental disclosures
Cash paid for interest	$	2		$	4
Cash paid for income taxes	$	29		$	78

See notes to unaudited consolidated financial statements.

6

VOLCANO CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation and Nature of Operations

The unaudited consolidated financial statements of Volcano Corporation (“we”, “us”, “our” or the “Company”) contained in this quarterly report on Form 10-Q include our financial statements and the financial statements of our wholly-owned subsidiaries, Volcano Japan Co. Ltd. (“Volcano Japan”), Volcano Europe S.A./N.V. (“Volcano Europe”), Axsun Technologies, Inc. (“Axsun”) and Volcano Therapeutics South Africa (Pty) Ltd., a wholly-owned subsidiary of Volcano Europe. We design, develop, manufacture and commercialize a broad suite of intravascular ultrasound (“IVUS”) and functional measurement (“FM”) products that we believe enhance the diagnosis and treatment of vascular and structural heart disease. Our IVUS products consist of consoles, single-procedure disposable catheters and advanced functionality options and our FM products consist of pressure and flow consoles and single-procedure disposable pressure and flow guide wires. We are also developing ultra-high resolution Optical Coherence Tomography (“OCT”) systems and catheters, Forward-Looking IVUS (“FLIVUS”) systems and catheters and image-guided therapy products. We also develop and manufacture optical monitors, lasers, and optical engines used in OCT imaging systems and advanced photonic components and subsystems used in spectroscopy and other industrial applications.

We have prepared the accompanying financial information at March 31, 2009 and for the three months ended March 31, 2009 and 2008, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, the unaudited financial information at March 31, 2009 and for the three months ended March 31, 2009 and 2008 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Concentrations of Credit Risk

Goodman Company, Ltd. (“Goodman”), a distributor of our IVUS and FM products in Japan, accounted for approximately 12% and 19% of our revenues for the three months ended March 31, 2009 and 2008, respectively, and approximately 13% and 18% of our trade receivables at March 31, 2009 and December 31, 2008, respectively. No other single customer accounted for more than 10% of our revenues for any period presented and at March 31, 2009 and December 31, 2008, no other single customer accounted for more than 10% of our trade receivables.

In May 2008, we and Goodman mutually terminated our exclusive distribution agreements related to the distribution of our IVUS and FM products in Japan. We did not pay and we are not obligated to pay a fee in connection with this termination. Upon termination of our agreements with Goodman, we monitor the credit risk associated with Goodman as well as other general economic conditions and, accordingly, we have made and continue to make adjustments to the credit terms that are extended to Goodman. We have accelerated our direct sales strategy in Japan and currently expect to place and sell our products in Japan directly through an internal sales force beginning in the second quarter of 2009. Accordingly, as we implement this direct sales strategy, we expect to reduce distribution of our products through Goodman during the second and third quarters of 2009. We are currently discussing with Goodman the terms of our transition and currently cannot ascertain the timing and the impact of the transition on our operating expenses and subsequent net income. There is no assurance that we will reach an agreement with Goodman. Regardless of whether we reach an agreement with Goodman relating to the transition, our efforts to implement a direct sales strategy in Japan may adversely impact our revenues, results of operations and financial condition and cause us to incur additional expenses sooner than initially planned.

Stock-Based Compensation

We account for stock-based compensation under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified prospective method. We recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards. See Note 7 “Stockholders’ Equity” for additional information.

Product Warranty Costs

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

7

Accrued warranty liability is included in accrued expenses and other current liabilities in the unaudited consolidated balance sheets. The change in the accrued warranty liability for the three months ended March 31, 2009 and 2008 is summarized in the following table (in thousands):

	Three Months Ended March 31,
	2009			2008
Balance at beginning of period	$	1,104		$	1,129
Warranties issued		435			433
Settlements		(506	)		(571	)
Balance at end of period	$	1,033		$	991

Net Loss Per Share

Basic and diluted net loss per share is presented in accordance with SFAS No. 128, Earnings per Share. Basic net loss per share is computed by dividing consolidated net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing consolidated net loss by the weighted-average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the period. For the three months ended March 31, 2009 and 2008, our potentially dilutive shares, which include outstanding common stock options, restricted stock units and warrants have not been included in the computation of diluted net loss per share, as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. We were in a loss position for all periods presented and, accordingly, there is no difference between basic net loss per share and diluted net loss per share.

The basic and diluted net loss per share calculations for the three months ended March 31, 2009 and 2008 are as follows (in thousands, except per share data):

	Three Months Ended March 31,
	2009			2008
Net loss	$	(7,614	)	$	(2,326	)
Weighted-average number of shares used in computing net loss per share—basic and diluted		48,032			47,030
Net loss per share—basic and diluted	$	(0.16	)	$	(0.05	)

The following table sets forth potential shares of common stock at the end of each period presented that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive (in thousands):

	March 31,
	2009	2008
Stock options outstanding	5,968	5,656
Unvested restricted stock units	769	365
Warrants to purchase common stock	—	127

Collaboration Arrangements

We enter into collaboration arrangements with third-parties to perform research and development activities on our behalf. We account for these collaboration arrangements in accordance with the Emerging Issues Task Force (“EITF”) Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”) and EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent (“EITF 99-19”). Expenses recognized for our collaboration arrangements are recorded in research and development expense.

8

Recent Accounting Pronouncements

In April 2009 the Financial Accounting Standards Board (“FASB”) issued three related Staff Positions: (i) FASB Staff Position (“FSP”) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), (ii) FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FSP FAS 124-2”), and (iii) FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), which will be effective for interim and annual periods ending after June 15, 2009. FSP FAS 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157, Fair Value Measurements (“SFAS 157”), in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of an asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP FAS 115-2 and FSP FAS 124-2 modifies the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP FAS 107-1 and APB 28-1 enhances the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We are currently evaluating the impact these FSPs will have on our consolidated financial position and results of operations.

On January 1, 2009, we adopted EITF 07-1. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. EITF 07-1 requires that transactions with third parties (i.e., revenue generated and costs incurred by the partners) should be reported in the appropriate line item in each company’s financial statements pursuant to the guidance in EITF Issue No. 99-19. EITF 07-1 also includes enhanced disclosure requirements regarding the nature and purpose of the arrangement, the rights and obligations under the arrangement, the accounting policy, the amount and the income statement classification of collaboration transactions between the parties. The adoption of EITF 07-1 did not have a material impact on our current or prior consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”), which provides revised guidance on the acquisition of businesses. This standard changes the current guidance to require that all acquired assets, liabilities, minority interests and certain contingencies be measured at fair value, and certain other acquisition-related costs be expensed rather than capitalized. SFAS 141(R) also includes a substantial number of new disclosure requirements. SFAS 141(R) will apply to all of our future business combinations.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for non-controlling interests in consolidated financial statements. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and early adoption is prohibited. We do not have non-controlling interests that require application of the pronouncement.

In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal periods beginning after November 15, 2008. We adopted SFAS 157 to our nonfinancial assets and nonfinancial liabilities, which include assets and liabilities acquired in connection with business combinations and intangible assets. Our adoption of SFAS 157 for nonfinancial assets and liabilities did not have an impact on our consolidated financial position as of March 31, 2009 or our results of operations for the three months ended March 31, 2009.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. SFAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We currently have no derivatives or hedging activities that require application of the pronouncement.

In April 2008, the FASB issued a final FSP on SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. FSP FAS 142-3 will apply to all of our future acquisitions of intangible assets.

2. Acquisitions

CardioSpectra Acquisition

On December 18, 2007, we acquired CardioSpectra, Inc. (“CardioSpectra”), a privately-held company, as a wholly-owned subsidiary of Volcano. The acquisition was accounted for as an asset purchase in accordance with SFAS No. 141, Business Combinations (“SFAS 141”).

We acquired all of the outstanding equity interests in CardioSpectra for $27.0 million, consisting of $25.2 million in cash, transaction costs of $1.4 million and assumed liabilities of $0.4 million. Additional payments up to an aggregate of $38.0 million are due in the event certain milestones set forth in the Merger Agreement are achieved. The milestone payments are payable, at our sole discretion, in cash, shares of our common stock, or a combination of both and will be accounted for if and when the milestone payments become payable. The acquisition of CardioSpectra’s OCT technology is expected to complement our existing product offerings and further enhance our position as an imaging technology leader in the field of interventional medicine.

At March 31, 2009, the in-vivo testing had begun for the OCT program and it is expected to commercialize by late 2010. We will use commercially reasonable efforts to cause the milestones to occur. However, if we reasonably determine that a technical failure or commercial failure has occurred with respect to all or a part of the OCT program, we may, at our sole discretion, terminate all or part of the OCT cardiovascular program.

9

Novelis Acquisition

On May 15, 2008, we acquired all of the outstanding equity interests in Novelis, Inc. (“Novelis”), a privately-held company, which developed proprietary ultrasonic visualization and therapy technology for minimally invasive diagnostic and therapeutic devices. The core product line of Novelis is based on FLIVUS technology. The aggregate purchase price of $12.3 million was paid in cash and included transaction costs of $204,000. In addition, we may make an additional cash payment of $3.0 million based on the achievement of a specific regulatory milestone.

Axsun Acquisition

On December 24, 2008, we acquired all of the outstanding equity interests in Axsun, a privately-held company that develops and manufactures optical monitors for telecommunications, lasers and optical engines used in OCT imaging systems and advanced photonic components and subsystems used in spectroscopy and other industrial applications. The aggregate purchase price of $23.7 million consisted of $21.5 million paid in cash, $842,000 of accrued purchase consideration related to a working capital adjustment as defined in the purchase agreement, assumed liabilities of $6.5 million, and transaction costs of $725,000, net of cash received of $5.8 million. We recorded an additional $59,000 of transaction costs to goodwill during the three months ended March 31, 2009.

Of the $21.5 million cash consideration, $2.3 million was contributed to two escrow funds. The first escrow fund of $120,000 will be available to indemnify us for damages arising from the exercise of appraisal rights by the former stockholders of Axsun and is subject to release when all such claims are resolved. As of March 31, 2009, there were no outstanding claims against the escrow and we expect the balance of the escrow account to be released in May 2009. The second escrow fund of $2.2 million is available to indemnify us and related indemnitees for certain matters, including breaches of representations and warranties and covenants included in the merger agreement for 15 months following the closing.

3. Financial Statement Details

Cash and Cash Equivalents and Short-Term Available-for-Sale Investments

SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1, observable inputs such as quoted prices in active markets; Level 2, inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3, unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions. This hierarchy requires that we use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure our investments and marketable securities at fair value. Our cash and cash equivalents and short-term available-for-sale investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

The fair value of our financial assets subject to the disclosure requirements of SFAS 157 was determined using the following levels of inputs at March 31, 2009 and December 31, 2008 (in thousands):

	Fair Value Measurements at March 31, 2009
	Total		Level 1		Level 2		Level 3
Assets:
Cash	$	12,822	$	12,822	$	—	$	—
Money market funds		93,710		93,710		—		—
Corporate debt securities		27,374		27,374		—		—
U.S. Treasury and agency debt securities		9,986		9,986		—		—
Total	$	143,892	$	143,892	$	—	$	—
	Fair Value Measurements at December 31, 2008
	Total		Level 1		Level 2		Level 3
Assets:
Cash	$	14,243	$	14,243	$	—	$	—
Money market funds		86,706		86,706		—		—
Corporate debt securities		43,941		43,941		—		—
U.S. Treasury and agency debt securities		5,000		5,000		—		—
Total	$	149,890	$	149,890	$	—	$	—

10

During the three months ended March 31, 2009, no transfers were made into or out of the Level 2 or Level 3 categories.

Short-term investments have been classified as available-for-sale investments. At March 31, 2009, available-for-sale investments are detailed as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Corporate debt securities	$	27,403	$	31	$	60	$	27,374
U.S. Treasury and agency debt securities		9,979		7		—		9,986
Total	$	37,382	$	38	$	60	$	37,360

We invest our excess funds in short-term securities issued by the United States government, corporations, banks, municipalities, financial holding companies and in money market funds comprised of these same types of securities. Our cash and cash equivalents and short-term available-for-sale investments are placed with high credit quality financial institutions. Additionally, we diversify our investment portfolio in order to maintain safety and liquidity and we do not hold auction-rate or mortgage-backed securities. As of March 31, 2009, all of our investments will mature within one year. These investments are recorded at their estimated fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss.

Inventories

Inventories consist of the following (in thousands):

	March 31, 2009		December 31, 2008
Finished goods	$	8,423	$	10,121
Work-in-process		8,241		6,592
Raw materials		14,483		12,223
Total	$	31,147	$	28,936

4. Debt and Credit Facilities

In January 2009, we paid all principal and interest outstanding under the Loan and Security Agreement assumed in our acquisition of Axsun totaling $153,000, which represents the principal balance of $151,000 plus accrued interest.

The amounts outstanding for long-term debt all relate to capital leases at March 31, 2009 and December 31, 2008.

5. Intangible Assets

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

During the three months ended March 31, 2009, we recorded intangible asset additions of $64,000 related to internally developed patents and trademarks.

At March 31, 2009, intangible assets subject to amortization, by major class, consisted of the following (in thousands):

	March 31, 2009
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years)
Developed technology	$	20,565	$	11,259	$	9,306	7.3
Licenses		7,034		4,257		2,777	10.0
Customer relationships		2,473		1,509		964	6.7
Patents and trademarks		2,146		733		1,413	7.3
Assembled workforce		274		86		188	4.0
Total	$	32,492	$	17,844	$	14,648	7.6

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At March 31, 2009, future amortization expense associated with our intangible assets is expected to be as follows (in thousands):

2009 (remaining nine months)	$	3,162
2010		2,040
2011		2,039
2012		1,969
2013		1,636
Thereafter		3,802
Total	$	14,648

6. Commitments and Contingencies

Litigation

On January 7, 2009, LightLab Imaging Inc., or LightLab, filed a complaint against Volcano and its wholly-owned subsidiary, Axsun, in the Superior Court of Massachusetts, Suffolk County, seeking injunctive relief and unspecified damages. LightLab’s complaint alleges that Volcano interfered with LightLab’s development and supply agreement with Axsun, or Agreement, and its advantageous business relationship with Axsun, that Axsun breached its Agreement and that Axsun and Volcano misappropriated LightLab’s confidential information and trade secrets. The allegations in the complaint are based in large part on Volcano’s acquisition of Axsun and Volcano’s resulting access to the technical specifications and related pricing and order information with respect to the lasers manufactured by Axsun for LightLab. LightLab, a wholly owned subsidiary of Goodman, which is a distributor of Volcano’s IVUS and FM products in Japan, develops and sells OCT products for cardiovascular imaging and other medical uses. Along with its complaint, on January 7, 2009, LightLab also filed a motion for a temporary restraining order, which Axsun and Volcano opposed. On January 8, 2009, the Superior Court in Massachusetts issued a preliminary injunction against Axsun and Volcano, noting that discovery had been limited and directing the parties to prepare for a full hearing following more complete discovery. Following the discovery and subsequent hearing, the court reconsidered the broad injunction and on March 16, 2009 issued a much more limited order that provides that Axsun comply with the Agreement by not disclosing LightLab’s confidential information to Volcano. The order also provided that Axsun could not work with Volcano on the very specific version of the tunable laser as detailed in an exhibit to the Agreement. Subsequent to the court decision, LightLab filed an interlocutory appeal of this order which was denied. In addition, on March 3, 2009, LightLab filed a motion seeking an additional injunction to require Axsun to amend the Agreement to define the lasers to be delivered by Axsun under the Agreement to be a newer version developed and manufactured by Axsun. On April 2, 2009, the court denied LightLab’s motion for the additional injunction. A trial date has been scheduled for January 5, 2010. We believe the complaint is without merit and are defending ourselves vigorously. Under the existing order Axsun can continue to sell its lasers and micro-electro-mechanical systems to the market, including to Volcano, except Axsun cannot sell the specific tunable laser design detailed in the Agreement for cardiovascular imaging to any person other than Lightlab as long as Lightlab continues to have exclusive rights in the specified lasers under the Agreement. In addition, Volcano can proceed with working with Axsun on the design of other lasers for use with Volcano’s OCT products. Due to the preliminary nature of the litigation we are not able to make a reliable estimate of the range of possible loss, if any, and no loss reserves have been recorded related to the complaint in our financial statements.

We may also be a party to various other claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred and were not material in any period reported. Additionally, we assess, in conjunction with our legal counsel, the need to record a liability for litigation and contingencies. Reserve estimates are recorded when and if it is determined that a loss related matter is both probable and reasonably estimable. We believe that the ultimate disposition of these matters will not have a material impact on our consolidated results of operations, financial position or cash flows. Our evaluation of the likely impact of these matters could change in the future and unfavorable outcomes and/or defense costs, depending upon the amount and timing, could have a material adverse effect on results of operations or cash flows in future periods.

Operating Leases

We entered into a facility lease agreement for approximately 22,000 square feet of office space for our new corporate headquarters in San Diego, California for which we are obligated to pay approximately $633,000 of rent over a 16 month period commencing on April 1, 2009. Approximately $248,000 of rent is payable by December 31, 2009. We provided a $55,000 security deposit in accordance with the terms of the lease. We also renewed the facility lease for our facility in Billerica, Massachusetts for which we are obligated to pay approximately $2.9 million of rent over a five year period commencing on November 1, 2009. We have the right to renew the lease for an additional five years. The lease contains a rent escalation clause of approximately 3% per year in each of the successive years of the lease term. Rent expense is being recognized on a straight-line basis over the minimum lease terms.

Purchase Commitments

We have obligations under non-cancelable purchase commitments for inventory, primarily raw materials. At March 31, 2009, the future minimum payments under these non-cancelable purchase commitments totaled $21.8 million. Approximately $19.5 million of these commitments will require payment prior to December 31, 2009 and the remaining amounts will require payment at various dates through December 31, 2011.

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Indemnification

Our supplier, distributor and collaboration agreements generally include certain provisions for indemnification against liabilities if our products are recalled, infringe a third-party’s intellectual property rights or cause bodily injury due to alleged defects in our products. In addition, we have agreements with our present and former directors and executive officers indemnifying them against liabilities arising from service in their respective capacities to the Company. We maintain directors’ and officers’ insurance policies that may limit our exposure to such liabilities. To date, we have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

CardioSpectra Acquisition

In connection with our December 2007 acquisition of CardioSpectra, we may make additional payments of up to an aggregate of $38.0 million in the event that certain milestones, as set forth in the Merger Agreement (see Note 2), are achieved.

Novelis Acquisition

In connection with the Novelis Acquisition (see Note 2), we may make an additional cash payment of $3.0 million based on the achievement of a specific regulatory milestone.

Collaboration Agreements

In October 2007, we signed a clinical research support agreement with a third party in which the third party will conduct clinical studies concerning drug eluting stents. We have agreed to provide a total of $4.6 million to fund clinical study activities. We have a remaining obligation of up to $4.1 million and we will be billed as services are performed under the agreement.

7. Stockholders’ Equity

Stock Benefit Plans

At March 31, 2009, we have granted options and restricted stock units (“RSUs”) under the 2005 Equity Compensation Plan (the “2005 Plan”) and we have granted options under the 2000 Long Term Incentive Plan (the “2000 Plan”) under which a maximum aggregate number of 11,662,558 shares of our common stock may be issued or transferred to our employees, non-employee directors and consultants. Commencing in October 2005, options and awards have been and continue to be granted under the 2005 Plan. Options previously granted under the 2000 Plan that are cancelled or expire will increase the shares available for grant under the 2005 Plan. In addition, employees have purchased shares of the Company’s common stock under the 2007 Employee Stock Purchase Plan (the “Purchase Plan”). At March 31, 2009, 1,610,554 shares and 870,525 shares remained available to grant under the 2005 Plan and the Purchase Plan, respectively.

Stock Option Activity

Option activity for the three months ended March 31, 2009 is as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2008	5,957,995		$	10.62
Granted	472,000			13.84
Exercised	(239,961	)		2.25
Forfeited or expired	(222,334	)		17.35
Outstanding and exercisable at March 31, 2009	5,967,700			10.96	5.4	$	29,231
Vested and expected to vest at March 31, 2009	5,889,347			10.91	5.4		29,146

The total intrinsic value of stock options exercised during the three months ended March 31, 2009 and 2008 was $3.0 million and $896,000, respectively, which represents the difference between the exercise price of the option and the fair value of our common stock on the dates exercised.

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Non-vested option activity for the three months ended March 31, 2009 is as follows:

	Options		Weighted-Average Grant Date Fair Value
Non-vested shares subject to options at December 31, 2008	2,584,281		$	7.15
Granted	472,000			5.52
Vested	(254,863	)		6.46
Forfeited or expired	(222,334	)		8.16
Non-vested shares subject to options at March 31, 2009	2,579,084			6.83

The weighted-average grant date fair value of options granted during the three months ended March 31, 2009 and 2008 was $5.52 and $5.58, respectively.

Restricted Stock Unit Activity

RSU activity for the three months ended March 31, 2009 is as follows:

	Shares
Non-vested shares subject to RSUs at December 31, 2008	362,811
Granted	500,000
Vested	(88,303	)
Forfeited or expired	(5,692	)
Non-vested RSUs at March 31, 2009	768,816

These time-vested RSUs entitle the holder to shares of common stock as the units vest in equal annual installments over a four-year period. The weighted-average grant-date fair value of each RSU granted during the three months ended March 31, 2009 and 2008 was $13.69 and $12.96, respectively.

During the three months ended March 31, 2009, we released 88,072 shares of common stock based on the vesting terms of certain RSU agreements. In order for employees to satisfy minimum statutory tax withholding obligations upon releases of common stock underlying these RSU agreements, we repurchased 26,950 shares of common stock with a total value of $403,000 as of February 27, 2009. There was no common stock held in treasury as of March 31, 2009.

Employee Stock Purchase Plan Activity

On June 7, 2007, our stockholders approved the adoption of the Purchase Plan. The Purchase Plan provides eligible employees the opportunity to purchase shares of the Company’s common stock at the lower of up to 85% of the fair market value on the first or last day of the applicable offering period, by having withheld from their salary an amount up to 15% of their compensation, without paying brokerage fees or commissions on purchases. Our Purchase Plan is deemed to be compensatory, and therefore, Purchase Plan expense under SFAS 123(R) has been included in our consolidated statements of operations for the three months ended March 31, 2009 and 2008. We pay for the administrative expenses of the Purchase Plan. No employee may purchase more than $25,000 worth of common stock (calculated at the time the purchase right is granted) in any calendar year, nor purchase more than 750 shares in any six-month purchase period.

Commencing January 1, 2008, common stock reserved for issuance under the Purchase Plan automatically increases by the lesser of 1 1/2% of our outstanding common stock or 600,000 shares on the first day of January of each year. In November 2008, the Board of Directors exercised its right to not increase the number of shares of common stock available for issuance under the Purchase Plan as it was scheduled to occur on January 1, 2009. As a result, at March 31, 2009, the number of shares of common stock reserved for issuance under the Purchase Plan remained at 1,100,000 shares.

During the three months ended March 31, 2009 and 2008, 78,462 and 73,571 shares, respectively, were purchased at an average per share price of $12.72 and $10.42, respectively.

Fair Value Assumptions

The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option-pricing (the “Black-Scholes”) model utilizing the following weighted-average assumptions:

	Three Months Ended March 31,
	2009		2008
Risk-free interest rate	1.9	%	3.3	%
Expected life (years)	5.2		5.2
Estimated volatility	45.5	%	47.4	%
Expected dividends	None		None

The risk-free interest rate for periods within the contractual life of the option is based on the implied yield available on United States Treasury constant rate securities with the same or substantially equivalent remaining terms at the time of grant.

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Commencing on January 1, 2008, we estimate the expected term using our historical share option exercise experience.

Estimated volatility was calculated using the historical volatility of the common stock of comparable medical device companies using weekly price observations over a period generally commensurate with the expected term of our options. We did not exclude any period due to discrete historical events. We use the historical volatility of similar companies due to the limited trading history of our common stock. Since the completion of our initial public offering, we have also included the weekly price observations of our common stock, weighted for the number of price observations, in our estimate of volatility. We also evaluate, at least annually, whether circumstances have changed such that the identified entities are no longer similar to us, and remove or replace the peer companies in our analysis. We will continue to assess the appropriateness of our methodology for future periods.

We use a zero value for the expected dividend value factor since we have not declared any dividends in the past and we do not anticipate declaring any dividends in the foreseeable future.

Under SFAS 123(R), the fair value of each purchase option under the Purchase Plan is estimated at the beginning of each purchase period using the Black-Scholes model utilizing the following weighted-average assumptions:

	Three Months Ended March 31,
	2009			2008
Risk-free interest rate		1.4	%		3.4	%
Expected life (years)		0.5			0.5
Estimated volatility		57.1	%		50.2	%
Expected dividends		None			None
Fair value of purchase right	$	5.17		$	4.35

The computation of the expected volatility assumption used in the Black-Scholes model for purchase rights is based on the trading history of our common stock. The expected life assumption is based on the six-month term of each offering period. The risk-free interest rate is based on the United States Treasury constant maturity securities with the same or substantially equivalent remaining term in effect at the beginning of the offering period. We use a zero value for the expected dividend value factor since we have not declared any dividends in the past and we do not anticipate declaring any dividends in the foreseeable future.

Under SFAS 123(R), we estimate forfeitures and only recognize expense for those shares expected to vest. Our estimated forfeiture rates in the three months ended March 31, 2009 and 2008 are based on our historical forfeiture experience.

Stock-Based Compensation Expense

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

	Three Months Ended March 31,
	2009		2008
Cost of revenues	$	211	$	191
Selling, general and administrative		2,080		1,501
Research and development		424		369
Total	$	2,715	$	2,061

Included in our stock-based compensation expense is $54,000 and $35,000 of stock-based compensation expense related to non-employees in the three months ended March 31, 2009 and 2008, respectively. In addition, $167,000 and $81,000 of stock-based compensation expense related to the Purchase Plan was recorded in the three months ended March 31, 2009 and 2008, respectively. At March 31, 2009 and December 31, 2008, there was $242,000 and $266,000, respectively, of total stock-based compensation cost capitalized in inventories.

At March 31, 2009, there was $17.0 million, $10.1 million and $447,000 of total unrecognized compensation cost for stock options, RSUs and the Purchase Plan, respectively, which is expected to be recognized over weighted average terms of 2.7 years, 3.5 years and 0.4 years, respectively.

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

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Comprehensive Loss

The following table summarizes the components of comprehensive loss (in thousands):

	Three Months Ended March 31,
	2009			2008
Net loss	$	(7,614	)	$	(2,326	)
Other comprehensive loss:
Unrealized loss on available-for-sale securities		(88	)		(27	)
Foreign currency translation adjustments		(3,422	)		(1,033	)
Total comprehensive loss	$	(3,510	)	$	(1,060	)

The following table summarizes the components of our accumulated other comprehensive loss (in thousands):

	March 31, 2009			December 31, 2008
Unrealized gain (loss) on available-for-sale securities	$	(22	)	$	66
Accumulated foreign currency translation adjustments		(3,422	)		(3,142	)
	$	(3,444	)	$	(3,076	)

8. Segment and Geographic Information

Our chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about segment revenues by product and geographic region for purposes of making operating decisions and assessing financial performance. Historically, we considered ourselves to be a single reporting segment, specifically the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system (“Medical Segment”). In connection with our acquisition of Axsun in December 2008, we operate an additional segment, specifically the discovery, development, manufacture and sale of advanced photonic components and subsystems to telecommunications companies (“Telecom Segment”).

We do not assess the performance of our segments on other measures of income or expense, such as depreciation and amortization, operating income or net income. We do not produce reports for, or measure the performance of, our segments on any asset-based metrics. Therefore, segment information is presented only for revenues by product.

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

	Three Months Ended March 31,				Percentage Change
	2009		2008		2008 to 2009
Medical segment:
IVUS:
Consoles	$	8,411	$	6,372	32.0	%
Single-procedure disposables		29,120		25,203	15.5
FM:
Consoles		85		343	(75.2	)
Single-procedure disposables		6,260		3,434	82.3
Other		1,705		1,295	31.7
Sub-total medical segment		45,581		36,647	24.4
Telecom segment		3,378		—	n/a
	$	48,959	$	36,647	33.6

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

	Three Months Ended March 31,				Percentage Change
	2009		2008		2008 to 2009
Revenues (1):
United States	$	24,210	$	18,228	32.8	%
Japan		11,684		10,089	15.8
Europe, the Middle East and Africa		9,636		6,861	40.4
Rest of world		3,429		1,469	133.4
	$	48,959	$	36,647	33.6

(1) Revenues are attributed to geographies based on the location of the customer, except for shipments by original equipment manufacturers, which are attributed to the country of the origin of the equipment distributed.

Approximately 73% of our long-lived assets are located in the United States, approximately 20% are located in Japan, and less than 10% are located in each of our other respective geographies.

9. Income Taxes

We are subject to taxation in the U.S. and various state and foreign jurisdictions. We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. We are open for audit by the United States Internal Revenue Service and state tax jurisdictions from our inception in 2000 to 2008. We were audited by the Belgian tax authorities for the 2005 and 2006 years. There were no significant adjustments as a result of this audit. We continue to be open for audit by Belgium and various European tax jurisdictions from the inception of Volcano Europe in 2003 to 2008. We were audited by the Japanese tax authorities for the 2005 to 2007 years. There were no significant adjustments as a result of this audit. We continue to be open for audit by the Japanese tax authorities from the inception of Volcano Japan in 2004 to 2008.

For the three months ended March 31, 2009 and 2008, we recorded a provision for income taxes of approximately $194,000 and $208,000, respectively. The provision for income taxes consisted primarily of foreign income taxes, domestic state income taxes and federal alternative minimum tax.

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

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

Overview

We design, develop, manufacture and commercialize a broad suite of intravascular ultrasound, or IVUS, and functional measurement, or FM, products. We believe that these products enhance the diagnosis and treatment of vascular heart disease by improving the efficiency and efficacy of existing percutaneous interventional, or PCI, therapy procedures in the coronary or peripheral arteries. We market our products to physicians and technicians who perform PCI procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals.

Our IVUS products consist of ultrasound consoles, single-procedure disposable phased array and rotational IVUS imaging catheters and additional functionality options such as virtual histology, or VH, IVUS tissue characterization and ChromaFlo stent apposition analysis. Our IVUS consoles are marketed as stand-alone units or customized units that can be integrated into a variety of hospital-based interventional surgical suites called catheterization laboratories, or cath labs. We have developed customized cath lab versions of these consoles and are developing additional functionality options as part of our cath lab integration initiative. Our IVUS consoles have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, fractional flow reserve, or FFR, pressure wires and Medtronic’s Pioneer reentry device. We are developing additional offerings for integration into the platform, including, forward-looking IVUS, or FLIVUS, catheters, image-guided therapy catheters and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters.

Our FM offerings include consoles and single-procedure disposable pressure and flow guide wires used to measure the pressure and flow characteristics of blood around plaque enabling physicians to gauge the plaque’s physiological impact on blood flow and pressure.

We also develop and manufacture optical monitors, lasers, and optical engines used in OCT imaging systems and advanced photonic components and subsystems used in spectroscopy and other industrial applications.

We have corporate infrastructure in the United States, Europe and Japan; direct sales capabilities in the United States; and a combination of direct sales and distribution relationships in international markets, including Japan, Europe, the Middle East, Canada, Asia Pacific and Latin America. Our corporate office is located in San Diego, California. Our worldwide manufacturing and research and development operations are located in Rancho Cordova, California. We also have additional research and development facilities in Cleveland, Ohio; Forsyth County, Georgia; San Antonio, Texas; and Andover, Massachusetts. We have sales offices in Alpharetta, Georgia and Tokyo, Japan; sales and distribution offices in Zaventem, Belgium and Woodmead, South Africa; and a third-party distribution facility in Chiba, Japan. In addition, we have facilities in Billerica, Massachusetts for the primary operations of Axsun Technologies, Inc., or Axsun, our wholly owned subsidiary.

We have focused on building our domestic and international sales and marketing infrastructure to market our products to physicians and technicians who perform PCI procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals. At March 31, 2009, we had approximately 906 worldwide employees, including approximately 387 manufacturing employees, 226 sales and marketing employees and approximately 138 research and development employees.

In the three months ended March 31, 2009 and 2008, 33.3% and 18.8%, respectively, of our revenues and 19.5% and 15.0%, respectively, of our operating expenses were denominated in foreign currencies, primarily the Euro and the Yen. As a result, we are subject to risks related to fluctuations in foreign currency exchange rates, which could affect our operating results in the future.

On May 19, 2008, we and Goodman Company, Ltd., or Goodman, mutually terminated the Exclusive Distribution Agreement, dated September 27, 2004, pursuant to which Goodman distributed our IVUS products in Japan. Also on May 19, 2008, the oral agreement between us and Goodman, related to the exclusive distribution of our FM products in Japan, was terminated. We did not pay and we are not obligated to pay a termination fee in connection with this termination. Upon termination of our agreements with Goodman, we monitor the credit risk associated with Goodman as well as other general economic conditions and, accordingly, we have made and continue to make adjustments to the credit terms that are extended to Goodman. On June 30, 2008, Goodman transferred to us all marketing authorization and other regulatory approvals, or SHONINs, for all specified products held by Goodman or its affiliates. Although Goodman currently continues to distribute our rotational IVUS and FM products in Japan on a non-exclusive, purchase order basis, we have accelerated our direct sales strategy in Japan and currently expect to place and sell our products in Japan directly through an internal sales force beginning in the second quarter of 2009. Accordingly, as we implement this direct sales strategy, we expect to reduce distribution of our products through Goodman during the second and third quarters of 2009. We are currently discussing with Goodman the terms of our transition and currently cannot ascertain the timing and the impact of the transition on our operating expenses and subsequent net income. There is no assurance that we will reach an agreement with Goodman. Regardless of whether we reach an agreement with Goodman relating to the transition, our efforts to implement a direct sales strategy in Japan may adversely impact our revenues, results of operations and financial condition and cause us to incur additional expenses sooner than initially planned.

At March 31, 2009, we had a worldwide installed base of over 3,500 IVUS consoles and over 800 FM consoles. We intend to grow and leverage this installed base to drive recurring sales of our single-procedure disposable catheters and guide wires. In the three months ended March 31, 2009, the sale of our single-procedure disposable catheters and guide wires accounted for $35.4 million, or 72.3% of our revenues, a $6.7 million, or 23.5% increase from 2008, in which the sale of our single-procedure disposable catheters and guide wires accounted for $28.6 million, or 78.1% of our revenues.

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

On December 18, 2007, we acquired CardioSpectra, Inc., or CardioSpectra. Through CardioSpectra, we are developing innovative OCT technology, which is expected to complement our existing product offerings and further enhance our position as an imaging technology leader in the field of interventional medicine. OCT technology enables high resolution imaging of highly detailed structures in the vasculature, including vessel wall defects, intra-luminal thrombus and stent struts. Our long term goal is to integrate this OCT functionality into our s5i integrated imaging suite of products.

On May 15, 2008, we acquired Novelis, Inc., or Novelis, a company with proprietary ultrasonic visualization and therapy technology for minimally invasive diagnostic and therapeutic devices. Novelis’ proprietary FLIVUS technology platform is expected to build upon our existing suite of products and further enhance our position as an imaging technology leader in the field of interventional medicine by enabling FLIVUS and associated therapies in the interventional cardiology market. We expect to add the Novelis products and capability onto our s5i multi-modality integrated platform/hub.

On December 24, 2008, we acquired Axsun, a company that develops and manufactures optical monitors for telecommunications, lasers and optical engines used in medical OCT imaging systems and advanced photonic components and subsystems used in spectroscopy and other industrial applications. We believe Axsun’s proprietary OCT technology will provide us competitive advantages in the invasive imaging sector. In connection with the Axsun acquisition, we and Axsun were sued by LightLab Imaging, Inc., or LightLab. LightLab is a wholly owned subsidiary of Goodman, a distributor of our IVUS and FM products in Japan, and LightLab develops and sells OCT products for cardiovascular imaging and other medical uses. We believe the complaint is without merit and we intend to defend ourselves vigorously.

Economic conditions have continued to deteriorate significantly in many countries and regions, including without limitation the United States, and may remain depressed for the foreseeable future. If our customers do not obtain or do not have access to the necessary capital to operate their businesses, or are otherwise adversely affected by the deterioration in national and worldwide economic conditions, this could result in reductions in the sales of our products, longer sales cycles and slower adoption of new technologies by our customers, which would materially and adversely affect our business. In addition, our customers’ and suppliers’ liquidity, capital resources and credit may be adversely affected by the current financial and credit crisis, which could adversely affect our ability to collect on our outstanding invoices and lengthen our collection cycles, or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters. There can be no assurances that government responses to the disruptions in the financial or credit markets will improve the national and worldwide economic conditions in the near term.

Financial Operations Overview

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

Revenues. We generate revenues from two reporting segments: medical and telecom. Our medical segment represents our core business, in which we derive revenues primarily from the sale of our IVUS and FM consoles and single-procedure disposables. Our telecom segment derives revenues related to the sales of Axsun’s advanced photonic components and subsystems to telecommunication companies. In the three months ended March 31, 2009, we generated $49.0 million of revenues which is composed of $45.6 million from our medical segment and $3.4 million from our telecom segment. In the three months ended March 31, 2009, 82.3% of our medical segment revenues were derived from the sale of our IVUS consoles and IVUS single-procedure disposables, as compared with 86.2% in the three months ended March 31, 2008. In the three months ended March 31, 2009, 13.9% of our medical segment revenues were derived from the sale of our FM consoles and FM single-procedure disposables, as compared with 10.3% in the three months ended March 31, 2008. Other revenues consist primarily of service and maintenance revenues, shipping and handling revenues, sales of distributed products, spare parts sales, and license fees.

Our medical segment sales in the United States are generated by our direct sales representatives and our products are shipped to hospitals throughout the United States from our facility in Rancho Cordova, California. Our medical segment international sales are generated by our direct sales representatives or through independent distributors and are shipped throughout the world from our facilities in Rancho Cordova, California; Billerica, Massachusetts; Zaventem, Belgium; Chiba, Japan; and Woodmead, South Africa. Our telecom segment sales are generated by our direct sales representatives or through independent distributors and these products are shipped to telecommunications companies domestically and abroad.

We expect to continue to experience variability in our quarterly revenues from IVUS and FM consoles due in part to the timing of hospital capital equipment purchasing decisions. Further, we expect variability of our revenues based on the timing of our new product introductions, which may cause our customers to delay their purchasing decisions until the new products are commercially available. Alternatively, we may include in our arrangements with customers future deliverables, such as unspecified hardware upgrades or training. In these cases, we would be required to defer associated revenues from these customers until we have met our future deliverables obligation.

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Cost of Revenues. Cost of revenues consists primarily of material costs for the products that we sell and other costs associated with our manufacturing process, such as personnel costs, rent and depreciation. In addition, cost of revenues includes depreciation of company-owned consoles, royalty expenses for licensed technologies included in our products, service costs, provisions for warranty, distribution, freight and packaging costs and stock-based compensation expense. We expect our gross margin for IVUS and FM products to improve over time if we are successful in our ongoing efforts to streamline and improve our manufacturing processes and increase production volumes. We expect our overall gross margins to decrease due to the acquisition of Axsun and the lower gross margin on their product lines.

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel serving the sales, marketing, executive, finance, information technology and human resource functions. Other costs include travel and entertainment expenses, facility costs, trade show, training and other promotional expenses, professional fees for legal and accounting services and stock-based compensation expense. We expect that our selling, general and administrative expenses will increase as we continue to expand our sales force and marketing efforts and invest in the necessary infrastructure to support our continued growth.

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

In-process Research and Development. In-process research development, or IPR&D, consists of our projects acquired in connection with acquisitions that had not reached technological feasibility and had no alternative future uses as of each acquisition date. Certain additional payments that may be required in connection with our acquisitions could result in future charges to IPR&D.

In December 2007, we acquired the OCT project in connection with our acquisition of CardioSpectra, which was valued at $26.3 million. In-vivo testing and regulatory approval remained to be completed as of the acquisition date at an estimated cost of $7.2 million. In addition, milestone payments of up to $38.0 million may be paid in connection with successful and timely regulatory approvals and commercialization. The OCT project was expected to be commercialized by late 2008. Our initial assessment of the stage of completion of the OCT project at the acquisition date was underestimated. As of March 31, 2009, the OCT project in-vivo testing had begun and commercialization was behind schedule by approximately two years. In addition, we expect to incur approximately $10.0 million of costs to complete the OCT project for a revised estimated total of approximately $15.3 million. If the OCT project is not completed in a timely manner, such as if we experience delays associated with significant design changes that result from unsuccessful human trials or discoveries during human trials, we may jeopardize a potential competitive advantage, experience difficulties in obtaining our forecasted revenues and associated market share and we may not be required to pay some or all of the milestone payments.

In May 2008, we acquired the FLIVUS project in connection with our acquisition of Novelis, which was valued at $12.2 million. In-vivo testing and regulatory approval protocols remained to be completed for the FLIVUS project as of the acquisition date, at an estimated cost of $3.9 million. We expected the FLIVUS project to receive regulatory approvals and be commercialized during 2009. As of March 31, 2009, the project was behind schedule by approximately one year. In addition, we expect to incur approximately $5.7 million of costs to complete the FLIVUS project for a revised estimated total of approximately $7.2 million. If the FLIVUS project is not completed in a timely manner, such as if we experience delays associated with significant design changes that result from unsuccessful human trials or discoveries during human trials, we may jeopardize a potential competitive advantage and experience a potential loss of revenues and associated market share and we may not be required to pay the milestone payment.

In November 2008, we acquired an IPR&D project in connection with our acquisition of Impact Medical Technologies, LLC, a minor acquisition, valued at approximately $300,000.

The following table summarizes our significant IPR&D projects:

Project Name	Fair Value		Estimated Cost to Complete, as of Acquisition Date
OCT	$	26.3 million	$	7.2 million
FLIVUS		12.2 million		3.9 million

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

Interest Income. Interest income is comprised of interest income earned from our cash and cash equivalents and our short-term available-for-sale investments.

Interest Expense. Interest expense is comprised primarily of interest expense on our capital lease obligations.

Exchange Rate (Loss) Gain. Exchange rate gain (loss) is comprised of foreign currency transaction and remeasurement gains and losses, net.

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Provision for Income Taxes. Provision for income taxes is comprised of federal alternative minimum tax and state, local and foreign income taxes. We have evaluated our ability to fully utilize the net deferred tax assets on an individual jurisdiction basis. For those jurisdictions in which we believe there is sufficient uncertainty surrounding the realization of deferred tax assets through future taxable income, we have provided a full valuation allowance and no current benefit has been recognized for the net operating loss and other deferred tax assets.

Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the three months ended March 31, 2009 and 2008, presented in both absolute dollars (in thousands) and as a percentage of revenues:

	Three Months Ended March 31,
	2009					2008
Revenues	$	48,959		100.0	%	$	36,647		100.0	%
Cost of revenues		20,649		42.2			13,629		37.2
Gross profit		28,310		57.8			23,018		62.8
Operating expenses:
Selling, general and administrative		25,080		51.2			22,059		60.2
Research and development		8,769		17.9			5,637		15.4
In-process research and development		—		—			175		0.5
Amortization of intangibles		1,052		2.2			773		2.1
Total operating expenses		34,901		71.3			28,644		78.2
Operating loss		(6,591	)	(13.5	)		(5,626	)	(15.4	)
Interest income		301		0.6			1,833		5.0
Interest expense		(2	)	—			(4	)	—
Exchange rate (loss) gain		(1,128	)	(2.3	)		1,679		4.6
Loss before provision for income taxes		(7,420	)	(15.2	)		(2,118	)	(5.8	)
Provision for income taxes		194		0.4			208		0.5
Net loss	$	(7,614	)	(15.6	)%	$	(2,326	)	(6.3	)%

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

	Three Months Ended March 31,				Percentage Change
	2009		2008		2008 to 2009
Medical segment:
IVUS:
Consoles	$	8,411	$	6,372	32.0	%
Single-procedure disposables		29,120		25,203	15.5
FM:
Consoles		85		343	(75.2	)
Single-procedure disposables		6,260		3,434	82.3
Other		1,705		1,295	31.7
Sub-total medical segment		45,581		36,647	24.4
Telecom segment		3,378		—	n/a
	$	48,959	$	36,647	33.6

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

	Three Months Ended March 31,				Percentage Change
	2009		2008		2008 to 2009
Revenues (1):
United States	$	24,210	$	18,228	32.8	%
Japan		11,684		10,089	15.8
Europe, the Middle East and Africa		9,636		6,861	40.4
Rest of world		3,429		1,469	133.4
	$	48,959	$	36,647	33.6

(1) Revenues are attributed to geographies based on the location of the customer, except for shipments by original equipment manufacturers, which are attributed to the country of the origin of the equipment distributed.

Comparison of Three Months Ended March 31, 2009 and 2008

Revenues. Revenues increased $12.3 million, or 33.6%, to $49.0 million in the three months ended March 31, 2009, as compared to revenues of $36.6 million in the three months ended March 31, 2008. In the three months ended March 31, 2009, IVUS revenues increased $6.0 million, or 18.9%, as compared to the three months ended March 31, 2008, which is comprised of a $3.9 million, or 15.5%, increase in sales of our single-procedure disposable IVUS products and an increase of $2.0 million, or 32.0%, from sales of our IVUS consoles. In the three months ended March 31, 2009, FM revenues increased $2.6 million, or 68.0%, as compared to the three months ended March 31, 2008, which is comprised of an increase of $2.8 million, or 82.3%, in sales of our single-procedure disposable FM products, which was partially offset by a decrease of $258,000, or 75.2%, in sales of our FM consoles. Telecom revenues were $3.4 million in the three months ended March 31, 2009. We had no telecom revenues in the three months ended March 31, 2008 as we did not acquire Axsun until December 2008. Other revenues increased $410,000, or 31.7%, in the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, due primarily to the inclusion of other Axsun revenue in the period ending March 31, 2009. The increases in FM disposable revenues were primarily due to increased adoption of the technology based on recent clinical study data. In addition, revenues in the three months ended March 31, 2009 were also unfavorably impacted by $1.3 million in Euro foreign currency translation. Increases in revenues were realized across all of our key geographic markets.

Cost of Revenues. Cost of revenues increased $7.0 million, or 51.5%, to $20.6 million, or 42.2% of revenues in the three months ended March 31, 2009, from $13.6 million, or 37.2% of revenues in the three months ended March 31, 2008. Gross margin was 57.8% of revenues in the three months ended March 31, 2009, decreasing from 62.8% of revenues in the three months ended March 31, 2008. The increase in the cost of revenues was primarily due to higher sales volume. The decrease in gross margin resulted primarily from the addition of lower margin products from Axsun and was also impacted by services performed under software maintenance agreements and depreciation costs partially offset by a decrease in the production costs of IVUS and FM disposable products due to ongoing cost reduction initiatives and higher manufacturing capacity utilization combined with the unfavorable foreign currency translation impact on revenue as discussed above.

Selling, General and Administrative. Selling, general and administrative expenses increased $3.0 million, or 13.7%, to $25.1 million, or 51.2% of revenues in the three months ended March 31, 2009, as compared to $22.1 million, or 60.2% of revenues in the three months ended March 31, 2008. The increase in the three months ended March 31, 2009 as compared with the three months ended March 31, 2008 was primarily due to growth in our Japan operation to support our direct sales efforts, legal expenses related to the LightLab litigation, increased headcount resulting from the expansion of our U.S. and Europe sales organizations, inclusion of Axsun expenses not included in the period ending March 31, 2008, higher stock-based compensation expense, and increased infrastructure expenses to support company growth. These increases were offset by a decrease in due diligence expenses that were incurred in the period ending March 31, 2008 related to an acquisition that was not consummated.

Research and Development. Research and development expenses increased $3.1 million, or 55.6%, to $8.8 million, or 17.9% of revenues in the three months ended March 31, 2009, as compared to $5.6 million, or 15.4% of revenues in the three months ended March 31, 2008. The increase in research and development expenses in the three months ended March 31, 2009 as compared with the three months ended March 31, 2008 was primarily due to higher costs associated with the development of our OCT, FLIVUS and inclusion of Axsun expenses, growth in our research and development organization, and increased clinical trial expenses.

In-process research and development. In-process research and development expenses of $175,000 in the three months ended months ended March 31, 2008 related to our December 2007 acquisition of Cardiospectra. There were no in-process research and development expenses in the three months ended March 31, 2009.

Amortization of Intangibles. Amortization expense increased to $1.1 million, or 2.2% of revenues in the three months ended March 31, 2009, as compared to $773,000, or 2.1% of revenues in the three months ended March 31, 2008. The increase in amortization expense is primarily related to the amortization of intangible assets acquired from Axsun.

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Interest Income. Interest income decreased to $301,000, or 0.6% of revenues in the three months ended March 31, 2009, as compared to $1.8 million, or 5.0% of revenues in the three months ended March 31, 2008. The decrease was due to a decrease in the weighted-average interest rate on our investments and a decrease in our cash and cash equivalents and short-term available-for-sale investments.

Exchange Rate (Loss) Gain. Exchange rate loss for the three months ended March 31, 2009 was $1.1 million, as compared to an exchange rate gain of $1.7 million in the three months ended March 31, 2008. The loss in the three months ended March 31, 2009 primarily relates to the effect of the strengthening of the U.S. Dollar compared to the Yen during the quarter and the related effect on the valuation of Yen based assets and liabilities held by Volcano Japan. The exchange rate gain for the three months ended March 31, 2008, primarily relates to the weakening of the U.S. dollar against the Euro and its impact on the Euro-based intercompany receivables owed to Volcano Corporation by Volcano Europe.

Provision for Income Taxes. Provision for income taxes for the three months ended March 31, 2009 was $194,000, compared to a provision of $208,000 for the three months ended March 31, 2008. The provision for income taxes consisted primarily of foreign income taxes and domestic state income taxes.

Liquidity and Capital Resources

Sources of Liquidity

Historically, our sources of cash have included:

• issuance of equity securities, including underwritten public offerings of our common stock, cash generated from the exercise of stock options and participation in our employee stock purchase plan;

• cash generated from operations, primarily from the collection of accounts receivable resulting from product sales; and

• interest income.

Our historical cash outflows have primarily been associated with:

• cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs;

• expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency;

• capital expenditures related to the acquisition of equipment that we own and place at our customer premises and other fixed assets;

• cash used to repay our debt obligations and related interest expense; and

• cash used for acquisitions.

Other factors that impact our cash inflow and outflow include:

• significant increases in our product revenue with gross margins of 57.8% and 62.8% in the three months ended March 31, 2009 and 2008, respectively; and

• fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements.

At March 31, 2009, our cash and cash equivalents and short-term available-for-sale investments totaled $143.9 million. We invest our excess funds in short-term securities issued by corporations, banks, the United States government, municipalities, and financial holding companies and in money market funds comprised of United States Treasury securities. We do not hold auction rate securities or securities backed by mortgages.

At March 31, 2009, our accumulated deficit was $111.9 million. Since inception, we have generated significant operating losses and as a result we have not generated sufficient cash flow to fund our operations and the growth in our business. Accordingly, prior to our initial public offering, we financed our operations and acquisitions primarily through the issuances of $62.5 million of preferred stock, $20.0 million of senior subordinated notes and $7.0 million of term loans. These issuances of equity and debt were supplemented with borrowings from a revolving credit facility and equipment financing arrangements. The issuances of our senior subordinated notes, term loans and revolving credit facility included warrants to purchase our Series B preferred stock, which automatically converted into warrants to purchase common stock upon the completion of our initial public offering, or our common stock.

In connection with our acquisition of Axsun in December 2008, we assumed debt in the amount of $151,000. The debt was repaid with accrued interest in January 2009.

Cash Flows

Cash Flows from Operating Activities. Cash used in operating activities of $905,000 for the three months ended March 31, 2009 reflected our net loss of $7.6 million, offset by adjustments for non-cash expenses, consisting primarily of $3.4 million of depreciation and amortization, $2.7 million of stock-based compensation expense, and $1.1 million loss on foreign exchange. In addition, sources of cash primarily include decreases in accounts receivable of $5.4 million. Uses of cash primarily include increases in inventories of $2.3 million and decreases in accrued compensation of $2.6 million. The increase in inventories was primarily due to anticipated higher sales volumes. The decrease in accrued compensation was primarily due to the payment of bonuses and sales commissions.

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Cash Flows from Investing Activities. Cash provided by investing activities was $6.5 million in the three months ended March 31, 2009, which consisted primarily of $31.9 million resulting from the sale or maturity of short-term available-for-sale investments, partially offset by $20.5 million used to purchase short-term available-for-sale investments, $4.1 million used for capital expenditures, primarily for medical diagnostic equipment and leasehold improvements for our new Volcano Japan office, and $699,000 used for the Axsun acquisition.

Cash Flows from Financing Activities. Cash provided by financing activities was $1.0 million in the three months ended March 31, 2009, resulting primarily from proceeds of $1.0 million from the issuance of stock under our employee stock purchase plan and $539,000 of proceeds from the exercise of common stock options. These sources of cash were partially offset by $403,000 used for the repurchase of common stock and $151,000 used for the repayment of short-term debt, substantially related to the term loan acquired from Axsun.

Future Liquidity Needs

At March 31, 2009, we believe our current cash and cash equivalents and our short-term available-for-sale investments will be sufficient to fund working capital requirements, capital expenditures, and operations for at least the next twelve months. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future. At the present time, we have no material commitments for capital expenditures.

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment.

Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control—See Part II, Item 1A—”Risk Factors” set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2008. Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2008 and there have been no material changes during the three months ended March 31, 2009.

Off-Balance Sheet Arrangements

At March 31, 2009, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

In addition to the contractual obligations disclosed in Part II, Item 7 of our annual report on Form 10-K for the year ended December 31, 2008 the following contractual obligations were entered into during the three months March 31, 2009 that were outside of our ordinary course of business. We entered into a facility lease agreement for our new corporate headquarters in San Diego, California for which we are obligated to pay approximately $633,000 of rent over a 16 month period commencing on April 1, 2009. We also renewed the facility lease for our facility in Billerica, Massachusetts for which we are obligated to pay approximately $2.9 million of rent over a five year period commencing on November 1, 2009.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows.

Our exposure to interest rate risk at March 31, 2009, is related to the investment of our excess cash into highly liquid, short-term financial investments. We invest in money market funds in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments. We do not hold auction-rate or mortgage-backed securities. Due to the short-term nature of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.

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We are exposed to foreign currency risk related to our European and Japanese operations. We do not engage in hedging activities with respect to our foreign exchange risk. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro and the Yen, could adversely affect our financial results. During the three months ended March 31, 2009, revenues were unfavorably impacted by the valuation of foreign currencies, primarily the Euro, versus the U.S. dollar. In periods of a strengthening U.S. dollar, our results of operations including the amount of revenue that we report in future periods could be negatively impacted.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

During the quarter ended March 31, 2009, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that, at March 31, 2009, our disclosure controls and procedures were effective.

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

Changes in internal control over financial reporting

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q. During the first quarter of 2009, we expanded our internal controls to our operations in Japan related to new business processes and the transfer of responsibilities for the execution of the controls to our finance team in Japan. We will continue to develop internal controls for our Japan operations throughout fiscal 2009. Although management believes our internal controls have been maintained or enhanced by this expansion, there is a risk that deficiencies may exist and could constitute significant deficiencies or in the aggregate, a material weakness. Management will complete our evaluation and testing of the internal control changes as of December 31, 2009 and the results of such evaluation and testing will be included in our annual report on Form 10-K for the fiscal year ending December 31, 2009. There were no other changes in our internal control over financial reporting during the quarter ended March 31, 2009 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under Note 6—”Commitments and Contingencies, Litigation” of our Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference.

Item 1A. Risk Factors

This “Risk Factors” section provides updated information in certain areas from the “Risk Factors” set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2008, or the Annual Report. Set forth below are certain risk factors that have been substantively expanded or updated from the Annual Report. The risks and uncertainties described in the Annual Report, as expanded or updated below do not constitute all the risk factors that pertain to our business but we do believe that they reflect the more important ones. Please review the Annual Report for a complete listing of “Risk Factors” that pertain to our business.

Risks Related to Our Business and Industry

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

We were formed in January 2000 and until 2003 were a development stage company substantially devoted to the research and development of tools designed to diagnose vulnerable plaque. In July 2003, we acquired substantially all of the assets related to the intravascular ultrasound, or IVUS, and functional measurement, or FM, product lines from Jomed, Inc. and commenced the manufacturing, sale and distribution of IVUS and FM products. In December 2007, we acquired CardioSpectra, Inc., or CardioSpectra, an OCT technology company, in May 2008, we acquired Novelis, Inc., or Novelis, a Forward-Looking IVUS technology company, and in December 2008, we acquired Axsun Technologies, Inc., or Axsun, a manufacturer of laser and optical engines used in medical OCT imaging systems and advanced photonic components and subsystems used in other industrial applications. We have yet to demonstrate that we have sufficient revenues to become a sustainable, profitable business. Even if we do increase revenues, we expect our operating expenses will increase as we expand our business to meet anticipated growing demand for our products and as we devote resources to our sales, marketing and research and development activities. If we are unable to reduce our cost of revenues and our operating expenses, we may not achieve profitability. Although we achieved profitability during the quarters ended December 31, 2008 and September 30, 2008, you should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. At March 31, 2009, we had an accumulated deficit of $111.9 million. We expect to experience quarterly fluctuations in our revenues due to the timing of capital purchases by our customers and to a lesser degree the seasonality of disposable consumption by our customers and in our expenses as we make future investments in research and development, selling and marketing and general and administrative activities that will cause us to experience variability in our reported earnings and losses in future periods. Failure to achieve and sustain profitability would negatively impact the market price of our common stock.

If we choose to acquire new businesses, products or technologies, we may experience difficulty in the identification or integration of any such acquisition, and our business may suffer.

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 have pursued, and may in the future pursue, the acquisition of complementary businesses, products or technologies instead of developing them ourselves. For example, we acquired CardioSpectra in December 2007, Novelis in May 2008, and Axsun in December 2008. We do not know if we will be able to identify or complete any acquisitions, or whether we will be able to successfully integrate any acquired business, product or technology or retain 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. We have entered, and may in the future enter, markets through our acquisitions that we are not familiar with and have no experience managing. For example, Axsun historically sold devices in the industrial and telecommunications sectors for the optical monitoring market and we will continue to serve these markets. If we fail to integrate these operations into our business, our resources may be diverted from our core business and this could have a material adverse effect on our business, financial condition and results of operations.

Our business has become more decentralized geographically through our acquisitions and this may expose us to operating inefficiencies across these diverse locations, including difficulties and unanticipated expenses related to the integration of departments, information technology systems, and accounting records and maintaining uniform standards, such as internal accounting controls, procedures and policies. In addition, we have, and in the future may increase, our exposure to risks related to business operations outside the United States due to our acquisitions.

We may also encounter risks, costs and expenses associated with any undisclosed or potential liabilities or use more cash and other financial resources on integration and implementation activities than we expect. In addition, any amortization or other charges resulting from acquisitions could harm our operating results.

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

We derive, and anticipate we will continue to derive, a significant portion of our revenues from operations in Japan and Europe. In the three months ended March 31, 2009, revenues to customers located in Japan were $11.7 million and Europe, Middle East and Africa were $9.6 million, representing approximately 24% and 20%, respectively, of our total revenues. As we expand internationally, we will need to hire, train and retain qualified personnel for our direct sales efforts, retain distributors and train their personnel in countries where language, cultural or regulatory impediments may exist. We cannot ensure that distributors, physicians, regulators or other government agencies will accept our products, services and business practices. In addition, we purchase some components on the international market. The sale and shipment of our products and services across international borders, as well as the purchase of components from international sources, subject us to extensive United States and foreign governmental trade regulations. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping and sales activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions, including:

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

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

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

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

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

• business practices favoring local companies;

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

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

• changes in foreign political or economic conditions.

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

Fluctuations in foreign currency exchange rates could result in declines in our reported revenues and earnings.

Our reported revenues and earnings are subject to fluctuations in currency exchange rates. We do not engage in foreign currency hedging arrangements, and, consequently, foreign currency fluctuations may adversely affect our revenues and earnings. Should we choose to engage in hedging activities in the future we cannot be assured our hedges will be effective or that the costs of the hedges will not exceed their benefits. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Euro and the Yen, could adversely affect our financial results. During the three months ended March 31, 2009, 16.3% and 17.0% of our revenues were denominated in the Euro and Yen, respectively, 10.0% of our operating expenses were denominated in the Euro and 9.5% of our operating expenses were denominated in Yen. Revenues from our Japanese operations are primarily denominated in the U.S. Dollar. During the first quarter of 2009, the U.S. dollar strengthened versus the Yen. In periods of a strengthening U.S. dollar relative to Yen, our results of operations that we report in future periods could be negatively impacted.

Future interest income and the value of our investments may be impacted by further declines in interest rates and the broader effect of the recent disruption of credit markets.

We are conservative in our investment policies and our policies allow us to invest our excess cash primarily in corporate notes, money market funds and United States municipal debt securities. As of March 31, 2009, we have invested our excess cash in money market funds and corporate debt securities issued by banks and corporations. The interest paid on these types of investments and the value of certain securities may decline in the future as credit markets adjust to the national and global financial crisis. While our investment portfolio has not yet been adversely impacted, if there is continued and expanded disruption in the credit markets, our investment portfolio could be adversely affected in the future.

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

A portion of our revenue is generated by our third-party distributors. If these distributors cease or limit operations or experience a disruption of their business operations, or are not successful in selling our products, we may be unable to increase or maintain our level of revenues. Over the long term, we intend to grow our business internationally, and to do so we will need to attract additional distributors to expand the territories in which we do not directly sell our products. Our distributors may not commit the necessary resources to market and sell our products. If current or future distributors do not continue to distribute our products or do not perform adequately or if we are unable to locate distributors in particular geographic areas, we may not realize revenue growth internationally.

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A significant portion of our annual revenues has been derived from sales to our Japanese distributors, primarily Fukuda Denshi Co., Ltd., or Fukuda Denshi, Goodman Company Ltd., or Goodman, and Johnson & Johnson K.K., Medical Company Cordis Division, or Johnson and Johnson. In the three months ended March 31, 2009, we generated revenues of $9.7 million, which accounted for approximately 19.7% of our revenues, from sales to our Japanese distributors. In the three months ended March 31, 2009, Goodman accounted for 12.4% of our revenues.

On May 19, 2008, we and Goodman mutually terminated the Exclusive Distribution Agreement, dated September 27, 2004, pursuant to which Goodman distributed our rotational IVUS products in Japan on an exclusive basis. Additionally, on May 19, 2008, the oral agreement between us and Goodman, relating to the exclusive distribution of our FM products in Japan, originally distributed by Goodman under the International Distributor Agreement, dated September 17, 1994, by and among the Company, Goodman and Kaneko Enterprise, Inc., as amended, and any other oral agreements between the Company and Goodman relating to the distribution of our products in Japan, was terminated. We did not pay and we are not obligated to pay a fee in connection with this termination. Upon termination of our agreements with Goodman, we monitor the credit risk associated with Goodman as well as other general economic conditions and, accordingly, we have made and continue to make adjustments to the credit terms that are extended to Goodman. On June 30, 2008, Goodman transferred to us all Japanese marketing authorizations and other regulatory approvals, or SHONINs, for all rotational IVUS and FM products held by Goodman or its affiliates. Although Goodman currently continues to distribute our rotational IVUS and FM products in Japan on a non-exclusive, purchase order basis, we have accelerated our direct sales strategy in Japan and currently expect to place and sell our products in Japan directly through an internal sales force beginning in the second quarter of 2009. Accordingly, as we implement this direct sales strategy, we expect to reduce distribution of our products through Goodman during the second and third quarters of 2009. We are currently discussing with Goodman the terms of our transition and currently cannot ascertain the timing and the impact of the transition on our operating expenses and subsequent net income. There is no assurance that that we will reach an agreement with Goodman. Regardless of whether we reach an agreement with Goodman relating to the transition, our efforts to implement a direct sales strategy in Japan may adversely impact our revenues, results of operations and financial condition and cause us to incur additional expenses sooner than initially planned.

In connection with the Axsun acquisition, we and Axsun were sued by LightLab Imaging, Inc., or LightLab, for alleged breach of a development and supply agreement between Axsun and LightLab pursuant to which Axsun supplies tunable lasers to LightLab for use in LightLab’s OCT products. LightLab, a wholly owned subsidiary of Goodman, develops and sells OCT products for cardiovascular imaging and other medical uses.

We entered into an agreement with Fukuda Denshi in March 2006 that extended our commercial relationship through June 2012. This agreement became effective upon the transfer of the related regulatory approvals held by Fukuda Denshi, which took place on June 1, 2006. We also entered into a distribution agreement with Johnson and Johnson in December 2006.

A significant change in our relationship with our distributors, such as the recent changes in our relationship with Goodman, or in the relationships between our distributors may have a negative impact on our ability to sustain and grow our business in Japan.

We also use distributors in certain other international markets. Other than Japan, no one market in which we use distributors represents a significant portion of our revenues but, in the aggregate, problems with these distribution arrangements could negatively affect our international sales strategy, negatively impact our revenues and the market price of our stock.

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Item 6. Exhibits

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
3.2	Bylaws of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on August 29, 2008, and incorporated herein by reference).
3.3	Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2	Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).
4.3	Fourth Amended and Restated Investor Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).
4.7	Rights Agreement, by and between the Registrant and American Stock Transfer & Trust Company, dated June 20, 2006 (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
10.1	Named Executive Officer Cash Compensation Arrangements (filed as Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K (000-52045), as originally filed on March 10, 2009, and incorporated herein by reference).
10.2	Sublease Agreement, dated February 12, 2009, by and between the Registrant and Fair Isaac Corporation.
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

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

Signature	Title	Date
/s/ John T. Dahldorf John T. Dahldorf	Chief Financial Officer (principal financial officer, principal accounting officer and duly authorized officer)	May 7, 2009

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Exhibit Index

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
3.2	Bylaws of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on August 29, 2008, and incorporated herein by reference).
3.3	Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2	Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).
4.3	Fourth Amended and Restated Investor Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).
4.7	Rights Agreement, by and between the Registrant and American Stock Transfer & Trust Company, dated June 20, 2006 (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
10.1	Named Executive Officer Cash Compensation Arrangements (filed as Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K (000-52045), as originally filed on March 10, 2009, and incorporated herein by reference).
10.2	Sublease Agreement, dated February 12, 2009, by and between the Registrant and Fair Isaac Corporation.
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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EX-10.2

EXHIBIT 10.2

SUBLEASE AGREEMENT

THIS SUBLEASE (this “Sublease”) is made and entered into as of the 12th day of February, 2009, by and between FAIR ISAAC CORPORATION, a Delaware corporation (“Sublandlord”) and VOLCANO CORPORATION, a Delaware corporation (“Subtenant”).

RECITALS

A.    Kilroy Realty, L.P., a Delaware limited partnership, (“Prime Landlord”), as landlord, and Sublandlord, as tenant, are parties to that certain Office Lease dated February 14, 2003 attached hereto as Exhibit A (the “Prime Lease”), covering certain leased premises containing approximately 129,752 rentable square feet (the “Prime Lease Premises”) in the building commonly located at 3661 Valley Centre Drive, San Diego, California (the “Building”).

B.    Sublandlord desires to sublease a portion of the Prime Lease Premises to Subtenant, and Subtenant desires to sublease the same from Sublandlord, on the terms and conditions of this Sublease.

C.    Capitalized terms not otherwise defined in this Sublease shall have the meanings set forth in the Prime Lease.

NOW, THEREFORE, Sublandlord and Subtenant agree as follows:

1.    Sublease; Personal Property; Parking.

1.1    Sublease. Sublandlord hereby leases to Subtenant, and Subtenant hereby leases from Sublandlord the Sublease Premises (as defined in Section 2 below) for the term and for the rent and on all other terms and conditions set forth herein.

1.2    Personal Property. Sublandlord shall deliver the Sublease Premises to Subtenant together with those items of personal property identified on Exhibit B attached hereto (the “Personal Property”). During the Sublease Term (as defined below) Subtenant shall have the right to use the Personal Property in their “AS-IS” condition. Subtenant agrees to maintain the Personal Property in good order and condition and surrender the Personal Property to Sublandlord in such condition (reasonable wear and tear excepted) upon the expiration or sooner termination of this Sublease. Sublandlord has made no representations or warranties to Subtenant with regard to the condition of the Personal Property, the suitability thereof for any particular purpose and Sublandlord shall have no obligation to repair, replace or otherwise maintain the Personal Property during the Sublease Term.

1.3    Parking. During the Sublease Term, Subtenant shall have the non-exclusive right to use its pro rata share (i.e., 16.96%) of the parking spaces made available to Sublandlord under Item 9 of the Basic Lease Information contained in the Prime Lease, subject to the terms and provisions of the Prime Lease, including, without limitation, Article 28. Subtenant acknowledges that the parking spaces are non-reserved.

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1.4    Common Areas. Subtenant shall have the non-exclusive right, during Building Hours, to use those common areas located on the first floor of the Building as depicted as “shared space” on Exhibit C attached hereto, subject to any reasonable rules and regulations as may be imposed by Sublandlord.

2.    Sublease Premises. The “Sublease Premises” shall be deemed to consist of: (a) approximately 20,000 square feet of rentable space in the Prime Lease Premises located on the 2nd floor of the Building (the “2^nd Floor Sublease Premises”) and (b) approximately 2,000 square feet of rentable space in the Prime Lease Premises located on the 1^st floor of the Building (the “1^st Floor Sublease Premises”) as shown on the floor plans attached hereto as Exhibit D. Subtenant shall have no right to exercise any rights under the Prime Lease to expand the Prime Lease Premises. Sublandlord shall deliver the 1^st Floor Sublease Premises to Subtenant upon receipt of the last of the following: (i) an executed Sublease from Subtenant; (ii) the first months’ payment of Sublease Base Rent and (iii) a fully executed Landlord Consent (as defined in Section 3 below). Sublandlord shall deliver the 2nd Floor Sublease Premises to Subtenant on April 1, 2009. If any portion of the Sublease Premises is delivered after the latest of the dates set forth hereinabove, then as of the Rent Commencement Date, Subtenant shall only be obligated to pay Sublease Base Rent with respect to that portion of the Sublease Premises which has been delivered to Subtenant. Such amount shall be determined by multiplying the square footage of the portion of the Sublease Premises that has been delivered to Subtenant by the rentable square foot rate set forth in Section 5 below. Notwithstanding anything to the contrary herein, the parties acknowledge and agree that the 2^nd Floor Sublease Premises does not include approximately 5,000 square feet of contiguous, rentable square feet located on the 2^nd floor of the Prime Lease Premises (herein referred to as the “Excluded Sublease Premises”) as such area is mutually agreed upon by the parties. Within sixty (60) days after the Sublease Commencement Date, the parties shall meet to determine a mutually agreeable area to serve as the Excluded Sublease Premises and Subtenant shall immediately surrender any portion of the Excluded Sublease Premises that is occupied by Subtenant. The Excluded Sublease Premises will not be occupied on a permanent basis by Subtenant; provided that it will also not be taped off or otherwise separately demised from the remainder of the Sublease Premises and Subtenant will be permitted to walk through or otherwise pass through the Excluded Sublease Premises to the extent required to access the remainder of the Sublease Premises or as may be required for exiting requirements or other code compliance or legal requirements. If the parties, acting in good faith, are unable to agree upon the location of the Excluded Sublease Premises, the Excluded Sublease Premises will be the area outlined on Exhibit F attached hereto.

3.    Term. The term of this Sublease (the “Sublease Term”) shall commence on the date upon which Sublandlord delivers the 2^nd Floor Sublease Premises to Subtenant (the “Sublease Commencement Date”) and shall continue until July 30, 2010. Subtenant

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shall have no right to exercise any rights under the Prime Lease to extend the term of the Prime Lease. Notwithstanding the foregoing, this Sublease shall not be effective unless Prime Landlord consents in writing by executing a consent in substantially the same form attached hereto as Exhibit E (the “Landlord Consent”), which consent shall include Prime Landlord’s approval of Subtenant’s intended use as set forth in Section 2.6 of the Landlord Consent.

4.    Use. Subtenant shall use the Sublease Premises only for general office purposes, and for no other purposes, except as expressly permitted in the consent executed by Prime Landlord. Subtenant’s use of the Sublease Premises shall at all times conform to all applicable governmental laws, statutes, ordinances, rules and regulations (collectively, “Laws”).

5.    Rent.

5.1.    Sublease Rent. Commencing on April 1, 2009 (the “Rent Commencement Date”), and continuing on the first day of each month thereafter during the Sublease Term, Subtenant shall pay to Sublandlord base rent equal to $2.50 per rentable square foot of the Sublease Premises per month (the “Sublease Base Rent”); provided, however, that Subtenant shall only be required to pay 50% of the Sublease Base Rent during the period beginning on the Rent Commencement Date and ending on December 31, 2009. Notwithstanding the foregoing, Subtenant agrees to pay the Sublease Base Rent due for the month of April, 2009, upon the execution of this Sublease by Subtenant. In addition to paying Sublease Base Rent, commencing on the earlier of (a) the Rent Commencement Date and (b) the date upon which Subtenant commences business operations within any portion of the Sublease Premises, and continuing on a monthly basis during the remaining Sublease Term, Subtenant shall pay as additional rent, the cost of electricity furnished to the Sublease Premises. If the Sublease Premises are separately metered, such amount shall be paid by Subtenant, prior to delinquency, directly to the applicable utility provider. If the Sublease Premises are not separately metered, Subtenant shall pay to Sublandlord, within twenty days following written notice from Sublandlord, the share of electricity charges reasonably attributable to the Sublease Premises, as reasonably determined by Sublandlord, provided that the amount of Subtenant’s share of such monthly electricity charges shall not exceed $.20 per rentable square foot of the Sublease Premises. All rent due under this Sublease (hereinafter referred to as “Sublease Rent”) shall be paid in advance and without notice, demand, deduction or offset (except as provided in this Sublease) on the first day of each month during the Sublease Term for which such Sublease Base Rent is payable. Sublease Base Rent for any partial months shall be prorated on a per diem basis.

5.2.    Security. Contemporaneously with the execution of this Sublease, Subtenant shall deliver to Sublandlord a security deposit equal to $55,000.00 (the “Security Deposit”). If Subtenant defaults in the performance of its obligations, covenants and conditions under this Sublease, including without limitation Subtenant’s obligation to remove any subtenant improvements if required by this Sublease, Sublandlord may use the Security Deposit, or any portion of it, to cure the default or to compensate Sublandlord for all damage sustained by Sublandlord resulting from Subtenant’s default. If any of the Security Deposit is so used, Subtenant shall

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deposit cash with Sublandlord in an amount sufficient to restore the Security Deposit to the full amount stated above within five (5) days after Sublandlord has demanded such replenishment. If Subtenant is not in default at the expiration or termination of this Sublease, Sublandlord shall return the Security Deposit (or such portion thereof as remains) to Subtenant within thirty (30) days after expiration or termination of this Sublease subject to the conditions that (a) Subtenant has surrendered possession of the Sublease Premises to Sublandlord free of any subtenants or other persons claiming possession or right to occupy the Sublease Premises and (b) Subtenant has performed all of its obligations under this Sublease. Sublandlord may commingle the Security Deposit with Sublandlord’s general and other funds and shall not be required to pay interest on the Security Deposit. The use of the Security Deposit by Sublandlord in the manner stated above shall not limit or restrict Sublandlord from exercising any other rights or remedies provided to Sublandlord under this Sublease or under law or equity if Subtenant defaults.

6.    Subtenant Improvements. Sublandlord shall deliver the Sublease Premises to Subtenant in broom clean condition with all plumbing, electrical, mechanical and lighting in good working order. Subject to the foregoing obligations on the part of Sublandlord, Subtenant acknowledges that it has inspected the Sublease Premises and agrees to accept the Sublease Premises in their “AS IS” condition. Subtenant acknowledges that, except as provided in this Sublease, Sublandlord has made no representations or warranties concerning the condition of the Sublease Premises or their fitness for any particular use and Subtenant shall rely solely on its own investigations and inspections to determine the suitability of the Sublease Premises for its intended use. Except as provided in this Sublease, any work necessary to prepare the Sublease Premises for Subtenant’s occupancy shall be performed at Subtenant’s sole cost and expense. All such work shall be done in a good and workmanlike manner, free of mechanics liens and in accordance with all other provisions of the Prime Lease, including, without limitation, those provisions of the Prime Lease requiring consent of Prime Landlord, and with all Laws.

7.    Alterations.

7.1.    Subtenant shall not make or permit anyone to make any alterations, decorations, additions or improvements, structural or otherwise (collectively, “Subtenant Alterations”), in or to the Sublease Premises without the prior written consent of Sublandlord, which consent may be withheld in Sublandlord’s sole discretion, provided that Sublandlord will not unreasonably withhold its consent if Prime Landlord consents to any proposed Subtenant Alterations by Subtenant. Any Subtenant Alterations shall be made at Subtenant’s sole expense and subject to the Prime Lease. As a condition precedent to consent of Sublandlord hereunder, Sublandlord may require that any Subtenant Alterations be removed at the end of the Sublease Term and that the Sublease Premises be restored to the condition existing on the Sublease Commencement Date, unless Prime Landlord agrees in writing that any Subtenant Alterations may remain upon the Sublease Premises upon the expiration of the Prime Lease. Subtenant agrees to obtain and deliver to

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Sublandlord such security against mechanic’s liens as Sublandlord shall reasonably request. If any mechanic’s lien is filed against any part of the Sublease Premises for work claimed to have been done for, or materials claimed to have been furnished to, Subtenant, such mechanic’s lien shall be discharged by Subtenant in accordance with all of the provisions of the Prime Lease but in no event later than fifteen (15) days thereafter, at Subtenant’s sole cost and expense, by the payment thereof or, with Prime Landlord’s approval, by bonding around such liens in accordance with applicable law.

7.2.    All Subtenant Alterations made by Subtenant shall become the property of Sublandlord upon expiration of the Sublease Term and shall remain upon and be surrendered with the Sublease Premises as a part thereof without disturbance or injury, except for any Subtenant Alterations that have been designated for removal.

7.3.    Subtenant shall surrender the Sublease Premises to Sublandlord in good condition and repair, reasonable wear and tear excepted.

8.    Prime Lease.

8.1.    This Sublease is subject and subordinate to the Prime Lease. It is the intent of Subtenant and Sublandlord to incorporate the Prime Lease into this Sublease by reference except as otherwise specifically provided herein. Notwithstanding the foregoing sentence, Subtenant shall not be obligated to pay the base rent or the Direct Expenses that are payable to Prime Landlord under the Prime Lease; provided, however, Subtenant shall pay all other sums due to Prime Landlord pursuant to the Prime Lease to the extent such sums are applicable to utilities or services provided to the Sublease Premises (e.g. after hours HVAC charges and related expenses).

8.2.    Except as otherwise expressly provided by the terms of this Sublease, Subtenant agrees to be bound by and perform all the terms, provisions and conditions to be performed by or applicable to Sublandlord under the Prime Lease to the extent the same are applicable to the Sublease Premises or Subtenant’s use of any portion of the Building, and for purposes of said limited incorporation by reference of the Prime Lease, any references therein to “Tenant” shall be deemed references to Subtenant. Sublandlord shall have the benefit of all rights and remedies available to Prime Landlord under the Prime Lease, including, but not limited to the right of re-entry. Subtenant shall indemnify, defend and hold Sublandlord harmless from and against any loss or damage occurring by reason of breach by Subtenant of the Prime Lease as incorporated herein, including, without limitation (a) the cost of cure or loss of Prime Lease; (b) any claims, damages, and expenses arising out of or relating to any claim that the Sublease Premises were not surrendered in the condition required by this Sublease and (c) any attorneys’ fees incurred in connection with the foregoing.

8.3.    All references to “Landlord” in the Prime Lease shall be deemed to continue to be references to Prime Landlord and Sublandlord shall have no liability to Subtenant for Prime Landlord’s defaults. At Subtenant’s request, Sublandlord shall request that Prime Landlord cure any default caused by Prime Landlord.

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8.4.    Sublandlord represents and warrants that as of the date of this Sublease, (i) the Prime Lease is in full force and effect; (ii) to the best of Sublandlord’s actual knowledge there is no default by Prime Landlord or Sublandlord under the Prime Lease; (iii) there are no circumstances which, given notice or the passage of time or both, would constitute a default by Sublandlord under the Prime Lease; and (iv) that Sublandlord has the full right, power and authority to enter into this Sublease (subject to the consent of Prime Landlord). During the Sublease Term, Sublandlord shall not voluntarily do, or fail to do, anything which would constitute a default under the Prime Lease or permit the Prime Lease to be surrendered, cancelled or terminated for any reason, except in connection with a termination of this Sublease pursuant to Section 14 or pursuant to an express right of termination under the Prime Lease (such as casualty or condemnation).

9.    Assignment and Subletting. Subtenant shall not assign this Sublease in whole or in part, or sublet all or any part of the Sublease Premises, or permit occupancy of all or any part of the Sublease Premises under any arrangement by a party other than Subtenant, without the prior written consent of Sublandlord, which consent may be withheld in Sublandlord’s sole discretion, provided that Sublandlord agrees not to unreasonably withhold its consent if Prime Landlord consents to any transfer by Subtenant. Subtenant acknowledges that its right to further sublease the Sublease Premises or assign this Sublease are subordinate and subject to the terms of the Prime Lease, including without limitation those provisions requiring the consent of Prime Landlord.

10.    Default; Performance by Sublandlord

10.1.    Default. The occurrence of any one or more of the following shall constitute an “Event of Default” under this Sublease:

a. Subtenant shall fail to pay any rent or other sum due hereunder within five (5) days after written notice from Sublandlord; provided however, Sublandlord shall only be obligated to give two (2) notices per calendar year and once two (2) notices have been given, if Subtenant thereafter fails to pay any amount due under this Sublease, Subtenant shall be deemed to be in default if such payment is not made within five (5) days of the date due;

b. Subtenant shall create or suffer a default under the Prime Lease under any provision of the Prime Lease applicable to Subtenant or the Sublease Premises and Subtenant shall not cure such default at least five (5) days prior to the expiration of any applicable cure period with respect to such default under the Prime Lease;

6

c. Subtenant shall default in the due keeping, observing or performance of any covenant, term, provision or condition of this Sublease not described above on the part of Subtenant to be kept, observed or performed, and if such default shall continue and shall not be remedied by Subtenant within twenty (20) days after Sublandlord shall have given to Subtenant a written notice specifying the same; provided that if the nature of such default is such that the same cannot reasonably be cured within such twenty (20) day period and if such default does not create a default under the Prime Lease, Subtenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure such default, but in no event exceeding a period of time in excess of sixty (60) days after written notice thereof from Sublandlord;

d. any event shall occur or any contingency shall arise whereby this Sublease or the estate hereby granted or the unexpired balance of the term hereof would, by operation of law or otherwise, devolve or pass to any person, firm, association or corporation other than Subtenant except as expressly permitted hereunder;

e. Subtenant shall make an assignment of its property for the benefit of creditors or shall file a voluntary petition under any bankruptcy or insolvency law, or an involuntary petition under any bankruptcy or insolvency law shall be filed against Subtenant and such involuntary petition is not dismissed within sixty (60) days after the filing thereof;

f. a petition is filed by or against Subtenant under the reorganization provisions of the United States Bankruptcy Code or under the provisions of any law of like import, unless such petition under said reorganization provisions be one filed against Subtenant which is dismissed within sixty (60) days after its filing;

g. Subtenant shall file a petition under the arrangement provisions of the United States Bankruptcy Code or under the provisions of any law of like import; or

h. a permanent receiver, trustee or liquidator shall be appointed for Subtenant or of or for the property of Subtenant, and such receiver, trustee or liquidator shall not have been discharged within sixty (60) days from the date of his or her appointment.

7

If an Event of Default occurs under this Sublease, Subtenant does hereby authorize and fully empower Sublandlord to use all lawful means available to cancel and annul this Sublease, and to re-enter and take possession of the Sublease Premises, and remove all persons and their property therefrom so as to recover at once full and exclusive possession of all the Sublease Premises, whether in possession of Subtenant or of third persons, or vacant; or Sublandlord may at its option at any time after such default or violation of condition or covenant, re-enter and take possession of the Sublease Premises without such re-entering working a forfeiture of the rents to be paid and the covenants to be kept by Subtenant for the full term of this Sublease. The foregoing shall in no way limit the remedies or rights of Sublandlord and the parties hereby agree that all of the rights and remedies in favor of Prime Landlord under the Prime Lease shall inure to the benefit of Sublandlord if an Event of Default occurs under this Sublease.

10.2.    If Subtenant shall fail to perform any act on its part to be performed hereunder, Sublandlord may (but shall not be obligated so to do) after giving written notice to Subtenant (and a reasonable opportunity to cure, provided that no notice and cure period need to be given for any emergency repairs or action) perform such act without waiving or releasing Subtenant from any of its obligations relative thereto. All sums paid or costs incurred by Sublandlord in so performing such acts under this Section 10.2, together with reasonable attorneys’ fees and interest thereon at a rate per annum equal to the lesser of 18 percent or the maximum rate permitted by law, from the date each such payment was made or such cost incurred by Sublandlord, shall be payable by Subtenant to Sublandlord on demand.

10.3.    No reference to nor exercise of any specific right or remedy by Sublandlord shall prejudice or preclude Sublandlord from exercising or invoking any other remedy in respect thereof, whether allowed at law or in equity or expressly provided for herein. No such remedy shall be exclusive or dependent upon any other such remedy, but Sublandlord may from time to time exercise any one or more of such remedies independently or in combination.

11.    Indemnification. Subtenant agrees to indemnify and hold harmless Sublandlord from any and all claims, liabilities, causes of action or costs (including attorneys’ fees and costs of suit), however caused, to the extent they arise out of Subtenant’s use or occupancy of the Sublease Premises or any breach or default by Subtenant of any of the provisions of this Sublease. Sublandlord agrees to indemnify and hold harmless Subtenant from any and all claims, liabilities, causes of action or costs (including attorneys’ fees and costs of suit), however caused, to the extent they arise out of any breach or default by Sublandlord of any of the provisions of this Sublease. The foregoing indemnities shall survive the expiration or earlier termination of this Sublease. Notwithstanding anything to the contrary contained in this Sublease, all claims for indemnification and other recoveries by either Subtenant or Sublandlord shall be limited to direct, proximately caused damages and neither party shall be liable to the other for any consequential or special damages arising out of a breach of this Sublease (other than a breach resulting from the intentional misconduct of the other party). The foregoing shall in no way limit Subtenant’s liability for any damages (including consequential or special damages) for which Sublandlord may be liable for under the Prime Lease as a result of any act, negligence or willful misconduct by Subtenant.

8

12.    Release. Subtenant hereby waives and releases any and all claims against Sublandlord for the interruption or interference in the use of the Sublease Premises from any cause whatsoever other than the willful acts or gross negligence of Sublandlord or its officers, employees or agents; provided that if any such interference or interruption results in an abatement of any rent payable by Sublandlord under the Prime Lease, Subtenant shall be entitled to a proportionate abatement of Sublease Rent to the extent and for the duration that Sublandlord’s rent abates under the Prime Lease. In addition, to the extent that Subtenant is prevented from using, and does not use, the Sublease Premises or any portion thereof, as a result of any interruption or interference caused solely by Sublandlord’s negligence and if such interruption or interference continues for five consecutive business days after Sublandlord’s receipt of notice from Subtenant, Subtenant shall be entitled to abate Sublease Rent for such period of time that Subtenant continues to be prevented from using, and does not use, the Sublease Premises, or a portion thereof, in the proportion that the rentable area of the portion of the Sublease Premises that is not used, bears to the total rentable area of the Sublease Premises.

13.    Insurance and Waiver of Claims.

13.1.    Insurance. Subtenant agrees to purchase and to carry in full force all insurance required by the Prime Lease to be carried by Sublandlord; provided, however, that Subtenant’s obligation to carry property damage insurance shall be limited to the Sublease Premises. Subtenant shall name Sublandlord and Prime Landlord as additional insureds on all liability insurance policies and as loss payees on its property damage insurance and shall provide Sublandlord with reasonable evidence of such insurance.

13.2.    Waiver of Claims. Notwithstanding any other provision in this Sublease to the contrary, Sublandlord and Subtenant hereby release one another, and Subtenant releases Prime Landlord, from any and all liability or responsibility (to the other or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage covered by property insurance or coverable by the insurance required by Section 13.1 hereof, even if such loss or damage shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible.

14.    Notices. All notices of any kind required under the provisions of this Sublease or the Prime Lease shall be mailed, postage prepaid, by certified or registered mail, return receipt requested or by a nationally recognized overnight delivery service, addressed as follows:

Sublandlord:

Fair Isaac Corporation

9

200 Smith Ranch Road

San Rafael, CA 94903

Attn: Abe Kleinfeld

Subtenant:

Volcano Corporation

2870 Kilgore Road

Rancho Cordova, CA 95670

Attn: John Dahldorf, Chief Financial Officer

Either party may, by such notice, designate a new or other address to which notice may be mailed. Any notice given hereunder shall be deemed received. Upon receipt of any notice from Prime Landlord relating to the Sublease Premises, Sublandlord shall promptly deliver a copy of such notice to Subtenant in accordance with the terms and conditions of this Section 14.

15.    Miscellaneous Provisions.

15.1.    This Sublease shall be construed under the laws of California.

15.2.    Each provision herein shall be deemed separate and distinct from all other provisions, and if any one of them shall be declared illegal or unenforceable, the same shall not affect the legality or enforceability of the other terms, conditions, and provisions hereof, which shall remain in full force and effect.

15.3.    This Sublease shall extend, apply to and firmly bind the heirs, executors, administrators, successors and assigns of the respective parties hereto as fully as the respective parties are themselves bound, but this provision shall not authorize the assignment of this Sublease or sublease of the Sublease Premises contrary to the provisions herein contained. Subtenant represents and warrants that it has the full right, power and authority to enter into this Sublease

15.4.    The term of this Sublease and Subtenant’s right to possession of the Sublease Premises shall terminate upon the termination of the Prime Lease for any reason.

15.5.    Subtenant and Sublandlord each represents and warrants that it has dealt with no broker, agent or other person in connection with this Sublease other than Jones Lang LaSalle (“Sublandlord’s Broker”) and Irving Hughes (“Subtenant’s Broker”). Sublandlord agrees to pay Sublandlord’s Broker and Subtenant’s Broker a commission in accordance with Sublandlord’s written listing agreement. Subtenant and Sublandlord each hereby indemnifies and holds harmless the other from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with the indemnifying party with regard to this Sublease. The provisions of this Section shall survive the expiration or termination of this Sublease.

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15.6.    This Sublease may be executed in counterparts, which upon execution by all parties shall constitute one integrated agreement.

IN WITNESS THEREOF, the parties hereto have hereunto set their hands as of the date hereinbefore first written.

SUBLANDLORD
FAIR ISAAC CORPORATION
By	/s/  Abe Kleinfeld
Its	Director of Real Estate

SUBTENANT
VOLCANO CORPORATION
By	/s/  John Dahldorf
Its	CFO

11

EXHIBIT A

PRIME LEASE*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

A-1

EXHIBIT B

LIST OF PERSONAL PROPERTY*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

B-1

EXHIBIT C

DEPICTION OF COMMON AREAS*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

C-1

EXHIBIT D

FLOOR PLAN OF SUBLEASE PREMISES

1^st Floor Sublease Premises*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

D-1

EXHIBIT D-2

2^nd Floor Sublease Premises*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

D-2

EXHIBIT E

FORM OF LANDLORD CONSENT*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

E-1

EXHIBIT F

FLOOR PLAN OF THE EXCLUDED SUBLEASE PREMISES*

* Omitted. Per Regulation S-K, Item 601(b)(2), the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request.

F-1

EX-31.1

Exhibit 31.1

VOLCANO CORPORATION

CERTIFICATION

I, R. Scott Huennekens, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Volcano Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2009	/s/ R. Scott Huennekens
	R. Scott Huennekens
	President & Chief Executive Officer
	(principal executive officer)

EX-31.2

Exhibit 31.2

VOLCANO CORPORATION

CERTIFICATION

I, John T. Dahldorf, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Volcano Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2009	/s/ John T. Dahldorf
	John T. Dahldorf
	Chief Financial Officer
	(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS AMENDED, AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Volcano Corporation (the “Company”) on Form 10-Q for the three months ended March 31, 2009, as filed with the Securities and Exchange Commission (the “Report”), I, R. Scott Huennekens, President & Chief Executive Officer of the Company, certify, in compliance with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 7, 2009	/s/ R. Scott Huennekens
	R. Scott Huennekens
	President & Chief Executive Officer
	(principal executive officer)

This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Volcano Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS AMENDED, AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Volcano Corporation (the “Company”) on Form 10-Q for the three months ended March 31, 2009, as filed with the Securities and Exchange Commission (the “Report”), I, John T. Dahldorf, Chief Financial Officer of the Company, certify, in compliance with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 7, 2009	/s/ John T. Dahldorf
	John T. Dahldorf
	Chief Financial Officer
	(principal financial officer)

This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Volcano Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.