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 September 30, 2011

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	(I.R.S. Employer
incorporation or organization)	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   þ    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  þ	Accelerated filer  ¨	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 October 28, 2011
Common stock, $0.001 par value	52,626,577

VOLCANO CORPORATION

Quarterly Report on Form 10-Q for the quarter ended September 30, 2011

Index

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	a. Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010	3
	b. Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2011 and 2010	4
	c. Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2011	5
	d. Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	6
	e. Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 6.	Exhibits	54
Signatures		56
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VOLCANO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	September 30, 2011			December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	53,091		$	43,429
Short-term available-for-sale investments		154,314			175,283
Accounts receivable, net		63,413			59,133
Inventories		46,463			40,499
Prepaid expenses and other current assets		8,673			6,643
Total current assets		325,954			324,987
Long-term available-for-sale investments		33,928			26,804
Property and equipment, net		73,411			56,503
Intangible assets, net		15,261			17,103
Goodwill		2,487			2,487
Other non-current assets		5,494			3,682
Total assets	$	456,535		$	431,566
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,716		$	13,895
Accrued compensation		15,687			18,241
Accrued expenses and other current liabilities		14,102			21,960
Deferred revenues		6,423			5,898
Current maturities of long-term debt		72			56
Total current liabilities		49,000			60,050
Convertible senior notes		94,505			91,162
Other long-term debt		38			74
Deferred revenues		2,878			2,466
Other		3,215			3,478
Total liabilities		149,636			157,230
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at September 30, 2011 and December 31, 2010		—			—
Common stock, par value of $0.001; 250,000 shares authorized at September 30, 2011 and December 31, 2010; 52,611 and 51,366 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		53			51
Additional paid-in capital		425,101			402,895
Accumulated other comprehensive income (loss)		1,091			(593	)
Accumulated deficit		(119,346	)		(128,017	)
Total stockholders’ equity		306,899			274,336
Total liabilities and stockholders’ equity	$	456,535		$	431,566

See notes to unaudited condensed consolidated financial statements.

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VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues	$	85,767		$	72,886		$	250,798		$	212,910
Cost of revenues, excluding amortization of intangibles		29,538			25,955			84,175			79,686
Gross profit		56,229			46,931			166,623			133,224
Operating expenses:
Selling, general and administrative		36,034			29,565			106,982			92,726
Research and development		13,928			10,185			40,337			29,637
Amortization of intangibles		860			627			2,572			1,821
In-process research and development		—			—			—			65
Total operating expenses		50,822			40,377			149,891			124,249
Operating income		5,407			6,554			16,732			8,975
Interest income		226			106			701			274
Interest expense		(1,834	)		(249	)		(5,895	)		(267	)
Exchange rate loss		(502	)		(91	)		(1,181	)		(635	)
Other, net		—			—			(2	)		(19	)
Income before provision for income taxes		3,297			6,320			10,355			8,328
Provision for income taxes		669			735			1,684			1,363
Net income	$	2,628		$	5,585		$	8,671		$	6,965
Net income per share:
Basic	$	0.05		$	0.11		$	0.17		$	0.14
Diluted	$	0.05		$	0.10		$	0.16		$	0.13
Shares used in calculating net income per share:
Basic		52,517			50,810			52,188			50,339
Diluted		54,947			53,278			54,605			53,032

See notes to unaudited condensed consolidated financial statements.

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VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2010		51,366	$	51	$	402,895	$	(593	)	$	(128,017	)	$	274,336
Issuance of common stock under equity plans		1,245		2		12,618		—			—			12,620
Employee stock-based compensation cost		—		—		9,473		—			—			9,473
Non-employee stock-based compensation cost		—		—		115		—			—			115
Comprehensive income
Net income		—		—		—		—			8,671			8,671
Foreign currency translation adjustments		—		—		—		1,701			—			1,701
Changes in net unrealized gain on available-for-sale investments		—		—		—		(17	)		—			(17	)
Total comprehensive income														10,355
Balance at September 30, 2011		52,611	$	53	$	425,101	$	1,091		$	(119,346	)	$	306,899

See notes to unaudited condensed consolidated financial statements.

5

VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30
	2011			2010
Operating activities
Net income	$	8,671		$	6,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		17,159			13,521
Amortization of investment premium, net		2,727			489
Accretion of debt discount on convertible senior notes		3,470			125
Non-cash stock-based compensation expense		9,605			9,239
Other non-cash adjustments		(53	)		364
Loss on disposal of long-lived assets		133			39
In-process research and development		—			65
Changes in operating assets and liabilities:
Accounts receivable		(2,942	)		(1,538	)
Inventories		(4,624	)		(1,007	)
Prepaid expenses and other assets		(2,349	)		(998	)
Restricted cash		(89	)		—
Accounts payable		(1,519	)		(202	)
Accrued compensation		(2,642	)		(1,639	)
Accrued expenses and other liabilities		(7,964	)		310
Deferred revenues		970			845
Net cash provided by operating activities		20,553			26,578
Investing activities
Purchase of short-term and long-term available-for-sale investments		(255,261	)		(101,818	)
Sale or maturity of short-term and long-term available-for-sale investments		266,363			63,066
Capital expenditures		(30,374	)		(19,205	)
Cash paid related to acquisitions, net of cash acquired		—			(4,200	)
Cash paid for intangible assets and other investments		(1,673	)		(2,985	)
Proceeds from foreign currency exchange contracts		1,164			1,417
Payment for foreign currency exchange contracts		(3,962	)		(3,684	)
Net cash used in investing activities		(23,743	)		(67,409	)
Financing activities
Repayment of debt		(46	)		(36	)
Proceeds from sale of common stock under employee stock purchase plan		3,555			2,741
Proceeds from exercise of common stock options		9,065			9,983
Proceeds from issuance of convertivle senior notes		—			115,000
Payment of debt issuance costs		—			(3,571	)
Purchase of call options		—			(27,190	)
Proceeds from issuance of warrants		—			17,149
Tax benefit related to stock-based compensation		—			176
Increases of restricted cash		—			(82	)
Net cash provided by financing activities		12,574			114,170
Effect of exchange rate changes on cash and cash equivalents		278			(677	)
Net decrease in cash and cash equivalents		9,662			72,662
Cash and cash equivalents, beginning of period		43,429			56,055
Cash and cash equivalents, end of period	$	53,091		$	128,717
Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,391		$	46
Cash paid for income taxes	$	842		$	395
Supplemental disclosure of non-cash investing activities:
Issuance of common stock related to milestone payment	$	—		$	10,469

See notes to unaudited condensed consolidated financial statements.

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VOLCANO CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

1. Summary of Significant Accounting Policies

Basis of Presentation and Nature of Operations

The unaudited condensed consolidated financial statements of Volcano Corporation (“we,” “us,” “our,” “Volcano” 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., or Volcano Japan, Volcano Europe B.V.B.A., or Volcano Europe, Axsun Technologies, Inc., or Axsun, Volcano Therapeutics South Africa (Pty) Ltd., or Volcano South Africa, a wholly owned subsidiary of Volcano Europe, Volcano Netherlands Holdings, B.V., or Volcano Netherlands, and Volcarica, Socieded de Responsabilidad Limitada, a wholly owned subsidiary of Volcano Netherlands.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These unaudited condensed 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, 2010.

We design, develop, manufacture and commercialize a broad suite of intravascular ultrasound, or IVUS, and fractional flow reserve, or FFR, products that we believe enhance the diagnosis and treatment of vascular and structural heart disease. Our products consist of consoles which have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, fractional flow reserve pressure wires and Medtronic’s Pioneer reentry device. We are developing additional offerings for integration into the platform, including forward-looking IVUS, or FL.IVUS, catheters, image-guided therapy catheters and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters.

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters and additional functionality options such as virtual histology IVUS tissue characterization and ChromaFlo stent apposition analysis. Our FFR offerings include FFR 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, laser and non-laser light sources, and optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors used by telecommunications and other industrial companies.

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Concentrations of Credit Risk

Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, short-term and long-term available-for-sale investments, and accounts receivable. We have established guidelines to limit our exposure to credit risk by placing our investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We also place our cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand. Therefore we believe the financial risks associated with these financial instruments are minimal.

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms. We perform ongoing credit evaluations of our customers, and generally we do not require collateral on our accounts receivable. We estimate the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and we record a provision for uncollectible accounts when collection is uncertain. To date, we have not experienced significant credit-related losses.

We currently hold foreign exchange forward contracts with a single counterparty. The bank counterparty in these contracts exposes us to credit-related losses in the event of their nonperformance and we do not require collateral for their performance. However, to mitigate that risk, we only contract with counterparties who meet our minimum credit quality guidelines. In addition, our exposure in the event of a default by our counterparty is limited to the changes in value of our hedged balances.

In connection with the issuance of our 2.875% Convertible Senior Notes, or the Notes, we purchased call options from JPMorgan Chase Bank National Association, or JPMorgan Chase. Non-performance by JPMorgan Chase under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price. See Note 3 “Financial Statement Details — Convertible Debt” for additional information.

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We purchase integrated circuits and other key components for use in our products from third-party suppliers. For certain components, which are currently single sourced, there are relatively few sources of supply. Although we believe that other suppliers could provide similar components on comparable terms, establishment of additional or replacement suppliers may not be accomplished quickly. Any significant supply interruption could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see “Risk Factors — Our manufacturing operations are dependent upon third-party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.”

Net Income per Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential dilutive securities are excluded from the diluted earnings per share computation in loss periods as their effect would be anti-dilutive.

Our potentially dilutive shares include outstanding common stock options, restricted stock units, incremental shares issuable upon the conversion of the Notes, or exercise of the warrants relating to the Notes (See Note 3 “Financial Statement Details — Convertible Debt”). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income per share or if the underlying obligation will be settled in cash as discussed in the following paragraph. For the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, potentially dilutive shares totaling 57,000, 444,000, 19,100, and 181,000, respectively, have not been included in the computation of diluted net income per share, as the result would be anti-dilutive.

Diluted net income per common share does not include any incremental shares related to the Notes for the three months ended September 30, 2010 and the nine months ended September 30, 2011 and 2010. Because the principal amount of the Notes will be settled in cash upon conversion if a conversion occurs, the Notes have no impact on diluted net income per common share until the price of our common stock exceeds the conversion price (initially $29.64, subject to adjustments) of the Notes. For the three months ended September 30, 2011, 49,000 shares related to the Notes were included in the computation of the diluted net income per common share because the average market price of our common stock during the three months ended September 30, 2011 exceeded the conversion price of the Notes. In addition, the diluted net income per common share does not include any incremental shares related to the exercise of the warrants for the three and nine months ended September 30, 2011 and 2010. The warrants will not have an impact on diluted net income per common share until the price of our common stock exceeds the strike price of the warrants (initially $34.875, subject to adjustments). When the market price of our stock exceeds the strike price of the warrants, as applicable, we will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon exercise of the warrants using the treasury stock method.

In addition, the call options to purchase our common stock, which we purchased to hedge against potential dilution upon conversion of the Notes (see Note 3 “Financial Statement Details — Convertible Debt”), are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the Notes.

8

The basic and diluted net income per share calculations for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands, except per share data, unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net income	$	2,628	$	5,585	$	8,671	$	6,965
Weighted average common shares outstanding for basic		52,517		50,810		52,188		50,339
Dilutive potential common stock outstanding:
Stock options		2,001		2,133		2,023		2,310
Restricted stock units		361		320		380		365
Employee stock purchase plan		19		15		14		18
Convertible senior notes		49		—		—		—
Weighted average common shares outstanding for diluted		54,947		53,278		54,605		53,032
Net income per share:
Basic	$	0.05	$	0.11	$	0.17	$	0.14
Diluted	$	0.05	$	0.10	$	0.16	$	0.13

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board, or FASB, updated the accounting guidance relating to the test for potential impairment of goodwill that we are required to perform annually. The updated guidance requires companies to perform the second step of the impairment test to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists because the carrying amount of a reporting unit is zero or negative. In considering whether it is more likely than not that a goodwill impairment exists, an entity shall evaluate whether there are adverse qualitative factors. The updated guidance is effective for us beginning in fiscal year 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment is effective for us beginning in fiscal year 2012. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.

In June 2011, the FASB amended requirements for the presentation of comprehensive income, to increase the prominence of other comprehensive income (OCI) in financial statements. Companies will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. This amendment eliminates the option to present other comprehensive income in the statement of stockholders’ equity. The amendment is effective for us beginning in fiscal year 2012. The adoption of this guidance will not impact our financial position, results of operations or cash flows and will only impact the presentation of comprehensive income in our financial statements. The Company is currently evaluating how it will report comprehensive income, either method permitted will constitute a change in the Company’s financial statement presentation.

Reclassification

Certain reclassifications have been made to the prior year’s financial statements to conform to current year presentation.

2. Acquisitions

CardioSpectra Acquisition

On December 18, 2007, we acquired CardioSpectra, Inc., or CardioSpectra, a privately held corporation, for an aggregate purchase price of $27.0 million. 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. The acquisition was accounted for as an asset purchase. We have included the operating results associated with the CardioSpectra acquisition in our consolidated financial statements from the date of acquisition.

Subject to the terms of the Merger Agreement, we may be required to make milestone payments. 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. We have used and will continue to 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.

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In December 2009, the first milestone specified in the CardioSpectra merger agreement was achieved and at December 31, 2009, the corresponding milestone payment totaling $11.0 million was recorded as in-process research and development, or IPR&D, expense. In January 2010, we paid the milestone payment with the issuance of 609,360 shares of our common stock and $531,000 of cash. The second milestone specified in the merger agreement was not achieved as of December 31, 2010, and as such, the second milestone payment was not paid. Additional remaining milestone payments of up to $17.0 million may be paid upon achievement of the respective revenue targets described in the merger agreement. As of September 30, 2011, we have not achieved the respective revenue targets. Therefore, we have not recorded any liability related to these milestones.

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 the telecommunications industry, laser and non-laser light sources 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 $23.8 million consisted of $22.3 million paid in cash, assumed liabilities of $6.5 million, and transaction costs of $725,000, net of cash received of $5.8 million. The acquisition was accounted for as a business combination.

Correspondingly, the purchase price was allocated to the net tangible and intangible assets based on their estimated fair values as of the acquisition date. Goodwill was recorded for the amount by which total purchase consideration exceeded net assets acquired. This goodwill was allocated to our medical segment and is not deductible for income tax purposes. We have included the operating results associated with the Axsun acquisition in our consolidated financial statements from the date of acquisition.

Fluid Medical Acquisition

On August 5, 2010, we acquired all of the outstanding equity interests in Fluid Medical, Inc., or Fluid Medical, a privately held company, which is engaged in the development of imaging technology for use in various structural heart applications, including, but not limited to, mitral valve repair. Fluid Medical’s technology and intellectual property provide forward field of view imaging on highly maneuverable catheters that have the potential to enable or enhance visualization for procedures currently done with inadequate imaging. This technology is expected to result in a Forward-Looking Intra-Cardiac Echo, or FL.ICE, catheter that will initially be focused on minimally invasive structural heart applications, such as percutaneous aortic and mitral valve therapies. As we expand our line of visualization tools used in performing percutaneous interventional, or PCI, procedures, we believe this technology will enhance our ability to provide a broad suite of visualization products to our customers.

The purchase price of $4.2 million consisted of $3.6 million in cash payments and $150,000 of debt forgiveness related to working capital loans we made to Fluid Medical prior to the acquisition. Additionally, we have retained $400,000 as a “hold-back” liability to satisfy any claims for indemnification made within 18 months following the closing. Assets acquired primarily included $4.1 million of IPR&D. Additionally, we recorded a deferred tax liability of $1.6 million related to the difference between the book and tax basis of the acquired assets. The transaction was accounted for as a business combination and, as such, we recorded $1.6 million of goodwill reflecting the amount by which the purchase consideration exceeded the acquired net assets. This goodwill was allocated to our medical segment and is not deductible for income tax purposes. We recorded $184,000 of acquisition-related costs related to this transaction, which were recognized in our statement of operations during the year ended December 31, 2010 as selling, general and administrative expense.

The IPR&D asset we recorded represents an estimate of the fair value of in-process technology related to Fluid Medical’s imaging technology program, which is still in the prototype phase. As such, based on authoritative accounting guidance, amortization of the IPR&D will not occur until it reaches market feasibility. Costs incurred in connection with this project subsequent to the date of acquisition will be expensed as incurred, and the project is currently expected to be completed in 2013. In the event the project is abandoned, we will record an impairment charge for this amount.

3. Financial Statement Details

Cash and Cash Equivalents and Available-for-Sale Investments

We invest our excess funds in securities issued by the U.S. 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 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 mortgage-backed securities. As of September 30, 2011, all of our investments will mature within 20 months. These investments are recorded at their estimated fair value including accrued interest receivable, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss).

Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

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• Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of money market funds and U.S. Treasury and agency debt securities.

• Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of corporate debt securities including commercial paper, corporate bonds, certificates of deposit and foreign currency forward contracts.

• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. We have not measured the fair value of any of our assets using Level 3 inputs.

We utilize a third-party pricing service to assist us in obtaining fair value pricing for our investments. Pricing for securities is based on proprietary models. Inputs are documented in accordance with the fair value disclosure hierarchy. We utilize a third-party financial institution to assist us in obtaining fair value pricing for our foreign currency forward contracts.

During the three and nine months ended September 30, 2011 and 2010, no transfers were made into or out of the Level 1, 2, or 3 categories. We will continue to review our fair value inputs on a quarterly basis.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below at September 30, 2011:

	Fair Value Measurements at September 30, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	33,031	$	33,031	$	—	$	—
Money market funds		20,060		20,060		—		—
Sub-total cash and cash equivalents		53,091		53,091		—		—
Corporate debt securities		122,246		—		122,246		—
U.S. Treasury and agency debt securities		32,068		32,068		—		—
Sub-total short-term investments		154,314		32,068		122,246		—
Long Term:
Corporate debt securities		12,882		—		12,882		—
U.S. Treasury and agency debt securities		21,046		21,046		—		—
Sub-total long-term investments		33,928		21,046		12,882		—
Total Assets	$	241,333	$	106,205	$	135,128	$	—
Liabilities:
Foreign currency forward contracts	$	355	$	—	$	355	$	—

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Our investments have been classified as available-for-sale. At September 30, 2011, available-for-sale investments are detailed as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	122,267	$	11	$	32	$	122,246
U.S. Treasury and agency debt securities		32,069		4		5		32,068
Short-term available-for-sale investments	$	154,336	$	15	$	37	$	154,314
Long-term:
Corporate debt securities	$	12,891	$	8	$	17	$	12,882
U.S. Treasury and agency debt securities		21,046		4		4		21,046
Long-term available for sale investments	$	33,937	$	12	$	21	$	33,928

Available-for-sale investments that are in an unrealized loss position at September 30, 2011 are detailed as follows (in thousands):

	Estimated Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	58,474	$	49
U.S. Treasury and agency debt securities		19,030		9
	$	77,504	$	58

At December 31, 2010, available-for-sale investments are detailed as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	97,685	$	41	$	14	$	97,712
U.S. Treasury and agency debt securities		77,585		8		22		77,571
Short-term available-for-sale investments	$	175,270	$	49	$	36	$	175,283
Long-term:
Corporate debt securities	$	16,830	$	1	$	29	$	16,802
U.S. Treasury and agency debt securities		10,002		—		—		10,002
Long-term available for sale investments	$	26,832	$	1	$	29	$	26,804

Derivative Financial Instruments

Our derivative financial instruments are primarily composed of foreign currency forward contracts. We record derivative financial instruments as either assets or liabilities in our unaudited condensed consolidated balance sheets and measure them at fair value. At September 30, 2011 and December 31, 2010, notional amounts of our outstanding contracts were $52.5 million and $54.0 million, respectively. At September 30, 2011, the outstanding derivatives had maturities of 91 days or less. The fair value of our foreign currency forward contracts of $355,000 was included in accrued expenses and other current liabilities in our unaudited condensed consolidated balance sheet at September 30, 2011, and the fair value of our foreign currency forward contracts of $299,000 was included in accrued expenses and other current liabilities in our condensed consolidated balance sheet at December 31, 2010. For the three and nine months ended September 30, 2011, $572,000 and $2,269,000 of net losses related to our derivative financial instruments are included in exchange rate loss in our unaudited condensed consolidated statements of operations. For the three and nine months ended September 30, 2010, $2.7 million and $2.6 million of net losses, related to our derivative financial instruments were included in our consolidated statements of operations.

In connection with our convertible debt offering (discussed in more detail below) we purchased call options on our common stock from JPMorgan Chase. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants to JPMorgan Chase, which give JPMorgan Chase the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. In accordance with the authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively as long as they continue to meet the conditions for equity classification.

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Inventories

Inventories consist of the following (in thousands):

	September 30, 2011		December 31, 2010
Finished goods (1)	$	22,703	$	20,996
Work-in-process		9,446		7,946
Raw materials		14,314		11,557
	$	46,463	$	40,499

(1) Finished goods inventory includes consigned inventory of $4.9 million and $3.3 million at September 30, 2011 and December 31, 2010, respectively.

Property and Equipment

Property and equipment consists of the following (in thousands):

	September 30, 2011			December 31, 2010
Medical diagnostic equipment	$	63,865		$	55,836
Other equipment		32,089			27,721
Leasehold improvements		8,317			8,062
Purchased software		4,033			3,331
Construction-in-progress (1)		26,197			7,852
		134,501			102,802
Accumulated depreciation and amortization		(61,090	)		(46,299	)
	$	73,411		$	56,503

(1) Construction-in-progress at September 30, 2011 and December 31, 2010 includes $367,000 and $42,000, respectively, of capitalized interest related to the construction of our manufacturing facility in Costa Rica.

Intangible Assets

Intangible assets consist of developed technology, licenses, customer relationships, patents and trademarks, and assembled workforce which are amortized using the straight-line method over periods ranging from 3 to 20 years, representing the estimated useful lives of the assets. IPR&D consists of in-process technology related to Fluid Medical’s imaging program, which is still in the prototype phase and, therefore, amortization will not begin until such technology reaches market feasibility.

We conduct impairment assessment of our goodwill and certain intangible assets during the fourth quarter of each year. We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an asset is used. During the nine months ended September 30, 2011 and through the date of this report, there were no triggering events, changes in market conditions or other factors that would indicate possible or actual impairment of our long-lived assets.

During the nine months ended September 30, 2011, we recorded intangible asset additions of approximately $493,000 related to patents, $117,000 related to customer relationships and $161,000 related to licensed technology.

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At September 30, 2011, intangible assets by major class consist of the following (in thousands):

	September 30, 2011
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Intangible assets subject to amortization
Developed technology	$	22,651	$	15,663	$	6,988		8.2
Licenses		7,195		5,890		1,305		10.0
Customer relationships		4,089		2,800		1,289		3.3
Patents and trademarks		3,148		1,536		1,612		10.0
Assembled workforce		274		257		17		4.0
		37,357		26,146		11,211		7.3
Intangible assets not yet subject to amortization
In-process research and development (2)		4,050		—		4,050		n/a
	$	41,407	$	26,146	$	15,261

At December 31, 2010, intangible assets by major class consist of the following (in thousands):

	December 31, 2010
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Intangible assets subject to amortization
Developed technology	$	22,651	$	14,666	$	7,985		8.2
Licenses		7,034		5,400		1,634		10.0
Customer relationships		3,978		2,005		1,973		3.4
Patents and trademarks		2,655		1,262		1,393		7.1
Assembled workforce		274		206		68		4.0
		36,592		23,539		13,053		7.1
Intangible assets not yet subject to amortization
In-process research and development (2)		4,050		—		4,050		n/a
	$	40,642	$	23,539	$	17,103

(1) Weighted average life of intangible assets is presented excluding fully amortized assets.

(2) IPR&D represents an estimate of fair value of in-process technology related to Fluid Medical’s imaging technology program, which is still in the prototype phase. As such, based on authoritative guidance, amortization of the IPR&D will not occur until it reaches market feasibility. In the event the project is abandoned, we will record an impairment charge for this amount.

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At September 30, 2011, future amortization expense associated with our intangible assets is expected to be as follows (in thousands):

2011 (remaining three months)	$	884
2012		3,016
2013		2,169
2014		1,551
2015		1,135
Thereafter		2,456
	$	11,211

Restructuring Activity

In June 2009, we implemented a restructuring plan to consolidate our resources related to the research and development of our OCT technology. As part of the restructuring plan, during the first quarter of 2010 we completed the closure of our San Antonio, Texas facility and relocated such operations to our Billerica, Massachusetts facility. Approximately 20 employees were impacted by the restructuring plan. One-time benefits to affected employees included relocation or a separation agreement including severance payments, continuing medical benefits, and outplacement assistance. Sixteen employees entered into separation agreements. All terminations were completed as of May 31, 2010.

Consistent with authoritative guidance, we accrued relocation costs and the costs of one-time termination benefits to employees who were not required to render service beyond a minimum retention period of 60 days. The remaining one-time termination benefits were recorded to expense ratably over required service periods. Additionally, costs related to moving equipment between the facilities were expensed during the period incurred. As a result, we recorded $0 and $63,000 as research and development expense during the three and nine months ended September 30, 2010. In addition, during the three and nine months ended September 30, 2010, we recorded $0 and $454,000 of additional restructuring costs as selling, general and administrative expense for the termination of the operating lease and related contract costs, including a charge for the impairment of certain property and equipment.

On April 26, 2010, we entered into a lease termination agreement with the landlord of our San Antonio facility. Total termination costs of $330,000 included a lump-sum lease-termination payment, broker commissions and the surrender of our security deposit. We were correspondingly released from any future obligations under this facility lease. The termination payment represented a savings over the original estimated restructuring liability related to the remaining lease payments and resulted in a benefit of $116,000 that was recorded during the second quarter of 2010. At September 30, 2011, there were no future obligations related to this restructuring activity.

Convertible Debt

In September 2010, we issued $115.0 million aggregate principal amount of 2.875% Convertible Senior Notes due September 1, 2015, or, the Notes, in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on March 1 and September 1, commencing on March 1, 2011.

The Notes are general unsecured obligations that rank pari passu with our other existing and future unsecured obligations. Prior to June 1, 2015, the Notes are convertible only upon certain events specified in the indenture governing the Note. The initial conversion rate for the Notes is 33.7339 shares of common stock per $1,000 principal amount of the Notes, representing an initial effective conversion price of approximately $29.64 per share of common stock. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the Notes but will not be adjusted for accrued and unpaid interest.

We received proceeds of $100.5 million from issuance of the Notes, net of debt issuance costs ($4.4 million) and net payments related to our hedge transactions ($10.0 million) which are described in more detail below. We recorded total debt issuance costs (including broker fees) of approximately $4.4 million, which were allocated on a pro-rata basis to the debt ($3.6 million) and equity ($866,000) components of the transaction. The debt component is primarily included in non-current liabilities and is being accreted to interest expense over five years, the term of the Notes. The equity component was netted against the proceeds and included in additional paid-in capital.

We may not redeem the Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the Notes may require us to purchase all or a portion of their Notes at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the repurchase date. Holders who convert their Notes in connection with a make-whole fundamental change, as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate.

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In connection with the offering of the Notes, to hedge against potential dilution upon conversion of the Notes, we also purchased call options on our common stock from JPMorgan Chase. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the Notes. We paid an aggregate of $27.2 million to purchase these call options. The call options will expire on September 1, 2015, unless earlier terminated or exercised. To reduce the cost of the hedge, in a separate transaction we sold warrants to JPMorgan Chase. These warrants give JPMorgan Chase the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. These warrants will be exercisable and will expire in equal installments for a period of 50 trading days beginning on December 1, 2015. We received an aggregate of $17.2 million from the sale of these warrants. In accordance with the applicable authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and will not be marked to market prospectively as long as they continue to meet the condition for equity classification. The net amount of $10.0 million paid to JPMorgan Chase was recorded as a reduction to additional paid-in capital. We did not record the potential tax benefit of approximately $10.4 million related to the call options as we have recorded a full valuation allowance against our deferred tax assets. The settlement terms of the call options provide for net share settlement and the settlement terms of the warrants provide for net share or cash settlement at our option. The carrying values of the liability and equity components of the Notes are reflected in our unaudited condensed consolidated balance sheets as follows (in thousands):

	September 30, 2011			December 31, 2010
Liabilities:
Principal amount of the 2.875% Convertible Senior Notes	$	115,000		$	115,000
Unamortized discount of liability component		(18,292	)		(21,211	)
Unamortized debt issuance costs		(2,203	)		(2,627	)
Carrying value of liability component	$	94,505		$	91,162
Equity — net carrying value	$	22,263		$	22,263

The fair value of the Notes at September 30, 2011 was $139.4 million.

Other Long-Term Debt

The amounts outstanding for other long-term debt at September 30, 2011 and December 31, 2010 relate to capital leases.

4. Commitments and Contingencies

Litigation — LightLab

On January 7, 2009, LightLab Imaging, Inc., or LightLab, filed a complaint against us and our wholly owned subsidiary, Axsun, in the Superior Court of Massachusetts, Suffolk County, seeking injunctive relief and unspecified damages (the Massachusetts Action). LightLab develops and sells OCT products for cardiovascular imaging and other medical uses. On July 6, 2010, LightLab was acquired by St. Jude Medical, Inc., or St. Jude.

Prior to our acquisition of Axsun, Axsun had entered into a development and supply agreement, or the Agreement, with LightLab, in which, among other things, Axsun agreed to supply tunable lasers to LightLab for use in LightLab’s OCT imaging products until April 2016, with exclusivity in the field of coronary artery imaging expiring in April 2014. Since the acquisition, Axsun has continued to supply lasers to LightLab. The complaint includes allegations that Volcano interfered with the Agreement and with LightLab’s advantageous business relationship with Axsun, that Axsun breached the Agreement, that Axsun and Volcano misappropriated LightLab’s confidential information and trade secrets, and violated Chapter 93A, a Massachusetts statute that provides for recovery of up to three times damages plus attorneys fees (93A).

The Judge ordered that the trial in the Massachusetts Action proceed in separate phases, with a jury trial first on liability, followed by a jury trial on damages, and then non-jury hearings on liability under 93A and on injunctive relief. The jury trial on liability commenced on January 4, 2010 and the jury returned a verdict on February 4, 2010 that included findings that the contract specifications for the lasers Axsun supplies and previously supplied to LightLab are trade secrets of LightLab, that Axsun agreed not to sell any tunable lasers to Volcano for any purpose or to third parties for use in cardiology imaging during the exclusivity period in the contract, and that Axsun breached its contract with LightLab. The jury further found that Volcano intentionally interfered with LightLab’s advantageous business relationship with Axsun.

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A trial in the Massachusetts Action with respect to damages was set to commence on April 7, 2010 (Damages Trial). In lieu of conducting the Damages Trial, the parties agreed and stipulated that the sum of $200,000 would be treated as if it were the jury’s verdict against the defendants in the Damages Trial (the Stipulation).

Upon the entry of the Stipulation, LightLab waived its rights, if any, to make any additional claims for special damages relating to lasers received in 2009 that do not meet the version 6 specification, for special damages claimed by LightLab in prior pleadings, and for the repair and/or replacement of any of the lasers specified in the Stipulation. In addition, Axsun waived its rights, if any, to make any claim for recovery from LightLab for certain engineering charges in connection with a development and supply agreement with LightLab, and for return by LightLab of any of the lasers specified in the Stipulation.

Under the Stipulation, all parties expressly reserved their otherwise properly preserved rights of appeal. These rights include LightLab’s appellate rights, if any, regarding its claim for alleged lost profits in excess of the above-referenced $200,000 stipulated amount to the extent LightLab is able to establish that it has properly preserved such rights.

The injunctive relief phase of the Massachusetts Action commenced on April 12, 2010. In a ruling issued October 5, 2010, the Court rejected LightLab’s claims for protection of five alleged trade secrets relating to laser technologies, and denied all of LightLab’s requests for permanent injunctions with respect to those trade secrets. The ruling followed a two-week trial on five of a number of trade secret claims alleged by LightLab.

In a summary judgment ruling issued January 26, 2011, the Court rejected the remainder of LightLab’s claims for protection of its remaining trade secrets, and denied all of LightLab’s claims for permanent injunctions with respect to those trade secrets. This judgment completed the trade secret portion of the Massachusetts Action.

In a ruling issued January 28, 2011, the Court found that Volcano and Axsun violated 93A, and awarded LightLab additional damages of $400,000 and reasonable attorneys’ fees.

On February 10, 2011, and on April 7, 2011, the Court entered a Final Judgment and an Amended Final Judgment, respectively, in the Massachusetts Action: a) in favor of Volcano and Axsun on LightLab’s claims for trade secret misappropriation on items 1-30 on LightLab’s list of alleged trade secrets, b) ordered Volcano and Axsun to collectively pay $600,000 in damages (which amount includes the $200,000 agreed to in the Stipulation and the $400,000 ordered in the 93A ruling) and $4.5 million in attorneys’ fees, (resulting in a total of $5.1 million recorded to selling, general and administrative expense and accrued in other current liabilities during the fourth quarter of 2010), c) in favor of LightLab on its claims against Axsun for breach of contract, breach of implied covenant of good faith and fair dealing, for violation of 93A, and misappropriation of trade secrets for disclosing three particular items to Volcano in December 2008 – the specifications for the two lasers provided by Axsun to LightLab and one Axsun laser prototype made in 2008, d) in favor of LightLab on its claims against Volcano for intentional interference with a contract and advantageous business relationship, unjust enrichment, violation of 93A, and misappropriation of trade secrets for the same three trade secrets described above. In addition, the Court denied a majority of LightLab’s requested injunctions, and entered limited injunctive relief, none of which management believes have a material effect upon Volcano. The Final Judgment and Amended Final Judgment are substantially similar. The Amended Final Judgment corrects non-substantive clerical errors. On April 15, 2011, LightLab filed a notice of appeal, with respect to various decisions of the Court, including, a) the Court’s decisions adverse to LightLab’s claims for trade secret misappropriation in items 1-30 of LightLab’s alleged list of trade secrets, including the Court’s post-trial finding of fact and rulings of law adverse to LightLab on items 1 – 5, the Court’s two summary judgment decisions adverse to LightLab on items 6 – 23 and 25 – 30 (item 24 having been voluntarily dismissed by LightLab), and various rulings requiring evidence of use or intent to use as a prerequisite for injunctive relief; b) the Court’s post-trial decisions denying permanent injunctive relief that LightLab requested as terms of the Final Judgment; c) the Court’s pre-trial rulings excluding certain lost profits damages evidence that LightLab sought to introduce at trial; d) various discovery and pre-trial orders denying LightLab discovery about Axsun’s work for Volcano; e) the Court’s order barring LightLab from claiming that the sale of Axsun to Volcano itself constituted a breach of the LightLab-Axsun supply contract; and f) the denial of LightLab’s motion to alter or amend the Final Judgment, which motion sought to obtain additional declaratory relief barring Axsun from “supplying” tunable lasers to Volcano. Volcano and Axsun do not intend to cross appeal the Amended Final Judgment, and on July 5, 2011, Volcano and Axsun satisfied their payment obligations under the Amended Final Judgment by making a payment to Lightlab in the amount of approximately $5.4 million.

On February 5, 2010, Volcano and our wholly owned subsidiary, Axsun, commenced an action in the Delaware Chancery Court, or the Chancery Court Action, against LightLab seeking a declaration of Volcano and Axsun’s rights with respect to certain OCT technology, the High Definition Swept Source. The complaint was served on LightLab on March 19, 2010. LightLab then filed a counter-claim that included a claim against Axsun and Volcano for violations of 93A. Volcano and Axsun moved to dismiss LightLab’s 93A counter-claim, and LightLab responded to that motion by amending its 93A counter-claim. The 93A counterclaim has been stayed pending further action by the Chancery Court. This case has been stayed until such time as Volcano has achieved certain development and regulatory milestones.

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Additionally, on May 24, 2011, LightLab commenced a separate action in Delaware Chancery Court, or the Second Chancery Court Action, against Volcano and Axsun alleging that Axsun is inappropriately assisting Volcano in the development of a third-party laser. The complaint seeks injunctive relief and unspecified damages. After Volcano and Axsun moved to dismiss the Second Chancery Court Action, LightLab filed an amended complaint against Volcano and Axsun, adding additional allegations regarding misappropriation of trade secrets. Volcano and Axsun have submitted an answer to the amended complaint. In addition, Volcano and Axsun moved for judgment on the pleadings, seeking to dismiss a portion of LightLab’s amended complaint, and have filed an additional motion to stay the remainder of the Second Chancery Court Action. Those motions are currently pending.

Litigation — St. Jude

On July 27, 2010, St. Jude filed a lawsuit against Volcano in federal district court in Delaware (collectively, with the counterclaims described below, the Delaware Patent Action), alleging that our pressure guide wire products infringe five patents owned by St. Jude. St. Jude is seeking injunctive relief and monetary damages. This action does not involve OCT technology and is separate from the Massachusetts Action.

On September 20, 2010, Volcano filed its response, in which we denied the allegations that our PrimeWire^® products infringe any valid claim of St. Jude’s asserted patents. In addition, Volcano filed a counterclaim in which we have alleged that St. Jude’s PressureWire^® products and its RadiAnalyzer^® Xpress product infringe three Volcano patents. In our counterclaim, Volcano is seeking injunctive relief and monetary damages. A trial has been scheduled for October 15, 2012 for the Delaware Patent Action.

Litigation — Other

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 are not able to predict or estimate the ultimate outcome or range of possible losses relating to the Massachusetts Action, the Chancery Court Action, the Delaware Patent Action the Second Chancery Court Action, or any of the other lawsuits, claims or counterclaims described above. However, we believe that the ultimate disposition of these matters, individually and in the aggregate, including the matters discussed above, 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 our results of operations or cash flows in future periods.

Operating Leases

Rent expense for our facilities leases is being recognized on a straight-line basis over the respective minimum lease terms.

Purchase Commitments

We have obligations under non-cancelable purchase commitments. The majority of these obligations relate to inventory, primarily raw materials. At September 30, 2011, the future minimum payments under these non-cancelable purchase commitments totaled $19.8 million, of which $18.8 million will require payments at various dates through December 31, 2011 and the remainder will require payments at various dates through September 30, 2012.

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. At September 30, 2011, we have a remaining obligation of up to $2.5 million and we will be billed as services are performed under the agreement. In addition, we have entered into agreements with other third parties to sponsor clinical studies. Generally, we contract with one or more clinical research sites for a single study and no one agreement is material to our consolidated results of operations or financial condition. We are usually billed as services are performed based on enrollment and are required to make payments over periods ranging from less than one year up to three years. Our actual payments under these agreements will vary based on enrollment.

In September 2010, we entered into a series of agreements under which we agreed to purchase a parcel of land in Costa Rica for $3.0 million for the purpose of constructing a manufacturing facility and we agreed to retain a firm to construct our cold shell manufacturing building for $10.5 million (20% of which was paid upon execution of the agreement, with the balance payable over the eleven-month construction period through 2011). We also entered into an agreement to retain a construction manager and for the completion of an operational manufacturing facility, including the addition of equipment and related improvements, for approximately $21.5 million which will be paid at various dates throughout 2011 into the first quarter of 2012. As of September 30, 2011, the total amount paid related to the construction of the Costa Rica manufacturing facility, including the cost of securing the land for the construction site, is $18.3 million, of which $13.2 million was paid during the nine months ended September 30, 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 Volcano. 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 unaudited condensed consolidated financial statements.

Sole source suppliers

We rely on a number of sole source suppliers to supply transducers, substrates and processing for our scanners used in our catheters. We are not parties to supply agreements with these suppliers but instead use purchase orders as needed.

5. Stockholders’ Equity

Stock Benefit Plans

Our 2005 Amended and Restated Equity Compensation Plan, or 2005 Amended Plan, provides for an aggregate of 16,212,558 shares of our common stock that may be issued or transferred to our employees, non-employee directors and consultants, including increases of 2,050,000 and 2,500,000 shares which were approved by our stockholders on July 29, 2009 and May 2, 2011, respectively. Commencing July 29, 2009, the number of shares of common stock available for issuance under the 2005 Amended Plan was reduced by one share for each share of stock issued pursuant to a stock option or a stock appreciation right and one and sixty-three hundredths (1.63) shares for each share of common stock issued pursuant to a restricted stock award, restricted stock unit, or RSU, award, performance stock award or other stock award. Commencing May 2, 2011, the number of shares of common stock available for issuance under the 2005 Amended Plan was reduced by one share for each share of stock issued pursuant to a stock option or a stock appreciation right and two and twelve hundredths (2.12) shares for each share of common stock issued pursuant to a restricted stock award, RSU, award, performance stock award or other stock award. Shares net exercised or retained to cover a participant’s minimum tax withholding obligations do not again become available for issuance under the 2005 Amended Plan.

At September 30, 2011, we have granted stock options and RSUs under the 2005 Amended Plan. Stock options previously granted under the 2000 Long Term Incentive Plan that are cancelled or expired will increase the shares available for grant under the 2005 Amended Plan. In addition, employees have purchased shares of the Company’s common stock under the 2007 Employee Stock Purchase Plan, or the Purchase Plan. At September 30, 2011, 4,287,162 shares and 415,198 shares remained available to grant under the 2005 Amended Plan and the Purchase Plan, respectively.

Fair Value Assumptions

The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing, or Black-Scholes, model utilizing the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Risk-free interest rate		1.9	%		2.0	%		2.1	%		2.3	%
Expected life (years)		4.5			4.4			4.4			4.6
Estimated volatility		46.8	%		43.9	%		47.4	%		46.6	%
Expected dividends		None			None			None			None
Weighted-average grant date fair value	$	13.10		$	8.33		$	11.52		$	8.01

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

Since January 1, 2008, we have used our historical stock option exercise experience to estimate the expected term of our stock options.

Historically, our 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 stock options. We did not exclude any period due to discrete historical events. We used 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.

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As of January 1, 2011 we determined that the trading history of our common stock is sufficient in relation to the expected term of our stock options to begin using the volatility calculated on our common stock without further consideration of the volatility of comparable medical device companies’ common stock. As such, for any options granted during the three and nine months ended September 30, 2011, we have solely utilized the volatility of our own common stock in determining the grant date fair value.

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.

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Risk-free interest rate		0.1	%		0.2	%		0.2	%		0.2	%
Expected life (years)		0.5			0.5			0.5			0.5
Estimated volatility		35.7	%		34.6	%		35.7	%		35.9	%
Expected dividends		None			None			None			None
Fair value of purchase right	$	6.87		$	5.36		$	6.48		$	4.91

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 U.S. 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.

Stock-Based Compensation Expense

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

	Three Months Ended September 30 ,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenues	$	146	$	185	$	304	$	586
Selling, general and administrative		2,720		2,503		8,057		7,563
Research and development		450		360		1,244		1,090
	$	3,316	$	3,048	$	9,605	$	9,239

Included in our stock-based compensation expense is $0, $159,000, $115,000 and $484,000 of stock-based compensation expense related to non-employees in the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively. Stock-based compensation expense of $257,000, $233,000, $793,000 and $661,000 related to the Purchase Plan was also recorded in the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively. At September 30, 2011 and December 31, 2010, there was $206,000 and $223,000, respectively, of total stock-based compensation cost capitalized in inventories.

We estimate forfeitures and only recognize expense for those shares expected to vest. Our estimated forfeiture rates in the three and nine months ended September 30, 2011 and 2010 are based on our historical forfeiture experience.

6. 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. Our medical segment is engaged in the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. Our industrial segment focuses on the discovery, development, manufacture and sale of micro-optical spectrometers and optical channel monitors to telecommunications and other industrial companies.

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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 September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Medical segment:
Consoles	$	9,709	$	8,129		19.4	%	$	29,420	$	27,585		6.7	%
Single-procedure disposables:
IVUS		49,760		42,641		16.7			147,384		122,122		20.7
FM		16,653		11,275		47.7			47,954		32,579		47.2
Other		6,796		4,663		45.7			16,565		12,658		30.9
Sub-total medical segment		82,918		66,708		24.3			241,323		194,944		23.8
Industrial segment		2,849		6,178		(53.9	)		9,475		17,966		(47.3	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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 September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Revenues (1):
United States	$	38,964	$	33,353		16.8	%	$	113,201	$	96,257		17.6	%
Japan		26,599		20,963		26.9			76,406		57,683		32.5
Europe, the Middle East and Africa		14,637		13,603		7.6			45,534		42,726		6.6
Rest of world		5,567		4,967		12.1			15,657		16,244		(3.6	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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

At September 30, 2011, approximately 45.2% of our long-lived assets, excluding financial assets, are located in the U.S., approximately 24.7% are located in Japan, approximately 25.5% are located in Costa Rica and less than 5% are located in our remaining geographies. At December 31, 2010, approximately 51% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 34% were located in Japan, and less than 15% were located in our remaining geographies.

7. 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 U.S. Internal Revenue Service and state tax jurisdictions from our inception in 2000 through 2010. 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 through 2010, and by South Africa from the inception of Volcano South Africa in 2008 through 2010. We were audited by the Japanese tax authorities for the 2005 through 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 through 2010.

Our effective tax rate is a blended rate resulting from the composition of taxable income in the global jurisdictions in which we conduct business. We recognize a full valuation allowance against our deferred tax assets in the jurisdictions where there is insufficient certainty surrounding the realization of deferred tax assets through future taxable income. On a quarterly basis, we assess our ability to realize our deferred tax assets and the corresponding need for a valuation allowance. We expect that due to a combination of recent positive operating results and projections of continued profitability, we may be able to release a portion of our valuation allowance for deferred tax assets in certain jurisdictions in the near future. Such assessment could result in a material reduction of our valuation allowances as soon as in the fourth quarter of 2011, particularly with respect to our U.S. jurisdiction, which represents the largest component of our valuation allowance.

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For the three and nine months ended September 30, 2011 and 2010, we recorded a provision for income taxes of $669,000, $735,000, $1.7 million, and $1.4 million, respectively. The 2011 and 2010 expense is comprised of foreign income taxes as well as various state and local income taxes.

We apply the “with and without method — direct effects only”, in accordance with authoritative guidance, with respect to recognition of stock option excess tax benefits within stockholders’ equity (paid in capital). Therefore, the aforementioned provision for income tax is determined utilizing projected federal and state taxable income before the application of deductible excess tax benefits attributable to stock option exercises.

8. Subsequent Events

None.

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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 fractional flow reserve, or FFR, 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 products consist of multi-modality consoles which are marketed as stand-alone units or as 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 consoles have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, FFR pressure wires and Medtronic’s Pioneer reentry device. We are developing additional offerings for integration into the platform, including forward-looking IVUS, or FL.IVUS, catheters, image-guided therapy catheters and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters.

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters and additional functionality options such as virtual histology IVUS tissue characterization and ChromaFlo stent apposition analysis. Our FFR offerings include FFR 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.

Through Axsun Technologies, Inc., or Axsun, one of our wholly owned subsidiaries, we also develop and manufacture optical monitors, laser and non-laser light sources, and optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors used by telecommunications and other industrial companies.

We have corporate infrastructure in the U.S., Europe and Japan. 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 and San Diego, California. We have sales offices in Alpharetta, Georgia and Tokyo, Japan; sales and distribution offices in Zaventem, Belgium and Woodmead, South Africa; and third-party distribution facilities in Chiba, Japan and Tokyo, Japan. In addition, we have facilities in Billerica, Massachusetts for the manufacturing and operations of Axsun and the research and development of OCT and FL.IVUS technology. In September 2010, we, through a wholly owned subsidiary, entered into a series of agreements to acquire real property and to design and build manufacturing facilities in Costa Rica.

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. We sell our products directly to customers in the U.S., Japan, certain European markets as well as South Africa and utilize distributors in other European markets, including Spain, Portugal and parts of Italy, Middle East, North African countries, Canada, Asia Pacific, Latin America and Australia. Our distributors are involved in product launch planning, education and training, physician support and clinical trial management.

In the nine months ended September 30, 2011 and 2010, 47.4 % and 42.8 %, respectively, of our revenues and 22.3% and 22.9%, respectively, of our operating expenses were denominated in various non-U.S. dollar currencies, primarily the yen and the euro. We expect that a significant portion of our revenue and operating expenses will continue to be denominated in non-U.S. dollar currencies. 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.

At September 30, 2011, we had a worldwide installed base of approximately 6,600 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 nine months ended

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September 30, 2011, the sale of our single-procedure disposable catheters and guide wires accounted for $195.3 million, or 77.9% of our revenues, a $40.6 million, or 26.2% increase from the same period in 2010, in which the sale of our single-procedure disposable catheters and guide wires accounted for $154.7 million, or 72.7% of our revenues.

We manufacture our multi-modality and FFR consoles, IVUS catheters and FFR 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 24, 2008, we acquired Axsun, a company that develops and manufactures optical monitors for telecommunications, laser and non-laser light sources and optical engines used in medical OCT imaging systems and advanced photonic components and sub-systems 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 was a wholly owned subsidiary of Goodman Company, Ltd., or Goodman, which was a distributor of our IVUS and FFR products in Japan until that relationship was terminated in July 2009. LightLab was acquired by St. Jude Medical, Inc., or St. Jude, on July 6, 2010. LightLab develops and sells OCT products for cardiovascular imaging and other medical uses. For details related to the litigation, see Note 4 “Commitments and Contingencies – Litigation” to our unaudited condensed consolidated financial statements.

The economic conditions in many countries and regions where we generate most of our revenues remain uncertain. 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 any 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 their relative ability or inability to obtain capital and credit, 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.

The March 2011 earthquake, tsunami and associated events in Japan could negatively impact many of our customers, as well as the conditions in which our Tokyo-based subsidiary operates. In addition, such events may result in a downturn in Japan’s economy as a whole, which may adversely affect our ability to conduct business in Japan. Likewise, the political unrest in the Middle East may have adverse consequences to the global economy or to our customers in the Middle East, which could negatively impact our business. Uncertainty about future economic conditions may make it more difficult for us to forecast operating results and to make decisions about future investments. For further discussion, see “Risk Factors— General national and worldwide economic conditions may materially and adversely affect our financial performance and results of operations.”

Financial Operations Overview

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

Revenues. We derive our revenues from two reporting segments: medical and industrial. Our medical segment represents our core business, in which we derive revenues primarily from the sale of our consoles and single-procedure disposables. Our industrial segment derives revenues related to the sales of Axsun’s micro-optical spectrometers and optical channel monitors to telecommunication and other industrial companies. In the nine months ended September 30, 2011, we generated $250.8 million of revenues which is composed of $241.3 million from our medical segment and $9.5 million from our industrial segment. In the nine months ended September 30, 2011, 12.2% of our medical segment revenues were derived from the sale of our consoles, as compared with 14.2% in the nine months ended September 30, 2010. In the nine months ended September 30, 2011, IVUS single-procedure disposables accounted for 61.1% of our medical segment revenues, compared to 62.6% during the same period in 2010, while in the nine months ended September 30, 2011, 19.9% of our medical segment revenues were derived from the sale of our FFR single-procedure disposables, as compared with 16.7% in the nine months ended September 30, 2010. Other revenues consist primarily of revenue from Axsun’s medical segment, service and maintenance revenues, rental revenues, shipping and handling revenues, sales of distributed products, spare parts sales, and license fees.

We expect to continue to experience variability in our quarterly revenues from console sales 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. We may include in our arrangements with customers future deliverables, such as unspecified hardware upgrades or biomedical equipment education. In these cases, we would be required to defer the allocated arrangement consideration based on the relative estimated selling prices of the undelivered items until all our obligations have been met.

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

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, depreciation related to our manufacturing equipment and utilities. 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 a trend of further improvement in our gross margin for IVUS and FFR products if we are successful in our ongoing efforts to streamline and improve our manufacturing processes and increase production volumes.

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel serving the sales, marketing and administrative 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. Due to ongoing litigation, legal expenses tend to be somewhat unpredictable in their timing and amount. 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. We expect these expenses to grow at a slower rate than our revenues as we plan to leverage these costs as we continue to grow our business.

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. Due to product development timelines, research and development costs tend to be distributed unevenly between the periods. We expect our research and development expenses to increase as we continue to develop our products and technologies.

Amortization of Intangibles. We amortize intangible assets, consisting of our acquired developed technology, licenses, customer relationships, assembled workforce, patents and trademarks, using the straight-line method over their estimated useful lives of up to 20 years. These assets are regularly tested for impairment and abandonment.

In-process Research and Development. In-process research and development expense, 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 certain OCT assets in connection with our acquisition of CardioSpectra, Inc., or 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 December 2009, we achieved a milestone specified in the CardioSpectra merger agreement related to the receipt of CE mark regulatory approval and $11.0 million became payable by us to the former stockholders of CardioSpectra. We paid such amount to the former stockholders of CardioSpectra through the issuance of 609,360 shares of our common stock and $531,000 of cash in January 2010. The second milestone specified in the merger agreement was not achieved as of December 31, 2010, and as such, the second milestone payment was not paid. Although we have received CE mark approval for a preliminary version of our OCT product, this version is not intended to be commercialized. We believe there are significant incremental efforts and costs that must be incurred to complete a product that is suitable for commercialization and there is significant risk that a commercializable product may not result from our efforts. As of September 30, 2011, we estimate that we will incur $7.8 million of additional costs in order to obtain a commercializable OCT product for a total of approximately $27.5 million. The OCT project was originally expected to be commercialized by late 2008, however it was at an earlier stage of development than our initial assessment indicated. Due to uncertainties in our OCT development program, we are currently unable to predict when we will launch our OCT product. Additional milestone payments of up to $17.0 million may be paid to the former stockholders of CardioSpectra upon achievement of the respective revenue targets described in the merger agreement (see Note 2 “Acquisitions” to our unaudited condensed consolidated financial statements).

If we are unable to launch an OCT product in a timely manner, or at all, 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 position, 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 FL.IVUS project in connection with our acquisition of Novelis, which was valued at $12.2 million. Under the terms of the merger agreement, a milestone payment of $3.0 million was eligible to be earned by the Novelis stockholders

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upon receipt of FDA approval of a 510(k) application relating to the Novelis FL.IVUS device only in the event that the 510(k) application for such a device was filed with the FDA on or before December 31, 2009. At December 31, 2009 a 510(k) application had been made to the FDA. At that time, we believed that the 510(k) application would be approved and that the milestone would become payable. Accordingly, at December 31, 2009 we recorded an accrual for $3.0 million in relation to the potential milestone payment. Based on our internal assessments in relation to our ongoing interactions with the FDA regarding this 510(k) application, during the fourth quarter of 2010 it became apparent that our 510(k) application would not be approved prior to its expiration. Accordingly, we reversed the accrual for the milestone payment, resulting in a $3.0 million credit to IPR&D expense during the fourth quarter of 2010.

We believe there are significant incremental efforts and costs that must be incurred to complete a product that is suitable for commercialization. As of September 30, 2011, we estimate that we will incur $5.8 million of additional costs in order to commercialize the first product using FL.IVUS for a total of $16.7 million. We originally expected the FL.IVUS project to receive regulatory approvals and be commercialized during 2009. As of September 30, 2011, the project was expected to be completed in 2013.

If the FL.IVUS 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 other discoveries during human trials, we may jeopardize our competitive position and experience a potential loss of revenues and associated market share.

In August 2010, we acquired the Forward Looking Intra-Cardiac Echo, or FL.ICE, project in connection with our acquisition of Fluid Medical Inc., or Fluid Medical. This project was recorded as an intangible asset valued at $4.1 million. At the date of acquisition the estimated costs to complete were $5.9 million. At September 30, 2011 the estimated costs to complete are approximately $4.9 million, for a total of $6.9 million. As of September 30, 2011, the FL.ICE project was expected to be completed in 2013.

The following table summarizes our significant IPR&D projects (in millions):

Project Name	Fair Value		Estimated Cost to Complete, as of Acquisition Date		Costs Incurred Since  Acquisition		Estimated Cost to Complete, as of September 30, 2011		Total Estimated Costs to Complete since Acquisition Date
OCT	$	26.3	$	7.2	$	19.7	$	7.8	$	27.5
FL.IVUS		12.2		3.9		10.9		5.8		16.7
FL.ICE		4.1		5.9		2.0		4.9		6.9

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

Interest Expense. Interest expense is comprised of interest expense related to our convertible debt (including coupon interest, accretion of debt discount, and amortization of issuance costs), interest expense on the Final Judgment in our Massachusetts litigation (see Note 4 “Commitments and Contingencies – Litigation” to our unaudited condensed consolidated financial statements) and interest expense related to our capital lease obligations.

Exchange Rate Loss. Exchange rate loss is comprised of foreign currency transaction and remeasurement gains and losses, net, and the effect of changes in value and net settlements of our foreign currency forward contracts.

Provision for Income Taxes. Our effective tax rate is a blended rate resulting from the composition of taxable income in the global jurisdictions in which we conduct business. We apply the “with and without method — direct effects only”, in accordance with authoritative guidance, with respect to recognition of stock option excess tax benefits within stockholders equity (paid in capital). Therefore, provision for domestic income taxes is determined utilizing projected federal and state taxable income before the application of deductible excess tax benefits attributable to stock option exercises.

For nine months ended September 30, 2011 and 2010, the provision for income taxes is comprised of foreign taxes and various state and local income taxes.

We evaluate our ability to fully utilize our 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. We expect that due to a combination of recent positive operating results and projections of continued profitability, we may be able to release a portion of our valuation allowance for deferred tax assets in certain jurisdictions in the near future. Such assessment could result in a material reduction of our valuation allowances as soon as in the fourth quarter of 2011, particularly with respect to our U.S. jurisdiction, which represents the largest component of our valuation allowance. Our federal net operating loss carryforwards begin to expire in 2020 and our state net operating loss carryforwards begin to expire in 2012. Foreign net operating losses carry forward indefinitely. We also have federal research and experimentation tax credits, which begin to expire in 2022, and state research and experimentation tax credits, which carry forward indefinitely.

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Results of Operations

The following table sets forth items derived from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, presented in both absolute dollars (in thousands) and as a percentage of revenues:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2011					2010					2011					2010
Revenues	$	85,767		100.0	%	$	72,886		100.0	%	$	250,798		100.0	%	$	212,910		100.0	%
Cost of revenues, excluding amortization of intangibles		29,538		34.4			25,955		35.6			84,175		33.6			79,686		37.4
Gross profit		56,229		65.6			46,931		64.4			166,623		66.4			133,224		62.6
Operating expenses:		—										—
Selling, general and administrative		36,034		42.0			29,565		40.6			106,982		42.7			92,726		43.6
Research and development		13,928		16.2			10,185		14.0			40,337		16.1			29,637		13.9
Amortization of intangibles		860		1.0			627		0.9			2,572		1.0			1,821		0.9
In-process research and development		—		—			—		—			—		—			65		—
Total operating expenses		50,822		59.2			40,377		55.5			149,891		59.8			124,249		58.4
Operating income		5,407		6.4			6,554		8.9			16,732		6.6			8,975		4.2
Interest income		226		0.3			106		0.1			701		0.3			274		0.1
Interest expense		(1,834	)	(2.1	)		(249	)	(0.3	)		(5,895	)	(2.4	)		(267	)	(0.1	)
Exchange rate loss		(502	)	(0.6	)		(91	)	(0.1	)		(1,181	)	(0.5	)		(635	)	(0.3	)
Other, net		—		—			—		—			(2	)	—			(19	)	—
Income before provision for income taxes		3,297		4.0			6,320		8.7			10,355		4.0			8,328		3.9
Provision for income taxes		669		0.8			735		1.0			1,684		0.7			1,363		0.7
Net income	$	2,628		3.2	%	$	5,585		7.7	%	$	8,671		3.3	%	$	6,965		3.3	%

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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 September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Medical segment:
Consoles	$	9,709	$	8,129		19.4	%	$	29,420	$	27,585		6.7	%
Single-procedure disposables:
IVUS		49,760		42,641		16.7			147,384		122,122		20.7
FM		16,653		11,275		47.7			47,954		32,579		47.2
Other		6,796		4,663		45.7			16,565		12,658		30.9
Sub-total medical segment		82,918		66,708		24.3			241,323		194,944		23.8
Industrial segment		2,849		6,178		(53.9	)		9,475		17,966		(47.3	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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 September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Revenues (1):
United States	$	38,964	$	33,353		16.8	%	$	113,201	$	96,257		17.6	%
Japan		26,599		20,963		26.9			76,406		57,683		32.5
Europe, the Middle East and Africa		14,637		13,603		7.6			45,534		42,726		6.6
Rest of world		5,567		4,967		12.1			15,657		16,244		(3.6	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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

Comparison of Three Months Ended September 30, 2011 and 2010

Revenues. Revenues increased $12.9 million, or 17.7%, to $85.8 million in the three months ended September 30, 2011, as compared to revenues of $72.9 million in the three months ended September 30, 2010. In the three months ended September 30, 2011, revenues related to IVUS single-procedure disposables increased $7.1 million, or 16.7%, as compared to the three months ended September 30, 2010, while revenues related to FFR single-procedure disposables increased $5.4 million or 47.7% in the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. Revenues related to console sales in the three months ended September 30, 2011 increased $1.6 million, or 19.4% as compared to the three months ended September 30, 2010, due to increased penetration into certain foreign markets and original equipment manufacturer (OEM) sales channels. Overall, our revenue increases were driven by increased demand for our disposables, higher revenues resulting from our direct sales efforts in Japan and favorable impacts of foreign currency exchange related to the yen and euro. Additionally, the increases in FFR disposable revenues were primarily due to the broader availability of FFR technology as this functionality has been incorporated into our multi-modality console, in conjunction with an increased adoption of the technology based on clinical study data. Industrial segment revenues were $2.8 million in the three months ended September 30, 2011 as compared to $6.2 million in the same period last year, resulting from lower sales to our international telecommunications customers due to the telecommunications industry’s cyclical nature. Other revenues increased $2.1 million, primarily due to higher sales of third-party products and higher service contract and rental revenues. Increases in revenues were realized across all our key geographic markets. The Japanese market’s growth is due to the continued success of our direct sales efforts and the favorable impact of foreign currency exchange related to the yen.

Cost of Revenues. Cost of revenues increased $3.6 million, or 13.8%, to $29.5 million, or 34.4% of revenues in the three months ended September 30, 2011, from $26.0 million, or 35.6% of revenues in the three months ended September 30, 2010. Gross margin was 65.6% of revenues in the three months ended September 30, 2011, increasing from 64.4% of revenues in the three months ended September 30, 2010. This favorable gross margin was primarily the result of favorable product mix for IVUS and FFR disposable products, a decrease in the production costs of IVUS and FFR disposable products from ongoing cost reduction initiatives, and favorable impacts of foreign currency exchange rates to the gross margin related to the yen and euro. These benefits were partially offset by increased depreciation costs from additions of company-owned consoles.

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Selling, General and Administrative. Selling, general and administrative expenses increased $6.5 million, or 21.9%, to $36.0 million, or 42.0% of revenues in the three months ended September 30, 2011, as compared to $29.6 million, or 40.6% of revenues in the three months ended September 30, 2010. The increase in the three months ended September 30, 2011 as compared with the three months ended September 30, 2010 was primarily due to higher litigation expenses, the expansion of our Costa Rica general and administrative activities during the pre-production phase, expansion of Japan, Europe and U.S. sales and marketing organizations, including continued growth in our Japan operation to support our direct sales efforts there; unfavorable impacts of foreign currency exchange rates of the yen and euro; as well as increased information technology and infrastructure expenses to support company growth.

Research and Development. Research and development expenses increased $3.7 million, or 36.3%, to $13.9 million, or 16.2% of revenues in the three months ended September 30, 2011, as compared to $10.2 million, or 14.0% of revenues in the three months ended September 30, 2010. The increase in research and development expenses in the three months ended September 30, 2011 as compared with the three months ended September 30, 2010 was primarily due to increased spending on various product development projects and increased clinical expenses, mainly related to the VERDICT and FIRST clinical programs.

Amortization of Intangibles. Amortization expense increased to $860,000, or 1% of revenues in the three months ended September 30, 2011, as compared to $627,000, or 0.9% of revenues in the three months ended September 30, 2010. The increase is primarily related to the customer relationship intangibles we acquired upon the termination of a distributor relationship in November 2010.

Interest Income. Interest income increased to $226,000 in the three months ended September 30, 2011, as compared to $106,000 in the three months ended September 30, 2010. The increase was primarily due to a significant increase in our invested balances in the three months ended September 30, 2011 as compared to the three months ended September 30, 2010, resulting from the proceeds of our convertible debt offering discussed in Note 3 to our unaudited condensed consolidated financial statements “Financial Statement Details—Convertible Debt.”

Interest Expense. Interest expense increased to $1.8 million, or 2.1% of revenues in the three months ended September 30, 2011, as compared to $249,000 in the three months ended September 30, 2010. Interest expense during the three months ended September 30, 2011 was primarily related to our convertible debt (including coupon interest, accretion of debt discount, and amortization of debt issuance costs), and interest expense on our capital lease obligations, while in the three months ended September 30, 2010 interest expense was primarily related to our convertible debt which commenced on September 20, 2010.

Exchange Rate Loss. Exchange rate loss for the three months ended September 30, 2011 was $502,000, as compared to an exchange rate loss of $91,000 in the three months ended September 30, 2010. During the three months ended September 30, 2011 and 2010, the impact of fluctuations in exchange rates was mitigated by our hedging practices. Through our hedging program we reduce the volatility of our exchange rate gains and losses resulting from the translation of our intercompany receivable balances at current exchange rates.

Provision for Income Taxes. We recorded an income tax provision in the three months ended September 30, 2011 of $669,000, compared to a provision of $735,000 for the three months ended September 30, 2010.

Comparison of Nine months Ended September 30, 2011 and 2010

Revenues. Revenues increased $37.9 million, or 17.8%, to $250.8 million in the nine months ended September 30, 2011, as compared to revenues of $212.9 million in the nine months ended September 30, 2010. In the nine months ended September 30, 2011, revenues related to IVUS single-procedure disposables increased $25.3 million, or 20.7%, as compared to the nine months ended September 30, 2010, while revenues related to FFR single-procedure disposables increased $15.4 million or 47.2% in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. Revenues related to console sales in the nine months ended September 30, 2011 increased $1.8 million or 6.7% as compared to the nine months ended September 30, 2010, based on an increase in console unit sales. Overall, our revenue increases were driven by increased demand for our disposables, as well as higher revenues resulting from our direct sales efforts in Japan and favorable impacts of foreign exchange rates related to the yen and euro. Additionally, the increases in FFR disposable revenues were primarily due to the broader availability of FFR technology as this functionality has been incorporated into our multi-modality console, in conjunction with an increased adoption of the technology based on clinical study data. Industrial segment revenues were $9.5 million in the nine months ended September 30, 2011 as compared to $18.0 million in the same period last year, resulting from lower sales to our international telecommunications customers due to the telecommunications industry’s cyclical nature. Other revenues increased $3.9 million, primarily due to higher sales of third-party products and higher service contract and rental revenues. Increases in revenues were realized across all our key geographic markets. The Japanese market’s growth is due to the continued success of our direct sales efforts and the favorable impact of foreign currency exchange related to the yen.

Cost of Revenues. Cost of revenues increased $4.5 million, or 5.6%, to $84.2 million, or 33.6% of revenues in the nine months ended September 30, 2011, from $79.7 million, or 37.4% of revenues in the nine months ended September 30, 2010. The increase in the cost of revenues was primarily due to higher sales volume. Gross margin was 66.4% of revenues in the nine months ended September 30,

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2011, increasing from 62.6% of revenues in the nine months ended September 30, 2010. This favorable gross margin was primarily the result of a decrease in the production costs of IVUS and FFR disposable products due to favorable product mix, and ongoing cost reduction initiatives, a decline in lower margin Axsun industrial sales, and favorable impacts of foreign currency exchange rates to the gross margin related to the yen and euro. These benefits were partially offset by increased depreciation costs from additions of company-owned consoles.

Selling, General and Administrative. Selling, general and administrative expenses increased $14.3 million, or 15.4%, to $107.0 million, or 42.7% of revenues in the nine months ended September 30, 2011, as compared to $92.7 million, or 43.6% of revenues in the nine months ended September 30, 2010. The increase in the nine months ended September 30, 2011 as compared with the nine months ended September 30, 2010 was primarily due to the expansion of our U.S., Europe, and Japan sales and marketing organizations, including continued growth in our Japan operation to support our expanded direct sales efforts there; unfavorable impacts of foreign currency exchange rates related to the yen and euro; higher litigation expenses; expansion of our Costa Rica general and administrative activities during the pre-production phase; as well as increased information technology and infrastructure expenses to support company growth.

Research and Development. Research and development expenses increased $10.7 million, or 36.1%, to $40.3 million, or 16.1% of revenues in the nine months ended September 30, 2011, as compared to $29.6 million, or 13.9% of revenues in the nine months ended September 30, 2010. The increase in research and development expenses in the nine months ended September 30, 2011 as compared with the nine months ended September 30, 2010 was primarily due to increased spending on various product development projects and increased clinical expenses, mainly related to the VERDICT and FIRST clinical programs.

Amortization of Intangibles. Amortization expense increased to $2.6 million or 1.0% of revenues in the nine months ended September 30, 2011, as compared to $1.8 million, or 0.9% of revenues in the nine months ended September 30, 2010. The increase is primarily related to the amortization of the customer relationship intangibles we acquired upon the termination of a distributor relationship in November 2010.

In-process research and development. There were no IPR&D expenses recorded in the nine months ended September 30, 2011. In the nine months ended September 30, 2010 we recorded $65,000 of IPR&D expense related to the milestone achieved under the OCT program.

Interest Income. Interest income increased to $701,000 in the nine months ended September 30, 2011, as compared to $274,000 in the nine months ended September 30, 2010. The increase was primarily due to a significant increase in our invested balances in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010, resulting from the proceeds of our convertible debt offering discussed in Note 3 to our unaudited condensed consolidated financial statements “Financial Statement Details—Convertible Debt.”

Interest Expense. Interest expense increased to $5.9 million, or 2.4% of revenues in the nine months ended September 30, 2011, as compared to $267,000 in the nine months ended September 30, 2010. Interest expense during the nine months ended September 30, 2011 was related to our convertible debt (including coupon interest, accretion of debt discount, and amortization of debt issuance costs), interest expense on a judgment related to our LightLab litigation and interest expense on our capital lease obligations, while in the nine months ended September 30, 2010 interest expense was primarily related to our convertible debt which commenced on September 20, 2010.

Exchange Rate Loss. Exchange rate loss for the nine months ended September 30, 2011 was $1,181,000, as compared to an exchange rate loss of $635,000 in the nine months ended September 30, 2010. During the nine months ended September 30, 2011 and 2010 the impact of fluctuations in exchange rates was mitigated by our hedging practices. Through our hedging program we reduce the volatility of our exchange rate gains and losses resulting from the translation of our intercompany receivable balances at current exchange rates.

Provision for Income Taxes. We recorded an income tax provision in the nine months ended September 30, 2011 of $1,684,000, compared to a provision of $1,363,000 for the nine months ended September 30, 2010. The increase primarily relates to the increase in pre-tax book income and growth of our Japanese subsidiary.

Liquidity and Capital Resources

Sources of Liquidity

Historically, our sources of cash have included:

• issuance of equity and debt securities, including underwritten public offerings of our common stock and convertible bonds;

• cash generated from the exercise of stock options and participation in our employee stock purchase plan;

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• cash generated from operations, primarily 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.

Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows.

On September 20, 2010, we issued $115.0 million principal amount of 2.875% Convertible Senior Notes (the Notes) in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the Notes, we purchased call options on our common stock from JPMorgan Chase Bank, National Association, or JPMorgan Chase. In addition, to reduce the cost of the hedge, under separate transactions we sold warrants to JPMorgan Chase. We received proceeds of $100.5 million from issuance of the Notes, net of issuance costs ($4.4 million) and net payments related to our hedge transactions ($10.0 million).

At September 30, 2011, our cash and cash equivalents and investments totaled $241.3 million, as compared to $245.5 million at December 31, 2010. We invest our excess funds in short-term and long-term securities issued by corporations, banks, the U.S. government, municipalities, and financial holding companies and in money market funds comprised of U.S. Treasury and agency securities. We do not hold securities backed by mortgages.

At September 30, 2011, our accumulated deficit was $119.3 million, as compared to $128.0 million at December 31, 2010. Until recently, we generated significant operating losses and as a result we had not generated sufficient cash flow to fund our operations and the growth in our business. We achieved our first full year of profitability in 2010.

Cash Flows for the Nine months Ended September 30, 2011 and 2010

Cash Flows from Operating Activities. Cash provided by operating activities of $20.6 for the nine months ended September 30, 2011 reflected our net income of $8.7 million, adjusted for non-cash expenses, consisting primarily of $19.9 million of depreciation and amortization, $9.6 million of stock-based compensation expense and $3.5 million of accretion of debt discount on convertible notes. Uses of cash primarily included decreased accrued expenses of $8.0 million primarily related to a $5.4 million payment made to Lightlab discussed in Note 4 to our unaudited condensed consolidated financial statements “Commitment and Contingencies”, and $2.5 million payments made to Fukuda Denshi Co., Ltd. pursuant to an agreement which terminated our distributor relationship with them during the fourth quarter of 2010, reduced accrued compensation of $2.6 million, and increased accounts receivable of $2.9 million primarily related to increased sales, increased inventories of $4.6 million primarily related to forecasted sales demand and increased prepaid expense and other assets of $2.3 million. Cash provided by operating activities of $26.6 million for the nine months ended September 30, 2010 reflected our net income of $7.0 million, adjustments for non-cash expenses, consisting primarily of $14.0 million of depreciation and amortization and $9.2 million of stock-based compensation expense. Uses of cash included an increase in accounts receivable of $1.5 million due to increased sales, increased inventories of $1.0 million related to higher anticipated sales volumes, and a decrease in accrued compensation of $1.6 million.

Cash Used in Investing Activities. Cash used in investing activities was $23.7 million in the nine months ended September 30, 2011, resulting from approximately $255.3 million used to purchase investments, $30.4 million used for capital expenditures, primarily related to costs for the construction of our Costa Rica plant, the placement of company-owned consoles and upgrades of our information technology systems, $4.0 million of payments for foreign currency exchange forward contracts and $1.7 million used for acquisition of intangible assets and other investments. Sources of cash included the sale or maturity of investments of $266.4 million and $1.2 million of proceeds from foreign currency exchange contracts. Cash used in investing activities was $67.4 million in the nine months ended September 30, 2010, consisting primarily of $101.8 million used to purchase investments, $19.2 million used for capital expenditures including our purchase of land in Costa Rica for the planned construction of a manufacturing facility and an initial payment related to the construction of this facility, $4.2 million used for the acquisition of Fluid Medical and the milestone payment to CardioSpectra, $3.7 million of payments for foreign currency exchange forward contracts, as well as $3.0 million used for acquisition of intangible assets. Sources of cash included $63.1 million resulting from the maturity of investments and $1.4 million of proceeds from foreign currency exchange contracts.

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Cash Provided by Financing Activities. Cash provided by financing activities was $12.6 million in the nine months ended September 30, 2011, resulting primarily from proceeds of $9.1 million from employee exercises of common stock options and $3.5 million from the issuance of stock under our employee stock purchase plan. Cash provided by financing activities was $114.2 million in the nine months ended September 30, 2010, resulting primarily from net proceeds of $101.4 million from the convertible debt and related hedge transactions, $10.0 million from employee exercises of common stock options, and $2.7 million from the issuance of stock under our employee stock purchase plan. Since we are not able to predict cash proceeds from future stock option exercises with certainty, we cannot expect similar proceeds for the remainder of the year.

Future Liquidity Needs

At September 30, 2011, we believe our current cash and cash equivalents and our investments will be sufficient to fund working capital requirements, capital expenditures (including the expansion of our manufacturing operations into Costa Rica and the implementation of a new enterprise resource planning system), and operations for at least the next 12 months. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future.

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any 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, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment and cash that may be required to settle our foreign currency hedges.

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 this document and in our annual report on Form 10-K for the fiscal year ended December 31, 2010. 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 you 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, 2010.

Off-Balance Sheet Arrangements

At September 30, 2011, 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

At September 30, 2011, there were no additional material contractual obligations other than the items detailed in Note 4 - “Commitments and Contingencies–Purchase Commitments” and those disclosed in Part II, Item 7 of our annual report on Form 10-K for the year ended December 31, 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take six to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers, substrates and subassemblies would be available.

Interest Rate Risk

Our exposure to interest rate risk at September 30, 2011 is related to the investment of our excess cash into highly liquid financial investments as well as our convertible debt which has a fixed rate. Fixed rate investments and borrowing may have their fair market values adversely impacted from changes in interest rates.

We invest in cash and cash equivalents and investments 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 consistent with our tolerance for investment risk. Our investment policy specifies credit quality standards for our Investments. We do not hold mortgage-backed securities. Due to the generally short-term nature of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.

Foreign Currency Exchange Risk

We are exposed to foreign currency exchange risk related to our international sales and European and Japanese operations. 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 nine months ended September 30, 2011, 30.4% and 17% of our revenues were denominated in the yen and euro, respectively. During the nine months ended September, 2010, 27% and 15.8% of our revenues were denominated in the yen and euro, respectively. Since our yen denominated sales exceeds our yen denominated costs, whenever the U.S. dollar strengthens relative to the yen, there is an adverse effect on our results of operations. Conversely, whenever the U.S. dollar weakens relative to the yen, there is a positive effect on our results of operations. On the contrary, because our euro denominated costs exceeds our euro denominated sales, whenever the U.S. dollar strengthens relative to the euro, there is a positive effect on our results of operations. Conversely, whenever the U.S. dollar weakens relative to the Euro, there is an adverse effect on our results of operations.

Commencing October 2009, we began using foreign currency forward contracts to manage a portion of the foreign currency exposure risk for foreign subsidiaries with monetary assets and liabilities denominated in the yen and the euro. We only use derivative instruments to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates; we do not hold any derivative financial instruments for trading or speculative purposes. We primarily use foreign currency forward contracts to hedge foreign currency exposures, and they generally have terms of one year or less. Realized and unrealized gains or losses on the value of financial contracts used to hedge the exchange rate exposure of these monetary assets and liabilities are also included in the determination of net income, as these transactions have not been designated for hedge accounting treatment. These contracts effectively fix the exchange rate at which these specific monetary assets and liabilities will be settled so that gains or losses on the forward contracts offset the gains or losses from changes in the value of the underlying monetary assets and liabilities. These contracts contain net settlement features. If we experience unfavorable changes in foreign exchange rates, we may be required to use material amounts of cash to settle the transactions which may adversely affect the operating results that we report with respect to the corresponding period.

We currently hold foreign currency forward contracts with a single counterparty. The bank counterparty in these contracts exposes us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum credit quality guidelines. In addition, our exposure in the event of a default by our counterparty is limited to the changes in value of our hedged balances.

Market Price Sensitive Instruments

In order to reduce the potential equity dilution as a result of our Notes, we entered into a convertible note hedge transaction (the Hedge) entitling us to purchase up to 3.9 million shares of our common stock at an initial stock price of $29.64 per share, subject to adjustment. Upon conversion of our Notes, the Hedge is expected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the Hedge. We also entered into warrant transactions with the counterparties of the Hedge entitling them to acquire up to 3.9 million shares of our common stock, subject to adjustment, at an initial strike price of $34.88 per share, subject to adjustment. The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year to date period) at maturity of the warrants exceeds the strike price of the warrants. In addition, non-performance by the counterparties under the Hedge would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price. See Note 3 to our unaudited condensed consolidated financial statements “Financial Statement Details—Convertible Debt” for additional information.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that, at September 30, 2011, 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.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2011 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under Note 4 - “Commitments and Contingencies– Litigation” of our notes to unaudited condensed consolidated financial statements, included in Part I, Item 1 of this Report, is incorporated herein by reference.

Item 1A. Risk Factors

The risks described below may not be the only risks we face. Additional risks that we do not currently believe are material may also impair our business operations. The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business as previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. If any of the events or circumstances described in the following risks occurs, our business, financial condition, results of operations or cash flows could suffer, and the trading price of our common stock and our market capitalization could decline.

Risks Related to Our Business and Industry

We are dependent on the success of our consoles and catheters and cannot be certain that IVUS and FM technology or our IVUS and FM products will achieve the broad acceptance necessary to develop a sustainable, profitable business.

Our revenues are primarily derived from sales of our intravascular ultrasound, or IVUS, and functional measurement, or FM products, which include our multi-modality consoles and our single-procedure disposable catheters and fractional flow reserve wires. IVUS technology is widely used for determining the placement of stents in patients with coronary disease in Japan but the penetration rate in the U.S. and Europe for the same type of procedure is relatively low. Our wires are used to measure the pressure and flow characteristics of blood around plaque enabling physicians to gauge the physiological impact of blood flow and pressure. We expect that sales of our IVUS and FM products will continue to account for a majority of our revenues for the foreseeable future, however it is difficult to predict the penetration and future growth rate or size of the market for IVUS and FM technology. The expansion of the IVUS and FM markets depends on a number of factors, such as:

• physicians accepting the benefits of the use of IVUS and FM in conjunction with angiography;

• physician experience with IVUS and FM products;

• the availability of, and physicians’ willingness to participate in, training required to gain proficiency in the use of IVUS and FM products;

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• the additional procedure time required for use of IVUS and FM;

• the perceived risks generally associated with the use of new products and procedures;

• the availability of alternative treatments or procedures that are perceived to be or are more effective, safer, easier to use or less costly than IVUS and FM technology;

• the availability of adequate reimbursement; and

• the success of our marketing efforts and publicity regarding IVUS and FM technology.

Even if IVUS and FM technology gain wide market acceptance, our IVUS and FM products may not adequately address market requirements and may not continue to gain market acceptance among physicians, healthcare payors and the medical community due to factors such as:

• the lack of perceived benefits of information related to plaque composition available to the physician through use of our IVUS products, including the ability to identify calcified and other forms of plaque;

• the lack of perceived benefits of information related to pressure and flow characteristics of blood around plaque available to the physician through the use of our FM products;

• the actual and perceived ease of use of our IVUS and FM products;

• the quality of the images rendered by our IVUS products;

• the quality of the measurements provided by our FM products;

• the cost, performance, benefits and reliability of our IVUS and FM products relative to competing products and services;

• the lack of perceived benefit of integration of our IVUS and FM products into the catheterization laboratory, or cath lab; and

• the extent and timing of technological advances.

If IVUS and FM technology generally, or our IVUS and FM products specifically, do not gain wide market acceptance, we may not be able to achieve our anticipated growth, revenues or profitability and our results of operations would suffer.

* 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. As we expand internationally, we will need to hire, train and retain qualified personnel for our manufacturing and direct sales efforts, retain distributors and train their and our manufacturing, sales and other 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. Further, we purchase, and in the future will manufacture, some components in international markets. The manufacture, sale and shipment of our products and services across international borders, as well as the purchase of components from international sources, subject us to extensive U.S. and foreign governmental trade regulations. Current or future trade, social and environmental regulations or political issues could restrict the supply of resources used in production or increase our costs. 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 manufacturing, shipping and sales activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions, including:

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

• 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;

• fluctuations in foreign currency exchange rates; and

• changes in foreign political or economic conditions.

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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.

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

We were formed in January 2000 and only recently have become profitable on a quarterly basis with respect to some of our fiscal quarters. We achieved our first full year of profitability in 2010. To the extent that we are able to increase revenues, we expect our operating expenses will also increase as we expand our business to meet anticipated growing demand for our products; as we devote resources to our sales, marketing and research and development activities and as we satisfy our debt service obligations. If we are unable to reduce our cost of revenues and our operating expenses, we may not achieve sustained profitability. 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. Additionally, expenses will fluctuate as we make future investments in research and development, selling and marketing and general and administrative activities and as we satisfy our debt service obligations. This will cause us to experience variability in our reported earnings and losses in future periods. You should not rely on our operating results for any prior quarterly or annual period as an indication of our future operating performance.

We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations.

We have a significant amount of indebtedness, including $115.0 million aggregate principal with additional accrued interest, of indebtedness under our 2.875% convertible senior notes due 2015, or the convertible senior notes. Our ability to make payments on, and to refinance, our indebtedness, including the convertible senior notes, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of the convertible senior notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the convertible senior notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the convertible senior notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to affect any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions. In addition, in the event of a default with respect to the convertible senior notes, the holders of the convertible senior notes and/or the trustee under the indenture governing these notes may accelerate the payment of our obligations under these notes, which could have a material adverse effect on our business, financial condition and results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.

In addition, our significant indebtedness combined with our other financial obligations and contractual commitments could have other important consequences. For example, it could:

• make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;

• limit our flexibility in planning for, or reacting to, changes in our business and our industry;

• place us at a competitive disadvantage compared to our competitors who have less debt; and

• limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, which we are not prohibited from doing under the terms of the indenture governing the convertible senior notes, the risks related to our business and our ability to service our indebtedness would increase.

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

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

• innovate and maintain scientifically advanced technology;

• apply our technology across products and markets;

• develop proprietary products;

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

• obtain and maintain patent protection for our products;

• obtain and maintain regulatory clearance or approvals;

• manufacture cost-effectively;

• successfully market our products; and

• attract and retain skilled personnel.

With respect to our IVUS products, our biggest competitor is Boston Scientific, Inc., or Boston Scientific. Our FM products compete with the products of St. Jude Medical, Inc., or St. Jude. We also compete in Japan with respect to IVUS products with Terumo Corporation, or Terumo. Boston Scientific, St. Jude, Terumo and other potential competitors who are substantially larger than us may enjoy competitive advantages, including:

• more established distribution networks;

• entrenched relationships with physicians;

• products and procedures that are less expensive;

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

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

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

• established relationships with healthcare providers and payors; and

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

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

Failure to innovate may adversely impact our competitive position and may adversely impact our product revenues.

Our future success will depend upon our ability to innovate new products and introduce enhancements to our existing products in order to address the changing needs of the marketplace. Frequently, product development programs require assessments to be made of future clinical need and commercial feasibility, which are difficult to predict. Customers may forego purchases of our products and purchase our competitors’ products as a result of delays in introduction of our new products and enhancements, failure to choose correctly among technical alternatives or failure to offer innovative products or enhancements at competitive prices and in a timely manner. In addition, announcements of new products may result in a delay in or cancellation of purchasing decisions in anticipation of such new products. We may not have adequate resources to introduce new products in time to effectively compete in the marketplace. Any delays in product releases may negatively affect our business.

We also compete with new and existing alternative technologies that are being used to penetrate the worldwide vascular imaging market without using IVUS technology. These products, procedures or solutions could prove to be more effective, faster, safer or less costly than our IVUS products. Technologies such as angiography, angioscopy, multi-slice computed tomography, intravascular magnetic resonance imaging, or MRI, electron beam computed tomography, and MRI with contrast agents are being used to image the vascular system.

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We also develop and manufacture optical monitors, laser and non-laser light sources, and optical engines used in Optical Coherence Tomography, or OCT, imaging systems as well as micro-optical spectrometers and optical channel monitors with applications in telecommunications, pharmaceutical manufacturing, high-speed industrial process control, and chemical and petrochemical processing, medical diagnostics, and scientific discovery. Products developed by competitors based on tunable filter technology could compete on the basis of lower cost and other factors. In addition, customers may build similar functionality directly into their products, which in turn could decrease the demand for our OCT imaging systems and related products.

The introduction of new products, procedures or clinical solutions by competitors may result in price reductions, reduced margins, loss of market share and may render our products obsolete. We cannot guarantee that these alternative technologies will not be commercialized and become viable alternatives to our products in the future, and we cannot guarantee that we will be able to compete successfully against them if they are commercialized.

*Delays in planned product introductions may adversely affect our business and negatively impact future revenues.

We are currently developing new products as well as product enhancements with respect to our existing products. We have in the past experienced, and may again in the future experience, delays in various phases of product development and commercial launch, including during research and development, manufacturing, limited release testing, marketing and customer education efforts. In particular, developing and integrating products and technologies of acquired businesses is time consuming and in has in the past resulted, and may again in the future result, in longer developmental timelines than we initially anticipated. We are currently engaged in ongoing litigation regarding our (a) High Definition Swept Source non-laser light source and (b) our efforts to develop and obtain a laser light source from third parties with LightLab Imaging, Inc., or LightLab, in Delaware Chancery Court. LightLab is a wholly-owned subsidiary of St. Jude. Depending on the outcome of this litigation, we may experience delays in the commercial launch of our OCT imaging systems. Any delays in our product launches may significantly impede our ability to successfully compete in our markets and may reduce our revenues.

We and our present and future collaborators may fail to develop or effectively commercialize products covered by our present and future collaborations if:

• our collaborators become competitors of ours or enter into agreements with our competitors;

• we do not achieve our objectives under our collaboration agreements;

• we are unable to manage multiple simultaneous product discovery and development collaborations;

• we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators;

• we or our collaborators are unable to obtain patent protection for the products or proprietary technologies we develop in our collaborations; or

• we or our collaborators encounter regulatory hurdles that prevent commercialization of our products.

In addition, conflicts may arise with our collaborators, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any conflicts arise with our existing or future collaborators, they may act in their self-interest, which may be adverse to our best interest.

If we or our collaborators are unable to develop or commercialize products, or if conflicts arise with our collaborators, we will be delayed or prevented from developing and commercializing products which will harm our business and financial results.

If the clinical studies that we sponsor or co-sponsor are unsuccessful, or clinical data from studies conducted by other industry participants are negative, we may not be able to develop or increase penetration in identified markets and our business prospects may suffer.

We sponsor or co-sponsor several clinical studies to demonstrate the benefits of our products in current markets where we are trying to increase use of our products and in new markets. Implementing a study is time consuming and expensive, and the outcome is uncertain. The completion of any of these studies may be delayed or halted for numerous reasons, including, but not limited to, the following:

• patients die during a clinical study for a variety of reasons that may or may not be related to our products, including the advanced stage of their disease or other medical problems;

• regulatory inspections of manufacturing facilities, which may, among other things, require us or a co-sponsor to undertake corrective action or suspend the clinical studies;

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• changes in governmental regulations or administrative actions;

• patients experience adverse side effects, including adverse side effects to our or a co-sponsor’s drug candidate or device;

• the FDA institutional review boards or other regulatory authorities do not approve a clinical study protocol or place a clinical study on hold;

• patients do not enroll in a clinical study or do not follow-up at the expected rate;

• our co-sponsors do not perform their obligations in relation to the clinical study or terminate the study;

• third-party clinical investigators do not perform the clinical studies on the anticipated schedule or consistent with the clinical study protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner; and

• the interim results of the clinical study are inconclusive or negative, and the study design, although approved and completed, is inadequate to demonstrate safety and efficacy of our products.

Some of the studies that we co-sponsor are designed to study the efficacy of a third-party’s drug candidate or device. Such studies are designed and controlled by the third-party and the results of such studies will largely depend upon the success of the third-party’s drug candidate or device. These studies may be terminated before completion for reasons beyond our control such as adverse events associated with a third-party drug candidate or device. A failure in such a study may have an adverse impact on our business by either the attribution of the study’s failure to our technology or our inability to leverage publicity for proper functionality of our products as part of a failed study.

Clinical studies may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical studies and completion of patient follow-up depend on many factors, including the size of the patient population, the study protocol, the proximity of patients to clinical sites, eligibility criteria for the study and patient compliance. For example, patients may be discouraged from enrolling in our clinical studies if the applicable protocol requires them to undergo extensive post-treatment procedures or if they are persuaded to participate in different contemporaneous studies conducted by other parties. Delays in patient enrollment or failure of patients to continue to participate in a study may result in an increase in costs, delays or the failure of the study. Such events may have a negative impact on our business by making it difficult to penetrate or expand certain identified markets. Further, if we are forced to contribute greater financial and clinical resources to a study, valuable resources will be diverted from other areas of our business.

Negative results from clinical studies conducted by other industry participants could harm our results. For example, recently the number of percutaneous interventional, or PCI, procedures declined due to concerns attributed to late stent thrombosis and the long-term efficacy of drug-eluting stents. If the number of PCI procedures continues to decline, the need for IVUS procedures could also decline and our business prospects may suffer.

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 acquired, and may in the future acquire, complementary businesses, products or technologies instead of developing them ourselves. We do not know if we will identify or complete any additional 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. 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 controls, procedures and policies. In addition, we have, and in the future may increase, our exposure to risks related to business operations outside the U.S. due to our acquisitions.

We may also encounter risks, costs and expenses associated with any undisclosed or other unanticipated 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 negatively impact our operating results.

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If our products and technologies are unable to adequately identify the plaque that is most likely to rupture and cause a coronary event, we may not be able to develop a market for our vulnerable plaque products or expand the market for existing products.

We are utilizing substantial resources toward developing products and technologies to aid in the identification, diagnosis and treatment of the plaque that is most likely to rupture and cause a coronary event, or vulnerable plaque. The Providing Regional Observations to Study Predictors of Events in the Coronary Tree study demonstrated the ability of IVUS and virtual histology, or VH, to stratify lesions according to risk. However, no randomized controlled trial has been performed to assess the benefit of treating or deferring treatment in these stratified lesions. If we are unable to develop products or technologies that can identify vulnerable plaque, a market for products to identify vulnerable plaque may not materialize and our business may suffer.

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

We do not engage in foreign currency hedging arrangements for our revenues or operating expenses, and, consequently, foreign currency fluctuations may adversely affect our revenues and earnings. During the nine months ended September 30, 2011, 30.4% and 17.0% of our revenues were denominated in the yen and euro, respectively, 12.7% of our operating expenses were denominated in the yen and 9.6% of our operating expenses were denominated in the euro. Commencing October 2009, we began using foreign currency forward contracts to manage a portion of the foreign currency risk related to our intercompany receivable balances with our foreign subsidiaries whose functional currencies are the euro and yen. 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 result in material amounts of cash being required to settle the hedge transactions or could adversely affect our financial results. In periods of a strengthening U.S. dollar relative to the yen or the euro, we would record less revenue and our results of operations could be negatively impacted.

* General national and worldwide economic conditions may materially and adversely affect our financial performance and results of operations.

Our operations and performance depend significantly on national and worldwide economic conditions and the resulting impact on purchasing decisions and the level of spending on our products by customers in the geographic markets in which our IVUS and FM products are sold or distributed. These economic conditions remain challenging in many countries and regions, including without limitation the U.S., Japan, Europe, Middle East and Africa, where we have generated most of our revenues. The March 2011 tsunami and associated events in Japan could negatively impact many of our customers, as well as the conditions in which our Tokyo-based subsidiary operates. In addition, such events may result in a downturn in Japan’s economy as a whole, which may adversely affect our ability to conduct business in Japan. Likewise, the political unrest in the Middle East may have adverse consequences to the global economy or to our customers in the Middle East, which could negatively impact our business. In any event, uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. 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’, distributors’ and suppliers’ liquidity, capital resources and credit may be adversely affected by their relative ability or inability to obtain capital and credit, which could adversely affect our ability to collect on our outstanding invoices or lengthen our collection cycles, distribute our products or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters.

In addition, 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. While our investment portfolio has experienced reduced yields, we have not yet experienced a deterioration of the credit quality of our holdings or other material adverse effects. There can be no assurances that our investment portfolio will not experience any such deterioration in credit quality or other material adverse effects in future periods, or that national and worldwide economic conditions will not worsen.

* Our transition to a direct sales force in Japan may not be successful or may cause us to incur additional expenses and experience reduced revenues sooner than initially planned. If we are not successful or incur such additional expenses sooner than expected, then our business and results of operations may be materially and adversely affected.

Historically, a significant portion of our annual revenues have been derived from sales to our Japanese distributors. We have recently completed the termination of our distributor relationships in Japan, and have fully transitioned to a direct sales force in Japan. There is no assurance that we will be successful in our transition to a direct sales force in Japan and that we will be able to continue to successfully place, sell and service our products in Japan through a direct sales force or to successfully insure the growth of our direct sales force that may be needed in the future. Our challenges and potential risks in connection with expanding our direct sales force in Japan include, but are not limited to, (a) the successful retention and servicing of current dealers and customers in Japan, (b) strong

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market adoption of our technology in Japan, (c) the achievement of our growth and market development strategies in Japan, (d) our ability to recruit, train and retain an expanded direct sales force in Japan, and (e) the effect of the recent earthquake, tsunami and nuclear power plant meltdown in Japan on operating conditions as well as end-user demand. In addition, we may incur significant additional expenses and reduced revenues. Our efforts to successfully expand our direct sales strategy in Japan or the failure to achieve our sales objectives in Japan may adversely impact our revenues, results of operations and financial condition and negatively impact our ability to sustain and grow our business in Japan.

Our manufacturing operations are dependent upon third-party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.

We rely on a number of sole source suppliers to supply transducers, substrates and processing for our scanners used in our catheters. We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take six to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers and substrates would be available. We are not parties to supply agreements with these suppliers but instead use purchase orders as needed.

Our reliance on these sole source suppliers subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, including:

• inability to obtain adequate supply in a timely manner or on commercially reasonable terms;

• interruption or delayed delivery of supply resulting from our suppliers’ difficulty in accessing financial or credit markets or otherwise secure cash and capital resources;

• interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;

• delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component;

• uncorrected quality and reliability defects that impact performance, efficacy and safety of products from replacement suppliers;

• price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components;

• difficulty identifying and qualifying alternative suppliers for components in a timely manner;

• production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and

• delays in delivery by our suppliers due to changes in demand from us or their other customers.

In addition, because we do not have long term supply agreements with some of our suppliers, we are subjected to the following risks:

• unscheduled price increases;

• lack of notice when the materials used to manufacture are not available;

• lack of notice of discontinued operations or manufacturing.

We also utilize lean manufacturing processes that attempt to optimize the timing of our inventory purchases and supply levels of our inventories. Any significant delay or interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner or to plan for sufficient inventory, could impair our ability to manufacture our products or meet the demand of our customers and harm our business. Identifying and qualifying additional or replacement suppliers for any of the components or materials used in our products, or obtaining additional inventory, if required, may not be accomplished quickly or at all and could involve significant additional costs. Any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components or materials used to manufacture our products or sufficient inventory would limit our ability to manufacture our products and could therefore have a material adverse effect on our business, financial condition and results of operations.

We announced plans in 2010 to expand our manufacturing capacity by constructing facilities in Costa Rica. We may encounter a number of challenges relating to the construction, management and operation of such facilities, and the expansion has and will continue to increase our fixed costs, which may have a negative impact on our financial results and condition.

On September 23, 2010, we, through a wholly owned subsidiary, entered into a series of agreements to acquire real property and design and build manufacturing facilities in Costa Rica. We have never established or operated manufacturing facilities outside the U.S., and cannot assure you that we will be able to successfully establish or operate these facilities in a timely or profitable manner, or at all. We depend upon Zona Franca Coyol, a third party construction company, to assist us in the design, construction and validation of the manufacturing facilities. In addition, we will need to transfer our manufacturing processes, technology and know-how to our

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Costa Rica facilities. If we are unable to establish or operate these facilities or successfully transfer our manufacturing processes, technology and know-how in a timely and cost-effective manner, or at all, then we may experience disruptions in our operations, which could negatively impact our business and financial results.

We will need to obtain a number of permits and regulatory approvals prior, and subsequent, to commencing operations in such facilities. Our ability to obtain necessary permits and approvals may be subject to additional costs and possible delays beyond what we initially plan for. In addition, our manufacturing facilities, and those of our suppliers, must comply with applicable regulatory requirements. Failure of our manufacturing facilities to comply with regulatory and quality requirements would harm our business and our results of operations.

Our ability to operate this facility successfully will greatly depend on our ability to hire, train and retain an adequate number of employees, in particular employees with the appropriate level of knowledge, background and skills. We will compete with several other medical device companies with manufacturing facilities in Costa Rica to hire these skilled employees. Should we be unable to hire such employees, and an adequate number of them, our business and financial results could be negatively impacted.

As we continue construction on these manufacturing facilities, our fixed costs will increase. If we experience a demand in our products that exceeds our manufacturing capacity, we may not have sufficient inventory to meet our customers’ demands, which would negatively impact our revenues. If the demand for our products decreases or if we do not produce the output we plan or anticipate after the facilities are operational, we may not be able to spread a significant amount of our fixed costs over the production volume, thereby increasing our per unit fixed cost, which would have a negative impact on our financial condition and results of operations.

We also face particular commercial, jurisdictional and legal risks associated with our proposed expansion in Costa Rica. The success of this relationship and our activities in Costa Rica in general are subject to the economic, political and legal conditions or developments in Costa Rica.

Disruptions or other adverse developments during the construction and planned operations stage of our planned Costa Rica facilities could materially adversely affect our business. If our Costa Rica operations are disrupted for any reason, we may be forced to locate alternative manufacturing facilities, including facilities operated by third parties. Disruptions may include, but are not limited to: changes in the legal and regulatory environment in Costa Rica; slowdowns or work stoppages within the Costa Rican customs authorities; acts of God (including but not limited to potential disruptive effects from an active volcano near the facility or earthquakes, hurricanes and other natural disasters); and other issues associated with significant operations that are remote from our headquarters and operations centers. Additionally, continued growth in product sales could outpace the ability of our Costa Rican operation to supply products on a timely basis or cause us to take actions within our manufacturing operations which increase costs, complexity and timing. Locating alternative facilities would be time-consuming, would disrupt our production and cause shipment delays and could result in damage to our reputation and profitability. Additionally, we cannot assure you that alternative manufacturing facilities would offer the same cost structure as our Costa Rica facility.

If our facilities are damaged or destroyed, we may experience delays that could negatively impact our revenues.

Our facilities may be affected by natural or man-made disasters. If one of our facilities were affected by a disaster, we would be forced to rely on third party manufacturers or to shift production to another manufacturing facility. In such an event, we would face significant delays in manufacturing which would prevent us from being able to sell our products. In addition, our insurance may not be sufficient to cover all of the potential losses and may not continue to be available to us on acceptable terms, or at all.

We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents and short-term and long-term available-for-sale investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to act on opportunities to acquire or invest in complementary businesses, products or technologies. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

• market acceptance of our products;

• the revenues generated by our products;

• the need to adapt to changing technologies and technical requirements, and the costs related thereto;

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

• the existence and timing of opportunities for expansion, including acquisitions and strategic transactions; and

• costs and fees associated with defending existing or potential litigation.

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In addition, we are required to make periodic interest payments to the holders of our convertible senior notes and to make payments of principal upon conversion or maturity. We may also be required to purchase the convertible senior notes for cash upon the occurrence of a change of control or certain other fundamental changes involving us. If our capital resources are insufficient to satisfy our debt service or liquidity requirements, we may seek to sell additional equity or debt securities or to obtain debt financing. The sale of additional equity or debt securities, or the use of our stock in an acquisition or strategic transaction, would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and our significant historical losses and the current national and global financial conditions may prevent us from obtaining additional funds on favorable terms, if at all.

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

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

We have collaborations with a number of entities, including Medtronic, Inc., The Cleveland Clinic Foundation, General Electric Company, Siemens AG and Koninklijke Philips Electronics N.V. In each collaboration, we combine our technology or core capabilities with those of the third party to permit either greater penetration into markets or to enhance the functionality of our current and planned products. We have limited control over the amount and timing of resources that our current collaborators or any future collaborators devote to our collaborations or potential products. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop or commercialize products that arise out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. Moreover, in the event of termination of a collaboration agreement, we may not realize the intended benefits or we may not be able to replace the arrangement on comparable terms or at all.

If the third-party distributors that we rely on to market and sell our products are not successful, we may be unable to increase or maintain our level of revenues.

A portion of our revenue is generated by our third-party distributors, especially in international markets. 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, and any such developments could negatively affect our international sales strategy. 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.

Our reported or future financial results could be adversely affected by the application of existing or future accounting standards.

U.S. generally accepted accounting principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could have a significant adverse effect on our financial results. For example, the accounting for convertible debt securities, and the accounting for the convertible note hedge transactions and the warrant transactions we entered into in connection with the offering of the convertible senior notes, is subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. We cannot predict if or when any such change could be made and any such change could have an adverse impact on our reported or future financial results. In addition, in the event the conversion features of the convertible senior notes are triggered, we could be required under applicable accounting standards to reclassify all or a portion of the outstanding principal of the convertible senior notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

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*We cannot assure you that our net operating loss carryforwards will be available to reduce our tax liability.

Our ability to use our net operating loss carryforwards to reduce future income tax obligations may be limited or reduced. Generally, a change of more than 50 percentage points in the ownership of our shares, by value, over the three-year period ending on the date the shares were acquired constitutes an ownership change and may limit our ability to use our net operating loss carryforwards. Should additional ownership changes occur in the future, our ability to utilize our net operating loss carryforwards could be limited.

If we fail to properly manage our anticipated growth, our business could suffer.

Rapid growth of our business is likely to continue to place a significant strain on our managerial, operational and financial resources and systems. To execute our anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively. We anticipate hiring additional personnel to assist in the commercialization of our current products and in the development of future products. We will be dependent on our personnel and third parties to effectively market and sell our products to an increasing number of customers. We will also depend on our personnel to develop and manufacture in anticipated increased volumes our existing products, as well as new products and product enhancements. Further, our anticipated growth will place additional strain on our suppliers resulting in increased need for us to carefully monitor for quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.

* Issues arising from the implementation of our new enterprise resource planning system could adversely affect our operating results and ability to manage our business effectively.

We have begun implementing a new enterprise resource planning, or ERP, system to further enhance operating efficiencies and provide more effective management of our business operations. The new ERP system will be deployed for use throughout our company in a number of “go live” phases, the first of which is expected to occur during the fourth quarter of 2011 with company-wide deployment expected to be completed subsequently. Implementing a new ERP system is costly and involves risks inherent in the conversion to a new computer system, including loss of information, disruption to our normal operations, changes in accounting procedures and internal control over financial reporting, as well as problems achieving accuracy in the conversion of electronic data. Failure to properly or adequately address these issues could result in increased costs, the diversion of management’s and employees’ attention and resources and could materially adversely affect our operating results, internal controls over financial reporting and ability to manage our business effectively. While the ERP system is intended to further improve and enhance our information systems, large scale implementation of a new information system exposes us to the risks of starting up the new system and integrating that system with our existing systems and processes, including possible disruption of our financial reporting, which could lead to a failure to make required filings under the federal securities laws on a timely basis.

If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.

Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their employment at any time. The loss of any of our senior management team, in particular our President and Chief Executive Officer, R. Scott Huennekens, could harm our business. We have entered into employment contracts or similar agreements with R. Scott Huennekens; our Chief Financial Officer, John T. Dahldorf; our Executive Vice President, Global Sales, Jorge J. Quinoy; and Michel Lussier, President of Volcano Europe and Clinical and Scientific Affairs, Advanced Imaging Systems, Scientific Affairs, and EMEA, but these agreements do not guarantee that they will remain employed by us in the future. The announcement of the loss of one of our key employees could negatively affect our stock price. Our ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face challenges in hiring, training, managing and retaining employees in certain areas including clinical, technical, sales and marketing. This could delay new product development and commercialization, and hinder our marketing and sales efforts, which would adversely impact our competitiveness and financial results.

The expense and potential unavailability of insurance coverage for our company, customers or products may have an adverse effect on our financial position and results of operations.

While we currently have insurance for our business, property, directors and officers, and products, insurance is increasingly costly and the scope of coverage is narrower, and we may be required to assume more risk in the future. If we are subject to claims or suffer a loss or damage in excess of our insurance coverage, we will be required to cover the amounts outside of or in excess of our insurance limits. If we are subject to claims or suffer a loss or damage that is outside of our insurance coverage, we may incur significant costs associated with loss or damage that could have an adverse effect on our financial position and results of operations. Furthermore, any claims made on our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all. We do not have the financial resources to self-insure, and it is unlikely that we will have these financial resources in the foreseeable future.

Our product liability insurance covers our products and business operations, but we may need to increase and expand this coverage commensurate with our expanding business. Any product liability claims brought against us, with or without merit, could result in:

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• substantial costs of related litigation or regulatory action;

• substantial monetary penalties or awards;

• decreased demand for our products;

• reduced revenue or market penetration;

• injury to our reputation;

• withdrawal of clinical study participants;

• an inability to establish new strategic relationships;

• increased product liability insurance rates; and

• an inability to secure continuing coverage.

Some of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain regions or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and potential customers may opt against purchasing our products due to the cost or inability to procure insurance coverage.

Risks related to government regulation

If we fail to obtain or maintain, or experience significant delays in obtaining, regulatory clearances or approvals for our products or product enhancements, our ability to commercially distribute and market our products could suffer.

Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. Our failure to comply with such regulations or to make adequate, timely corrections, could lead to the imposition of injunctions, suspensions or loss of marketing clearances or approvals, product recalls, manufacturing cessation, termination of distribution, product seizures, civil penalties, or some combination of such actions. The process of obtaining regulatory authorizations to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such authorizations will be granted on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new medical device only after the device has received clearance of a premarket notification submission, referred to as a 510(k), or the approval of a premarket approval application, referred to as a PMA. We cannot guarantee the length of time the FDA will take to review a 510(k) or a PMA submission; nor can we guarantee that the FDA will clear or approve such submissions. If regulatory clearance or approvals are received, additional delays may occur related to manufacturing, distribution, or product labeling. In addition, we cannot assure you that any new or modified medical devices we develop will be eligible for the shorter 510(k) clearance process as opposed to the PMA process. We have no experience in obtaining PMA approvals.

In the member states of the European Economic Area, or EEA, our medical devices are required to comply with the essential requirements of the EU Medical Devices Directives before they can be marketed. Our products, including their design and manufacture, have been certified by the British Standards Institute, or BSI, a United Kingdom Notified Body, as being compliant with the requirements of the Medical Devices Directives. Consequently, we are entitled to affix a CE mark to our products and their packaging and this gives us the right to sell them in the EEA. If we fail to maintain compliance with the Medical Devices Directives, our products will no longer qualify for the CE mark and the relevant devices would not be eligible for marketing in the EEA.

We currently market our IVUS and FM products in Japan under two types of regulatory approval known as a SHONIN and a NINSHO. As the holder of the SHONINs, we have the authority to import and sell those products for which we have the SHONINs as well as those products for which we have obtained a NINSHO. Responsibility for Japanese regulatory filings and future compliance resides with us. We cannot guarantee that we will be able to adequately meet Japanese regulatory requirements. Non-compliance with Japanese regulations may result in action to prohibit further importation and sale of our products in Japan, a significant market for our products. If we are unable to sell our IVUS and FM products in Japan, we will lose a significant part of our annual revenues, and our business will be substantially impacted.

Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent, and to the extent we continue to market and sell our products in foreign countries, we will be subject to rigorous regulation in the future. In such circumstances, where we utilize distributors in foreign countries to market and sell our products, we would rely significantly on our distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. Regulatory delays or failures to obtain and maintain marketing authorizations, including 510(k) clearances and PMA approvals, could disrupt our business, harm our reputation, and adversely affect our sales.

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Modifications to our products may require new regulatory clearances or approvals or may require us to recall or cease marketing our products until clearances or approvals are obtained.

Modifications to our products may require the submission of new 510(k) notifications, PMA applications, or other documents. If a modification is implemented to address a safety concern, we may also need to initiate a recall or cease distribution of the affected device. In addition, if the modified devices require the submission of a 510(k) or PMA and we distribute such modified devices without a new 510(k) clearance or PMA approval, we may be required to recall or cease distributing the devices. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a premarket submission and if it does, whether the submission should be a new PMA, PMA supplement, or 510(k). A marketing submission is not required for a modification that a manufacturer determines does not significantly affect safety or efficacy and does not represent a major change in its intended use. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that clearance of a new 510(k) or approval of a new PMA submission is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require clearance of a new 510(k) or approval of a new PMA. If we begin manufacture and distribution of the modified devices and the FDA later disagrees with our determination and requires the submission of a new 510(k) or PMA for the modifications, we may also be required to recall the distributed modified devices and to stop distribution of the modified devices, which could have an adverse effect on our business. If the FDA does not clear or approve the modified devices, we may need to redesign the devices, which could also harm our business. When a device is marketed without a required clearance or approval, the FDA has the authority to bring an enforcement action, including injunction, seizure and, in egregious circumstances, criminal prosecution. The FDA considers such additional actions generally when there is a serious risk to public health or safety and the company’s corrective and preventive actions are inadequate to address the FDA’s concerns.

If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or effectiveness, or would constitute a major change in its intended use, then the manufacturer must seek and obtain clearance of a new 510(k) or, if applicable, an approval of a new PMA or PMA supplement. Where we determine that modifications to our products require clearance of a new 510(k) or approval of a new PMA or PMA supplement, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the EEA, we must notify BSI, our EEA Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

*The FDA is reviewing the 510(k) process and could change the criteria to obtain clearance which could affect our ability to obtain timely reviews and increase the resources needed to meet new criteria.

Over the past several years, concerns have been raised about whether the 510(k) program optimally achieves its intended goals. The FDA released for public comment in August 2010 a set of preliminary reports and recommendations from an internal 510(k) Working Group and Task Force on the Utilization of Science in Regulatory Decision Making. In January 2011, the FDA announced twenty-five action items it intends to take with respect to the pre-market notification process. Although the FDA has not detailed the specific modifications or clarifications that it intends to make to its guidance, policies and regulations pertaining to the review and regulation of devices such as ours which seek and receive market clearance through the 510(k) pre-market notification process, the FDA’s announced action items signal that additional regulatory requirements are likely. These reforms, when implemented, could impose additional regulatory requirements upon us which could delay our ability to obtain new clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances. In the future, the FDA will announce which recommended improvements it will implement, and the timeline for their implementation.

If the FDA makes changes to the 510(k) program, we may be required to prepare and submit more data and information than is currently required, which could require additional resources and more expense, require more time to prepare a submission, and result in a longer review period by the FDA. Such changes could adversely affect our business.

If we or our suppliers fail to comply with the FDA’s Quality System Regulation or ISO Quality Management Systems, manufacturing of our products could be negatively impacted and sales of our products could suffer.

Our manufacturing practices must be in compliance with the FDA’s 21 CFR Part 820 Quality System Regulation, or QSR, which governs the facilities, methods, controls, procedures, and records of the design, manufacture, packaging, labeling, storage, shipping, installation, and servicing of our products intended for human use. We are also subject to similar state and foreign requirements and licenses, including the MDD—93/42/EEC and the ISO 13485 Quality Management Systems, or QMS, standard applicable to medical devices. In addition, we must engage in regulatory reporting in the case of potential patient safety risks and must make available our manufacturing facilities, procedures, and records for periodic inspections and audits by governmental agencies, including the FDA, state authorities and comparable foreign agencies. If we fail to comply with the QSR, QMS, or other applicable regulations and standards, our operations could be disrupted and our manufacturing interrupted, and we may be subject to enforcement actions if our corrective and preventive actions are not adequate to ensure compliance.

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Failure to take adequate corrective action in response to inspectional observations or any notice of deficiencies from a regulatory inspection or audit could result in partial or total shut-down of our manufacturing operations unless and until adequate corrections are implemented, voluntary or FDA-ordered recall, FDA seizure of affected devices, court-ordered injunction or consent decree that could impose additional regulatory oversight and significant requirements and limitations on our manufacturing operations, significant fines, suspension or withdrawal of marketing clearances and approvals, and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our products and cause our revenue to decline.

The FDA, BSI, Japan’s Pharmaceutical & Medical Device Administration, or PMDA, and other regulatory agencies and bodies have previously imposed inspections and audits on us, and may in the future impose additional inspections or audits at any time which may conclude that our quality system is noncompliant with applicable regulations and standards. Such findings could potentially disrupt our business, harm our reputation and adversely affect our sales.

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

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found or suspected. For example, in 2010 we recalled our Xtract™ catheter in circumstances where no patient safety incident was reported but where we had evidence that the device’s integrity could be compromised under certain storage conditions. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include corrections as well as removals, of any of our products would divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers, and reduce our ability to achieve expected revenues.

We are required to comply with medical device reporting, or MDR, requirements and must report certain malfunctions, deaths, and serious injuries associated with our products, which can result in voluntary corrective actions or agency enforcement actions.

Under the FDA MDR regulations, medical device manufacturers are required to submit information to the FDA when they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in the EEA are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the Competent Authority in whose jurisdiction the incident occurred. Were this to happen to us, the relevant Competent Authority would file an initial report, and there would then be a further inspection or assessment if there are particular issues. This would be carried out either by the Competent Authority or it could require that the BSI, as the Notified Body, carry out the inspection or assessment.

Malfunction of our products could result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such as inspection or enforcement actions. Malfunctions have been reported to us in the past, and, while we investigated each of the incidents and believe we have taken the necessary corrective and preventive actions, we cannot guarantee that similar or different malfunctions will not occur in the future. If malfunctions do occur, we cannot guarantee that we will be able to correct the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected devices, initiate voluntary recalls, and redesign the devices; nor can we ensure that regulatory authorities will not take actions against us, such as ordering recalls, imposing fines, or seizing the affected devices. If someone is harmed by a malfunction or by product mishandling, we may be subject to product liability claims. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

We are subject to federal, state and foreign healthcare laws and regulations and implementation or changes to such healthcare laws and regulations could adversely affect our business and results of operations.

In an effort to contain rising healthcare costs, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, which may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs. The PPACA includes, among other things, the following measures:

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• a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the U.S., with limited exceptions, effective 2013;

• a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

• new reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers, effective March 30, 2013;

• payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models, beginning on or before January 1, 2013; and

• an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

We are unable to predict at this time the impact of such recently enacted federal healthcare reform legislation on the medical device industry in general, or on us in particular and what, if any, additional legislation or regulation relating to the medical device industry may be enacted in the future. An expansion in the government’s role in the U.S. healthcare industry may lower reimbursements for procedures using our products, reduce medical procedure volumes and adversely affect our business and results of operations. Although we cannot predict the many ways that the federal healthcare reform laws might affect our business, we will be subject to the 2.3% excise tax scheduled to take effect in 2013. It is unclear whether and to what extent, if at all, other anticipated developments resulting from the federal healthcare reform legislation, such as an increase in the number of people with health insurance and an increased focus on preventive medicine, may provide us additional revenue to offset this excise tax. If additional revenue does not materialize, or if our efforts to offset the excise tax through spending cuts or other actions are unsuccessful, the increased tax burden would adversely affect our financial performance, which in turn could cause the price of our stock to decline. In addition, a number of foreign governments are also considering or have adopted proposals to reform their healthcare systems. Because a significant portion of our revenues from our operations is derived internationally, if significant reforms are made to the healthcare systems in other jurisdictions, our sales and results of operations may be materially and adversely impacted.

We intend to market our products in a number of international markets. Although certain of our IVUS products have been approved for commercialization in Japan and in the EEA, in order to market our products in other foreign jurisdictions, we have had to, and will need to in the future, obtain separate regulatory approvals. The approval procedure varies among jurisdictions and can involve substantial additional testing. Approval or clearance of a device by the FDA does not ensure approval by regulatory authorities in other jurisdictions, and approval by one foreign regulatory authority does not ensure marketing authorization by regulatory authorities in other foreign jurisdictions or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval in addition to other risks. In addition, the time required to obtain foreign approval may differ from that required to obtain FDA approval, and we may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any foreign market other than in the EEA and Japan.

We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.

Our operations may be directly or indirectly affected by various broad federal, state or foreign healthcare fraud and abuse laws. In particular, the federal Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. The government could seek to apply the Anti-Kickback Statute to device manufacturers’ financial relationships with clinical trial investigators. Among other theories, the government could allege that such relationships are payments to induce the investigators to arrange for or recommend the ordering, purchasing or leasing of the manufacturers’ products by the hospitals, medical institutions and other entities with whom they are affiliated. We are also subject to the federal Health Insurance Portability and Accountability Act of 1996, (HIPAA), which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters, and federal “sunshine” laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding any “transfer of value” made or distributed to prescribers and other health care providers.

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Also, the federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.

In addition, many states have adopted laws similar to each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers as well as laws that restrict our marketing activities with physicians, and require us to report consulting and other payments to physicians. Some states, such as California, Massachusetts and Vermont, mandate implementation of commercial compliance programs to ensure compliance with these laws.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the recently enacted PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Further, we expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. We also are subject to foreign fraud and abuse laws, which vary by country. For instance, in the European Union, legislation on inducements offered to physicians and other healthcare workers or hospitals differ from country to country. Breach of the laws relating to such inducements may expose us to the imposition of criminal sanctions. It may also harm our reputation, which could in turn affect sales.

If our customers are unable to obtain coverage of or sufficient reimbursement for procedures performed with our products, it is unlikely that our products will be widely used.

Successful sales of our products depend on the availability of adequate coverage and reimbursement from third-party payors. Healthcare providers that purchase medical devices for treatment of their patients generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these devices. Both public and private insurance coverage and reimbursement plans are central to new product acceptance. Customers are unlikely to use our products if they do not receive reimbursement adequate to cover the cost of our products and related procedures.

To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Coverage, reimbursement, and healthcare payment systems in international markets vary significantly by country, and by region in some countries, and include both government-sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international coverage or reimbursement approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.

To date, our products have generally been covered as part of procedures for which reimbursement has been available. However, in the U.S., as well as in foreign countries, government-funded programs (such as Medicare and Medicaid) or private insurance programs, together commonly known as third-party payors, pay the cost of a significant portion of a patient’s medical expenses. Coverage of and reimbursement for medical technology can differ significantly from payor to payor.

All third-party coverage and reimbursement programs, whether government funded or insured commercially, whether inside the U.S. or outside, are developing increasingly sophisticated methods of controlling healthcare costs. Such cost-containment programs adopted by third-party payers, including legislative and regulatory changes to coverage and reimbursement policies, could potentially limit the amount which healthcare providers are willing to pay for medical devices, which could adversely impact our business.

We believe that future coverage of and reimbursement for our products may be subject to increased restrictions both in the U.S. and in international markets. Third-party reimbursement and coverage for our products may not be available or adequate in either the U.S. or international markets. Future legislation, regulations, coverage or reimbursement policies adopted by third-party payors may adversely affect the growth of the markets for our products, reduce the demand for our existing products or our products currently under development, and limit our ability to sell our products on a profitable basis.

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We may be subject to health information privacy and security standards that include penalties for noncompliance.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations safeguard the privacy and security of individually-identifiable health information. Certain of our operations may be subject to these requirements. Penalties for noncompliance with these rules include both criminal and civil penalties. In addition, the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, expanded federal health information privacy and security protections. Among other things, HITECH makes certain of HIPAA’s privacy and security standards directly applicable to “business associates”—independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also set forth new notification requirements for health data security breaches, increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. Occasionally, our field service representatives enter into “field service agreements” which obligate us to protect any protected health information that we may receive in the field in accordance with HIPAA and HITECH.

Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.

We use hazardous materials in our research and development and manufacturing processes. We are subject to federal, state and local regulations governing use, storage, handling and disposal of these materials and associated waste products. We are currently licensed to handle such materials, but there can be no assurance that we will be able to retain these licenses in the future or obtain licenses under new regulations if and when they are required by governing authorities. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources and any applicable insurance. We have also incurred and may continue to incur expenses related to compliance with environmental laws. Such future expenses or liability could have a significant negative impact on our business, financial condition and results of operations. Further, we cannot assure that the cost of compliance with these laws and regulations will not materially increase in the future. We may also incur expenses related to ensuring that our operations comply with environmental laws related to our operations, and those of prior owners or operators of our properties, at current or former manufacturing sites where operations have previously resulted in spills, discharges or other releases of hazardous substances into the environment. We could be held strictly liable under U.S. environmental laws for contamination of property that we currently or formerly owned or operated without regard to fault or whether our actions were in compliance with law at the time. Our liability could also increase if other responsible parties, including prior owners or operators of our facilities, fail to complete their clean-up obligations or satisfy indemnification obligations to us. Similarly, if we fail to ensure compliance with applicable environmental laws in foreign jurisdictions in which we operate, we may not be able to offer our products and may be subject to civil or criminal liabilities.

The use, misuse or off-label use of our products may result in injuries that could lead to product liability suits, which could be costly to our business.

Our currently marketed products have been cleared by the relevant regulatory authority in each jurisdiction where we market them. There may be increased risk of injury if physicians attempt to use our products in procedures outside of those indications cleared or approved for use, known as off-label use. Our sales force is trained according to company policy not to promote our products for off-label uses, and in our instructions for use in all markets we specify that our products are not intended for use outside of those indications cleared for use. However, we cannot prevent a physician from using our products for off-label applications. Our catheters and guide wires are intended to be single-procedure products. In spite of clear labeling and instructions against reuse, we are aware that certain physicians have elected to reuse our products. Reuse of our catheters and guide wires may increase the risk of product liability claims. Reuse may also subject the party reusing the product to regulatory authority inspection and enforcement action. Physicians may also misuse our product if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us.

Risks related to our intellectual property and litigation

Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.

Our success depends significantly on our ability to protect our intellectual property and proprietary technologies. Our policy is to obtain and protect our intellectual property rights. We rely on patent protection, as well as a combination of copyright, trade secret and

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trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be advantageous to us. Any patents we have obtained or will obtain may be challenged by re-examination, opposition or other administrative proceeding, or in litigation. Such challenges could result in a determination that the patent is invalid. In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents. To the extent our intellectual property protection offers inadequate protection, or is found to be invalid, we are exposed to a greater risk of direct competition. If our intellectual property does not provide adequate protection against our competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S.

In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.

*The medical device industry is characterized by patent and other intellectual property litigation, and we could become subject to litigation that could be costly, result in the diversion of our management’s time and efforts, require us to pay damages or prevent us from selling our products.

The medical device industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether or not a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert that they own U.S. or foreign patents containing claims that cover our products, their components or the methods we employ in the manufacture or use of our products. For example, we are currently involved with St. Jude in patent litigation regarding each party’s pressure guide wire products and whether these products infringe the patents of the other party. Because patent applications can take many years to issue and in many instances at least 18 months to publish, there may be applications now pending of which we are unaware, which may later result in issued patents that contain claims that cover our products. There could also be existing patents, of which we are unaware, that contain claims that cover one or more components of our products. As the number of participants in our industry increases, the possibility of patent infringement claims against us also increases.

Any interference proceeding, litigation or other assertion of claims against us, including our current patent litigation with St. Jude Medical, may cause us to incur substantial costs, could place a significant strain on our financial resources, divert the attention of our management from our core business and harm our reputation. If the relevant patents asserted against us were upheld as valid and enforceable and were found to be infringed, we could be required to pay substantial damages and/or royalties and could be prevented from selling our products unless we could obtain a license or were able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may be unable to make, use, sell or otherwise commercialize one or more of our products in the affected country. In addition, if we are found to infringe willfully, we could be required to pay treble damages and attorney fees, among other penalties.

We expect to enter new product fields in the future. Entering such additional fields may subject us to claims of infringement. Defending any infringement claims would be expensive and time consuming.

We are aware of certain third-party U.S. patents in fields that we are targeting for development. We do not have licenses to these patents nor do we believe that such licenses are required to develop, commercialize or sell our products in these areas. However, the owners of these patents may initiate a lawsuit alleging infringement of one or more of these or other patents. If they do, we may be required to incur substantial costs related to patent litigation, which could place a significant strain on our financial resources and divert the attention of management from our business and harm our reputation. Adverse determinations in such litigation could cause us to redesign or prevent us from manufacturing or selling our products in these areas, which would have an adverse effect on our business by limiting our ability to generate revenues through the sale of these products.

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From time to time in the ordinary course of business, we receive letters from third parties advising us of third-party patents that may relate to our business. The letters do not explicitly seek any particular action or relief from us. Although these letters do not threaten legal action, these letters may be deemed to put us on notice that continued operation of our business might infringe intellectual property rights of third parties. We do not believe we are infringing any such third-party rights, and we are unaware of any litigation or other proceedings having been commenced against us asserting such infringement. We cannot assure you that such litigation or other proceedings may not be commenced against us in the future.

Our rights to a worldwide license of certain IVUS patents owned or licensed by Boston Scientific may be challenged.

The marketing and sale of our current rotational IVUS catheters and pullback products depend on a license for IVUS-related patents owned or licensed by Boston Scientific. Boston Scientific was required to transfer the related intellectual property rights pursuant to a 1995 order of the Federal Trade Commission. We obtained rights to the license in 2003 through our former wholly-owned subsidiary, Pacific Rim Medical Ventures, which merged into us on December 30, 2004. In the event Boston Scientific disputes our rights to the license or seeks to terminate the license, we may be required to expend significant time and resources defending our rights. An adverse determination could cause us to redesign or prevent us from manufacturing or selling our rotational IVUS catheters and pullback products, which would have an adverse effect on our business. Additionally, in the event that the chain of title from the 1995 transfer of rights from Boston Scientific through the 2003 transfer to us is successfully challenged, we may have fewer rights to the technology than our business requires which will negatively impact our ability to continue our development of rotational IVUS catheters and pullback products or subject us to disputes with Boston Scientific or others with respect to the incorporation of this intellectual property into our products.

Our VH IVUS business depends on a license from The Cleveland Clinic Foundation, the loss of which would severely impact our business.

The marketing and sale of our VH IVUS functionality for IVUS depends on an exclusive license to patents owned by The Cleveland Clinic Foundation, the license to which we obtained in April 2002. We are aware that maintenance of the license depends upon certain provisions being met by us including payment of royalties, commercialization of the licensed technology and obtaining regulatory clearances or approvals. If The Cleveland Clinic Foundation were to claim that we committed a material breach or default of these provisions and we were not able to cure such breach or default, The Cleveland Clinic Foundation would have a right to terminate the agreement. The loss of the rights granted under the agreement could require us to redesign our VH IVUS functionality or prevent us from manufacturing or selling our IVUS products containing VH IVUS in countries covered by these patents. In addition, our exclusive license shall become non-exclusive if we fail to obtain regulatory clearances or approvals to commercialize the licensed technology within a proscribed time period. The cost of redesigning or an inability to sell our VH IVUS products would have a negative impact on our ability to grow our business and achieve our expected revenues.

Risks related to our common stock

We expect that the price of our common stock will fluctuate substantially.

The market price of our common stock could be subject to significant fluctuation. Factors that could cause volatility in the market price of our common stock include the following:

• changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;

• quarterly variations in our or our competitors’ results of operations;

• changes in governmental regulations or in the status of our regulatory clearance or approvals;

• changes in availability of third-party reimbursement in the U.S. or other countries;

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

• the announcement of an acquisition or other business combination or strategic transaction;

• possible sales of our common stock by investors who view the convertible senior notes as a more attractive means of equity participation in us;

• the conversion of some or all of our convertible senior notes and any sales in the public market of shares of our common stock issued upon conversion of the notes;

• hedging or arbitrage trading activity that may develop involving our common stock, including in connection with the convertible note hedge transaction and warrant transaction we entered into in connection with our convertible senior notes offering and arbitrage strategies employed or that may be employed by investors in our convertible senior notes;

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• announcements related to patents issued to us or our competitors;

• the announcement of pending or threatened litigation and developments in litigation involving us;

• sales of large blocks of our common stock, including sales by our executive officers and directors; and

• general market and economic conditions and other factors unrelated to our operating performance or the operating performance of our competitors.

These factors may materially and adversely affect the market price of our common stock.

Additional equity issuances or a sale of a substantial number of shares of our common stock may cause the market price of our common stock to decline.

If our existing stockholders sell a substantial number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline. In addition, sales of a substantial number of shares of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. Because we may need to raise additional capital in the future to continue to expand our business and develop new products, we may, among other things, conduct additional equity offerings. These future equity issuances, together with any additional shares of our common stock issued or issuable in connection with past or any future acquisitions, would result in further dilution to investors and could depress the market price of our common stock.

No prediction can be made regarding the number of shares of our common stock that may be issued or the effect that the future sales of shares of our common stock will have on the market price of our shares.

*Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

As of October 19, 2011, our directors, officers and principal stockholders (those holding more than 5% of our common stock) collectively controlled a significant portion of our outstanding common stock. To the extent our directors, officers and principal stockholders continue to hold a significant portion of our outstanding common stock, these stockholders, if they act together, would be able to exert significant influence over the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might adversely affect the market price of our common stock and may not be in the best interests of our other stockholders.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and other agreements and in Delaware law could discourage a takeover.

Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. These provisions include:

• a classified board of directors;

• advance notice requirements to stockholders for matters to be brought at stockholder meetings;

• a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and

• the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law that, in general, prohibit any business combination or merger with a beneficial owner of 15% or more of our common stock unless the holder’s acquisition of our stock was approved in advance by our board of directors. These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

We have adopted a stockholder rights plan that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. Under the rights plan:

• the rights will become exercisable only upon the occurrence of certain events specified in the plan, including the acquisition of 20% of our outstanding common stock by a person or group, with limited exceptions;

• each right will entitle the holder, other than an acquiring person, to acquire shares of our common stock at a discount to the then prevailing market price;

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• our board of directors may redeem outstanding rights at any time prior to a person becoming an acquiring person at a minimal price per right; and

• prior to a person becoming an acquiring person, the terms of the rights may be amended by our board of directors without the approval of the holders of the rights.

In addition, the terms of our convertible senior notes may require us to purchase these notes for cash in the event of a takeover of our company. The indenture governing the convertible senior notes also prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the notes. These and other provisions applicable to the convertible senior notes may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to our stockholders.

We have not paid dividends in the past and do not expect to pay dividends in the future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in our current and future debt agreements, and other factors our board of directors may deem relevant. If we do not pay dividends, a return on our common stock will only occur if our stock price appreciates.

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, as revised (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on May 4, 2011, 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).
4.4	Rights Agreement, dated June 20, 2006, by and between the Registrant and American Stock Transfer & Trust Company (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).
4.5	Indenture, dated September 20, 2010, by and between the Registrant and Wells Fargo Bank (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).
4.6	Supplemental Indenture, dated September 20, 2010 by and between Registrant and Wells Fargo Bank, N.A. (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20 2010, and incorporated herein by reference).
4.7	Form of 2.875% Convertible Senior Notes due 2015 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

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31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1*	Certification of the President & Chief Executive Officer pursuant to 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.

* 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.

** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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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)	November 4, 2011

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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, as revised (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on May 4, 2011, 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).
4.4	Rights Agreement, dated June 20, 2006, by and between the Registrant and American Stock Transfer & Trust Company (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).
4.5	Indenture, dated September 20, 2010, by and between the Registrant and Wells Fargo Bank (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).
4.6	Supplemental Indenture, dated September 20, 2010 by and between Registrant and Wells Fargo Bank, N.A. (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20 2010, and incorporated herein by reference).
4.7	Form of 2.875% Convertible Senior Notes due 2015 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1*	Certification of the President & Chief Executive Officer pursuant to 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Calculation Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.

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* 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.

** Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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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: November 4, 2011	/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: November 4, 2011	/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, or the Company, on Form 10-Q for the three months ended September 30, 2011, as filed with the Securities and Exchange Commission, or 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: November 4, 2011	/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, or the Company, on Form 10-Q for the three months ended September 30, 2011, as filed with the Securities and Exchange Commission, or 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: November 4, 2011	/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.

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Condensed Consolidated Balance Sheets
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	250,000,000	250,000,000
Common stock, shares issued	52,611,000	51,366,000
Common stock, shares outstanding	52,611,000	51,366,000

XML

Condensed Consolidated Statements Of Operations (USD $) In Thousands, except Per Share data	3 Months Ended				9 Months Ended
	Sep. 30, 2011		Sep. 30, 2010		Sep. 30, 2011		Sep. 30, 2010
Condensed Consolidated Statements Of Operations
Revenues	$ 85,767	[1]	$ 72,886	[1]	$ 250,798	[1]	$ 212,910	[1]
Cost of revenues, excluding amortization of intangibles	29,538		25,955		84,175		79,686
Gross profit	56,229		46,931		166,623		133,224
Operating expenses:
Selling, general and administrative	36,034		29,565		106,982		92,726
Research and development	13,928		10,185		40,337		29,637
Amortization of intangibles	860		627		2,572		1,821
In-process research and development							65
Total operating expenses	50,822		40,377		149,891		124,249
Operating income	5,407		6,554		16,732		8,975
Interest income	226		106		701		274
Interest expense	(1,834)		(249)		(5,895)		(267)
Exchange rate loss	(502)		(91)		(1,181)		(635)
Other, net					(2)		(19)
Income before provision for income taxes	3,297		6,320		10,355		8,328
Provision for income taxes	669		735		1,684		1,363
Net income	$ 2,628		$ 5,585		$ 8,671		$ 6,965
Net income per share:
Basic	$ 0.05		$ 0.11		$ 0.17		$ 0.14
Diluted	$ 0.05		$ 0.10		$ 0.16		$ 0.13
Shares used in calculating net income per share:
Basic	52,517		50,810		52,188		50,339
Diluted	54,947		53,278		54,605		53,032

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

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Financial Statement Details (Narrative) (Details) (USD $) Share data in Millions, except Per Share data, unless otherwise specified	0 Months Ended	1 Months Ended	3 Months Ended			9 Months Ended
	Apr. 26, 2010	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010	Jun. 30, 2010	Sep. 30, 2011	Sep. 30, 2010	Dec. 31, 2010
Transfers between levels 1, 2, 3			$ 0	$ 0		$ 0	$ 0
Maturity period for investments, months						20
Notional amount of foreign currency forward contracts			52,500,000			52,500,000		54,000,000
Maximum remaining maturity of foreign currency forward contracts			91 days or less			91 days or less
Fair value of foreign currency forward contracts			355,000			355,000		299,000
Net losses related to derivative financial instruments			572,000			2,269,000
Employees impacted by restructuring plan						20
Employees entered into separation agreements						16
Minimum retention period for accrued relocation costs and the costs of one-time termination benefits, days						60
Gain (loss) on derivative financial instruments				2,700,000			2,600,000
Costs related to moving equipment between the facilities				0			63,000
Additional restructuring costs				0			454,000
Total termination costs	330,000
Savings related to the remaining lease payments					116,000
Future obligations related to restructuring activity			0			0
Convertible debt, maturity date		Sep. 01, 2015
Initial conversion rate, number of shares						33.7339
Initial conversion rate, principal amount			1,000			1,000
Initial effective conversion price			$ 29.64			$ 29.64
Proceeds from issuance of the notes						100,500,000
Debt issuance costs							3,571,000
Net payments related to hedge transactions						10,000,000
Years on which debt issuance cost accreted to interest expense						5
Percent of principal repaid on repurchase of notes						100.00%
Payments for purchase of call options from JPMorgan Chase						27,200,000
Expiration date of call option			Sep. 01, 2015			Sep. 01, 2015
Number of trading days over which warrants expire						50
Proceeds from Issuance of Warrants							17,149,000
Reduction to additional paid-in capital in connection with hedging transaction with JPMorgan Chase						10,000,000
Tax benefit related to call option						10,400,000
Fair value of the Notes			139,400,000			139,400,000
Aggregate principal amount			115,000,000			115,000,000		115,000,000
Debt issuance costs							4,400,000
Equity [Member]
Debt issuance costs						$ 866,000
Call Option [Member]
Right to purchase common stock, number of shares						3.9
Purchase price of common stock			29.64			29.64
Warrants [Member]
Right to purchase common stock, number of shares						3.9
Purchase price of common stock			34.875			34.875
2.875% Convertible Senior Notes [Member]
Convertible senior notes, interest rate		2.875%		2.875%			2.875%

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Oct. 28, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Entity Registrant Name	Volcano Corp
Entity Central Index Key	0001354217
Trading Symbol	volc
Entity Filer Category	Large Accelerated Filer
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		52,626,577

XML

Financial Statement Details (Available-For-Sale Investments That Are In An Unrealized Loss Position) (Details) (USD $) In Thousands	Sep. 30, 2011
Available-for-sale securities, Estimated Fair Value	$ 77,504
Available-for-sale Securities, Gross Unrealized Losses	58
U.S. Treasury And Agency Debt Security [Member]
Available-for-sale securities, Estimated Fair Value	19,030
Available-for-sale Securities, Gross Unrealized Losses	9
Corporate Debt Securities [Member]
Available-for-sale securities, Estimated Fair Value	58,474
Available-for-sale Securities, Gross Unrealized Losses	$ 49

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Segment And Geographic Information

9 Months Ended

Sep. 30, 2011

Segment And Geographic Information [Abstract]

Segment And Geographic Information

6. 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. Our medical segment is engaged in the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. Our industrial segment focuses on the discovery, development, manufacture and sale of micro-optical spectrometers and optical channel monitors to telecommunications and other industrial companies.

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 September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Medical segment:
Consoles	$	9,709	$	8,129		19.4	%	$	29,420	$	27,585		6.7	%
Single-procedure disposables:
IVUS		49,760		42,641		16.7			147,384		122,122		20.7
FM		16,653		11,275		47.7			47,954		32,579		47.2
Other		6,796		4,663		45.7			16,565		12,658		30.9
Sub-total medical segment		82,918		66,708		24.3			241,323		194,944		23.8
Industrial segment		2,849		6,178		(53.9	)		9,475		17,966		(47.3	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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 September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Revenues (1):
United States	$	38,964	$	33,353		16.8	%	$	113,201	$	96,257		17.6	%
Japan		26,599		20,963		26.9			76,406		57,683		32.5
Europe, the Middle East and Africa		14,637		13,603		7.6			45,534		42,726		6.6
Rest of world		5,567		4,967		12.1			15,657		16,244		(3.6	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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

At September 30, 2011, approximately 45.2% of our long-lived assets, excluding financial assets, are located in the U.S., approximately 24.7% are located in Japan, approximately 25.5% are located in Costa Rica and less than 5% are located in our remaining geographies. At December 31, 2010, approximately 51% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 34% were located in Japan, and less than 15% were located in our remaining geographies.

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Financial Statement Details (Inventories) (Details) (USD $)	Sep. 30, 2011		Dec. 31, 2010
Financial Statement Details [Abstract]
Finished goods	$ 22,703,000	[1]	$ 20,996,000	[1]
Work-in-process	9,446,000		7,946,000
Raw materials	14,314,000		11,557,000
Inventories	46,463,000		40,499,000
Consigned inventory	$ 4,900,000		$ 3,300,000

[1] Finished goods inventory includes consigned inventory of $4.9 million and $3.3 million at September 30, 2011 and December 31, 2010, respectively.

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Segment And Geographic Information (Schedule Of Revenues By Segment And Product) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2011		Sep. 30, 2010		Sep. 30, 2011		Sep. 30, 2010
Revenues	$ 85,767	[1]	$ 72,886	[1]	$ 250,798	[1]	$ 212,910	[1]
Percentage Change	17.70%	[1]			17.80%	[1]
Consoles [Member] | Medical Segment [Member]
Revenues	9,709		8,129		29,420		27,585
Percentage Change	19.40%				6.70%
IVUS [Member] | Medical Segment [Member]
Revenues	49,760		42,641		147,384		122,122
Percentage Change	16.70%				20.70%
FM [Member] | Medical Segment [Member]
Revenues	16,653		11,275		47,954		32,579
Percentage Change	47.70%				47.20%
Other [Member] | Medical Segment [Member]
Revenues	6,796		4,663		16,565		12,658
Percentage Change	45.70%				30.90%
Medical Segment [Member]
Revenues	82,918		66,708		241,323		194,944
Percentage Change	24.30%				23.80%
Industrial Segment [Member]
Revenues	$ 2,849		$ 6,178		$ 9,475		$ 17,966
Percentage Change	(53.90%)				(47.30%)

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

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Financial Statement Details (Available-For-Sale Investments) (Details) (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Available-for-sale securities, Gross Unrealized Losses	$ 58
Available-for-sale securities, Estimated Fair Value	77,504
Short-Term Available-For-Sale Investments [Member]
Available-for-sale securities, Amortized Cost	154,336	175,270
Available-for-sale securities, Gross Unrealized Gains	15	49
Available-for-sale securities, Gross Unrealized Losses	37	36
Available-for-sale securities, Estimated Fair Value	154,314	175,283
Short-Term Available-For-Sale Investments [Member] | U.S. Treasury And Agency Debt Security [Member]
Available-for-sale securities, Amortized Cost	32,069	77,585
Available-for-sale securities, Gross Unrealized Gains	4	8
Available-for-sale securities, Gross Unrealized Losses	5	22
Available-for-sale securities, Estimated Fair Value	32,068	77,571
Short-Term Available-For-Sale Investments [Member] | Corporate Debt Securities [Member]
Available-for-sale securities, Amortized Cost	122,267	97,685
Available-for-sale securities, Gross Unrealized Gains	11	41
Available-for-sale securities, Gross Unrealized Losses	32	14
Available-for-sale securities, Estimated Fair Value	122,246	97,712
Long-Term Available For Sale Investments [Member]
Available-for-sale securities, Amortized Cost	33,937	26,832
Available-for-sale securities, Gross Unrealized Gains	12	1
Available-for-sale securities, Gross Unrealized Losses	21	29
Available-for-sale securities, Estimated Fair Value	33,928	26,804
Long-Term Available For Sale Investments [Member] | U.S. Treasury And Agency Debt Security [Member]
Available-for-sale securities, Amortized Cost	21,046	10,002
Available-for-sale securities, Gross Unrealized Gains	4
Available-for-sale securities, Gross Unrealized Losses	4
Available-for-sale securities, Estimated Fair Value	21,046	10,002
Long-Term Available For Sale Investments [Member] | Corporate Debt Securities [Member]
Available-for-sale securities, Amortized Cost	12,891	16,830
Available-for-sale securities, Gross Unrealized Gains	8	1
Available-for-sale securities, Gross Unrealized Losses	17	29
Available-for-sale securities, Estimated Fair Value	12,882	16,802
U.S. Treasury And Agency Debt Security [Member]
Available-for-sale securities, Gross Unrealized Losses	9
Available-for-sale securities, Estimated Fair Value	19,030
Corporate Debt Securities [Member]
Available-for-sale securities, Gross Unrealized Losses	49
Available-for-sale securities, Estimated Fair Value	$ 58,474

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Financial Statement Details (Tables)

9 Months Ended

12 Months Ended

Sep. 30, 2011

Dec. 31, 2010

Financial Statement Details [Abstract]

Financial Assets And Liabilities Measured At Fair Value On A Recurring Basis

	Fair Value Measurements at September 30, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	33,031	$	33,031	$	—	$	—
Money market funds		20,060		20,060		—		—
Sub-total cash and cash equivalents		53,091		53,091		—		—
Corporate debt securities		122,246		—		122,246		—
U.S. Treasury and agency debt securities		32,068		32,068		—		—
Sub-total short-term investments		154,314		32,068		122,246		—
Long Term:
Corporate debt securities		12,882		—		12,882		—
U.S. Treasury and agency debt securities		21,046		21,046		—		—
Sub-total long-term investments		33,928		21,046		12,882		—
Total Assets	$	241,333	$	106,205	$	135,128	$	—
Liabilities:
Foreign currency forward contracts	$	355	$	—	$	355	$	—

Available-For-Sale Investments

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	122,267	$	11	$	32	$	122,246
U.S. Treasury and agency debt securities		32,069		4		5		32,068
Short-term available-for-sale investments	$	154,336	$	15	$	37	$	154,314
Long-term:
Corporate debt securities	$	12,891	$	8	$	17	$	12,882
U.S. Treasury and agency debt securities		21,046		4		4		21,046
Long-term available for sale investments	$	33,937	$	12	$	21	$	33,928

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	97,685	$	41	$	14	$	97,712
U.S. Treasury and agency debt securities		77,585		8		22		77,571
Short-term available-for-sale investments	$	175,270	$	49	$	36	$	175,283
Long-term:
Corporate debt securities	$	16,830	$	1	$	29	$	16,802
U.S. Treasury and agency debt securities		10,002		—		—		10,002
Long-term available for sale investments	$	26,832	$	1	$	29	$	26,804

Available-For-Sale Investments That Are In An Unrealized Loss Position

	Estimated Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	58,474	$	49
U.S. Treasury and agency debt securities		19,030		9
	$	77,504	$	58

Inventories

	September 30, 2011		December 31, 2010
Finished goods (1)	$	22,703	$	20,996
Work-in-process		9,446		7,946
Raw materials		14,314		11,557
	$	46,463	$	40,499

(1) Finished goods inventory includes consigned inventory of $4.9 million and $3.3 million at September 30, 2011 and December 31, 2010, respectively.

Property And Equipment

	September 30, 2011				December 31, 2010
Medical diagnostic equipment		$	63,865			$	55,836
Other equipment			32,089				27,721
Leasehold improvements			8,317				8,062
Purchased software			4,033				3,331
Construction-in-progress (1)			26,197				7,852
			134,501				102,802
Accumulated depreciation and amortization			(61,090	)			(46,299	)
		$	73,411			$	56,503

(1) Construction-in-progress at September 30, 2011 and December 31, 2010 includes $367,000 and $42,000, respectively, of capitalized interest related to the construction of our manufacturing facility in Costa Rica.

Intangible Assets By Major Class

	September 30, 2011
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Intangible assets subject to amortization
Developed technology	$	22,651	$	15,663	$	6,988		8.2
Licenses		7,195		5,890		1,305		10.0
Customer relationships		4,089		2,800		1,289		3.3
Patents and trademarks		3,148		1,536		1,612		10.0
Assembled workforce		274		257		17		4.0
		37,357		26,146		11,211		7.3
Intangible assets not yet subject to amortization
In-process research and development (2)		4,050		—		4,050		n/a
	$	41,407	$	26,146	$	15,261

At December 31, 2010, intangible assets by major class consist of the following (in thousands):

	December 31, 2010
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Intangible assets subject to amortization
Developed technology	$	22,651	$	14,666	$	7,985		8.2
Licenses		7,034		5,400		1,634		10.0
Customer relationships		3,978		2,005		1,973		3.4
Patents and trademarks		2,655		1,262		1,393		7.1
Assembled workforce		274		206		68		4.0
		36,592		23,539		13,053		7.1
Intangible assets not yet subject to amortization
In-process research and development (2)		4,050		—		4,050		n/a
	$	40,642	$	23,539	$	17,103

(1) Weighted average life of intangible assets is presented excluding fully amortized assets.

(2) IPR&D represents an estimate of fair value of in-process technology related to Fluid Medical's imaging technology program, which is still in the prototype phase. As such, based on authoritative guidance, amortization of the IPR&D will not occur until it reaches market feasibility. In the event the project is abandoned, we will record an impairment charge for this amount.

Future Amortization Expense Of Intangible Assets

2011 (remaining three months)	$	884
2012		3,016
2013		2,169
2014		1,551
2015		1,135
Thereafter		2,456
	$	11,211

Carrying Values Of The Liability And Equity Components Of The Notes

	September 30, 2011			December 31, 2010
Liabilities:
Principal amount of the 2.875% Convertible Senior Notes	$	115,000		$	115,000
Unamortized discount of liability component		(18,292	)		(21,211	)
Unamortized debt issuance costs		(2,203	)		(2,627	)
Carrying value of liability component	$	94,505		$	91,162
Equity — net carrying value	$	22,263		$	22,263

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Acquisitions

9 Months Ended

Sep. 30, 2011

Acquisitions

Acquisitions

2. Acquisitions

CardioSpectra Acquisition

On December 18, 2007, we acquired CardioSpectra, Inc., or CardioSpectra, a privately held corporation, for an aggregate purchase price of $27.0 million. 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. The acquisition was accounted for as an asset purchase. We have included the operating results associated with the CardioSpectra acquisition in our consolidated financial statements from the date of acquisition.

Subject to the terms of the Merger Agreement, we may be required to make milestone payments. 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. We have used and will continue to 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.

In December 2009, the first milestone specified in the CardioSpectra merger agreement was achieved and at December 31, 2009, the corresponding milestone payment totaling $11.0 million was recorded as in-process research and development, or IPR&D, expense. In January 2010, we paid the milestone payment with the issuance of 609,360 shares of our common stock and $531,000 of cash. The second milestone specified in the merger agreement was not achieved as of December 31, 2010, and as such, the second milestone payment was not paid. Additional remaining milestone payments of up to $17.0 million may be paid upon achievement of the respective revenue targets described in the merger agreement. As of September 30, 2011, we have not achieved the respective revenue targets. Therefore, we have not recorded any liability related to these milestones.

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 the telecommunications industry, laser and non-laser light sources 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 $23.8 million consisted of $22.3 million paid in cash, assumed liabilities of $6.5 million, and transaction costs of $725,000, net of cash received of $5.8 million. The acquisition was accounted for as a business combination.

Correspondingly, the purchase price was allocated to the net tangible and intangible assets based on their estimated fair values as of the acquisition date. Goodwill was recorded for the amount by which total purchase consideration exceeded net assets acquired. This goodwill was allocated to our medical segment and is not deductible for income tax purposes. We have included the operating results associated with the Axsun acquisition in our consolidated financial statements from the date of acquisition.

Fluid Medical Acquisition

On August 5, 2010, we acquired all of the outstanding equity interests in Fluid Medical, Inc., or Fluid Medical, a privately held company, which is engaged in the development of imaging technology for use in various structural heart applications, including, but not limited to, mitral valve repair. Fluid Medical's technology and intellectual property provide forward field of view imaging on highly maneuverable catheters that have the potential to enable or enhance visualization for procedures currently done with inadequate imaging. This technology is expected to result in a Forward-Looking Intra-Cardiac Echo, or FL.ICE, catheter that will initially be focused on minimally invasive structural heart applications, such as percutaneous aortic and mitral valve therapies. As we expand our line of visualization tools used in performing percutaneous interventional, or PCI, procedures, we believe this technology will enhance our ability to provide a broad suite of visualization products to our customers.

The purchase price of $4.2 million consisted of $3.6 million in cash payments and $150,000 of debt forgiveness related to working capital loans we made to Fluid Medical prior to the acquisition. Additionally, we have retained $400,000 as a "hold-back" liability to satisfy any claims for indemnification made within 18 months following the closing. Assets acquired primarily included $4.1 million of IPR&D. Additionally, we recorded a deferred tax liability of $1.6 million related to the difference between the book and tax basis of the acquired assets. The transaction was accounted for as a business combination and, as such, we recorded $1.6 million of goodwill reflecting the amount by which the purchase consideration exceeded the acquired net assets. This goodwill was allocated to our medical segment and is not deductible for income tax purposes. We recorded $184,000 of acquisition-related costs related to this transaction, which were recognized in our statement of operations during the year ended December 31, 2010 as selling, general and administrative expense.

The IPR&D asset we recorded represents an estimate of the fair value of in-process technology related to Fluid Medical's imaging technology program, which is still in the prototype phase. As such, based on authoritative accounting guidance, amortization of the IPR&D will not occur until it reaches market feasibility. Costs incurred in connection with this project subsequent to the date of acquisition will be expensed as incurred, and the project is currently expected to be completed in 2013. In the event the project is abandoned, we will record an impairment charge for this amount.

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Stockholders' Equity (Fair Value Of Stock Option Under The Purchase Plan, Weighted-Average Assumptions) (Details) (Purchase Option Under Purchase Plan [Member], USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Purchase Option Under Purchase Plan [Member]
Risk-free interest rate	0.10%	0.20%	0.20%	0.20%
Expected life (years)	0.5	0.5	0.5	0.5
Estimated volatility	35.70%	34.60%	35.70%	35.90%
Expected dividends	0.00%	0.00%	0.00%	0.00%
Fair value of purchase right	$ 6.87	$ 5.36	$ 6.48	$ 4.91

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Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events

Subsequent Events

8. Subsequent Events

None.

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Segment And Geographic Information (Tables)

9 Months Ended

Sep. 30, 2011

Segment And Geographic Information [Abstract]

Schedule Of Revenues By Segment And Product

	Three Months Ended September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Medical segment:
Consoles	$	9,709	$	8,129		19.4	%	$	29,420	$	27,585		6.7	%
Single-procedure disposables:
IVUS		49,760		42,641		16.7			147,384		122,122		20.7
FM		16,653		11,275		47.7			47,954		32,579		47.2
Other		6,796		4,663		45.7			16,565		12,658		30.9
Sub-total medical segment		82,918		66,708		24.3			241,323		194,944		23.8
Industrial segment		2,849		6,178		(53.9	)		9,475		17,966		(47.3	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

Schedule Of Revenues By Geography

	Three Months Ended September 30,				Percentage Change			Nine Months Ended September 30,				Percentage Change
	2011		2010		2010 to 2011			2011		2010		2010 to 2011
Revenues (1):
United States	$	38,964	$	33,353		16.8	%	$	113,201	$	96,257		17.6	%
Japan		26,599		20,963		26.9			76,406		57,683		32.5
Europe, the Middle East and Africa		14,637		13,603		7.6			45,534		42,726		6.6
Rest of world		5,567		4,967		12.1			15,657		16,244		(3.6	)
	$	85,767	$	72,886		17.7		$	250,798	$	212,910		17.8

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

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Summary Of Significant Accounting Policies (Policy)

9 Months Ended

Sep. 30, 2011

Summary Of Significant Accounting Policies

Basis Of Presentation And Nature Of Operations

Basis of Presentation and Nature of Operations

The unaudited condensed consolidated financial statements of Volcano Corporation ("we," "us," "our," "Volcano" 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., or Volcano Japan, Volcano Europe B.V.B.A., or Volcano Europe, Axsun Technologies, Inc., or Axsun, Volcano Therapeutics South Africa (Pty) Ltd., or Volcano South Africa, a wholly owned subsidiary of Volcano Europe, Volcano Netherlands Holdings, B.V., or Volcano Netherlands, and Volcarica, Socieded de Responsabilidad Limitada, a wholly owned subsidiary of Volcano Netherlands.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company's financial position and of the results of operations and cash flows for the periods presented. These unaudited condensed 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, 2010.

We design, develop, manufacture and commercialize a broad suite of intravascular ultrasound, or IVUS, and fractional flow reserve, or FFR, products that we believe enhance the diagnosis and treatment of vascular and structural heart disease. Our products consist of consoles which have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, fractional flow reserve pressure wires and Medtronic's Pioneer reentry device. We are developing additional offerings for integration into the platform, including forward-looking IVUS, or FL.IVUS, catheters, image-guided therapy catheters and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters.

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters and additional functionality options such as virtual histology IVUS tissue characterization and ChromaFlo stent apposition analysis. Our FFR offerings include FFR 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, laser and non-laser light sources, and optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors used by telecommunications and other industrial companies.

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Concentrations Of Credit Risk

Concentrations of Credit Risk

Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, short-term and long-term available-for-sale investments, and accounts receivable. We have established guidelines to limit our exposure to credit risk by placing our investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We also place our cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand. Therefore we believe the financial risks associated with these financial instruments are minimal.

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms. We perform ongoing credit evaluations of our customers, and generally we do not require collateral on our accounts receivable. We estimate the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and we record a provision for uncollectible accounts when collection is uncertain. To date, we have not experienced significant credit-related losses.

We currently hold foreign exchange forward contracts with a single counterparty. The bank counterparty in these contracts exposes us to credit-related losses in the event of their nonperformance and we do not require collateral for their performance. However, to mitigate that risk, we only contract with counterparties who meet our minimum credit quality guidelines. In addition, our exposure in the event of a default by our counterparty is limited to the changes in value of our hedged balances.

In connection with the issuance of our 2.875% Convertible Senior Notes, or the Notes, we purchased call options from JPMorgan Chase Bank National Association, or JPMorgan Chase. Non-performance by JPMorgan Chase under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price. See Note 3 "Financial Statement Details — Convertible Debt" for additional information.

We purchase integrated circuits and other key components for use in our products from third-party suppliers. For certain components, which are currently single sourced, there are relatively few sources of supply. Although we believe that other suppliers could provide similar components on comparable terms, establishment of additional or replacement suppliers may not be accomplished quickly. Any significant supply interruption could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see "Risk Factors — Our manufacturing operations are dependent upon third-party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays."

Net Income Per Share

Net Income per Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential dilutive securities are excluded from the diluted earnings per share computation in loss periods as their effect would be anti-dilutive.

Our potentially dilutive shares include outstanding common stock options, restricted stock units, incremental shares issuable upon the conversion of the Notes, or exercise of the warrants relating to the Notes (See Note 3 "Financial Statement Details — Convertible Debt"). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income per share or if the underlying obligation will be settled in cash as discussed in the following paragraph. For the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, potentially dilutive shares totaling 57,000, 444,000, 19,100, and 181,000, respectively, have not been included in the computation of diluted net income per share, as the result would be anti-dilutive.

Diluted net income per common share does not include any incremental shares related to the Notes for the three months ended September 30, 2010 and the nine months ended September 30, 2011 and 2010. Because the principal amount of the Notes will be settled in cash upon conversion if a conversion occurs, the Notes have no impact on diluted net income per common share until the price of our common stock exceeds the conversion price (initially $29.64, subject to adjustments) of the Notes. For the three months ended September 30, 2011, 49,000 shares related to the Notes were included in the computation of the diluted net income per common share because the average market price of our common stock during the three months ended September 30, 2011 exceeded the conversion price of the Notes. In addition, the diluted net income per common share does not include any incremental shares related to the exercise of the warrants for the three and nine months ended September 30, 2011 and 2010. The warrants will not have an impact on diluted net income per common share until the price of our common stock exceeds the strike price of the warrants (initially $34.875, subject to adjustments). When the market price of our stock exceeds the strike price of the warrants, as applicable, we will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon exercise of the warrants using the treasury stock method.

In addition, the call options to purchase our common stock, which we purchased to hedge against potential dilution upon conversion of the Notes (see Note 3 "Financial Statement Details — Convertible Debt"), are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the Notes.

The basic and diluted net income per share calculations for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands, except per share data, unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net income	$	2,628	$	5,585	$	8,671	$	6,965
Weighted average common shares outstanding for basic		52,517		50,810		52,188		50,339
Dilutive potential common stock outstanding:
Stock options		2,001		2,133		2,023		2,310
Restricted stock units		361		320		380		365
Employee stock purchase plan		19		15		14		18
Convertible senior notes		49		—		—		—
Weighted average common shares outstanding for diluted		54,947		53,278		54,605		53,032
Net income per share:
Basic	$	0.05	$	0.11	$	0.17	$	0.14
Diluted	$	0.05	$	0.10	$	0.16	$	0.13

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Commitments And Contingencies (Narrative) (Details) (USD $)	0 Months Ended	1 Months Ended	9 Months Ended				1 Months Ended	9 Months Ended
	Apr. 07, 2011	Apr. 30, 2010	Sep. 30, 2011	Jan. 28, 2011	Oct. 31, 2007	Sep. 30, 2010 Land in Costa Rica [Member]	Sep. 30, 2010 Manufacturing Facility [Member]	Sep. 30, 2011 Operational Manufacturing Facility [Member]	Sep. 30, 2010 Operational Manufacturing Facility [Member]
Stipulated amount that would be treated as the jury's verdict against the defendants in the damages trial		$ 200,000
Additional damages awarded				400,000
Total damages	600,000
Attorney's fees	4,500,000
Total amount of litigation settlement	5,100,000
Agreement to fund clinical study activities					4,600,000
Purchase commitments			19,800,000			3,000,000	10,500,000		21,500,000
Purchase commitment payments at various dates through December 31, 2011			18,800,000
Clinical trial obligation			2,500,000
Percentage of payment made on execution of contract							20.00%
Expenses related to construction of manufacturing facility								18,300,000
Amount paid for securing land			13,200,000
Settlement payment obligation to Axsun			$ 5,400,000

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Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes

Income Taxes

7. 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 U.S. Internal Revenue Service and state tax jurisdictions from our inception in 2000 through 2010. 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 through 2010, and by South Africa from the inception of Volcano South Africa in 2008 through 2010. We were audited by the Japanese tax authorities for the 2005 through 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 through 2010.

Our effective tax rate is a blended rate resulting from the composition of taxable income in the global jurisdictions in which we conduct business. We recognize a full valuation allowance against our deferred tax assets in the jurisdictions where there is insufficient certainty surrounding the realization of deferred tax assets through future taxable income. On a quarterly basis, we assess our ability to realize our deferred tax assets and the corresponding need for a valuation allowance. We expect that due to a combination of recent positive operating results and projections of continued profitability, we may be able to release a portion of our valuation allowance for deferred tax assets in certain jurisdictions in the near future. Such assessment could result in a material reduction of our valuation allowances as soon as in the fourth quarter of 2011, particularly with respect to our U.S. jurisdiction, which represents the largest component of our valuation allowance.

For the three and nine months ended September 30, 2011 and 2010, we recorded a provision for income taxes of $669,000, $735,000, $1.7 million, and $1.4 million, respectively. The 2011 and 2010 expense is comprised of foreign income taxes as well as various state and local income taxes.

We apply the "with and without method — direct effects only", in accordance with authoritative guidance, with respect to recognition of stock option excess tax benefits within stockholders' equity (paid in capital). Therefore, the aforementioned provision for income tax is determined utilizing projected federal and state taxable income before the application of deductible excess tax benefits attributable to stock option exercises.

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Condensed Consolidated Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Operating activities
Net income	$ 8,671	$ 6,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	17,159	13,521
Amortization of investment premium, net	2,727	489
Accretion of debt discount on convertible senior notes	3,470	125
Non-cash stock-based compensation expense	9,605	9,239
Other non-cash adjustments	(53)	364
Loss on disposal of long-lived assets	133	39
In-process research and development		65
Changes in operating assets and liabilities:
Accounts receivable	(2,942)	(1,538)
Inventories	(4,624)	(1,007)
Prepaid expenses and other assets	(2,349)	(998)
Restricted cash	(89)
Accounts payable	(1,519)	(202)
Accrued compensation	(2,642)	(1,639)
Accrued expenses and other liabilities	(7,964)	310
Deferred revenues	970	845
Net cash provided by operating activities	20,553	26,578
Investing activities
Purchase of short-term and long-term available-for-sale investments	(255,261)	(101,818)
Sale or maturity of short-term and long-term available-for-sale investments	266,363	63,066
Capital expenditures	(30,374)	(19,205)
Cash paid related to acquisitions, net of cash acquired		(4,200)
Cash paid for intangible assets and other investments	(1,673)	(2,985)
Proceeds from foreign currency exchange contracts	1,164	1,417
Payment for foreign currency exchange contracts	(3,962)	(3,684)
Net cash used in investing activities	(23,743)	(67,409)
Financing activities
Repayment of debt	(46)	(36)
Proceeds from sale of common stock under employee stock purchase plan	3,555	2,741
Proceeds from exercise of common stock options	9,065	9,983
Proceeds from issuance of convertivle senior notes		115,000
Payment of debt issuance costs		(3,571)
Purchase of call options		(27,190)
Proceeds from issuance of warrants		17,149
Tax benefit related to stock-based compensation		176
Increases of restricted cash		(82)
Net cash provided by financing activities	12,574	114,170
Effect of exchange rate changes on cash and cash equivalents	278	(677)
Net decrease in cash and cash equivalents	9,662	72,662
Cash and cash equivalents, beginning of period	43,429	56,055
Cash and cash equivalents, end of period	53,091	128,717
Supplemental disclosures of cash flow information:
Cash paid for interest	3,391	46
Cash paid for income taxes	842	395
Supplemental disclosure of non-cash investing activities:
Issuance of common stock related to milestone payment		$ 10,469

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Financial Statement Details

9 Months Ended

Sep. 30, 2011

Financial Statement Details [Abstract]

Financial Statement Details

3. Financial Statement Details

Cash and Cash Equivalents and Available-for-Sale Investments

We invest our excess funds in securities issued by the U.S. 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 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 mortgage-backed securities. As of September 30, 2011, all of our investments will mature within 20 months. These investments are recorded at their estimated fair value including accrued interest receivable, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss).

Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

• Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of money market funds and U.S. Treasury and agency debt securities.

• Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of corporate debt securities including commercial paper, corporate bonds, certificates of deposit and foreign currency forward contracts.

• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. We have not measured the fair value of any of our assets using Level 3 inputs.

We utilize a third-party pricing service to assist us in obtaining fair value pricing for our investments. Pricing for securities is based on proprietary models. Inputs are documented in accordance with the fair value disclosure hierarchy. We utilize a third-party financial institution to assist us in obtaining fair value pricing for our foreign currency forward contracts.

During the three and nine months ended September 30, 2011 and 2010, no transfers were made into or out of the Level 1, 2, or 3 categories. We will continue to review our fair value inputs on a quarterly basis.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below at September 30, 2011:

	Fair Value Measurements at September 30, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	33,031	$	33,031	$	—	$	—
Money market funds		20,060		20,060		—		—
Sub-total cash and cash equivalents		53,091		53,091		—		—
Corporate debt securities		122,246		—		122,246		—
U.S. Treasury and agency debt securities		32,068		32,068		—		—
Sub-total short-term investments		154,314		32,068		122,246		—
Long Term:
Corporate debt securities		12,882		—		12,882		—
U.S. Treasury and agency debt securities		21,046		21,046		—		—
Sub-total long-term investments		33,928		21,046		12,882		—
Total Assets	$	241,333	$	106,205	$	135,128	$	—
Liabilities:
Foreign currency forward contracts	$	355	$	—	$	355	$	—

Our investments have been classified as available-for-sale. At September 30, 2011, available-for-sale investments are detailed as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	122,267	$	11	$	32	$	122,246
U.S. Treasury and agency debt securities		32,069		4		5		32,068
Short-term available-for-sale investments	$	154,336	$	15	$	37	$	154,314
Long-term:
Corporate debt securities	$	12,891	$	8	$	17	$	12,882
U.S. Treasury and agency debt securities		21,046		4		4		21,046
Long-term available for sale investments	$	33,937	$	12	$	21	$	33,928

Available-for-sale investments that are in an unrealized loss position at September 30, 2011 are detailed as follows (in thousands):

	Estimated Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	58,474	$	49
U.S. Treasury and agency debt securities		19,030		9
	$	77,504	$	58

At December 31, 2010, available-for-sale investments are detailed as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	97,685	$	41	$	14	$	97,712
U.S. Treasury and agency debt securities		77,585		8		22		77,571
Short-term available-for-sale investments	$	175,270	$	49	$	36	$	175,283
Long-term:
Corporate debt securities	$	16,830	$	1	$	29	$	16,802
U.S. Treasury and agency debt securities		10,002		—		—		10,002
Long-term available for sale investments	$	26,832	$	1	$	29	$	26,804

Derivative Financial Instruments

Our derivative financial instruments are primarily composed of foreign currency forward contracts. We record derivative financial instruments as either assets or liabilities in our unaudited condensed consolidated balance sheets and measure them at fair value. At September 30, 2011 and December 31, 2010, notional amounts of our outstanding contracts were $52.5 million and $54.0 million, respectively. At September 30, 2011, the outstanding derivatives had maturities of 91 days or less. The fair value of our foreign currency forward contracts of $355,000 was included in accrued expenses and other current liabilities in our unaudited condensed consolidated balance sheet at September 30, 2011, and the fair value of our foreign currency forward contracts of $299,000 was included in accrued expenses and other current liabilities in our condensed consolidated balance sheet at December 31, 2010. For the three and nine months ended September 30, 2011, $572,000 and $2,269,000 of net losses related to our derivative financial instruments are included in exchange rate loss in our unaudited condensed consolidated statements of operations. For the three and nine months ended September 30, 2010, $2.7 million and $2.6 million of net losses, related to our derivative financial instruments were included in our consolidated statements of operations.

In connection with our convertible debt offering (discussed in more detail below) we purchased call options on our common stock from JPMorgan Chase. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants to JPMorgan Chase, which give JPMorgan Chase the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. In accordance with the authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively as long as they continue to meet the conditions for equity classification.

Inventories

Inventories consist of the following (in thousands):

	September 30, 2011		December 31, 2010
Finished goods (1)	$	22,703	$	20,996
Work-in-process		9,446		7,946
Raw materials		14,314		11,557
	$	46,463	$	40,499

(1) Finished goods inventory includes consigned inventory of $4.9 million and $3.3 million at September 30, 2011 and December 31, 2010, respectively.

Property and Equipment

Property and equipment consists of the following (in thousands):

	September 30, 2011			December 31, 2010
Medical diagnostic equipment	$	63,865		$	55,836
Other equipment		32,089			27,721
Leasehold improvements		8,317			8,062
Purchased software		4,033			3,331
Construction-in-progress (1)		26,197			7,852
		134,501			102,802
Accumulated depreciation and amortization		(61,090	)		(46,299	)
	$	73,411		$	56,503

(1) Construction-in-progress at September 30, 2011 and December 31, 2010 includes $367,000 and $42,000, respectively, of capitalized interest related to the construction of our manufacturing facility in Costa Rica.

Intangible Assets

Intangible assets consist of developed technology, licenses, customer relationships, patents and trademarks, and assembled workforce which are amortized using the straight-line method over periods ranging from 3 to 20 years, representing the estimated useful lives of the assets. IPR&D consists of in-process technology related to Fluid Medical's imaging program, which is still in the prototype phase and, therefore, amortization will not begin until such technology reaches market feasibility.

We conduct impairment assessment of our goodwill and certain intangible assets during the fourth quarter of each year. We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an asset is used. During the nine months ended September 30, 2011 and through the date of this report, there were no triggering events, changes in market conditions or other factors that would indicate possible or actual impairment of our long-lived assets.

During the nine months ended September 30, 2011, we recorded intangible asset additions of approximately $493,000 related to patents, $117,000 related to customer relationships and $161,000 related to licensed technology.

At September 30, 2011, intangible assets by major class consist of the following (in thousands):

	September 30, 2011
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Intangible assets subject to amortization
Developed technology	$	22,651	$	15,663	$	6,988		8.2
Licenses		7,195		5,890		1,305		10.0
Customer relationships		4,089		2,800		1,289		3.3
Patents and trademarks		3,148		1,536		1,612		10.0
Assembled workforce		274		257		17		4.0
		37,357		26,146		11,211		7.3
Intangible assets not yet subject to amortization
In-process research and development (2)		4,050		—		4,050		n/a
	$	41,407	$	26,146	$	15,261

At December 31, 2010, intangible assets by major class consist of the following (in thousands):

	December 31, 2010
	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Intangible assets subject to amortization
Developed technology	$	22,651	$	14,666	$	7,985		8.2
Licenses		7,034		5,400		1,634		10.0
Customer relationships		3,978		2,005		1,973		3.4
Patents and trademarks		2,655		1,262		1,393		7.1
Assembled workforce		274		206		68		4.0
		36,592		23,539		13,053		7.1
Intangible assets not yet subject to amortization
In-process research and development (2)		4,050		—		4,050		n/a
	$	40,642	$	23,539	$	17,103

(1) Weighted average life of intangible assets is presented excluding fully amortized assets.

(2) IPR&D represents an estimate of fair value of in-process technology related to Fluid Medical's imaging technology program, which is still in the prototype phase. As such, based on authoritative guidance, amortization of the IPR&D will not occur until it reaches market feasibility. In the event the project is abandoned, we will record an impairment charge for this amount.

At September 30, 2011, future amortization expense associated with our intangible assets is expected to be as follows (in thousands):

2011 (remaining three months)	$	884
2012		3,016
2013		2,169
2014		1,551
2015		1,135
Thereafter		2,456
	$	11,211

Restructuring Activity

In June 2009, we implemented a restructuring plan to consolidate our resources related to the research and development of our OCT technology. As part of the restructuring plan, during the first quarter of 2010 we completed the closure of our San Antonio, Texas facility and relocated such operations to our Billerica, Massachusetts facility. Approximately 20 employees were impacted by the restructuring plan. One-time benefits to affected employees included relocation or a separation agreement including severance payments, continuing medical benefits, and outplacement assistance. Sixteen employees entered into separation agreements. All terminations were completed as of May 31, 2010.

Consistent with authoritative guidance, we accrued relocation costs and the costs of one-time termination benefits to employees who were not required to render service beyond a minimum retention period of 60 days. The remaining one-time termination benefits were recorded to expense ratably over required service periods. Additionally, costs related to moving equipment between the facilities were expensed during the period incurred. As a result, we recorded $0 and $63,000 as research and development expense during the three and nine months ended September 30, 2010. In addition, during the three and nine months ended September 30, 2010, we recorded $0 and $454,000 of additional restructuring costs as selling, general and administrative expense for the termination of the operating lease and related contract costs, including a charge for the impairment of certain property and equipment.

On April 26, 2010, we entered into a lease termination agreement with the landlord of our San Antonio facility. Total termination costs of $330,000 included a lump-sum lease-termination payment, broker commissions and the surrender of our security deposit. We were correspondingly released from any future obligations under this facility lease. The termination payment represented a savings over the original estimated restructuring liability related to the remaining lease payments and resulted in a benefit of $116,000 that was recorded during the second quarter of 2010. At September 30, 2011, there were no future obligations related to this restructuring activity.

Convertible Debt

In September 2010, we issued $115.0 million aggregate principal amount of 2.875% Convertible Senior Notes due September 1, 2015, or, the Notes, in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on March 1 and September 1, commencing on March 1, 2011.

The Notes are general unsecured obligations that rank pari passu with our other existing and future unsecured obligations. Prior to June 1, 2015, the Notes are convertible only upon certain events specified in the indenture governing the Note. The initial conversion rate for the Notes is 33.7339 shares of common stock per $1,000 principal amount of the Notes, representing an initial effective conversion price of approximately $29.64 per share of common stock. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the Notes but will not be adjusted for accrued and unpaid interest.

We received proceeds of $100.5 million from issuance of the Notes, net of debt issuance costs ($4.4 million) and net payments related to our hedge transactions ($10.0 million) which are described in more detail below. We recorded total debt issuance costs (including broker fees) of approximately $4.4 million, which were allocated on a pro-rata basis to the debt ($3.6 million) and equity ($866,000) components of the transaction. The debt component is primarily included in non-current liabilities and is being accreted to interest expense over five years, the term of the Notes. The equity component was netted against the proceeds and included in additional paid-in capital.

We may not redeem the Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the Notes may require us to purchase all or a portion of their Notes at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the repurchase date. Holders who convert their Notes in connection with a make-whole fundamental change, as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate.

In connection with the offering of the Notes, to hedge against potential dilution upon conversion of the Notes, we also purchased call options on our common stock from JPMorgan Chase. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the Notes. We paid an aggregate of $27.2 million to purchase these call options. The call options will expire on September 1, 2015, unless earlier terminated or exercised. To reduce the cost of the hedge, in a separate transaction we sold warrants to JPMorgan Chase. These warrants give JPMorgan Chase the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. These warrants will be exercisable and will expire in equal installments for a period of 50 trading days beginning on December 1, 2015. We received an aggregate of $17.2 million from the sale of these warrants. In accordance with the applicable authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and will not be marked to market prospectively as long as they continue to meet the condition for equity classification. The net amount of $10.0 million paid to JPMorgan Chase was recorded as a reduction to additional paid-in capital. We did not record the potential tax benefit of approximately $10.4 million related to the call options as we have recorded a full valuation allowance against our deferred tax assets. The settlement terms of the call options provide for net share settlement and the settlement terms of the warrants provide for net share or cash settlement at our option. The carrying values of the liability and equity components of the Notes are reflected in our unaudited condensed consolidated balance sheets as follows (in thousands):

	September 30, 2011			December 31, 2010
Liabilities:
Principal amount of the 2.875% Convertible Senior Notes	$	115,000		$	115,000
Unamortized discount of liability component		(18,292	)		(21,211	)
Unamortized debt issuance costs		(2,203	)		(2,627	)
Carrying value of liability component	$	94,505		$	91,162
Equity — net carrying value	$	22,263		$	22,263

The fair value of the Notes at September 30, 2011 was $139.4 million.

Other Long-Term Debt

The amounts outstanding for other long-term debt at September 30, 2011 and December 31, 2010 relate to capital leases.

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Income Taxes (Details) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Income Taxes
Provision for income taxes	$ 669	$ 735	$ 1,684	$ 1,363

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Financial Statement Details (Carrying Values Of The Liability And Equity Components Of The Notes) (Details) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Financial Statement Details [Abstract]
Principal amount of the 2.875% Convertible Senior Notes	$ 115,000,000	$ 115,000,000
Unamortized discount of liability component	(18,292,000)	(21,211,000)
Unamortized debt issuance costs	(2,203,000)	(2,627,000)
Carrying value of liability component	94,505,000	91,162,000
Equity - net carrying value	$ 22,263,000	$ 22,263,000

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Commitments And Contingencies

9 Months Ended

Sep. 30, 2011

Commitments And Contingencies

Commitments And Contingencies

4. Commitments and Contingencies

Litigation — LightLab

On January 7, 2009, LightLab Imaging, Inc., or LightLab, filed a complaint against us and our wholly owned subsidiary, Axsun, in the Superior Court of Massachusetts, Suffolk County, seeking injunctive relief and unspecified damages (the Massachusetts Action). LightLab develops and sells OCT products for cardiovascular imaging and other medical uses. On July 6, 2010, LightLab was acquired by St. Jude Medical, Inc., or St. Jude.

Prior to our acquisition of Axsun, Axsun had entered into a development and supply agreement, or the Agreement, with LightLab, in which, among other things, Axsun agreed to supply tunable lasers to LightLab for use in LightLab's OCT imaging products until April 2016, with exclusivity in the field of coronary artery imaging expiring in April 2014. Since the acquisition, Axsun has continued to supply lasers to LightLab. The complaint includes allegations that Volcano interfered with the Agreement and with LightLab's advantageous business relationship with Axsun, that Axsun breached the Agreement, that Axsun and Volcano misappropriated LightLab's confidential information and trade secrets, and violated Chapter 93A, a Massachusetts statute that provides for recovery of up to three times damages plus attorneys fees (93A).

The Judge ordered that the trial in the Massachusetts Action proceed in separate phases, with a jury trial first on liability, followed by a jury trial on damages, and then non-jury hearings on liability under 93A and on injunctive relief. The jury trial on liability commenced on January 4, 2010 and the jury returned a verdict on February 4, 2010 that included findings that the contract specifications for the lasers Axsun supplies and previously supplied to LightLab are trade secrets of LightLab, that Axsun agreed not to sell any tunable lasers to Volcano for any purpose or to third parties for use in cardiology imaging during the exclusivity period in the contract, and that Axsun breached its contract with LightLab. The jury further found that Volcano intentionally interfered with LightLab's advantageous business relationship with Axsun.

A trial in the Massachusetts Action with respect to damages was set to commence on April 7, 2010 (Damages Trial). In lieu of conducting the Damages Trial, the parties agreed and stipulated that the sum of $200,000 would be treated as if it were the jury's verdict against the defendants in the Damages Trial (the Stipulation).

Upon the entry of the Stipulation, LightLab waived its rights, if any, to make any additional claims for special damages relating to lasers received in 2009 that do not meet the version 6 specification, for special damages claimed by LightLab in prior pleadings, and for the repair and/or replacement of any of the lasers specified in the Stipulation. In addition, Axsun waived its rights, if any, to make any claim for recovery from LightLab for certain engineering charges in connection with a development and supply agreement with LightLab, and for return by LightLab of any of the lasers specified in the Stipulation.

Under the Stipulation, all parties expressly reserved their otherwise properly preserved rights of appeal. These rights include LightLab's appellate rights, if any, regarding its claim for alleged lost profits in excess of the above-referenced $200,000 stipulated amount to the extent LightLab is able to establish that it has properly preserved such rights.

The injunctive relief phase of the Massachusetts Action commenced on April 12, 2010. In a ruling issued October 5, 2010, the Court rejected LightLab's claims for protection of five alleged trade secrets relating to laser technologies, and denied all of LightLab's requests for permanent injunctions with respect to those trade secrets. The ruling followed a two-week trial on five of a number of trade secret claims alleged by LightLab.

In a summary judgment ruling issued January 26, 2011, the Court rejected the remainder of LightLab's claims for protection of its remaining trade secrets, and denied all of LightLab's claims for permanent injunctions with respect to those trade secrets. This judgment completed the trade secret portion of the Massachusetts Action.

In a ruling issued January 28, 2011, the Court found that Volcano and Axsun violated 93A, and awarded LightLab additional damages of $400,000 and reasonable attorneys' fees.

On February 10, 2011, and on April 7, 2011, the Court entered a Final Judgment and an Amended Final Judgment, respectively, in the Massachusetts Action: a) in favor of Volcano and Axsun on LightLab's claims for trade secret misappropriation on items 1-30 on LightLab's list of alleged trade secrets, b) ordered Volcano and Axsun to collectively pay $600,000 in damages (which amount includes the $200,000 agreed to in the Stipulation and the $400,000 ordered in the 93A ruling) and $4.5 million in attorneys' fees, (resulting in a total of $5.1 million recorded to selling, general and administrative expense and accrued in other current liabilities during the fourth quarter of 2010), c) in favor of LightLab on its claims against Axsun for breach of contract, breach of implied covenant of good faith and fair dealing, for violation of 93A, and misappropriation of trade secrets for disclosing three particular items to Volcano in December 2008 – the specifications for the two lasers provided by Axsun to LightLab and one Axsun laser prototype made in 2008, d) in favor of LightLab on its claims against Volcano for intentional interference with a contract and advantageous business relationship, unjust enrichment, violation of 93A, and misappropriation of trade secrets for the same three trade secrets described above. In addition, the Court denied a majority of LightLab's requested injunctions, and entered limited injunctive relief, none of which management believes have a material effect upon Volcano. The Final Judgment and Amended Final Judgment are substantially similar. The Amended Final Judgment corrects non-substantive clerical errors. On April 15, 2011, LightLab filed a notice of appeal, with respect to various decisions of the Court, including, a) the Court's decisions adverse to LightLab's claims for trade secret misappropriation in items 1-30 of LightLab's alleged list of trade secrets, including the Court's post-trial finding of fact and rulings of law adverse to LightLab on items 1 – 5, the Court's two summary judgment decisions adverse to LightLab on items 6 – 23 and 25 – 30 (item 24 having been voluntarily dismissed by LightLab), and various rulings requiring evidence of use or intent to use as a prerequisite for injunctive relief; b) the Court's post-trial decisions denying permanent injunctive relief that LightLab requested as terms of the Final Judgment; c) the Court's pre-trial rulings excluding certain lost profits damages evidence that LightLab sought to introduce at trial; d) various discovery and pre-trial orders denying LightLab discovery about Axsun's work for Volcano; e) the Court's order barring LightLab from claiming that the sale of Axsun to Volcano itself constituted a breach of the LightLab-Axsun supply contract; and f) the denial of LightLab's motion to alter or amend the Final Judgment, which motion sought to obtain additional declaratory relief barring Axsun from "supplying" tunable lasers to Volcano. Volcano and Axsun do not intend to cross appeal the Amended Final Judgment, and on July 5, 2011, Volcano and Axsun satisfied their payment obligations under the Amended Final Judgment by making a payment to Lightlab in the amount of approximately $5.4 million.

On February 5, 2010, Volcano and our wholly owned subsidiary, Axsun, commenced an action in the Delaware Chancery Court, or the Chancery Court Action, against LightLab seeking a declaration of Volcano and Axsun's rights with respect to certain OCT technology, the High Definition Swept Source. The complaint was served on LightLab on March 19, 2010. LightLab then filed a counter-claim that included a claim against Axsun and Volcano for violations of 93A. Volcano and Axsun moved to dismiss LightLab's 93A counter-claim, and LightLab responded to that motion by amending its 93A counter-claim. The 93A counterclaim has been stayed pending further action by the Chancery Court. This case has been stayed until such time as Volcano has achieved certain development and regulatory milestones.

Additionally, on May 24, 2011, LightLab commenced a separate action in Delaware Chancery Court, or the Second Chancery Court Action, against Volcano and Axsun alleging that Axsun is inappropriately assisting Volcano in the development of a third-party laser. The complaint seeks injunctive relief and unspecified damages. After Volcano and Axsun moved to dismiss the Second Chancery Court Action, LightLab filed an amended complaint against Volcano and Axsun, adding additional allegations regarding misappropriation of trade secrets. Volcano and Axsun have submitted an answer to the amended complaint. In addition, Volcano and Axsun moved for judgment on the pleadings, seeking to dismiss a portion of LightLab's amended complaint, and have filed an additional motion to stay the remainder of the Second Chancery Court Action. Those motions are currently pending.

Litigation — St. Jude

On July 27, 2010, St. Jude filed a lawsuit against Volcano in federal district court in Delaware (collectively, with the counterclaims described below, the Delaware Patent Action), alleging that our pressure guide wire products infringe five patents owned by St. Jude. St. Jude is seeking injunctive relief and monetary damages. This action does not involve OCT technology and is separate from the Massachusetts Action.

On September 20, 2010, Volcano filed its response, in which we denied the allegations that our PrimeWire^® products infringe any valid claim of St. Jude's asserted patents. In addition, Volcano filed a counterclaim in which we have alleged that St. Jude's PressureWire^® products and its RadiAnalyzer^® Xpress product infringe three Volcano patents. In our counterclaim, Volcano is seeking injunctive relief and monetary damages. A trial has been scheduled for October 15, 2012 for the Delaware Patent Action.

Litigation — Other

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 are not able to predict or estimate the ultimate outcome or range of possible losses relating to the Massachusetts Action, the Chancery Court Action, the Delaware Patent Action the Second Chancery Court Action, or any of the other lawsuits, claims or counterclaims described above. However, we believe that the ultimate disposition of these matters, individually and in the aggregate, including the matters discussed above, 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 our results of operations or cash flows in future periods.

Operating Leases

Rent expense for our facilities leases is being recognized on a straight-line basis over the respective minimum lease terms.

Purchase Commitments

We have obligations under non-cancelable purchase commitments. The majority of these obligations relate to inventory, primarily raw materials. At September 30, 2011, the future minimum payments under these non-cancelable purchase commitments totaled $19.8 million, of which $18.8 million will require payments at various dates through December 31, 2011 and the remainder will require payments at various dates through September 30, 2012.

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. At September 30, 2011, we have a remaining obligation of up to $2.5 million and we will be billed as services are performed under the agreement. In addition, we have entered into agreements with other third parties to sponsor clinical studies. Generally, we contract with one or more clinical research sites for a single study and no one agreement is material to our consolidated results of operations or financial condition. We are usually billed as services are performed based on enrollment and are required to make payments over periods ranging from less than one year up to three years. Our actual payments under these agreements will vary based on enrollment.

In September 2010, we entered into a series of agreements under which we agreed to purchase a parcel of land in Costa Rica for $3.0 million for the purpose of constructing a manufacturing facility and we agreed to retain a firm to construct our cold shell manufacturing building for $10.5 million (20% of which was paid upon execution of the agreement, with the balance payable over the eleven-month construction period through 2011). We also entered into an agreement to retain a construction manager and for the completion of an operational manufacturing facility, including the addition of equipment and related improvements, for approximately $21.5 million which will be paid at various dates throughout 2011 into the first quarter of 2012. As of September 30, 2011, the total amount paid related to the construction of the Costa Rica manufacturing facility, including the cost of securing the land for the construction site, is $18.3 million, of which $13.2 million was paid during the nine months ended September 30, 2011.

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 Volcano. 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 unaudited condensed consolidated financial statements.

Sole source suppliers

We rely on a number of sole source suppliers to supply transducers, substrates and processing for our scanners used in our catheters. We are not parties to supply agreements with these suppliers but instead use purchase orders as needed.

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Financial Statement Details (Property And Equipment) (Details) (USD $)	Sep. 30, 2011		Dec. 31, 2010
Property and Equipment, Gross	$ 134,501,000		$ 102,802,000
Accumulated depreciation and amortization	(61,090,000)		(46,299,000)
Property and Equipment, Net	73,411,000		56,503,000
Leasehold Improvements [Member]
Property and Equipment, Gross	8,317,000		8,062,000
Other Equipment [Member]
Property and Equipment, Gross	32,089,000		27,721,000
Purchased Software [Member]
Property and Equipment, Gross	4,033,000		3,331,000
Construction-In-Progress [Member]
Property and Equipment, Gross	26,197,000	[1]	7,852,000	[1]
Capitalized interest	367,000		42,000
Medical Diagnostic Equipment [Member]
Property and Equipment, Gross	$ 63,865,000		$ 55,836,000

[1] Construction-in-progress at September 30, 2011 and December 31, 2010 includes $367,000 and $42,000, respectively, of capitalized interest related to the construction of our manufacturing facility in Costa Rica.

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Stockholders' Equity (Narrative) (Details) (USD $)	0 Months Ended		9 Months Ended	12 Months Ended	9 Months Ended	3 Months Ended		9 Months Ended			3 Months Ended		9 Months Ended
	May 02, 2011	Jul. 29, 2009	Sep. 30, 2011	Dec. 31, 2010	Sep. 30, 2011 Stock Options [Member]	Sep. 30, 2011 Non-Employees [Member]	Sep. 30, 2010 Non-Employees [Member]	Sep. 30, 2011 Non-Employees [Member]	Sep. 30, 2010 Non-Employees [Member]	Sep. 30, 2011 Amended Plan [Member]	Sep. 30, 2011 Purchase Plan [Member]	Sep. 30, 2010 Purchase Plan [Member]	Sep. 30, 2011 Purchase Plan [Member]	Sep. 30, 2010 Purchase Plan [Member]
Common stock issued in equity compensation plan			16,212,558
Increase in common stock shares issued in equity compensation plan	2,500,000	2,050,000
Reduction in number of shares available for issuance under amendment plan pursuant to stock option			1
Reduction in number of shares available for issuance under amendment plan pursuant to restricted stock award			1.63		2.12
Shares available for grant under employee stock purchase plan										4,287,162	415,198		415,198
Stock-based compensation expense						$ 0	$ 159,000	$ 115,000	$ 484,000		$ 257,000	$ 233,000	$ 793,000	$ 661,000
Stock-based compensation cost capitalized in inventories			$ 206,000	$ 223,000

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Financial Statement Details (Future Amortization Expense Of Intangible Assets) (Details) (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011
Financial Statement Details [Abstract]
2011 (remaining three months)	$ 884
2012	3,016
2013	2,169
2014	1,551
2015	1,135
Thereafter	2,456
Future amortization expense, Total	$ 11,211

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Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2011

Stockholders' Equity

Fair Value Of Stock Option On Grant Date, Weighted-Average Assumptions

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Risk-free interest rate		1.9	%		2.0	%		2.1	%		2.3	%
Expected life (years)		4.5			4.4			4.4			4.6
Estimated volatility		46.8	%		43.9	%		47.4	%		46.6	%
Expected dividends		None			None			None			None
Weighted-average grant date fair value	$	13.10		$	8.33		$	11.52		$	8.01

Fair Value Of Stock Option Under The Purchase Plan, Weighted-Average Assumptions

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Risk-free interest rate		0.1	%		0.2	%		0.2	%		0.2	%
Expected life (years)		0.5			0.5			0.5			0.5
Estimated volatility		35.7	%		34.6	%		35.7	%		35.9	%
Expected dividends		None			None			None			None
Fair value of purchase right	$	6.87		$	5.36		$	6.48		$	4.91

Table Of Stock-Based Compensation Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenues	$	146	$	185	$	304	$	586
Selling, general and administrative		2,720		2,503		8,057		7,563
Research and development		450		360		1,244		1,090
	$	3,316	$	3,048	$	9,605	$	9,239

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Stockholders' Equity

9 Months Ended

Sep. 30, 2011

Stockholders' Equity

Stockholders' Equity

5. Stockholders' Equity

Stock Benefit Plans

Our 2005 Amended and Restated Equity Compensation Plan, or 2005 Amended Plan, provides for an aggregate of 16,212,558 shares of our common stock that may be issued or transferred to our employees, non-employee directors and consultants, including increases of 2,050,000 and 2,500,000 shares which were approved by our stockholders on July 29, 2009 and May 2, 2011, respectively. Commencing July 29, 2009, the number of shares of common stock available for issuance under the 2005 Amended Plan was reduced by one share for each share of stock issued pursuant to a stock option or a stock appreciation right and one and sixty-three hundredths (1.63) shares for each share of common stock issued pursuant to a restricted stock award, restricted stock unit, or RSU, award, performance stock award or other stock award. Commencing May 2, 2011, the number of shares of common stock available for issuance under the 2005 Amended Plan was reduced by one share for each share of stock issued pursuant to a stock option or a stock appreciation right and two and twelve hundredths (2.12) shares for each share of common stock issued pursuant to a restricted stock award, RSU, award, performance stock award or other stock award. Shares net exercised or retained to cover a participant's minimum tax withholding obligations do not again become available for issuance under the 2005 Amended Plan.

At September 30, 2011, we have granted stock options and RSUs under the 2005 Amended Plan. Stock options previously granted under the 2000 Long Term Incentive Plan that are cancelled or expired will increase the shares available for grant under the 2005 Amended Plan. In addition, employees have purchased shares of the Company's common stock under the 2007 Employee Stock Purchase Plan, or the Purchase Plan. At September 30, 2011, 4,287,162 shares and 415,198 shares remained available to grant under the 2005 Amended Plan and the Purchase Plan, respectively.

Fair Value Assumptions

The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option-pricing, or Black-Scholes, model utilizing the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Risk-free interest rate		1.9	%		2.0	%		2.1	%		2.3	%
Expected life (years)		4.5			4.4			4.4			4.6
Estimated volatility		46.8	%		43.9	%		47.4	%		46.6	%
Expected dividends		None			None			None			None
Weighted-average grant date fair value	$	13.10		$	8.33		$	11.52		$	8.01

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

Since January 1, 2008, we have used our historical stock option exercise experience to estimate the expected term of our stock options.

Historically, our 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 stock options. We did not exclude any period due to discrete historical events. We used 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.

As of January 1, 2011 we determined that the trading history of our common stock is sufficient in relation to the expected term of our stock options to begin using the volatility calculated on our common stock without further consideration of the volatility of comparable medical device companies' common stock. As such, for any options granted during the three and nine months ended September 30, 2011, we have solely utilized the volatility of our own common stock in determining the grant date fair value.

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.

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Risk-free interest rate		0.1	%		0.2	%		0.2	%		0.2	%
Expected life (years)		0.5			0.5			0.5			0.5
Estimated volatility		35.7	%		34.6	%		35.7	%		35.9	%
Expected dividends		None			None			None			None
Fair value of purchase right	$	6.87		$	5.36		$	6.48		$	4.91

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 U.S. 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.

Stock-Based Compensation Expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenues	$	146	$	185	$	304	$	586
Selling, general and administrative		2,720		2,503		8,057		7,563
Research and development		450		360		1,244		1,090
	$	3,316	$	3,048	$	9,605	$	9,239

Included in our stock-based compensation expense is $0, $159,000, $115,000 and $484,000 of stock-based compensation expense related to non-employees in the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively. Stock-based compensation expense of $257,000, $233,000, $793,000 and $661,000 related to the Purchase Plan was also recorded in the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively. At September 30, 2011 and December 31, 2010, there was $206,000 and $223,000, respectively, of total stock-based compensation cost capitalized in inventories.

We estimate forfeitures and only recognize expense for those shares expected to vest. Our estimated forfeiture rates in the three and nine months ended September 30, 2011 and 2010 are based on our historical forfeiture experience.

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Summary Of Significant Accounting Policies (Schedule Of Basic And Diluted Net Income Per Share Calculations) (Details) (USD $) In Thousands, except Per Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Net income	$ 2,628	$ 5,585	$ 8,671	$ 6,965
Weighted average common shares outstanding for basic	52,517	50,810	52,188	50,339
Weighted average common shares outstanding for diluted	54,947	53,278	54,605	53,032
Basic	$ 0.05	$ 0.11	$ 0.17	$ 0.14
Diluted	$ 0.05	$ 0.10	$ 0.16	$ 0.13
2.875% Convertible Senior Notes [Member]
Dilutive potential common stock outstanding	49
Stock Options [Member]
Dilutive potential common stock outstanding	2,001	2,133	2,023	2,310
Restricted Stock Units (RSUs) [Member]
Dilutive potential common stock outstanding	361	320	380	365
Employee Stock Purchase Plan [Member]
Dilutive potential common stock outstanding	19	15	14	18

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Segment And Geographic Information (Schedule Of Revenues By Geography) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2011		Sep. 30, 2010		Sep. 30, 2011		Sep. 30, 2010
Revenues	$ 85,767	[1]	$ 72,886	[1]	$ 250,798	[1]	$ 212,910	[1]
Percentage Change	17.70%	[1]			17.80%	[1]
United States [Member]
Revenues	38,964	[1]	33,353	[1]	113,201	[1]	96,257	[1]
Percentage Change	16.80%	[1]			17.60%	[1]
Japan [Member]
Revenues	26,599	[1]	20,963	[1]	76,406	[1]	57,683	[1]
Percentage Change	26.90%	[1]			32.50%	[1]
Europe, The Middle East And Africa [Member]
Revenues	14,637	[1]	13,603	[1]	45,534	[1]	42,726	[1]
Percentage Change	7.60%	[1]			6.60%	[1]
Rest Of World [Member]
Revenues	$ 5,567	[1]	$ 4,967	[1]	$ 15,657	[1]	$ 16,244	[1]
Percentage Change	12.10%	[1]			(3.60%)	[1]

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

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Financial Statement Details (Intangible Assets By Major Class) (Details) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2011		Dec. 31, 2010
Intangible Assets, Cost	$ 41,407,000		$ 40,642,000
Intangible Assets, Accumulated Amortization	26,146,000		23,539,000
Intangible Assets, Net	15,261,000		17,103,000
Intangible asset amortization period, minimum	3
Intangible asset amortization period, maximum	20
Customer Relationships [Member]
Intangible Assets, Cost	4,089,000		3,978,000
Intangible Assets, Accumulated Amortization	2,800,000		2,005,000
Intangible Assets, Net	1,289,000		1,973,000
Intangible Assets, Weighted-Average Life, Years	3.3	[1]	3.4	[1]
Intangible asset additions during period	117,000
Developed Technology [Member]
Intangible Assets, Cost	22,651,000		22,651,000
Intangible Assets, Accumulated Amortization	15,663,000		14,666,000
Intangible Assets, Net	6,988,000		7,985,000
Intangible Assets, Weighted-Average Life, Years	8.2	[1]	8.2	[1]
Licenses [Member]
Intangible Assets, Cost	7,195,000		7,034,000
Intangible Assets, Accumulated Amortization	5,890,000		5,400,000
Intangible Assets, Net	1,305,000		1,634,000
Intangible Assets, Weighted-Average Life, Years	10.0	[1]	10.0	[1]
Licensed Technology [Member]
Intangible asset additions during period	161,000
Patents [Member]
Intangible asset additions during period	493,000
Intangible Assets Subject To Amortization [Member]
Intangible Assets, Cost	37,357,000		36,592,000
Intangible Assets, Accumulated Amortization	26,146,000		23,539,000
Intangible Assets, Net	11,211,000		13,053,000
Intangible Assets, Weighted-Average Life, Years	7.3	[1]	7.1	[1]
Patents And Trademarks [Member]
Intangible Assets, Cost	3,148,000		2,655,000
Intangible Assets, Accumulated Amortization	1,536,000		1,262,000
Intangible Assets, Net	1,612,000		1,393,000
Intangible Assets, Weighted-Average Life, Years	10.0	[1]	7.1	[1]
Assembled Workforce [Member]
Intangible Assets, Cost	274,000		274,000
Intangible Assets, Accumulated Amortization	257,000		206,000
Intangible Assets, Net	17,000		68,000
Intangible Assets, Weighted-Average Life, Years	4.0	[1]	4.0	[1]
In-Process Research And Development [Member]
Intangible Assets, Accumulated Amortization		[2]
Intangible assets not yet subject to amortization, Cost	4,050,000	[2]	4,050,000	[2]
Intangible assets not yet subject to amortization, Net	$ 4,050,000	[2]	$ 4,050,000	[2]

[1] Weighted average life of intangible assets is presented excluding fully amortized assets.

[2] IPR&D represents an estimate of fair value of in-process technology related to Fluid Medical's imaging technology program, which is still in the prototype phase. As such, based on authoritative guidance, amortization of the IPR&D will not occur until it reaches market feasibility. In the event the project is abandoned, we will record an impairment charge for this amount.

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Condensed Consolidated Statement Of Stockholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member]	Additional Paid-In Capital [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Accumulated Deficit [Member]	Total
Beginning Balance, Value at Dec. 31, 2010	$ 51	$ 402,895	$ (593)	$ (128,017)	$ 274,336
Beginning Balance, Shares at Dec. 31, 2010	51,366,000
Issuance of common stock under equity plans, Value	2	12,618			12,620
Issuance of common stock under equity plans, Shares	1,245,000
Employee stock-based compensation cost		9,473			9,473
Non-employee stock-based compensation cost		115			115
Comprehensive income
Net income				8,671	8,671
Foreign currency translation adjustments			1,701		1,701
Changes in net unrealized gain on available-for-sale investments			(17)		(17)
Total comprehensive income					10,355
Ending Balance, Value at Sep. 30, 2011	$ 53	$ 425,101	$ 1,091	$ (119,346)	$ 306,899
Ending Balance, Shares at Sep. 30, 2011	52,611,000

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Acquisitions (Details) (USD $)	1 Months Ended				0 Months Ended
	Jan. 31, 2010 First Milestone [Member] CardioSpectra Acquisition [Member]	Dec. 31, 2009 First Milestone [Member] CardioSpectra Acquisition [Member] In-Process Research And Development [Member]	Dec. 31, 2010 Second Milestone [Member] CardioSpectra Acquisition [Member]	Dec. 18, 2007 CardioSpectra Acquisition [Member]	Dec. 24, 2008 Axsun Acquisition [Member]	Aug. 05, 2010 Fluid Medical Acquisition [Member]
Aggregate purchase price of acquisition		$ 11,000,000		$ 27,000,000	$ 23,800,000	$ 4,200,000
Issuance of common stock, shares	609,360
Business acquisition through cash paid	531,000				22,300,000	3,600,000
Business acquisition additional remaining payments			17,000,000
Business acquisition relating to transaction costs					725,000	184,000
Business acquisition, purchase price allocation, liabilities assumed					6,500,000
Cash acquired from acquisition					5,800,000
Business acquisition debt forgiveness						150,000
Business acquisition hold-back liability retained						400,000
Business acquisition, deferred tax liability						1,600,000
Business acquisition relating to goodwill						1,600,000
Time frame for claims, months						18
Business acquisition, in progress research and development						$ 4,100,000

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Financial Statement Details (Financial Assets And Liabilities Measured At Fair Value On A Recurring Basis) (Details) (USD $) In Thousands	Sep. 30, 2011
Cash and cash equivalents	$ 53,091
Short-term investments	154,314
Long-term investments	33,928
Assets, fair value disclosure	241,333
Cash [Member]
Cash and cash equivalents	33,031
Cash [Member] | Level 1 [Member]
Cash and cash equivalents	33,031
Cash [Member] | Level 2 [Member]
Cash and cash equivalents
Cash [Member] | Level 3 [Member]
Cash and cash equivalents
Corporate Debt Securities [Member]
Short-term investments	122,246
Long-term investments	12,882
Corporate Debt Securities [Member] | Level 1 [Member]
Short-term investments
Long-term investments
Corporate Debt Securities [Member] | Level 2 [Member]
Short-term investments	122,246
Long-term investments	12,882
Corporate Debt Securities [Member] | Level 3 [Member]
Short-term investments
Long-term investments
Money Market Funds [Member]
Cash and cash equivalents	20,060
Money Market Funds [Member] | Level 1 [Member]
Cash and cash equivalents	20,060
Money Market Funds [Member] | Level 2 [Member]
Cash and cash equivalents
Money Market Funds [Member] | Level 3 [Member]
Cash and cash equivalents
U.S. Treasury And Agency Debt Securities [Member]
Short-term investments	32,068
Long-term investments	21,046
U.S. Treasury And Agency Debt Securities [Member] | Level 1 [Member]
Short-term investments	32,068
Long-term investments	21,046
U.S. Treasury And Agency Debt Securities [Member] | Level 2 [Member]
Short-term investments
Long-term investments
U.S. Treasury And Agency Debt Securities [Member] | Level 3 [Member]
Short-term investments
Long-term investments
Foreign Currency Forward Contracts [Member]
Liabilities, fair value disclosure	355
Foreign Currency Forward Contracts [Member] | Level 1 [Member]
Liabilities, fair value disclosure
Foreign Currency Forward Contracts [Member] | Level 2 [Member]
Liabilities, fair value disclosure	355
Foreign Currency Forward Contracts [Member] | Level 3 [Member]
Liabilities, fair value disclosure
Level 1 [Member]
Cash and cash equivalents	53,091
Short-term investments	32,068
Long-term investments	21,046
Assets, fair value disclosure	106,205
Level 2 [Member]
Cash and cash equivalents
Short-term investments	122,246
Long-term investments	12,882
Assets, fair value disclosure	135,128
Level 3 [Member]
Cash and cash equivalents
Short-term investments
Long-term investments
Assets, fair value disclosure

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Summary Of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Summary Of Significant Accounting Policies

Summary Of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Basis of Presentation and Nature of Operations

The unaudited condensed consolidated financial statements of Volcano Corporation ("we," "us," "our," "Volcano" 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., or Volcano Japan, Volcano Europe B.V.B.A., or Volcano Europe, Axsun Technologies, Inc., or Axsun, Volcano Therapeutics South Africa (Pty) Ltd., or Volcano South Africa, a wholly owned subsidiary of Volcano Europe, Volcano Netherlands Holdings, B.V., or Volcano Netherlands, and Volcarica, Socieded de Responsabilidad Limitada, a wholly owned subsidiary of Volcano Netherlands.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company's financial position and of the results of operations and cash flows for the periods presented. These unaudited condensed 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, 2010.

We design, develop, manufacture and commercialize a broad suite of intravascular ultrasound, or IVUS, and fractional flow reserve, or FFR, products that we believe enhance the diagnosis and treatment of vascular and structural heart disease. Our products consist of consoles which have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, fractional flow reserve pressure wires and Medtronic's Pioneer reentry device. We are developing additional offerings for integration into the platform, including forward-looking IVUS, or FL.IVUS, catheters, image-guided therapy catheters and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters.

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters and additional functionality options such as virtual histology IVUS tissue characterization and ChromaFlo stent apposition analysis. Our FFR offerings include FFR 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, laser and non-laser light sources, and optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors used by telecommunications and other industrial companies.

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Concentrations of Credit Risk

Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, short-term and long-term available-for-sale investments, and accounts receivable. We have established guidelines to limit our exposure to credit risk by placing our investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We also place our cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand. Therefore we believe the financial risks associated with these financial instruments are minimal.

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms. We perform ongoing credit evaluations of our customers, and generally we do not require collateral on our accounts receivable. We estimate the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and we record a provision for uncollectible accounts when collection is uncertain. To date, we have not experienced significant credit-related losses.

We currently hold foreign exchange forward contracts with a single counterparty. The bank counterparty in these contracts exposes us to credit-related losses in the event of their nonperformance and we do not require collateral for their performance. However, to mitigate that risk, we only contract with counterparties who meet our minimum credit quality guidelines. In addition, our exposure in the event of a default by our counterparty is limited to the changes in value of our hedged balances.

In connection with the issuance of our 2.875% Convertible Senior Notes, or the Notes, we purchased call options from JPMorgan Chase Bank National Association, or JPMorgan Chase. Non-performance by JPMorgan Chase under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price. See Note 3 "Financial Statement Details — Convertible Debt" for additional information.

We purchase integrated circuits and other key components for use in our products from third-party suppliers. For certain components, which are currently single sourced, there are relatively few sources of supply. Although we believe that other suppliers could provide similar components on comparable terms, establishment of additional or replacement suppliers may not be accomplished quickly. Any significant supply interruption could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see "Risk Factors — Our manufacturing operations are dependent upon third-party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays."

Net Income per Share

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential dilutive securities are excluded from the diluted earnings per share computation in loss periods as their effect would be anti-dilutive.

Our potentially dilutive shares include outstanding common stock options, restricted stock units, incremental shares issuable upon the conversion of the Notes, or exercise of the warrants relating to the Notes (See Note 3 "Financial Statement Details — Convertible Debt"). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income per share or if the underlying obligation will be settled in cash as discussed in the following paragraph. For the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, potentially dilutive shares totaling 57,000, 444,000, 19,100, and 181,000, respectively, have not been included in the computation of diluted net income per share, as the result would be anti-dilutive.

Diluted net income per common share does not include any incremental shares related to the Notes for the three months ended September 30, 2010 and the nine months ended September 30, 2011 and 2010. Because the principal amount of the Notes will be settled in cash upon conversion if a conversion occurs, the Notes have no impact on diluted net income per common share until the price of our common stock exceeds the conversion price (initially $29.64, subject to adjustments) of the Notes. For the three months ended September 30, 2011, 49,000 shares related to the Notes were included in the computation of the diluted net income per common share because the average market price of our common stock during the three months ended September 30, 2011 exceeded the conversion price of the Notes. In addition, the diluted net income per common share does not include any incremental shares related to the exercise of the warrants for the three and nine months ended September 30, 2011 and 2010. The warrants will not have an impact on diluted net income per common share until the price of our common stock exceeds the strike price of the warrants (initially $34.875, subject to adjustments). When the market price of our stock exceeds the strike price of the warrants, as applicable, we will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon exercise of the warrants using the treasury stock method.

In addition, the call options to purchase our common stock, which we purchased to hedge against potential dilution upon conversion of the Notes (see Note 3 "Financial Statement Details — Convertible Debt"), are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the Notes.

The basic and diluted net income per share calculations for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands, except per share data, unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net income	$	2,628	$	5,585	$	8,671	$	6,965
Weighted average common shares outstanding for basic		52,517		50,810		52,188		50,339
Dilutive potential common stock outstanding:
Stock options		2,001		2,133		2,023		2,310
Restricted stock units		361		320		380		365
Employee stock purchase plan		19		15		14		18
Convertible senior notes		49		—		—		—
Weighted average common shares outstanding for diluted		54,947		53,278		54,605		53,032
Net income per share:
Basic	$	0.05	$	0.11	$	0.17	$	0.14
Diluted	$	0.05	$	0.10	$	0.16	$	0.13

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board, or FASB, updated the accounting guidance relating to the test for potential impairment of goodwill that we are required to perform annually. The updated guidance requires companies to perform the second step of the impairment test to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists because the carrying amount of a reporting unit is zero or negative. In considering whether it is more likely than not that a goodwill impairment exists, an entity shall evaluate whether there are adverse qualitative factors. The updated guidance is effective for us beginning in fiscal year 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment is effective for us beginning in fiscal year 2012. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.

In June 2011, the FASB amended requirements for the presentation of comprehensive income, to increase the prominence of other comprehensive income (OCI) in financial statements. Companies will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. This amendment eliminates the option to present other comprehensive income in the statement of stockholders' equity. The amendment is effective for us beginning in fiscal year 2012. The adoption of this guidance will not impact our financial position, results of operations or cash flows and will only impact the presentation of comprehensive income in our financial statements. The Company is currently evaluating how it will report comprehensive income, either method permitted will constitute a change in the Company's financial statement presentation.

Reclassification

Certain reclassifications have been made to the prior year's financial statements to conform to current year presentation.

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Summary Of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2011

Summary Of Significant Accounting Policies

Schedule Of Basic And Diluted Net Income Per Share Calculations

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net income	$	2,628	$	5,585	$	8,671	$	6,965
Weighted average common shares outstanding for basic		52,517		50,810		52,188		50,339
Dilutive potential common stock outstanding:
Stock options		2,001		2,133		2,023		2,310
Restricted stock units		361		320		380		365
Employee stock purchase plan		19		15		14		18
Convertible senior notes		49		—		—		—
Weighted average common shares outstanding for diluted		54,947		53,278		54,605		53,032
Net income per share:
Basic	$	0.05	$	0.11	$	0.17	$	0.14
Diluted	$	0.05	$	0.10	$	0.16	$	0.13

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Stockholders' Equity (Fair Value Of Stock Option On Grant Date, Weighted-Average Assumptions) (Details) (Stock Option [Member], USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Stock Option [Member]
Risk-free interest rate	1.90%	2.00%	2.10%	2.30%
Expected life (years)	4.5	4.4	4.4	4.6
Estimated volatility	46.80%	43.90%	47.40%	46.60%
Expected dividends	0.00%	0.00%	0.00%	0.00%
Weighted-average grant date fair value	$ 13.10	$ 8.33	$ 11.52	$ 8.01

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Summary Of Significant Accounting Policies (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Potentially dilutive shares not included in the computation of diluted net income per share	57,000	444,000	19,100	181,000
Call option strike price			$ 29.64
2.875% Convertible Senior Notes [Member]
Notes included in the computation of the diluted net income per common share	49,000
JPMorgan [Member]
Call option strike price			$ 34.875

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Condensed Consolidated Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and cash equivalents	$ 53,091	$ 43,429
Short-term available-for-sale investments	154,314	175,283
Accounts receivable, net	63,413	59,133
Inventories	46,463	40,499
Prepaid expenses and other current assets	8,673	6,643
Total current assets	325,954	324,987
Long-term available-for-sale investments	33,928	26,804
Property and equipment, net	73,411	56,503
Intangible assets, net	15,261	17,103
Goodwill	2,487	2,487
Other non-current assets	5,494	3,682
Total assets	456,535	431,566
Liabilities and Stockholders' Equity
Accounts payable	12,716	13,895
Accrued compensation	15,687	18,241
Accrued expenses and other current liabilities	14,102	21,960
Deferred revenues	6,423	5,898
Current maturities of long-term debt	72	56
Total current liabilities	49,000	60,050
Convertible senior notes	94,505	91,162
Other long-term debt	38	74
Deferred revenues	2,878	2,466
Other	3,215	3,478
Total liabilities	149,636	157,230
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at September 30, 2011 and December 31, 2010
Common stock, par value of $0.001; 250,000 shares authorized at September 30, 2011 and December 31, 2010; 52,611 and 51,366 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	53	51
Additional paid-in capital	425,101	402,895
Accumulated other comprehensive income (loss)	1,091	(593)
Accumulated deficit	(119,346)	(128,017)
Total stockholders' equity	306,899	274,336
Total liabilities and stockholders' equity	$ 456,535	$ 431,566

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Stockholders' Equity (Table Of Stock-Based Compensation Expense) (Details) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Stock-based Compensation Expense, total	$ 3,316	$ 3,048	$ 9,605	$ 9,239
Cost Of Revenue [Member]
Stock-based compensation expense	146	185	304	586
Selling, General And Administrative [Member]
Stock-based compensation expense	2,720	2,503	8,057	7,563
Research And Development [Member]
Stock-based compensation expense	$ 450	$ 360	$ 1,244	$ 1,090

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Segment And Geographic Information (Narrative) (Details)	Sep. 30, 2011	Dec. 31, 2010
United States [Member]
Percentage of long-lived assets excluding financial assets	45.20%	51.00%
Japan [Member]
Percentage of long-lived assets excluding financial assets	24.70%	34.00%
Costa Rica [Member]
Percentage of long-lived assets excluding financial assets	25.50%
Rest Of World [Member]
Percentage of long-lived assets excluding financial assets	5.00%	15.00%