VOLC 12.31.2012 10-K

10-K 1 volc1231201210-k.htm FORM 10-K VOLC 12.31.2012 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



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

For the fiscal year ended December 31, 2012



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

For the transition period from to

Commission file number 000-52045

Volcano Corporation

(Exact Name of Registrant as Specified in its Charter)



Delaware		33-0928885
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
3661 Valley Centre Drive, Suite 200
San Diego, California		92130
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(800) 228-4728

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



Title of each class		Name of each exchange on which registered
Common Stock, $0.001 per share par value		The NASDAQ Stock Market LLC

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

None

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

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

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 x 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 x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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.



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

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on June 30, 2012 (which is the last business day of registrant’s most recently completed second fiscal quarter), as reported on the NASDAQ Global Select Market was approximately $1.5 billion. Approximately 292,000 shares of common stock held by executive officers and directors on June 30, 2012 have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At February 15, 2013, 54,103,541 shares of Common Stock, par value $0.001, of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates information by reference to portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2013. Such definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2012.

VOLCANO CORPORATION

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012

TABLE OF CONTENTS




PART I
Item 1.	Business	3
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	37
Item 2.	Properties	37
Item 3.	Legal Proceedings	37
Item 4.	Mine Safety Disclosures	37

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37
Item 6.	Selected Financial Data	40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 8.	Financial Statements and Supplementary Data	59
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	101
Item 9A.	Controls and Procedures	101
Item 9B.	Other Information	103

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	104
Item 11.	Executive Compensation	104
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	104
Item 13.	Certain Relationships and Related Transactions, and Director Independence	104
Item 14.	Principal Accounting Fees and Services	104

PART IV
Item 15.	Exhibits, Financial Statement Schedules	105
SIGNATURES		111
EXHIBIT INDEX

Forward-looking statements: This annual report on Form 10-K (“Annual Report”) contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” "could," “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” "intends" or “continues” or the negative of those words and other comparable words. Forward-looking statements include, but are not limited to, statements about:


•	our intentions, beliefs and expectations regarding our expenses, sales, operations and future financial performance;


•	our operating results;


•	our plans for future products and enhancements of existing products;


•	anticipated growth and trends in our business;


•	the timing of and our ability to maintain and obtain regulatory clearances or approvals;


•	our belief that our cash and cash equivalents and short-term available-for-sale investments will be sufficient to satisfy our anticipated cash requirements;


•	our expectations regarding our revenues, customers and distributors;


•	our beliefs and expectations regarding our market penetration and expansion efforts;


•	our expectations regarding the benefits and integration of recently-acquired businesses and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;


•	our anticipated trends and challenges in the markets in which we operate; and


•	our expectations and beliefs regarding and the impact of investigations, claims and litigation

These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed here. For a detailed discussion of the risks and uncertainties that could contribute to such differences see the “Risk Factors” section in Part I, Item 1A of this Annual Report as well as the discussion in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere throughout this Annual Report and in any other documents incorporated by reference into this Annual Report. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report.

Volcano has registered and common law trademarks in the U.S. and elsewhere in the world including, but not limited to, Axsun^®, ChromaFlo^®, ComboMap^®, ComboWire^®, Eagle Eye^®, iFR™, GlyDx^®, PrimeWire^®, PrimeWire Prestige^®, Revolution^®, s5™, s5i^®, SmartMap^®, SpinVision^®, Valet^®, VH^®, VIBE^® and VOLCANO^®. Other brand names or trademarks appearing in this Annual Report are the property of their respective holders.

PART I



Item 1.	Business

Overview

We design, develop, manufacture and commercialize a broad suite of precision guided therapy tools including 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 diagnostic angiograms, percutaneous interventional, or PCI, therapy procedures in the coronary arteries or peripheral arteries and veins. We are facilitating the adoption of functional PCI, in which our FFR technology is used to determine whether or not a stent is necessary, and IVUS is used to guide stent placement and optimization. We market our products to physicians, nurses and technicians who perform a variety of endovascular based coronary and peripheral interventional procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals.

Our products consist of multi-modality consoles that 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, image-guided therapy catheters and Medtronic's Pioneer reentry device.

pressure. We are developing additional offerings for integration into the platform, including adenosine-free Instant Wave-Free Ratio FFR, or iFR, forward-looking IVUS, or FL.IVUS, catheters, Forward-Looking Intra-Cardiac Echo, or FL.ICE, catheters, high resolution Focal Acoustic Computed Tomography, or FACT, catheters, and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters. Our Valet microcatheter, Visions PV .035 catheter and Short Tip Eagle Eye Platinum, or EEP, products received 510(k) clearance and CE Mark approval in 2012. Our Preview™, the first generation FL.IVUS device, received CE Mark for peripheral indications in 2012.

Through Axsun Technologies, Inc., or Axsun, one of our wholly-owned subsidiaries, we also develop and manufacture optical monitors for the telecommunications industry, laser and non-laser light sources, 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.

We believe the broader market for intra-body imaging and sensing products will grow from approximately $332 million in 2006 to approximately $2.7 billion by 2021, representing a compound annual growth rate, or CAGR, of approximately 15%. Within this broader market, we estimate that the current market for our IVUS, FFR and Axsun products is approximately $750 million. We base our estimated market sizes in part on discussion with market analysts and on our internal assessment of our historical and projected sales and those of our competitors. We believe the IVUS market is growing at approximately 3.5% annually and the FFR market is growing at approximately 20-30% annually, and we expect that these markets, together with the market for our Axsun products, could grow to more than $1.1 billion in the next five years. For example, we believe that the FFR market alone grew at a CAGR of more than 30% from 2008 to 2012, largely as a result of published findings from the Fractional Flow Reserve versus Angiography for Multivessel Evaluation, or FAME, and Fractional Flow Reserve-Guided PCI versus Medical Therapy in Stable Coronary Disease, or FAME 2, studies. In addition, we have a number of products in development, including IVUS-guided therapies, FL.IVUS, OCT, micro-catheter technologies and optical and micro-electro-mechanical systems for use in telecommunications, industrial spectroscopy or medical OCT applications, and thrombectomy devices. Many of these products in development leverage our existing platform technology and represent an aggregate estimated addressable market opportunity of up to $5 billion.

We have focused on building our domestic and international sales and marketing infrastructure to market our products to physicians and technicians who perform PCI and vascular procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals. We sell our products directly to customers in the United States, Japan, certain European markets and South Africa. We utilize distributors in other geographic areas, which are also involved in product launch planning, education and training, physician support and clinical study management.

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 multi-modality and FFR consoles and our IVUS and FFR single-use disposables. Our industrial segment derives revenues related to the sales of micro-optical spectrometers and optical channel monitors by Axsun to telecommunication and industrial companies. We continue building direct sales capabilities in the U.S., certain parts of Europe, South Africa, and Japan. During the year ended December 31, 2012, we generated worldwide revenues of $381.9 million, which is comprised of $371.1 million from our medical segment and $10.7 million from our industrial segment, and had operating income of $19.6 million. Our total assets as of December 31, 2012 were $902.3 million. Our revenue, operating income and other financial results for the last three fiscal years are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” sections contained in this Annual Report. At December 31, 2012, we had a worldwide installed base of more than 7,700 consoles. We intend to grow and leverage this installed base of consoles to drive recurring sales of our single-use disposable catheters and guide wires, which accounted for approximately 81% of our medical segment revenues during the year ended December 31, 2012. In 2012, approximately 47% of our revenues were generated in the U.S., approximately 32% were generated in Japan, and approximately 15% were generated in Europe, the Middle East and Africa, with the balance of sales occurring in other international markets.

Our Strategy

Our long-term growth strategy incorporates expansion of our existing businesses, commercialization of new products and licensing or acquiring new technologies. The core of this strategy is offering a multi-modality platform that seeks to deliver all of the benefits associated with conventional IVUS and FFR devices, while providing enhanced functionality and proprietary features that address the limitations associated with conventional forms of these technologies. We are seeking to make precision-guided, functional PCI a standard of care and to position us as a leading provider of precision-guided therapy. We believe that recent clinical data from studies involving IVUS and FFR, as well as updated clinical guidelines elevating the use of these technologies, will help drive market adoption. For example, data released in 2012 from the ADAPT-DES study (Assessment of Platelet Therapy with Drug-Eluting Stents), the largest study conducted with IVUS guidance to date, indicated IVUS guidance results in better patient outcomes and fewer complications at 30 days and 12 months compared to procedures

without IVUS. In addition, we have a number of new offerings under development that will further leverage our multi-modality platform. Factors driving our strategy include:

•

Accelerating the trend toward less invasive procedures. Our IVUS products offer continuous, real-time three-dimensional imaging, plaque visualization, color-coded identification of plaque composition, and automatic drawing of lumen and vessel borders allowing for automatic vessel sizing. Our FFR products offer physicians a simple pressure and flow based method to determine whether stenting or additional PCI is required. This strategy complements our focus on precision-guided therapy by providing sophisticated guidance tools that enhance the value of minimally invasive procedures.


•	Enhancing the outcomes of PCI procedures. We believe our products enabled with novel technological enhancements provide clinically significant information that improves the outcomes of current and increasingly complex PCI procedures.


•	Providing documentation for necessity of procedures. Increasingly, hospitals and third-party payors are requesting proof of necessity for PCIs. We believe our IVUS and FFR technologies can assist clinicians in documenting the clinical necessity of these procedures.

•

Decreasing the number of interventional devices used per procedure and optimizing their usage. Our FFR products offer the opportunity to physiologically assess lesion severity and determine whether stents are needed. Additionally, our IVUS products provide intra-vascular imaging. As a result, our IVUS and FFR products have the potential to reduce the number of devices deployed by identifying the appropriate lesion for stenting and ensuring that stents are placed and expanded correctly, thereby enhancing patient outcomes and lowering treatment costs.


•	Improving ease of use of IVUS and FFR technologies to drive market adoption. We have designed our console offerings to be “always there, always on, and easy to use.” Our consoles are easily integrated into an existing or newly constructed cath lab facility.


•	Improving the diagnosis of cardiovascular disease. We believe our VH IVUS products can significantly improve the diagnosis of cardiovascular disease by addressing the limitations of diagnostic angiography, and allowing clinicians to identify patients and lesions at risk for future adverse coronary vascular system events.

•

Enabling new procedures to treat coronary artery disease peripheral artery disease and structural heart disease. Currently, the treatment of a number of vascular and structural heart diseases, including coronary, peripheral and carotid artery disease and atrial fibrillation, is limited by conventional catheter-based techniques and angiography. Because our technologies address many of these current limitations, we believe our products provide physicians the potential to diagnose and, optimally treat these diseases percutaneously, and may address limitations in the treatment of structural heart disease.

Our goal is to establish our IVUS and FFR products as the standard of care for PCI diagnostic and therapeutic procedures and expand the use of IVUS and FFR for these procedures. The key elements of our strategy for achieving this goal are to:

•

Grow existing IVUS and FFR Markets globally. We believe that most PCI procedures today, particularly those of a more complex nature, benefit greatly from more precise guidance than angiography alone can provide. We believe that by making our devices easier to use and enabling faster interpretation of images, investing in thoughtful clinical studies and registries that prove the benefits of our technologies, educating physicians and hospital executives on the clinical need for our products and existing guidelines, training staff on the procedural use of our products, and providing access to all patients through the expansion of our installed base, we can continue to grow and cultivate the current PCI market which represents, on an annual basis, more than three million procedures worldwide. We also plan to develop a portfolio of image guided therapy devices.

•

Increase market share in existing IVUS and FFR markets. We continue to introduce product enhancements to meet physicians’ needs for improved visualization, characterization, and ease of use. We believe these enhancements make our products easier to use than competing products and provide substantially more and better information to improve procedural outcomes, thereby driving greater usage of our IVUS and FFR products within the existing PCI market. We believe we are the market leader in the IVUS market and intend to implement several strategies to increase our penetration in the FFR market. First, we have addressed limitations of conventional IVUS such as difficulty in use, lack of automation and grayscale imaging by developing technologies and introducing features such as automatic real-time drawing of lumen and vessel borders, color-coded identification of plaque composition, and automatic vessel sizing. Second, we developed PC-based IVUS and FFR consoles that can be integrated easily into cath labs, thereby making it easier for physicians to adopt and use our products. Third, we have increased the size of our direct sales force and initiated direct distribution strategies in key geographies. We have also entered into distribution and marketing agreements with leading cath lab equipment and stent manufacturers. We intend to grow and leverage our

installed base of IVUS and FFR consoles to drive recurring sales of our single-procedure disposable catheters and guide wires.

•

Expand our existing technologies to serve new markets. We plan to utilize our existing diagnostic technologies, including FFR and IVUS, to address new markets. The nearest term opportunity is in the peripherals vasculature, where we believe IVUS and FFR enable enhanced decision-making by clinicians versus the use of angiography alone. Current and potential IVUS applications include stenting in the iliac, femoral and below-the-knee arteries, atherectomy, inferior vena cava, or IVC, filter placement, and compressive and thrombotic venous disease. We believe FFR has several applications as well, including the assessment of gradients in lower limb arteries to determine treatment needs. As we pursue opportunities in this market, we plan to develop new IVUS and FFR products and develop or acquire therapeutic products that have clinical synergies with our diagnostic technologies. In addition, we plan to explore product development and marketing partnerships with other leading companies in the sector.

•

Develop new products that enable us to address new markets. We plan to leverage our current technology and develop new technology to expand into new markets and increase clinical applications through clinical studies, conducted by us or in collaboration with other companies. This includes programs for (1) IVUS guided therapy products that combine IVUS with balloons and potentially other therapeutic devices, (2) micro-catheter technologies for use in coronary, peripheral and other vascular applications, (3) FL.IVUS for applications including chronic total occlusions in the coronary and peripheral arteries, and Forward-Looking Intra-Cardiac Echo , or FL.ICE, for other structural heart applications, (4) OCT light-based imaging systems, which we believe can be used in coronary, peripheral and other vascular applications, and (5) optical and micro-electro-mechanical systems technologies in telecommunications, industrial spectroscopy or medical OCT applications, including ophthalmology and dentistry.

•

Enhance product capabilities and introduce new products through collaborations or acquisitions. We have a successful track record of acquiring and licensing technologies and collaborating with third parties to create synergistic product offerings. For instance, we licensed the iFR technology from Imperial College and FACT technology from The Cleveland Clinic Foundation. Since December 2007, we have acquired seven companies: CardioSpectra, Inc.; Novelis, Inc.; Impact Medical Technologies, LLC; Axsun; Fluid Medical, Inc; Sync-Rx Ltd.; and Crux Biomedical, Inc. The technologies obtained from these acquisitions form the foundation of many of the new technologies and products we expect to introduce. We believe there will be additional opportunities to leverage these capabilities through select technology or company acquisitions as well as collaborations that enhance our capabilities or complement our markets.

Our Products

Our multi-modality consoles are marketed as stand-alone units or units that can be integrated into cath labs. We offer consoles that combine IVUS and FFR technology, which are designed to allow the user to switch seamlessly between each modality. We also offer systems with either IVUS or FFR. The significantly expanded functionality of our offering enables the networking of patient information, control of IVUS and FFR information at both the operating table and in the cath lab control room, as well as the capability for images to be displayed on standard cath lab monitors. Our products include IVUS catheters, FFR guide wires, thrombus aspiration devices, and various options that provide additional functionality. We expect to continue developing new products and technologies to expand the market adoption of our offering, and also expect our platform will support IVUS integrated with other interventional devices in the future.

Consoles

We design, develop, manufacture and commercialize multi-modality consoles that are proprietary, high-speed electronic systems that process the signals received from our IVUS catheters and wires. These consoles generate high-resolution images that can be displayed on a monitor and can be permanently stored on the system or another medium. Our consoles are mobile, proprietary and high speed electronic systems with different functionalities and sizes designed and manufactured to process the signals received only from our catheters and guide wires. Our IVUS market strategy includes offering devices to clinicians that are easy to use, reduce procedure times and provide a higher level of information. We have a family of consoles including our PC-based s5 and the IVUS In-Vision Gold, or IVG. The s5 family of consoles, which became our primary console product offering following its full commercial launch in July 2006, is smaller, lighter and less expensive to manufacture than our IVUS IVG console, and has enhanced functionality. The s5 family includes:


•	s5: We believe this portable and mobile console is the lightest product on the market, and has a simple user interface.


•	s5i: This console is made up of components that can be customized to each cath lab’s specifications and integrated into virtually any cath lab while retaining the full functionality of the s5 system. When the s5i is integrated into the cath lab, it works seamlessly with the workflow of the cath lab in terms of acquiring and archiving patient images and data.

Both platforms support digital IVUS, rotational IVUS, FFR, VH IVUS and ChromaFlo as well as our planned future offerings.

In November 2012, we acquired Sync-Rx Ltd, or Sync-Rx, an Israel-based company that develops advanced software applications designed to optimize and facilitate trans-catheter cardiovascular interventions using automated online image processing. We believe that the Sync-Rx technology will provide us with a platform on which to build a range of advanced software features that will aid clinical decision-making by providing angiography and intra-body image enhancement, measurement and non-invasive imaging and intravascular co-registration capabilities, and create future opportunities in physiology and peripheral and minimally invasive structural heart therapy guidance.

Our IVUS Products

Catheters. Our single-use disposable catheters operate and interface solely with our family of consoles. We are the only company that offers both digital and rotational catheters. We believe this allows us to meet the needs of a greater number of physicians than our competitors. Our IVUS catheters vary in their principal uses, frequencies, shaft sizes, shaft lengths, guide wire compatibility and distal tip lengths. These differences allow for the use of different catheters in various portions of the vascular system.

We launched our latest generation digital catheter, the Eagle Eye Platinum Digital IVUS Catheter, commercially in May 2010. In September 2012, we introduced a new, short tip version of the Eagle Eye Platinum IVUS catheter that enables clinicians to get closer to a chronic total occlusion. During 2013, we expect to obtain clearance from the U.S. Food and Drug Administration, or FDA, for and begin commercial sales of our FACT catheter, which is designed to provide a higher level of ultrasound resolution imaging than is available with current IVUS ultrasound catheters. In addition, we plan to introduce a new peripheral IVUS catheter.

Additional Functionality. Our IVUS products incorporate key features that add valuable clinical functionality addressing a number of the historical limitations of conventional IVUS. We intend to develop additional functionality in the future. Currently, we offer:

ChromaFlo. Angiography alone does not always identify malapposed stents because the contrast injection that makes the lumen visible on x-ray can flow inside the stent, and in between the stent and vessel wall. When this occurs, the stent struts are too small to compete with the dark lumen of the x-ray, leaving the two dimensional image inconclusive or misleading. ChromaFlo stent apposition analysis uses sequential IVUS frames to differentiate circulating blood from stationary or anchored tissue. ChromaFlo can be particularly important when assessing stent placement as the detailed cross-sectional image clearly identifies moving blood inside and outside of the stent lumen, prompting physicians in many cases to expand the stent until all of the blood appears inside of the stent lumen. ChromaFlo can also help with the identification of luminal structures such as lumen border, bifurcations, dissections, and thrombus.

VH IVUS. Conventional IVUS allows the visualization of atherosclerotic plaque. However, it is limited to a subjective, and therefore qualitative, review of vascular and plaque dimensions and composition. Our VH IVUS product allows, for the first time, easy to read and interpret IVUS images with color-coded identification of plaque composition. Additionally, a key element of the VH IVUS product is the capability to provide automatic identification of lumen and vessel borders. This feature enables automated vessel sizing, which makes it easier and faster to use our IVUS products. Finally, our VH IVUS functionality offers the potential to determine plaque vulnerability and therefore stratification of risk. We have developed fully functional devices for each of these technologies and have used them in clinical studies. In January 2011, the New England Journal of Medicine published results from our clinical study Providing Regional Observations to Study Predictors of Events in the Coronary Tree, or PROSPECT, an international multi-center study, which demonstrated that VH IVUS tissue characterization software enables physicians to more accurately assess the risk of individual blockages than the use of the current standard-of-care—angiographic imaging—alone. The PROSPECT results demonstrated the ability to use VH IVUS functionality to identify high-risk plaques that could potentially be treated to prevent future events, and low-risk plaques that may not need intervention. We are in the process of participating in several additional clinical studies to correlate plaque vulnerability to its clinical significance and risk, and believe that these data will lead to further utilization of VH IVUS to triage coronary lesions.

Our FFR Products

Our FFR products consist of pressure and flow consoles and single-procedure disposable pressure and flow guide wires. We believe we are the only company that offers a full line of pressure and flow guide wires as well as a guide wire that can measure both pressure and flow. In addition, our FFR products are integrated with our s5 family of multi-modality consoles. In August 2010 and November 2011, we commercially launched PrimeWire and PrimeWire PRESTIGE PLUS, respectively, our latest generation of pressure guide wires. In October 2012, we announced the global launch of our PrestigePlus pressure guide wire with AccuSense Technology, the latest innovation to our FFR product line, which allows for more precise measurement

when distal pressure is monitored for longer periods of time. In addition, we believe we are the only company working on the development of iFR functionality, which is an FFR technology that does not require the administration of adenosine, used to widen blood vessels prior to the procedure. As a result, by enabling cardiologists to perform FFR without adenosine, iFR functionality has the potential to expand the patient population that could be diagnosed using FFR, and reduce the costs and time associated with its use.

We believe that favorable trial data relating to the measurement of FFR in addition to angiography will lead to further adoption of FFR technology by clinicians. In September 2009, published findings from the FAME study demonstrated that patients in the study with multi-vessel coronary artery disease who were treated by FFR guidance had a 34% reduction in death and myocardial infarction (heart attack) compared to angiographic guidance alone. In August 2012, the results of the FAME 2 study were published in the New England Journal of Medicine. FAME 2 showed that patients receiving PCI with proven ischemia (restriction of blood flow) by FFR had 66% fewer primary endpoint events including death, myocardial infarction and urgent revascularizations (e.g. coronary bypass) than those patients treated with optimal medical therapy alone. We believe these findings will continue to drive the growth and adoption of our disposable FFR wire products.

Product Expansion

We currently have a number of products under development that will leverage our existing platform technology and we believe will expand our presence in interventional medicine and related markets. Our product pipeline includes:

Micro Catheters

In January 2012, we received 510(k) clearance for the Valet Micro catheter, which can be used to facilitate PCI procedures when Chronic Total Occlusions (CTOs) are present. The Valet is expected to be used as a conduit for the exchange and/or support of guide wires in peripheral and coronary vascularizations. We initiated a limited market release of the product in the United States in August 2012.

Forward Looking Imaging (FL.IVUS/FL.ICE)

A principal area of focus for us is the development of our forward-looking advanced imaging technologies. These proprietary technologies have potential applications for a number of minimally invasive diagnostic and therapeutic applications in the coronary, peripheral and structural heart vasculature (arrangement of blood vessels). Our strategy is to integrate these offerings into our s5 family of consoles and target markets such as chronic total occlusions and other coronary, peripheral and structural heart indications.

Optical Coherence Tomography (OCT)

We are developing our OCT products to complement our existing product offerings and further enhance our position as an imaging technology leader in the field of interventional medicine. Our early model OCT systems have been used in several clinical settings in Europe and South America. We believe our OCT products will be an important addition to our product line, as we expect that our OCT offerings will allow us to expand our reach into clinical situations where extremely high resolution imaging is paramount by providing high quality visualization of stent expansion and apposition. Our goal is to integrate this OCT functionality directly into our s5i integrated imaging suite of products. Our OCT system is designed to allow fast, easy imaging of highly detailed structures in the vasculature, including vessel wall defects, intra-luminal thrombus and stent struts. Our OCT resolution is able to visualize even very thin layers of cells covering drug eluting stent struts at follow-up. However, unlike IVUS, OCT cannot see through blood and requires contrast injections while imaging. OCT also does not penetrate the vessel wall, so only measurements within the lumen and the first one to two millimeter of the lumen wall are possible. This means that the user cannot measure the full volume and type of plaque or provide the ability to visualize from vessel wall to vessel wall in the presence of coronary disease. We believe OCT will complement IVUS in its ability to see small luminal structures. This will predominantly be a clinical research tool initially until further clinical data can be developed to understand how OCT can be applied to daily PCI practice.

Image Guided Therapies

In December 2012, we acquired Crux Biomedical, Inc., or Crux, a private company developing a number of products designed to capture emboli (blood vessel package) and other debris through the vasculature. These include the Crux VCF System, a retrievable IVC filter to prevent pulmonary embolism (blockage of main artery of the lung). The Crux VCF received a CE Mark in December 2011 and 510(k) clearance in July 2012. We believe the Crux IVC filter product, combined with our IVUS technology, can upon regulatory approval, add significant clinical and economical value to our customers. Also in 2011, we completed a supply agreement with ev3, Inc., or ev3, a subsidiary of Covidien Public Limited Company, under which we will supply our proprietary IVUS technology for use in ev3's Plaque Excision System-catheters that remove plaque blocking peripheral arteries and interrupting blood flow.

Clinical Program

Our clinical studies are generally post-marketing studies using FDA-cleared and/or CE-marked products intended to provide data regarding diagnostic effectiveness and disease treatment outcomes, as well as the potential value of our products in providing therapy in markets and indications such as stent placement and optimization, plaque assessment and therapy guidance in the coronary and carotid arteries.

Our significant clinical studies include:

Assessment of Dual Anti-Platelet Therapy with Drug Eluting Stents (ADAPT)

This was a multi-center registry with over 8,500 patients enrolled, with 3,349 patients undergoing PCI with IVUS Guided PCI versus Angiography alone. The study represents the current clinical practice patterns based on the type of stents implanted and the type of medication regime the patient followed. This large data set concluded that IVUS guided PCI is safe and generated better clinical outcomes, even in high risk groups. Volcano IVUS influenced the change of therapy 75% of the time, mostly resulting in the placement of larger or longer stents and using IVUS to determine stent apposition resulting in stent dilatation. Both acute (defined as less than 30 days) and at one year follow up between IVUS-Guided PCI versus. Angiography alone resulted in a 33% reduction in myocardial infarction (MI), a50% reduction in stent thrombosis (ST) and a 38% reduction in ischemic TVR.

International Study of Comparative Health Effectiveness with Medical and Invasive Approaches (ISCHEMIA)

This is a randomized controlled trial that will study 8,000 patients with stable ischemic heart disease (SIHD) and moderate to severe ischemia. Patients will be randomized to invasive strategy with catheriziation/revascularization plus optimal medical therapy (OMT) versus a conservative strategy with OMT and catheriziation reserved for refractory symptoms or ACS. The study, funded by one of the largest grants ever awarded by the NIH/NHLBI for a comparative effectiveness trial, will enlist the collaboration of more than 150 medical centers around the U.S. and hundreds of sites in 33 countries globally. The ISCHEMIA trial enriches the population of patients enrolled by requiring documented proof of ischemia using non-invasive methods prior to enrollment and FFR during the procedures. Enrollment began in the third quarter of 2012 and is expected to continue for several years.

Adensonine Vasodilation Independent Stenosis Evaluation (ADVISE)

ADVISE was a pilot study to assess the ability of an investigational product, iFR, to provide a measurement of the severity of a coronary stenosis that is similar to FFR without the need for pharmacologic vasodilation. The results were presented during the Late Breaking Clinical Trial sessions at the TCT conference in November 2011. iFR was developed by physician-scientists at Imperial College London in partnership with us. ADVISE was an international multi-center study supported by Volcano and studied 157 stenoses in 131 patients to validate the iFR technology. iFR collected closely with FFR (r=0.90, p>0.001) with excellent diagnostic efficiency with receiver operating characteristic area under curve of 93 percent and overall diagnostic accuracy of 88 percent. We believe these outcomes demonstrate that the removal of adenosine from an FFR procedure would reduce costs and potential patient adverse events, and streamline workflow.

Adenosine Vasodilation Independent Stenosis Evaluation II (ADVISE II)

ADVISE II is a study focused on further understanding of iFR. The study will include a larger number of lesions, as a follow-on to ADVISE. It will be a prospective, global, multi-center study intended to generate data to support global regulatory submissions for the iFR technology. Enrollment is underway.

Evaluation of XIENCE PRIME^TM or XIENCE V^® versus Coronary Artery Bypass Surgery for Effectiveness of Left Main Revascularization (EXCEL)

EXCEL is a prospective, unblinded, randomized multi-center trial involving approximately 2,600 patients with left main coronary artery, orULMCA, disease and treatment groups of stenting with XIENCE PRIME or XIENCE V Everolimus Eluting Coronary Stent System versus coronary artery bypass grafting. Further, there will be a universal registry of approximately 1,000 patients who have angiographically significant left main disease but are not eligible for the randomized trial. All patients who are randomized to the PCI arm and have IVUS performed during the procedure will be included in the IVUS substudy. The purpose of the substudy is to determine how acute IVUS results will correlate with outcomes. There will be up to 160 global sites participating. Enrollment commenced in Europe in December 2010 and in the U.S in November 2011. Enrollment is expected to take approximately two years.

Sales, Marketing and Distribution

We sell consoles and disposables through our own direct sales force and distributors. In addition, we sell our consoles through our supply and distribution agreements with third parties. Our strategy is to leverage our installed base of consoles to

drive recurring sales of our proprietary disposables. We provide training and clinical support to users of our products to increase their familiarity with product features and benefits, thereby increasing usage.

We have direct sales capability in the U.S., certain parts of Europe, Japan and South Africa. We intend to continue to increase our direct sales personnel over time. At December 31, 2012, we had over 325 direct sales and support professionals, including 179 in the U.S., 81 in Japan, and 58 in Europe and the remaining in other geographies. In addition, we have numerous distributor relationships in these and other geographic areas.

In 2011, we completed our strategy to convert from a third-party distribution model in Japan to a direct sales model, a process we began in 2009. We previously sold our IVUS and FFR products in Japan primarily through three direct distributors: Goodman Company Ltd., or Goodman, Fukuda Denshi Co., Ltd., or Fukuda, and Johnson & Johnson K.K., Cordis Division, or Johnson & Johnson. In 2009, we terminated our distribution relationship with Goodman and implemented a direct sales program to replace that relationship. In 2010, we entered into an agreement to terminate our distribution agreement with Fukuda. In 2011, we ended our agreement with Johnson & Johnson. As a result, all of our business in Japan is now served by the Company’s direct sales force. We currently support our Japanese customers through our Tokyo-based subsidiary, Volcano Japan Co., Ltd., or Volcano Japan.

In Europe, we distribute our IVUS and FFR products through our subsidiary, Volcano Europe, B.V.B.A., or Volcano Europe. We sell our products directly to customers in certain European markets and utilize distributors in other European markets.

We have marketing agreements with leading healthcare company partners or their affiliates, including Medtronic, Inc., or Medtronic, General Electric Company, Siemens AG, Philips Medical Systems Nederland B.V., and Abbott. These agreements allow us to coordinate our marketing efforts with our strategic partners while still dealing directly with the customer.

At December 31, 2012, our global marketing team was comprised of 49 individuals, covering product management, corporate communications and programs, clinical support, and education and training. We devote significant resources to training and educating physicians in the use and benefits of our products. We also promote our products through medical society meetings attended by interventionists.

Our relationships with physician thought leaders in interventional cardiology are an important component of our selling and marketing efforts. These relationships are typically built around research collaborations that enable us to better understand and articulate the most useful features and benefits of our products, and to develop new solutions to challenges in PCI medicine.

Financial Information About Geographic Areas

The following table sets forth our revenues by geography expressed as dollar amounts (in thousands):



	Years Ended December 31,						Percentage Change
	2012		2011		2010		2011 to 2012		2010 to 2011
Revenues (1):
United States	$	177,992	$	157,412	$	134,645	13.1	%	16.9	%
Japan	123,558		105,892		79,277		16.7		33.6
Europe, the Middle East and Africa	57,913		60,249		57,614		(3.9	)	4.6
Rest of world	22,403		19,993		22,610		12.1		(11.6	)
	$	381,866	$	343,546	$	294,146	11.2	%	16.8	%


(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 December 31, 2012, approximately 42% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 42% were located in Costa Rica, approximately 12% were located in Japan, and less than 5% were located elsewhere.

At December 31, 2011, approximately 45% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 30% were located in Costa Rica, approximately 21% were located in Japan, and less than 5% were located elsewhere.

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 elsewhere.

Our international operations expose us and our representatives, agents, and distributors to risks inherent in operating in foreign jurisdictions, including the risks described in “Risk Factors—The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.”

Competition

We compete primarily on the basis of our ability to assist in the diagnosis and treatment of vascular diseases safely and effectively, with ease and predictability of product use, adequate third-party reimbursement, brand name recognition and cost. We believe that we compete favorably with respect to these factors, although there can be no assurance that we will be able to continue to do so in the future or that new products that perform better than those we offer will not be introduced. We believe that our continued success depends on our ability to:


•	innovate and maintain scientifically advanced technology;


•	apply our technology across products and markets;


•	successfully market our products;


•	develop proprietary products;


•	successfully conduct clinical studies that expand our markets;


•	obtain and maintain patent protection for our products;


•	secure and preserve regulatory approvals;


•	achieve manufacturing efficiencies;


•	attract and retain skilled personnel; and


•	successfully add complementary offerings and technology through acquisitions, licensing agreements and strategic partnerships.

Our primary imaging competitor globally is Boston Scientific, Inc., or Boston Scientific, but we also compete with Terumo Corporation in Japan. In the FFR market, our primary competitor is St. Jude Medical, Inc., or St. Jude, which acquired Radi Medical Systems AB, or Radi, in 2008. Because of the size of the vascular market opportunities, competitors and potential competitors have dedicated and will continue to dedicate significant resources to aggressively promote their products. New product developments that could compete with us more effectively are likely because the vascular disease market is characterized by extensive research efforts and technological progress. For example, OCT represents a potentially competitive technology with our IVUS technology. Competitors may develop technologies and products that are safer, more effective, easier to use or less expensive than ours.

We have encountered and expect to continue to encounter potential physician customers who, due to existing relationships with our competitors, are committed to or prefer the products offered by these competitors.

Through the Axsun subsidiary we compete on the basis of leading technology, high quality and the enhanced productivity that our products offer to customers in a variety of industries, including telecommunications, pharmaceutical manufacturing, high-speed industrial process control, chemical and petrochemical processing, medical diagnostics, and scientific discovery. Products developed by competitors based on lower performance tunable filter technology could compete on the basis of lower cost. In addition, customers may build similar functionality directly into their products. Our primary competitors in the telecommunications market include Optoplex Corporation, Aegis Lightwave, Inc. and BaySpec, Inc.

We expect that competitive pressures may result in price reductions and reduced margins over time for our products. Our products may be rendered obsolete or uneconomical by technological advances developed by one or more of our competitors.

Additional information regarding the risks associated with our competitive position and environment is described in “Risk Factors—Risks Related to Our Business and Industry.”

Intellectual Property

We believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain the proprietary aspects of our technologies. We rely on a combination of patent, trademark, trade secret, copyright and other intellectual property rights and measures to aggressively protect our intellectual property.

We require our employees and consultants to execute confidentiality agreements in connection with their employment or consulting relationships with us. We also require our employees and consultants who work on our products to agree to disclose and assign to us all inventions conceived during the term of their employment, while using our property or which relate to our business. Despite measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, our competitors may independently develop similar technologies.

The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the risk of an infringement claim against us grows. While we attempt to ensure that our products and methods do not infringe other parties’ patents and proprietary rights, our competitors may assert that our products, and the methods we employ, are covered by patents held by them. In addition, our competitors may assert that future products and methods we may employ infringe their patents. If third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling the affected product. For example, in July 2010, St. Jude sued us for patent infringement alleging products that have been on the market for more than ten years infringe upon St. Jude’s patents. Additional information regarding our litigation with St. Jude is provided in Note 4 “Commitments and Contingencies – Litigation” to our consolidated financial statements and risks related to our intellectual property rights are described in “Risk Factors—Risks Related to Our Intellectual Property and Litigation.”

Patents and Trademarks

We continue to expand and protect our intellectual property position. At December 31, 2012, we had a broad portfolio of over 350 owned or licensed U.S. and international patents and over 435 pending applications for owned or licensed patents. Our patents expire at various dates through 2032. We intend to continue to expand our intellectual property position to protect the design and use of our products, principally in the areas of IVUS, FFR, OCT imaging and image guided therapies for the diagnosis and guidance of treatment of vascular and structural heart disease. We continue to invest in internal research and development of concepts within our current markets and within other potential future markets. This enables us to continue to build our patent portfolio in areas of company interest.

Additionally, we utilize trademarks, trade names or logos in conjunction with the sale of our products. We currently have registered and common law trademarks in the U.S. and elsewhere in the world including, but not limited to, Axsun^®, ChromaFlo^®, ComboMap^®, ComboWire^®, Eagle Eye^®, iFR™, GlyDx^®, PrimeWire^®, PrimeWire Prestige^®, Revolution^®, s5™, s5i^®, SmartMap^®, SpinVision^®, Valet^®, VH^®, VIBE^® and VOLCANO^®.

Research and Development

Our research efforts are directed towards the development of new products and technologies that expand our existing platform of capabilities and applications in support of PCI. At December 31, 2012, our research and development staff consisted of 227 full-time engineers and technicians. The majority of this staff is located in Rancho Cordova, California. We also have research and development staff in San Diego, California; Menlo Park, California; Mountain View, California; Billerica, Massachusetts; Cleveland, Ohio; Forsyth County, Georgia and Netanya, Israel. Our research and development staff is focused on the development of new multi-modality systems and catheters, FFR consoles and guide wires, image-guided therapy systems, OCT and additional clinical applications that support our core business objectives.

Our product development process incorporates teams organized around each of our core technologies, with each team having representatives from research and development, marketing, regulatory, quality, clinical affairs and

manufacturing. Our team sets development priorities based on communicated customer needs. The feedback received from beta testing is incorporated into successive design iterations until a new product is ready for release.

Our research and development expenses were $55.5 million, $53.1 million, and $42.5 million in 2012, 2011 and 2010, respectively. These totals include expenses related to research and development, clinical and regulatory affairs. In addition, in 2010 we recorded a $3.0 million reduction in in-process research and development expenses related to the reversal of expenses recognized in the prior year for a development milestone related to the acquisition of the FL.IVUS program from Novelis, as we believed we would no longer achieve the milestone.

Manufacturing

Our manufacturing facilities are located in Rancho Cordova, California, where we produce multi-modality consoles, FFR consoles, IVUS catheters and FFR guide wires, and Billerica, Massachusetts, where we produce our 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. In addition, during the second quarter of 2012, we received FDA clearance and commenced manufacturing of disposables at our new plant in Costa Rica.

Our console manufacturing strategy is to use third-party manufacturing partners to produce circuit boards and mechanical sub-assemblies. We perform incoming inspection, final assembly and product testing to assure quality control. Our manufacturing strategy for our single-procedure disposable products is to use third-party manufacturing partners for certain proprietary components used in the final assembly. We perform incoming inspection on these components, assemble them into finished devices and test the final product to assure quality control. A portion of the scanner and sensor manufacturing is performed at third party contractors’ facilities using automated assembly processes and equipment. We are dependent on these third parties for day-to-day control and protection of their systems. We conduct the remaining process operations including final testing on the scanners and sensors at our Rancho Cordova facility. We aim to continuously improve our manufacturing processes to reduce costs and improve margins. We believe that by moving to PC-based consoles and improving our manufacturing processes through broad adoption of lean principles, selective use of automation and continuous design enhancements, we will be able to continue to reduce the cost to manufacture our consoles and single-procedure disposable products.

We manufacture our products in accordance with FDA required global regulations. We believe we are in material compliance with the U.S., European, Japanese, and Costa Rica regulations. The FDA and the European Union Notified Body have both inspected our manufacturing facilities in Rancho Cordova during the last 20 months. The European Union Notified Body inspected our manufacturing facilities in Costa Rica in 2012. The control systems for our optical and laser products are certified under ISO 9001:2008.

Government Regulation

Our medical device products are subject to extensive and rigorous regulation by the FDA, as well as other federal and state regulatory bodies in the U.S. and comparable authorities in other countries. We currently market our products in the U.S. under authorizations from the FDA, which are based on clearances of pre-market notification submissions, or 510(k); or approval of premarket approval applications, or PMA. If we seek to market new products, or to market new indications for our existing products, we will be required to obtain 510(k) clearance or PMA approval, as applicable. In 2011, the FDA recommended reforms to the 501(k) pre-market notification process. Although the FDA made some limited changes 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, additional reforms 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.

FDA regulations govern the following activities that we perform, or that are performed on our behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses:


•	product design, development and manufacture;


•	product safety, testing, labeling and storage;


•	clinical trials;


•	record keeping;


•	product marketing, sales and distribution; and


•	post-marketing safety surveillance, complaint handling, investigating reports of adverse events and malfunctions, reporting of serious injuries, including deaths, repairs, and recall of products.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may be preceded by notices of deficiencies or noncompliance via inspectional observations on form FDA-483, or 483s, general correspondence known as “Untitled Letters,” and more formal letters called “Warning Letters.” If we do not adequately and appropriately address the cited deficiencies or noncompliance, including the repair, replacement or recall of affected products if necessary, within a reasonable period of time, the FDA may take any one or more the following actions, which could adversely affect our business:


•	order a mandatory recall;


•	physically seize the affected products;


•	seek a court-ordered injunction and consent decree that could include, but may not be limited to, operating restrictions, additional government oversight of our operations, specific corrective and preventative actions, and partial suspension or total shutdown of production;


•	suspend review or refuse to clear pending 510(k) submissions or approvals pending for new products, new intended uses, or modifications to existing products;


•	after notice and an opportunity for a hearing, withdraw 510(k) clearances or PMA approvals that have already been granted;


•	impose civil monetary penalties; and


•	initiate criminal prosecution.

See “Risk Factors—Risks Related to Government Regulation.”

Employees

At December 31, 2012, we had 1,565 full time employees. None of our employees is presented by a labor union, and we believe our employee relations are good.

Seasonality

Our business is generally seasonal in nature and, historically, demand for our products has been the highest in the fourth quarter. Our working capital requirements vary from period to period depending on manufacturing volumes, the timing of deliveries and the payment cycles of our customers.

Corporate Information

We were incorporated in the state of Delaware in January 2000. Our principal executive offices are located at 3661 Valley Centre Drive, Suite 200, San Diego, California. Our phone number is (800) 228-4728 and our website address is www.volcanocorp.com.

Available Information

Our corporate website is www.volcanocorp.com and our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding us, at www.sec.gov. These reports and other information concerning the company may also be accessed at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The contents of these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.



Item 1A.	Risk Factors

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 FFR technology or our IVUS and FFR products will achieve the broad acceptance necessary for us to sustain a profitable business.

Our revenues are primarily derived from sales of our IVUS and FFR products, which include our multi-modality consoles and our single-procedure disposable catheters and fractional flow reserve wires. IVUS technology is widely used in Japan for determining the placement of stents in patients with coronary disease but the penetration rate in the United States 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 FFR 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 FFR technology. The expansion of the IVUS and FFR markets depends on a number of factors, such as:


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


•	physician experience with IVUS and FFR products either used alone or jointly used in a single percutaneous coronary intervention, or PCI;


•	the availability of training necessary for proficient use of IVUS and FFR products, as well as willingness by physicians to participate in such training;


•	the additional procedure time required for use of IVUS and FFR compared to the perceived benefits;


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


•	the placement of our products in treatment guidelines published by leading medical organizations;


•	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 FFR technology;


•	hospitals' willingness, and having sufficient budgets, to purchase our IVUS and FFR products;


•	the size and growth rate of the PCI market in the major geographies in which we operate;


•	the availability of adequate reimbursement; and


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

Even if IVUS and FFR technology gain wide market acceptance, our IVUS and FFR 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 benefit from 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 benefit from information related to pressure and flow characteristics of blood around plaque available to the physician through the use of our FFR products;


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


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


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


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


•	the lack of perceived benefit of integration of our IVUS and FFR products into the cath lab; and


•	the extent and timing of technological advances.

If IVUS and FFR technology generally, or our IVUS and FFR 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 that 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 outside the United States will accept our products, services and business practices. Further, we purchase, and in the future may manufacture, some components in foreign markets. The manufacture, sale and shipment of our products and services across international borders, as well as the purchase of components from non-U.S. 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;


•	differing local product preferences, including as a result of differing reimbursement practices;

•

possible failure to comply with anti-bribery laws such as the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, even though non-compliance could be inadvertent (see, for example, the discussion under “-Risks related to government regulation-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.”);


•	fluctuations in foreign currency exchange rates and their impact on our operating results; and


•	changes in foreign political or economic conditions.

In addition, we face risks associated with potential increased costs associated with overlapping tax structures, including the tax costs associated with repatriating cash. For example, President Obama's administration has announced legislative proposals to tax profits of U.S. companies earned abroad. We derive a significant portion of our revenues from our international operations, and while it is impossible for us to predict whether these and other proposals will be implemented, or how they will ultimately impact us, they may materially impact our results of operations if, for example, any future potential profits earned abroad are subject to U.S. income tax, or we are otherwise disallowed deductions as a result of any such profits.

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.

Declines in the number of PCI procedures performed for any reason will adversely impact our business.

Our IVUS and FFR products are used in connection with procedures. Physicians may choose to perform fewer PCI procedures. For example, recently the number of PCI procedures declined, in part due to concerns regarding the efficacy of therapeutic treatment options, the long-term efficacy of drug-eluting stents, economic constraints, reduced rates of restenosis and concerns by clinicians and payers regarding the appropriateness of conducting PCI procedures. If the number of PCI procedures continues to decline, the need for IVUS and FFR procedures could also decline, which would adversely impact our operating results and our business prospects.

We have a limited operating history, have only recently achieved profitability and cannot assure you that we will continue to achieve and sustain profitability in future periods.

We were formed in January 2000 and have been profitable, on a full-year basis, only in 2010, 2011 and 2012. 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, devote resources to our sales, marketing and research and development activities and satisfy our debt service obligations. If we are unable to reduce our cost of revenues and our operating expenses, we may not achieve 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, including as a result of new product introductions, transitioning from distributor arrangements to a direct sales force in different markets, satisfying our debt service obligations, and fund our litigation costs. 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 $485.0 million in aggregate principal amount of indebtedness under our 2.875% Convertible Senior Notes due 2015, or the 2015 Notes ($25.0 million), and our 1.75% Convertible Notes due 2017, or the 2017 Notes ($460.0 million). Our ability to make payments on, and to refinance, our indebtedness, including the 2015 Notes and the 2017 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 2015 Notes and the 2017 Notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the 2015 Notes or the 2017 Notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the 2015 Notes and 2017 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 execute 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 under the 2015 Notes or the 2017 Notes, the holders and/or the trustee under the indenture governing the 2015 Notes or the 2017 Notes, as applicable, may accelerate our payment obligations under the applicable notes, which could have a material adverse effect on our business, financial condition and results of operations. Any such acceleration may also trigger an event of default under the other series of notes. 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, research and development efforts, 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 indentures governing the 2015 Notes and the 2017 Notes, the risks related to our business and our ability to service our indebtedness would increase.

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 FFR 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 FFR market increases, we can make no assurance that our revenues will increase. In addition, as the markets for medical devices, including IVUS and FFR 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;


•	successfully market our products;


•	develop proprietary products;


•	successfully conduct clinical studies that expand our markets;


•	obtain and maintain patent protection for our products;


•	secure and preserve regulatory approvals;


•	achieve manufacturing efficiencies;


•	attract and retain skilled personnel; and


•	successfully add complementary offerings and technology through acquisitions, licensing agreements and strategic partnerships.

With respect to our IVUS products, our primary competitor is Boston Scientific, Inc., or Boston Scientific. Our FFR 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 or may be 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 FFR products may decline.

Failure to innovate may adversely impact our competitive position and may adversely impact our ability to drive price increases for our products and 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. We also rely on new products and product enhancements to attempt to drive price increases for our products in our markets. 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 in lieu of or for imaging the vascular system.

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 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.

The successful continuing development of our existing and new products depends on us maintaining strong relationships with physicians.

The research, development, marketing and sales of our products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, our existing and new products may not be developed and marketed in line with the needs and expectations of the professionals who use or would use and support our products and the development and marketing of our products could suffer, which could have a material adverse effect on our business and results of operations.

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 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 with LightLab Imaging, Inc., or LightLab, in Delaware Chancery Court regarding our High Definition Swept Source non-laser light source and Volcano's efforts to develop and/or obtain a laser light source from third parties. 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:


•	the death of one or more patients during a clinical study for 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;


•	changes in governmental regulations or administrative actions;


•	adverse side effects in patients, including adverse side effects from 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.

Divestitures of any of our businesses or product lines may materially adversely affect our business, results of operations and financial condition.

We continue to evaluate the performance of all of our businesses and may sell a business or product line. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a business or product line.

In connection with our recent acquisitions we may experience difficulty with integration, and if we choose to acquire any 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 recently acquired Sync-Rx, Ltd., or Sync-Rx, and Crux Biomedical, Inc., or Crux. We can provide no assurance that the expected benefits of the Sync-Rx or Crux acquisitions will be realized. Furthermore, we have agreed in the merger agreement with Crux that, in the event that we have not achieved the applicable commercial launch for one of the Crux products by June 30, 2016 (which date may be extended upon a specified payment by us to June 30, 2017), we will license back to the former Crux stockholders certain intellectual property rights relating to that product, which could adversely affect our business. 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, including in connection with our acquisitions of Sync-Rx and Crux. 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 United States due to our acquisitions.

We may also encounter risks, costs and expenses associated with any undisclosed or other unanticipated liabilities, use more cash and other financial resources on integration and implementation activities than we expect or incur significant costs and expenses related to litigation with counterparties to such transactions, such as the lawsuit filed against us in federal district

court on March 27, 2012 alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on our acquisition of CardioSpectra, Inc. in 2007. In addition, any amortization or other charges resulting from acquisitions could negatively impact our operating results.

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 in the development of 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 PROSPECT study demonstrated the ability of IVUS and 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 year ended December 31, 2012, 32.0% and 14.3% of our revenues were denominated in the yen and euro, respectively, 13.3% of our operating expenses were denominated in the yen and 9.4% 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 FFR and other products are sold or distributed. These economic conditions remain challenging in many countries and regions, including without limitation the United States, Japan, Europe, the Middle East and Africa, where we have generated most of our revenues. In the United States, the recovery from the recent recession has been below historic averages and the unemployment rate is expected to remain high for some time. The challenging global economic conditions have also led to concerns over the solvency of certain European Union member states, including Greece, Ireland, Italy, Portugal and Spain. On August 5, 2011, Standard & Poor's downgraded the U.S. credit rating to AA+ from its top rank of AAA, and the current U.S. debt ceiling and budget deficit concerns have increased the possibility of other credit-rating agency downgrades that could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. 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. We experienced declines in the number of PCI procedures performed in the U.S. and in sales of our non-medical products to telecommunications and industrial companies during 2012 due to, in part, the then-prevailing economic conditions. 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, adversely affect our ability to distribute our products or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters.

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 sooner than initially planned and experience reduced revenues. 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. In 2011, we completed the termination of our distributor relationships in Japan and 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 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 2011 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.

Quality problems with our processes and products could harm our reputation for producing high-quality products and erode our competitive advantage, sales and market share.

The manufacture of our products is a highly exacting and complex process, due in part to strict regulatory requirements. Failure to manufacture our products in accordance with product specifications could result in increased costs, lost revenues, field corrective actions, customer dissatisfaction or voluntary product recalls, any of which could harm our profitability and commercial reputation. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors. Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our products. If we fail to meet these standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high-quality devices will be harmed, our competitive advantage could be damaged, and we could lose customers and market share.

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 6 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 securing 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; and


•	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 may encounter a number of challenges relating to the management and operation of our newly constructed Costa Rica 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.

In 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 operated manufacturing facilities outside the United States, and cannot assure you that we will be able to successfully operate these facilities in an efficient or profitable manner, or at all. In addition, we are continuing to transfer our manufacturing processes, technology and know-how to our Costa Rica facilities. If we are unable to 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.

During 2012, we received regulatory approval to ship product from our Costa Rica facility to the United States, Japan and certain countries in Europe. We will need to obtain a number of additional regulatory approvals prior, and subsequent, to shipping products from this facility to other geographies. Our ability to obtain these 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.

The expansion of the manufacturing facilities has and will continue to increase our fixed costs. 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 or systems are damaged or destroyed, we may experience delays that could negatively impact our revenues or have other adverse effects.

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. Furthermore, although our computer and communications systems are protected through physical and software safeguards, they are still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events, and any failure of these systems to perform for any reason and for any period of time could adversely impact our ability to operate our business.

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.

In addition, we are required to make periodic interest payments to the holders of the 2015 Notes and the 2017 Notes and to make payments of principal upon conversion or maturity. We may also be required to purchase the 2015 Notes or the 2017 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, Siemens AG, and Philips Medical Systems Nederland B.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 offerings of the 2015 Notes and the 2017 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 2015 Notes or the 2017 Notes are triggered, we could be required under applicable accounting standards to reclassify all or a portion of the outstanding principal of the 2015 Notes or the 2017 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

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. In addition, with respect to any entity that we have acquired or may in the future acquire, the ability of those entities to use net operating loss carryforwards, if any, to reduce future income tax obligations may be limited or reduced due to changes in ownership of such entities occurring prior to or as a result of our acquisition of such entities.

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 is being deployed for use throughout our company in a number of “go live” phases, the first of which occurred during the fourth quarter of 2011 with company-wide deployment expected to be completed during the third quarter of 2013. 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.

Any defects or malfunctions in the computer hardware or software we utilize in our products could cause severe performance failures in such products, which would harm our reputation and adversely affect our results of operations and financial condition.

Our existing and new products depend and will depend on the continuous, effective and reliable operation of computer hardware and software. For example, our IVUS products utilize sophisticated software that analyzes in real-time plaque composition and identifies lumen and vessel borders, which are then displayed in three-dimensional, color-coded images on a computer screen. Any defect, malfunction or other failing in the computer hardware or software utilized by our IVUS or other products, including products we develop in the future, could result in inaccurate readings, misinterpretations of data, or other performance failures that could render our products unreliable or ineffective and could lead to decreased confidence in our products, damage to our reputation, reduction in our sales and product liability claims, the occurrence of any of which could have a material adverse effect on our results of operations and financial condition. Although we update the computer software utilized in our products on a regular basis, there can be no guarantee that defects do not or will not in the future exist or that unforeseen malfunctions, whether within our control or otherwise, will not occur.

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 President, Commercial U.S. & APLAC Sales, Jorge J. Quinoy; and Michel Lussier, President, Clinical and Scientific Affairs, 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 product liability, 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:


•	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.

Compliance with changing corporate governance and public disclosure regulations may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new SEC regulations and Nasdaq Global Select Market rules, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we have invested, and intend to continue to invest, in reasonably necessary resources to comply with evolving standards. These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities and may continue to do so in the future.

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. 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 FFR 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 FFR 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.

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 or PMA applications. 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 can review a manufacturer's decision not to submit a modification 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 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.

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 25 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, it has issued several draft guidance documents that, if implemented, will likely entail additional regulatory burdens. These additional regulatory burdens 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 draft guidance documents it will finalize and implement, along with any other recommended improvements, 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.

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 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 were 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, PPACA, which may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs. PPACA includes, among other things, the following measures:


•	a deductible 2.3% excise tax, with limited exceptions, on the sale of certain medical devices after December 31, 2012 by the manufacturer, producer, or importer of the device in an amount equal to 2.3% of the sale price;


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

•

new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing

organizations during the preceding calendar year, with data collection to be required no earlier than January 1, 2013 and reporting to be required at a later date yet to be specified;


•	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;


•	expansion of federal health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance; and


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

On June 28, 2012, the United States Supreme Court upheld the constitutionality of PPACA, excepting certain provisions that would have required states to expand their Medicaid programs or risk losing all of the state's Medicaid funding. At this time, it remains unclear whether there will be any further changes made to PPACA, whether in part or in its entirety. 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 cause general downward pressure on the prices of medical device products, 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, sales of certain of our products 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 healthcare program 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. This statute has been interpreted to apply to arrangements between device manufacturers on one hand and prescribers and purchasers on the other. For example, the government has sought to apply the Anti-Kickback Statute to device manufacturers' financial relationships with physician consultants. Among other theories, the government has alleged that such relationships are payments to induce the consultants 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. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and arrangements that involve remuneration that could induce prescribing, purchases, or recommendations may be subject to government scrutiny if they do not qualify for an exemption or a safe harbor. 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” requirements to report certain financial arrangements with physicians and teaching

hospitals, as defined in PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations.

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, several 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, Connecticut, Massachusetts and Nevada, 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 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 Act. 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.

In November 2012, we became aware through newspaper reports in the Italian media that a current and a former employee of ours were under criminal investigation for an alleged violation of Italian anti-bribery laws. We also learned that we had temporarily been prohibited from establishing new contractual relationships with hospitals that are part of the Italian national health system. Following a court hearing, the temporary prohibition was lifted, but such prohibition may be reinstituted in the future. The Italian public prosecutor is alleging that the approximately 5,000 Euro that we paid to an Italian state-employed physician for conducting a training session was paid in an effort to influence the outcome of a clinical trial. Although we dispute these allegations, if we are unsuccessful in our defense, we may be faced with fines, penalties and a debarment from creating new contractual relationships with hospitals that are part of the Italian national health system. As a result, we cannot assure you that the outcome of this investigation would not have material adverse effects to our business in Italy, or harm our reputation in Europe generally, which could negatively affect our 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 United States, 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 United States or outside, are developing increasingly sophisticated methods of controlling healthcare costs. Such cost-containment programs adopted by third-party payors, 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. The Centers for Medicare & Medicaid Services recently announced a three-year demonstration project to allow Medicare recovery auditors to audit Medicare payments for procedures prior to Medicare making payment for the procedure, versus following Medicare payment for the procedure as has historically been Medicare's process. The demonstration project includes 11 states that cover a large percentage of the U.S. populace, and different states are expected to be more or less aggressive in their performance of pre-payment audits, including with respect to the types of procedures for which Medicare payments may be audited on a pre-payment basis and the percentage of those procedures that are in fact so audited. Certain procedures that use our products will be subject to such Medicare pre-payment audits, which could induce healthcare providers to be less willing to perform those procedures due to increased reimbursement concerns owing to such pre-payment, rather than post-payment, audits, and any such reduction in procedure volumes could adversely affect our business and results of operations.

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. For example, on August 2, 2011, President Obama signed the Budget Control Act of 2011, which imposes significant cuts in federal spending over the next decade. Such cuts in federal spending could impact entitlement programs such as Medicare and aid to states for Medicaid programs. 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.

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. While we do not believe we are a covered entity or a business associate under HIPAA, 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 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, inter partes review, opposition or other administrative proceeding, or in litigation. Such challenges could result in a determination that the patent is invalid. Some of our older patents have expired or will expire in the near future. 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 United States. In addition, changes in U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law, including the transition from a “first-to-invent” system to a “first-to-file” system and changes to the way issued patents are challenged. These changes may favor larger and more established companies that have more resources than we do to devote to patent application filing and prosecution. The U.S. Patent and Trademark Office is currently developing regulations and procedures to administer the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents. However, it is possible that in order to adequately protect our patents under the “first-to-file” system, we will have to allocate significant additional resources, including additional personnel, to the establishment and maintenance of a new patent application process designed to be more streamlined and competitive in the context of the new “first-to-file” system, which would divert valuable resources from other areas of our business.

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 interference and other 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 Medical in patent litigation regarding our FFR products and whether these products infringe a St. Jude Medical patent. 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.

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, other than the matters described in Note 4 "Commitments and Contingencies - Litigation" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, 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 asserting infringement by us 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 will 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 United States 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 the 2015 Notes and the 2017 Notes as a more attractive means of equity participation in us;


•	the conversion of some or all of the 2015 Notes or the 2017 Notes and any sales in the public market of shares of our common stock issued upon conversion of the 2015 Notes or the 2017 Notes;


•	hedging or arbitrage trading activity that may develop involving our common stock, including in connection with the convertible note hedge transactions and warrant transactions we entered into in connection with the offerings of our 2015 Notes and 2017 Notes, and arbitrage strategies employed or that may be employed by investors in the notes or the 2015 Notes;


•	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 February 15, 2013, 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;


•	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 2015 Notes and 2017 Notes may require us to purchase those notes for cash in the event of a takeover of our company. The indentures governing the Notes also prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under such notes. These and other provisions applicable to the 2015 Notes and 2017 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 1B.	Unresolved Staff Comments

None



Item 2.	Properties

The following table summarizes our principal facilities under lease as of December 31, 2012, the location and size of each such facility and their designed use.



Location	Purpose (1)	Square Feet (Approximate)	Lease Expiration Dates
San Diego, California (2)	Principal executive offices and research and development	34,986	July 2015
Rancho Cordova, California	Manufacturing operations, product distribution, research and development and administrative functions	155,421	December 2014
Billerica, Massachusetts	Axsun operations and administrative functions, research and development	64,784	October 2021
Zaventem, Belgium	Europe administrative functions, sales and product distribution	18,600	May 2021
Tokyo, Japan	Japan sales operations and administrative functions	19,331	January 2015
Costa Rica	Manufacturing operations	140,000	Owned


(1)	All facilities are utilized for activities in our medical segment. The Billerica, Massachusetts facility is utilized for activities both in our medical and industrial segments.


(2)	In December 2012, we agreed to lease a facility in San Diego, California to serve as our new corporate headquarters, which is comprised of 92,602 square feet with an anticipated lease commencement date of August 2013 and lease expiration date of August 2023. We will vacate our current headquarters when we relocate to the new facility.

We also lease facilities in Forsyth County, Georgia, Menlo Park, California and Mountain View, California for various research and development activities; Alpharetta, Georgia for limited research and development activities and sales administration activities; Netanya, Israel for research and development activities and administrative functions and Woodmead, South Africa for sales and distribution activities. Collectively, these facilities represent approximately 25,000 square feet of space.

We believe that our current and planned facilities are adequate to meet our needs for the foreseeable future.



Item 3.	Legal Proceedings

The information set forth under Note 4 “Commitments and Contingencies – Litigation” to our consolidated financial statements included in Part II, Item 8 of this Annual Report, is incorporated herein by reference.



Item 4.	Mine Safety Disclosures

Not applicable.

PART II



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

Market Information

We completed our initial public offering on June 15, 2006. Our common stock is traded on the NASDAQ Global Select Market under the symbol “VOLC”. The following table sets forth the high and low sales price of our common stock for the periods indicated.



	Price Range
	Low		High
Year Ended December 31, 2012
First Quarter	$	21.98	$	29.91
Second Quarter	25.12		29.95
Third Quarter	25.01		30.59
Fourth Quarter	23.08		30.15
Year Ended December 31, 2011
First Quarter	$	23.56	$	28.95
Second Quarter	24.51		32.29
Third Quarter	26.22		33.51
Fourth Quarter	21.76		30.57

Holders

At February 15, 2013, the closing price of our common stock on the NASDAQ Global Select Market was $25.58 per share, and we had 32 stockholders of record.

Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The graph below compares total stockholder return on our common stock from December 31, 2007 through December 31, 2012 with the cumulative total return of (a) the NASDAQ Composite Index and (b) the NASDAQ Medical Equipment Index assuming a $100 investment made in each on December 31, 2007. Each of the three measures of cumulative total return assumes reinvestment of dividends, if any. The stock performance shown on the graph below is based on historical data and is not indicative of, or intended to forecast, possible future performance of our common stock.

Securities Authorized for Issuance under Equity Compensation Plans

For information concerning prior stockholder approval of and other matters relating to our equity incentive plans, see Item 12 in this annual report on Form 10-K.

Recent Sales of Unregistered Securities

None

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any shares of our common stock during the fourth quarter of 2012.

Dividends

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our

common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors. None of our outstanding capital stock is entitled to any dividends.



Item 6.	Selected Financial Data

The selected financial data set forth below are derived from our consolidated financial statements. The consolidated statement of operations data for the years ended December 31, 2012, 2011 and 2010, and the consolidated balance sheet data at December 31, 2012 and 2011 are derived from our consolidated financial statements included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2009 and 2008 and the consolidated balance sheet data at December 31, 2010, 2009 and 2008 are derived from our consolidated financial statements which are not included herein.

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report (in thousands, except per share data):



	Years Ended December 31,
	2012			2011			2010			2009			2008
Consolidated Statement of Operations Data:
Revenues	$	381,866		$	343,546		$	294,146		$	227,867		$	171,495
Cost of revenues, excluding amortization of intangibles	128,915			114,533			108,860			91,489			64,293
Gross profit	252,951			229,013			185,286			136,378			107,202
Operating expenses:
Selling, general and administrative	172,794			147,057			132,990			111,598			84,369
Research and development	55,469			53,098			42,517			37,372			26,690
Amortization of intangibles	3,240			3,447			2,559			4,224			3,125
Acquisition-related items	1,858			—			184
In-process research and development	—			—			(2,935		)	14,030			12,681
Total operating expenses	233,361			203,602			175,315			167,224			126,865
Operating income (loss)	19,590			25,411			9,971			(30,846		)	(19,663		)
Interest income	902			908			477			756			4,828
Interest expense	(7,975		)	(7,107		)	(2,192		)	(5		)	(113		)
Exchange rate gain (loss)	(576		)	(997		)	(904		)	2,328			1,809
Loss from debt extinguishment	(4,969		)	—			—			—			—
Other, net	2,717			(112		)	(25		)	—			54
Income (loss) before income taxes	9,689			18,103			7,327			(27,767		)	(13,085		)
Income tax expense (benefit) (1)	1,667			(19,990		)	2,087			1,187			620
Net income (loss)	$	8,022		$	38,093		$	5,240		$	(28,954	)	$	(13,705	)
Net income (loss) per share:
Basic	$	0.15		$	0.73		$	0.10		$	(0.60	)	$	(0.29	)
Diluted	$	0.15		$	0.70		$	0.10		$	(0.60	)	$	(0.29	)
Shares used in calculating net income (loss) per share:
Basic	53,475			52,300			50,551			48,400			47,376
Diluted	55,195			54,596			53,281			48,400			47,376



	At December 31,
	2012		2011		2010		2009		2008
Balance Sheet Data:
Cash and cash equivalents	$	330,635	$	107,016	$	43,429	$	56,055	$	100,949
Short-term available-for-sale investments	140,960		112,327		175,283		66,028		48,941
Working capital	546,790		293,057		264,937		158,668		183,147
Intangible assets, net (2)	50,657		15,245		17,103		11,623		15,636
Total assets	902,344		496,724		431,566		276,734		275,479
Short and long-term debt, including current maturities	383,472		95,809		91,292		160		242
Total stockholders’ equity	408,345		339,237		274,336		214,815		229,732

These historical results are not necessarily indicative of results expected for any future period.


(1)	During the quarter ended December 31, 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. Therefore, we reversed $4.9 million of the valuation allowance on certain of our net foreign deferred income tax assets.

During the quarter ended December 31, 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future. Therefore, we reversed $22 million of the valuation allowance on our net federal and certain state deferred income tax assets.


(2)	Includes the effects of the Axsun acquisition in December 2008, the Fluid Medical acquisition in 2010, and the Sync-Rx, Ltd. and Crux Biomedical, Inc. acquisitions in 2012.



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

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report.

Overview

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters, and additional functionality options such as Virtual Histology, or VH®, IVUS tissue characterization and ChromaFlo stent apposition analysis. Our FFR offerings can be accessed through our multi-modality platforms, and we also provide FFR-only consoles. Our FFR disposables are 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 are developing additional offerings for integration into the platform, including adenosine-free Instant Wave-Free Ratio FFR, or iFR, forward-looking IVUS, or FL.IVUS, catheters, Forward-Looking Intra-Cardiac Echo, or FL.ICE, catheters, high resolution Focal Acoustic Computed Tomography, or FACT, catheters, and ultra-high resolution Optical Coherence Tomography, or OCT, systems and catheters. Our Valet microcatheter, Visions PV .035 catheter and Short Tip Eagle Eye Platinum, or EEP, products received 510(k) clearance and CE Mark approval in 2012. Our Preview™, the first generation FL.IVUS device, received CE Mark for peripheral indications in 2012.

We have infrastructure in the U.S., Europe, Japan and Costa Rica. Our corporate office is located in California, U.S. Our manufacturing operations are located in California and Massachusetts, U.S. In addition, during the second quarter of 2012, we received clearance from U.S. Food and Drug Administration, or FDA, and commenced manufacturing of disposables at our new plant in Costa Rica. We have research and development facilities in California, Massachusetts, Ohio, Georgia, and Israel. We have sales offices in the U.S. and Japan; sales and distribution offices in Belgium and South Africa; and third-party distribution facilities in Japan. At December 31, 2012, we had 1,565 full time employees worldwide, including 682 manufacturing employees, 374 sales and marketing employees and 176 research and development employees.

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 and South Africa. We utilize distributors in other geographic areas, who are also involved in product launch planning, education and training, physician support and clinical trial management.

At December 31, 2012, we had a worldwide installed base of over 7,700 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 year ended December 31, 2012, the sale of our single-procedure disposable catheters and guide wires accounted for $300.7 million, or 81.0% of our medical segment revenues, a $32.7 million, or 12.2% increase from the year ended December 31, 2011, in which the sale of our single-procedure disposable catheters and guide wires accounted for $268.1 million, or 80.6% of our medical segment revenues.

Our revenues have increased from $294.1 million in 2010 to $343.5 million in 2011 and to $381.9 million in 2012. We had operating income of $19.6 million, $25.4 million and $10.0 million during 2012, 2011 and 2010. The 2012 operating income included $1.9 million of acquisition-related expenses. The 2010 operating income included a reversal of the $3.0 million charge related to the Novelis milestone, as we believed we would no longer achieve the milestone and $4.9 million in expenses resulting from the judgment related to our ongoing LightLab litigation (discussed in more detail in Note 4 “Commitments and Contingencies – Litigation – LightLab” to our consolidated financial statements).

In the years ended December 31, 2012, 2011 and 2010, 46.3%, 47.3% and 43.0%, respectively, of our revenues and 22.7%, 22.5% and 22.1%, respectively, of our operating expenses were denominated in various non-U.S. dollar currencies, primarily the euro and the Japanese yen. 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. If our yen or euro denominated sales exceed our yen or euro denominated costs, and the U.S. dollar strengthens relative to the yen or euro, there is an adverse effect on our results of operations. Conversely, if the U.S. dollar weakens relative to the yen or euro, there is a positive effect on our results of operations. For example, the average exchange rate of one U.S. dollar to yen decreased 0.4% from 79.6 in 2011 to 79.3 in 2012, which resulted in a net positive impact to our operational results for 2012 in the amount of approximately $300,000. The average exchange rate of one euro to U.S. dollar decreased 7.1% from 1.4 in 2011 to 1.3 in 2012, which resulted in a net negative impact to our operational results for 2012 in the amount of approximately $2.7 million.

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. We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 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.

External Factors

In September 2009, published findings from the Fractional Flow Reserve versus Angiography for Multivessel

Evaluation, or FAME, study demonstrated that patients in the study with multi-vessel coronary artery disease who were treated by FFR guidance had a 34% reduction in death and myocardial infarction (heart attack) compared to angiographic guidance alone. In August 2012, the results of the Fractional Flow Reserve-Guided PCI vs. Medical Therapy in Stable Coronary Disease, or FAME 2, study were published in the New England Journal of Medicine. FAME 2 showed that patients receiving PCI with proven ischemia by FFR had 66% fewer primary endpoint events including death, myocardial infarction and urgent revascularization's (e.g. coronary bypass) than those patients treated with optimal medical therapy alone. We believe these findings will continue to drive the growth and adoption of our disposable FFR wire products.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. on March 23, 2010. The legislation imposes on medical device manufacturers a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices beginning January 1, 2013.

The economic conditions in many countries and regions where we generate 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.

In addition, 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. The challenging global economic conditions have also led to concerns over the solvency of certain European Union member states, including Greece, Ireland, Italy, Portugal and Spain. 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 revenue 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 year ended December 31, 2012, we generated $381.9 million of revenues which is comprised of $371.1 million from our medical segment and $10.7 million from our industrial segment. We experienced increases in revenues related to IVUS and FFR single-procedure disposables in 2012 compared with 2011, while console sales remained relatively flat year over year. In the year ended December 31, 2012, 11.0% of our medical segment revenues were derived from the sale of our consoles, as compared with 12.3% in the year ended December 31, 2011. In the year ended December 31, 2012, IVUS single-procedure disposables accounted for 55.5% of our medical segment revenues, compared to 60.4% in 2011, while in the year ended December 31, 2012, 25.6% of our medical segment revenues were derived from the sale of our FFR single-procedure disposables, as compared with 20.2% in the year ended December 31, 2011. Other revenues consist primarily of service and maintenance 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.

Our medical segment sales are generated by our direct sales representatives or through independent distributors and are shipped throughout the world from facilities in California, Massachusetts, Belgium, Japan and 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 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 related to manufacturing employees. We expect a trend of 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, increase production volumes and transition certain manufacturing operations to Costa Rica.

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel serving the sales, administrative and marketing functions. Other costs include stock-based compensation expense, professional fees for legal and accounting service, travel and entertainment expenses, facility costs, trade show, training and other promotional expenses. 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.

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 developed technology, licenses, customer relationships, patents and trademarks, and covenant-not-to-compete, using the straight-line method over their estimated useful lives of up to 20 years. These assets are regularly tested for impairment and abandonment.

Acquisition-related items. Acquisition-related items consists of acquisition transaction costs and subsequent revision, if any, to the contingent consideration related to acquisitions.

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

OCT

In December 2007, we acquired certain OCT assets in connection with our acquisition of CardioSpectra, Inc., or CardioSpectra, which were 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 and $11.0 million became payable by us to the former stockholders of CardioSpectra. We paid such amount to the former stockholders of CardioSpectra with 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 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 December 31, 2012, we estimate that we will incur $5.4 million of additional costs in order to obtain a commercializable OCT product for a total cost of approximately $31.6 million. 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.

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 remaining milestone payments.

FL.IVUS

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 upon receipt of FDA approval of a 510(k) application relating to the Novelis FL.IVUS device only in the event that the original 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 original 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 incurred a total of $16.3 million for the FL.IVUS project since acquisition. In August 2012, Preview™, the first generation FL.IVUS device, received CE Mark for peripheral indications. The Preview™ device is currently being utilized in clinical studies in the U.S. and Europe.

FL.ICE

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 IPR&D asset and was valued at $4.1 million. At the date of acquisition the estimated costs to complete were $5.9 million. At December 31, 2012, the estimated costs to complete are approximately $4.9 million for a total of $10.7 million. As of December 31, 2012, the FL.ICE project was expected to be completed in 2013.

CO-REGISTRATION

In November 2012, in connection with our acquisition of Sync-Rx Ltd, or Sync-Rx, we acquired Sync-Rx's co-registration technology, which is still under development. This technology was recorded as an IPR&D asset and was valued at $1.3 million. At the date of acquisition and as of December 31, 2012, the estimated costs to complete the project are approximately $4.4 million with estimated completion in 2014.

IVC FILTER & RETRIEVAL KIT

In December 2012, in connection with our acquisition of Crux Biomedical, Inc., or Crux, we acquired Crux's IVC filter and retrieval kit technologies, which are still under development. These technologies were recorded as IPR&D assets and were valued at $28.4 million. At the date of acquisition and as of December 31, 2012, the estimated costs to complete the project are approximately $6.5 million with estimated completion in 2014.

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



	As of Acquisition Date				Costs Incurred Since Acquisition		Estimated Cost to Complete, as of December 31, 2012		Total Estimated Costs to Complete since Acquisition Date
Project Name	Fair Value		Estimated Cost to Complete		Costs Incurred Since Acquisition		Estimated Cost to Complete, as of December 31, 2012		Total Estimated Costs to Complete since Acquisition Date
OCT	$	26.3	$	7.2	$	26.2	$	5.4	$	31.6
FL.IVUS	12.2		3.9		16.3		—		16.3
FL.ICE	4.1		5.9		5.8		4.9		10.7
Co-registration	1.3		4.4		—		4.4		4.4
IVC filter & retrieval kit	28.4		6.5		—		6.5		6.5

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 senior notes, including coupon interest, accretion of debt discount, and amortization of issuance costs, offset by interest capitalization related to the Costa Rica plant construction, before the plant was placed into service in the second quarter of 2012, and our global Enterprise Resource Planning, or ERP, system implementation.

Exchange Rate Gain (Loss). Exchange rate gain (loss) is comprised of foreign currency transaction and remeasurement gains and losses, and the effect of changes in value and net settlements of our foreign exchange 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 (additional paid in capital). Therefore, the 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 the years ended December 31, 2012, 2011 and 2010, the provision for income taxes is comprised of federal, foreign and various state and local income taxes. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to continue to fluctuate as we increase foreign manufacturing and distribution operations. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the statement of operations. In the case of an acquired or merged entity, we will record a valuation allowance on a deferred asset through purchase accounting as an adjustment to goodwill at the acquisition date if it is more likely than not that all or a portion of the acquired deferred tax assets will not be recognized in the future. Any subsequent change to a valuation allowance established during purchase accounting within the measurement period of the acquisition (not to exceed twelve months) will also be recorded as an adjustment to goodwill, provided that such change relates to new information about the facts and circumstances that existed on the acquisition date. During the fourth quarter of 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. We expect that our operations in the respective foreign jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax assets. As a result, we released $4.9 million of the valuation allowance on our foreign deferred tax assets. During the fourth quarter of 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our federal and state deferred tax assets in the future as a result of cumulative profitability and expected future taxable income. Therefore, we reversed $22.0 million of the valuation allowance on our net federal and certain state deferred income tax assets.

Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 presented in both absolute dollars (in thousands) and as a percentage of revenues, with the dollar and percentage change year over year:



	Years Ended December 31,															Changes 2012 vs. 2011					Changes 2011 vs. 2010
	2012					2011					2010					$			%		$			%
Revenues	$	381,866		100.0	%	$	343,546		100.0	%	$	294,146		100.0	%	$	38,320		11.2	%	$	49,400		16.8	%
Cost of revenues, excluding amortization of intangibles	128,915			33.8		114,533			33.3		108,860			37.0		14,382			12.6		5,673			5.2
Gross profit	252,951			66.2		229,013			66.7		185,286			63.0		23,938			10.5		43,727			23.6
Operating expenses:
Selling, general and administrative	172,794			45.2		147,057			42.8		132,990			45.2		25,737			17.5		14,067			10.6
Research and development	55,469			14.5		53,098			15.5		42,517			14.5		2,371			4.5		10,581			24.9
Amortization of intangibles	3,240			0.8		3,447			1.0		2,559			0.9		(207		)	(6.0	)	888			34.7
Acquisition related items	1,858			0.5		—			—		184			0.1		1,858			—		(184		)	(100.0	)
In-process research and development	—			—		—			—		(2,935		)	(1.0	)	—			—		2,935			(100.0	)
Total operating expenses	233,361			61.1		203,602			59.3		175,315			59.6		29,759			14.6		28,287			16.1
Operating income	19,590			5.1		25,411			7.4		9,971			3.4		(5,821		)	(22.9	)	15,440			154.8
Interest income	902			0.2		908			0.3		477			0.2		(6		)	(0.7	)	431			90.4
Interest expense	(7,975		)	(2.1	)	(7,107		)	(2.1	)	(2,192		)	(0.7	)	(868		)	12.2		(4,915		)	224.2
Exchange rate loss	(576		)	(0.2	)	(997		)	(0.3	)	(904		)	(0.3	)	421			(42.2	)	(93		)	10.3
Loss from debt extinguishment	(4,969		)	(1.3	)	—			—		—			—		(4,969		)	—		—			—
Other, net	2,717			0.7		(112		)	—		(25		)	—		2,829			(2,525.9	)	(87		)	348.0
Income before income tax	9,689			2.5		18,103			5.3		7,327			2.5		(8,414		)	(46.5	)	10,776			147.1
Income tax (benefit) expense	1,667			0.4		(19,990		)	(5.8	)	2,087			0.7		21,657			(108.3	)	(22,077		)	(1,057.8	)
Net income	$	8,022		2.1	%	$	38,093		11.1	%	$	5,240		1.8	%	$	(30,071	)	(78.9	)%	$	32,853		627.0	%

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



	Years Ended December 31,						Changes 2012 vs. 2011					Changes 2011 vs. 2010
	2012		2011		2010		$			%		$			%
Medical segment:
Consoles	$	40,687	$	40,954	$	40,630	$	(267	)	(0.7	)%	$	324		0.8	%
Single-procedure disposables:
IVUS	205,843		200,970		167,023		4,873			2.4	%	33,947			20.3	%
FFR	94,885		67,082		46,517		27,803			41.4	%	20,565			44.2	%
Other	29,716		23,530		16,943		6,186			26.3	%	6,587			38.9	%
Sub-total medical segment	371,131		332,536		271,113		38,595			11.6	%	61,423			22.7	%
Industrial segment	10,735		11,010		23,033		(275		)	(2.5	)%	(12,023		)	(52.2	)%
	$	381,866	$	343,546	$	294,146	$	38,320		11.2	%	$	49,400		16.8	%

The following table sets forth our revenues by geographic area (in thousands) and the changes in revenues in the specified periods:



	Years Ended December 31,						Changes 2012 vs. 2011					Changes 2011 vs. 2010
	2012		2011		2010		$			%		$			%
Revenues (1):
United States	$	177,992	$	157,412	$	134,645	$	20,580		13.1	%	$	22,767		16.9	%
Japan	123,558		105,892		79,277		17,666			16.7	%	26,615			33.6	%
Europe, the Middle East and Africa	57,913		60,249		57,614		(2,336		)	(3.9	)%	2,635			4.6	%
Rest of world	22,403		19,993		22,610		2,410			12.1	%	(2,617		)	(11.6	)%
	$	381,866	$	343,546	$	294,146	$	38,320		11.2	%	$	49,400		16.8	%


(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 Years Ended December 31, 2012 and 2011

Revenues. Overall, the increase in the medical segment revenue in the year ended December 31, 2012 compared with the year ended December 31, 2011 was driven by increased demand for our disposable products, as well as higher revenues resulting from our continued growth in our direct sales efforts in Japan and favorable impacts of foreign exchange rates related to the yen, partially offset by the decline in the medical reimbursement rate in Japan, unfavorable impacts of foreign exchange rates to the euro and decreases in our revenues in southern Europe, in particular Spain where we were in the process of transitioning from a distributor to a direct sale model. Additionally, the increases in FFR disposable revenues were primarily due to the increased adoption of the technology based on clinical study data. The increase in other revenues is primarily due to higher sales of third-party products and higher service contract and rental revenues. We recognized increases in revenues across all our key geographic markets except for Europe. 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. The decrease in European markets relates to the unfavorable impacts of foreign currency exchange rates related to the euro and to the slowing economy in Europe, primarily in Spain.

Cost of Revenues. The increase in the cost of revenues in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to higher sales volume. Gross margin was 66.2% of revenues in the year ended December 31, 2012, decreasing from 66.7% of revenues in the year ended December 31, 2011. This unfavorable change in gross margin was primarily the result of the unfavorable impact of the foreign exchange rates to the euro and unfavorable impact on pricing as a result of a decline in the medical reimbursement rate in Japan.

Selling, General and Administrative. The increase in selling, general and administrative expenses in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to the higher variable costs for U.S. sales driven by higher sales volumes, the expansion of Japan and Europe sales and marketing organizations, including continued growth in our Japan operation to support our direct sales efforts there, expansion of our Costa Rica general and administrative activities during the pre-production phase in the first two quarters of 2012, and increased information technology and infrastructure expenses to support company growth.

Research and Development. The increase in research and development expenses in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to increased spending on various product development projects and activities supporting other acquired technologies.

Amortization of Intangibles. The decrease in amortization expense in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to the complete amortization of customer relationships acquired in 2009.

Acquisition-Related Items. The acquisition-related items during the year ended December 31, 2012 consist of transaction costs related to the Sync-Rx and Crux acquisitions and the change in fair value of the contingent consideration related to the Crux acquisition as a result of the passage of time from acquisition date to December 31, 2012.

Interest Income. Interest income for the year ended December 31, 2012 as compared to the year ended December 31, 2011 remained consistent.

Interest Expense. The increase in interest expense during the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily related to interest incurred on the convertible debt issued in December 2012.

Exchange Rate Gain (Loss). During the years ended December 31, 2012 and 2011, 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 remeasurement of our intercompany receivable balances at current exchange rates.

Loss from Debt Extinguishment. During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible senior notes due 2015, or the 2015 Notes, and recognized a $5.0 million loss, which is the difference between the carrying value of the liability component of the 2015 Notes, including any unamortized debt issuance costs, and the consideration attributed to the retirement of the liability component.

Other. During the year ended December 31, 2012, the Company recognized $2.8 million of gains in connection with the liquidation of a long term investment, which had been accounted for using the cost method.

Provision for Income Taxes. During the year ended December 31, 2012, we recognized income tax expense of $1.7 million compared to an income tax benefit of $20.0 million during the year ended December 31, 2011. During the quarter ended December 31, 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. We expect that our foreign operations in the respective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax assets. As a result, we released $4.9 million of the valuation allowance on our foreign deferred tax assets. During the quarter ended December 31, 2011, we

concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future as a result of cumulative profitability and expected future taxable income, resulting in the recognition of a tax benefit from the reversal of $22.0 million of the valuation allowance on our net federal and certain state deferred income tax assets.

Stock option excess tax benefits of $35,000 and $165,000 were credited to additional paid-in-capital during the years ended December 31, 2012 and 2011, respectively. During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible note due 2015 and recognized a loss for tax purposes, which is the difference between the carrying value of the liability for tax purposes compared to the repurchase price. In addition, the deferred tax asset related to the repurchased call option and deferred tax liability related to the warrant sold were recognized. The recognition of the loss for tax purposes (to the extent it related to equity transactions) and the related deferred tax asset and liability totaling $2.5 million was credited to additional paid in capital during the year ended December 31, 2012. The reversal of the valuation allowance related to our convertible senior notes of $1.7 million was credited to additional paid in capital during the year ended December 31, 2011.

Comparison of Years Ended December 31, 2011 and 2010

Revenues. Overall, the increase in the medical segment revenue in the year ended December 31, 2011 compared with the year ended December 31, 2010 was 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, and in conjunction with an increased adoption of the technology based on clinical study data. The revenue increases related to our consoles resulted from increased sales of console units, especially the FFR consoles which achieved increased penetration into the market during 2011. The decrease in industrial segment revenues results from lower sales to our international telecommunication customers due to the telecommunications industry’s cyclical nature. The increase in other revenues is primarily due to higher sales of third-party products and higher service contract and rental revenues. We recognized increases in revenues 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. The decrease in the rest of the world primarily relates to the decline in our industrial segment revenues to customers in China.

Cost of Revenues. The increase in the cost of revenues in the year ended December 31, 2011 compared with the year ended December 31, 2010 was primarily due to higher sales volume. Gross margin was 66.7% of revenues in the year ended December 31, 2011, up from 63.0% of revenues in the year ended December 31, 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. The increase in selling, general and administrative expenses in the year ended December 31, 2011 compared with the year ended December 31, 2010 was primarily due to increased headcount resulting from the expansion of our U.S., Japan and Europe sales organizations, including continued growth in our Japan operation to support our direct sales efforts there; expansion of our Costa Rica general and administrative activities during the pre-production phase; unfavorable impacts of foreign currency exchange rates related to the yen and euro; increased information technology and infrastructure expenses to support company growth; and legal expenses related to our litigation matters. In addition, during the year ended December 31, 2010, we recorded a judgment of $4.9 million, which is discussed in more detail in Note 4 “Commitments and Contingencies – Litigation – LightLab” to our consolidated financial statements.

Research and Development. The increase in research and development expenses in the year ended December 31, 2011 compared with the year ended December 31, 2010 was primarily due to increased spending on various product development projects, increased clinical expenses, mainly related to the VERDICT and FIRST clinical programs, and activities supporting other acquired technologies.

Amortization of Intangibles. The increase in amortization expense in the year ended December 31, 2011 compared with the year ended December 31, 2010 is primarily due to the addition of intangible assets and 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 was no IPR&D expense recorded in the year ended December 31, 2011. During 2010, we recorded $65,000 of IPR&D expense related to the milestone achieved under the OCT program offset by a $3 million reversal of an accrual for a milestone payment of $3.0 million recognized in 2009 related to our FL.IVUS project acquired from Novelis as we believed we would no longer achieve the milestone.

Interest Income. The increase in interest income was primarily due to a significant increase in our investment balances during the year ended December 31, 2011 as compared to the year ended December 31, 2010, resulting from the proceeds of our convertible debt offering issued on September 20, 2010 and favorable cash flows from operations.

Interest Expense. Interest expense during the year ended December 31, 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 a judgment related to our LightLab litigation, while in the year ended December 31, 2010 interest expense was primarily related to our convertible debt issued on September 20, 2010.

Exchange Rate Gain (Loss). During the year ended December 31, 2011 and 2010 the impact of fluctuations in exchange rates was somewhat mitigated by our hedging practices. Through our hedging program we reduce the volatility of our exchange rate gains and losses resulting from the remeasurement of our intercompany receivable balances at current exchange rates.

Provision for Income Taxes. During the quarter ended December 31, 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future. Therefore, we reversed $22.0 million of the valuation allowance on our net federal and certain state deferred income tax assets.

Stock option excess tax benefits of $165,000 and $433,000 were credited to additional paid-in-capital during the years ended December 31, 2011 and 2010, respectively. The reversal of the valuation allowance related to our convertible senior notes of $1.7 million was credited to additional paid in capital during the year ended December 31, 2011.

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;


•	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 million principal amount of 2.875% Notes due 2015, or the2015 Notes, in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the 2015 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 2015 Notes, net of issuance costs ($4.4 million) and net payments related to our hedge transactions ($10.0 million).

On December 5, 2012 , we issued $460.0 million principal amount of 1.75% Notes due 2017, or the 2017 Notes, in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the 2017 Notes, we purchased call options on our common stock from JPMorgan Chase and Goldman, Sachs & Co., or Goldman Sachs. In addition, to reduce the cost of the hedge, under separate transactions we sold warrants to JPMorgan Chase and Goldman Sachs. We received proceeds of $409.3 million from the issuance of the 2017 Notes, net of $14.6 million in debt issuance costs and net payments of $36.1 million related to our hedge transactions.

Concurrently with the issuance of the 2017 Notes, we retired $90.0 million of the 2015 Notes and retired the proportionate portion of the warrants and call options related to the 2015 Notes. We paid $104.9 million to repurchase the $90.0 million face value of the 2015 Notes and received a net amount of $3.6 million related to the retirement of the proportionate warrants and call options associated with the 2015 Notes.

At December 31, 2012, our cash and cash equivalents and available-for-sale investments totaled $516.0 million. 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.

At December 31, 2012, our accumulated deficit was $81.9 million. Since inception, we have generated significant operating losses. During the years ended December 31, 2012, 2011 and 2010, we achieved full years of profitability, and our business generated $49.8 million, $43.6 million and $46.2 million in cash flows from operating activities, respectively.

Cash Flows (in thousands)



	Years Ended December 31,
	2012			2011		2010
Net cash provided by operating activities	$	49,818		$	43,596	$	46,183
Net cash provided by (used in) investing activities	(147,216		)	6,729		(172,894		)
Net cash provided by financing activities	321,756			13,140		116,935
Effect of exchange rate changes on cash and cash equivalents	(739		)	122		(2,850		)
Net change in cash and cash equivalents	$	223,619		$	63,587	$	(12,626	)

Cash Flows from Operating Activities. Cash provided by operating activities of $49.8 million for 2012 reflected our net income of $8.0 million, adjusted for non-cash expenses, consisting primarily of $26.8 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $15.1 million of stock-based compensation expense, $5.7 million of accretion of debt discount on convertible notes, $5.0 million for the loss incurred on the retirement of debt. Additional sources of cash include increases in accrued compensation ($3.4 million), accrued expenses and other liabilities ($6.8 million) and deferred revenue ($4.2 million). Uses of cash include an increase in accounts receivable of $10.0 million due to increased sales and an increase in inventories of $13.3 million related to increased forecast sales demand.

Cash provided by operating activities of $43.6 million for 2011 reflected our net income of $38.1 million, adjusted for non-cash expenses, consisting primarily of $27.0 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $13.0 million of stock-based compensation expense, $4.7 million accretion of debt discount on our convertible notes, and offset by $22.8 million deferred tax benefit. Additional sources of cash include increases in accrued compensation ($2.0 million) and deferred revenue ($1.9 million). Uses of cash included an increase in accounts receivable of $9.3 million due to increased sales, decrease in accounts payable of $2.4 million and decrease in accrued expenses and other liabilities of $6.5 million.

Cash provided by operating activities of $46.2 million for 2010 reflected our net income of $5.2 million, adjusted for non-cash expenses, consisting primarily of $19.8 million of depreciation and amortization, including amortization or accretion of investment premium or discount, and $12.5 million of stock-based compensation expense. Additional sources of cash include increases in accrued expenses and other liabilities ($10.7 million), and accrued compensation ($4.0 million). Uses of cash included an increase in accounts receivable of $6.4 million due to increased sales, increased prepaid and other assets of $1.5 million, and an adjustment for non-cash expenses related to a decrease in IPR&D expenses of $2.9 million primarily due to the reversal of an accrual for a development milestone payment related to the Novelis acquisition ($3.0 million).

Cash Flows from Investing Activities. In 2012, $298.3 million was used to purchase short-term and long-term available-for-sale securities and $43.8 million was used for capital expenditures, including purchases of medical diagnostic equipment, manufacturing equipment and construction of the manufacturing facility in Costa Rica. Additionally, we used $54.5 million for the acquisitions of Sync-Rx and Crux, net of cash acquired, and $5.8 million for the acquisition of other intangible assets, including purchased technology and costs of patents. These purchases were partially offset by $252.9 million from the sale or maturity of investments.

In 2011, $310.6 million was used to purchase short-term and long-term available-for-sale securities and $43.2 million was used for the purchases of long-term assets, including facility construction in Costa Rica, and capital expenditures for medical diagnostic equipment, manufacturing equipment and ERP systems. Additionally, we used $3.5 million for the acquisition of other intangible assets and other investments, including purchased technology and costs of patents. These purchases were partially offset by $365.6 million from the sale or maturity of investments.

In 2010, $234.0 million was used to purchase short-term and long-term available-for-sale securities and $25.3 million was used for the purchases of long-term assets, including capital expenditures for medical diagnostic equipment and manufacturing equipment. Additionally, we used $4.2 million for the acquisition of Fluid Medical and $3.9 million for the acquisition of other intangible assets, including purchased technology and costs of patents. These purchases were partially offset by $97.2 million from the sale or maturity of investments.

Cash Flows from Financing Activities. Cash provided by financing activities in 2012 consisted primarily of net proceeds of $409.3 million from the issuance of the 2017 Notes and related hedge transactions, $9.9 million from exercises of common stock options and $3.9 million from the sale of common stock under our employee stock purchase plan; partially offset by the net payment of $101.3 million from the repurchase of a portion of the 2015 Notes and retirement of the related proportionate hedge transaction.

Cash provided by financing activities in 2011 consisted primarily of $9.4 million from exercises of common stock options, and $3.6 million from the sale of common stock under our employee stock purchase plan.

Cash provided by financing activities in 2010 consisted primarily of net proceeds of $100.5 million from the convertible debt and related hedge transactions, $13.4 million from exercises of common stock options, and $2.7 million from the sale of common stock under our employee stock purchase plan.

Future Liquidity Needs

At December 31, 2012, our primary short-term needs for capital, which are subject to change, include expenditures related to:


•	medical diagnostic equipment that we own and place at our customers’ premises;


•	our facilities expansion needs, including acquiring or leasing additional facilities and associated building costs or tenant improvements;


•	the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;


•	upgrades to our information technology infrastructure to enhance our capabilities and improve overall productivity;


•	support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources in the U.S. and abroad, particularly in Japan where our strategy is to continue to pursue a direct sales model;


•	the continued advancement of research and development activities;


•	improvements to and increases in our manufacturing capacity and efficiency; and


•	acquisitions of technologies and/or businesses that enhance our capabilities or complement our markets.

Our capital expenditures are largely discretionary and within our control. We expect that our product revenue and the resulting operating income, as well as the status of each of our product development programs, will significantly impact our cash management decisions.

At December 31, 2012, we believe our current cash and cash equivalents and our available-for-sale investments will be sufficient to fund working capital requirements, debt service requirements, capital expenditures 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 “Risk Factors—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.” Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all.

At December 31, 2012, we have gross federal and state net operating loss carry forwards of approximately $100.3 million and $65.4 million, respectively, available to reduce future taxable income if we remain profitable. Pursuant to Internal Revenue Code Section 382, use of net operating loss carry forwards related to acquisitions of an additional approximately $20.1 million may be limited. We expect to utilize our available net operating loss carry forwards to reduce future tax obligations in the event we are successful in maintaining continued profitability. However, future limitations on our ability to use net operating loss carry forwards and other minimum state taxes may increase our overall tax obligations.

Off-Balance Sheet Arrangements

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification to business partners and customers for losses suffered or incurred for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these agreements is unlimited. At December 31, 2012, we have not incurred any costs to defend lawsuits or settle claims related to these indemnification arrangements.

Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2012 for each of the periods indicated (in thousands):



Contractual Obligations	Payments Due By Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Capital lease obligations (including interest)	$	63	$	33	$	25	$	5	$	—
Operating lease obligations (1)	72,694		18,682		14,019		10,498		29,495
Non-cancelable purchase obligations (2)	50,999		38,665		9,472		2,862		—
Convertible senior notes	485,000		—		25,000		460,000		—
Interest on convertible senior notes	41,496		8,769		17,298		15,429		—
Clinical programs (3)	—		—		—		—		—
Total (4)	$	650,252	$	66,149	$	65,814	$	488,794	$	29,495


(1)	We lease office space and have entered into other lease commitments in the U.S. as well as locations in Japan, Europe, Asia and the Middle East. Operating lease obligations include future minimum lease payments under all our non-cancelable operating leases at December 31, 2012.


(2)	Consists of non-cancelable commitments primarily for the purchase of production materials and other inventory items.

(3)

We have commitments to provide funding of $4.6 million to a clinical study conducted by a third-party and at December 31, 2012, we have a remaining obligation of up to $2.1 million. 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.

(4)

The total above does not include the following contingent liabilities: a) milestone payments of up to an aggregate of $17.0 million which may be due to the former shareholders of CardioSpectra upon the achievement of certain milestones (and may, at our election, be payable in either cash or stock); b) potential payment of up to $1.9 million plus interest due to an agency of the Israeli government; c) potential milestone payments of an estimated $46.6 million due to the former shareholder of Crux (see Note 2 "Acquisitions" to our consolidated financial statements).

Critical Accounting Policies:

Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

Critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible

future resolution of the uncertainties increase, those judgments become even more subjective and complex. In order to provide an understanding about how our management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different circumstances, we have identified our critical accounting policies below.

Revenue Recognition

We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue from the sale of our products is generally recognized when title and risk of loss transfers to the customer, the terms of which are generally free on board shipping point. We use contracts and customer purchase orders to determine the existence of an arrangement. We use shipping documents and third-party proof of delivery to verify that title has transferred. We assess whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, we assess a number of factors, including past transaction history with the customer and the creditworthiness of the customer.

We prospectively adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU), No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13), and ASU No. 2009-14, Software (Topic 985):Certain Revenue Arrangements That Include Software Elements (ASU 2009-14), on January 1, 2010. We have applied ASU 2009-13 to our revenue arrangements containing multiple deliverables that were entered into or significantly modified on or after January 1, 2010. These deliverables can consist of consoles, options for the console, single-procedure disposable products, among other items and are considered separate units of accounting. We allocate arrangement consideration based on the relative selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Selling prices are determined using fair value, when available, or our estimate of selling price when fair value is not available. Typically, we recognize revenue for each unit of accounting upon delivery of the item and complete all obligations under an arrangement with multiple deliverables within one year.

All costs associated with the provision of service are recognized in cost of revenues as incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the consolidated balance sheets.

We sell our products through direct sales representatives in the U.S. and a combination of direct sales representatives and independent distributors in international markets. Sales to distributors are recorded when title and risk of loss transfer upon shipment (generally FOB shipping point). No direct sales customers or distributors have price protection. Estimated returns, which are historically nominal, are recorded as an allowance for sales return and as a reduction in revenues.

Fair Value

We record our short-term and long-term available-for-sale investments at fair value. At December 31, 2012, our cash and investments totaled $516.0 million. FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, establishes three levels of inputs that may be used to measure fair value (see Note 3 “Financial Statement Details” to our consolidated financial statements included in this Annual Report). Each level of input represents varying degrees of subjectivity and difficulty involved in determining fair value. Valuations using Level 1 and 2 inputs are generally based on price quotations and other observable inputs in active markets and do not require significant management judgment or estimation. We utilize a third-party pricing service to assist us in obtaining fair value pricing for these investments. While pricing for these securities is based on proprietary models, the inputs used are based on observable market information, therefore we have classified our inputs as Level 1 and Level 2.

We also record our foreign exchange forward contracts at fair value. At December 31, 2012, the fair value of our foreign exchange forward contracts of $3.5 million was included in prepaid and other current assets in our consolidated balance sheet. We utilize third-party financial institutions to assist us in obtaining fair value pricing for our foreign currency forward contracts and classified these fair value inputs as Level 2.

In addition, we record contingent consideration, which consist of obligations to pay former shareholders of an acquired entity if specified events occur or conditions are met such as the achievement of certain technological milestones or the achievement of targeted revenue milestones, at fair value. At December 31, 2012, the fair value of our contingent consideration arrangements was $30.2 million (net of the $900,000 contingent receivable). We determined the initial fair values of the contingent consideration, which includes payment upon FDA Clearance and milestone payments based on commercial sales of Crux products, using various estimates, including probabilities of success, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The key assumptions used to determine the fair value of the contingent consideration for the Crux acquisition relative to FDA Clearance include a 5% discount rate and probability adjusted milestone payment date ranges from May 31, 2013 to June 30, 2013. For the fair value relative to the milestone payments based on the commercial sales of Crux products, the key assumptions in applying the income approach include a 14% discount rate and probability-weighted expected milestone

payment ranges from $25.4 million to $69.3 million based on estimated commercial sales of Crux products ranging from $81.6 million to $245.3 million. As of December 31, 2012, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition.

Inventory Valuation

Inventories are valued at the lower of first-in, first-out cost or market value. Inventory provisions are recorded for materials that have become obsolete or are no longer used in current production and for inventory that has a market value less than the carrying value in inventory. We regularly monitor potential inventory excess, obsolescence and lower market values compared to standard costs and, when necessary, reduce the carrying amount of our inventory to its market value. Specific reserves are maintained to reduce the carrying value of inventory items on hand that we know may not be used in finished goods. If our estimates for potential inventory losses prove to be too low, then our future earnings will be affected when the related additional inventory losses are recorded.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Equipment and capitalized software are depreciated over the estimated useful lives of the assets, which range generally from three to ten years. Leasehold improvements are amortized over the lesser of the lease term including renewal periods that are reasonably assured or the estimated useful lives of the improvements, which are between three and ten years. The straight-line method is used for depreciation and amortization. Land is stated at cost and is not depreciated. Significant improvements which substantially extend the useful lives of assets are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Assets held under capital leases are recorded at the net present value of the minimum lease payments of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease and is included in our depreciation expense.

Our long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. No significant impairment of long-lived assets was identified or recorded during the years ended December 31, 2012, 2011 and 2010.

Goodwill

Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in a business combination. The impairment evaluation for goodwill is conducted annually as of October 1, or more frequently if events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We test for goodwill impairment at the reporting unit level, which is at the operating segment level. Our goodwill at December 31, 2012 and 2011 is allocated entirely to our medical segment.

We first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of our reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. In the first step, we compare the fair value of our reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of our reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of our reporting unit's goodwill. If the carrying value of our reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. There was no impairment of goodwill during the years ended December 31, 2012, 2011 and 2010.

Intangible Assets

Intangible assets are recorded at historical cost and amortized over their estimated useful lives. Intangible assets consist of acquired developed technology, licenses, customer relationships, assembled technology, patents and trademarks, as well as acquired in-process research and development technology, or IPR&D. Intangible assets with a definite life are amortized using the straight-line method over their estimated useful lives of up to 20 years.

When we acquire another entity, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets, and net tangible assets, with the remainder recognized as goodwill. IPR&D has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

Determining the allocation of the purchase price, including the portion of the purchase price allocated to IPR&D requires us to make significant estimates. The amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility.

Intangible assets are tested for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. No impairment of intangible assets was identified or recorded during the years ended December 31, 2012, 2011 and 2010.

Stock-based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model, or Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates. See Note 5 “Stockholders’ Equity” to our consolidated financial statements for a complete discussion of our equity compensation programs and the fair value assumptions used to determine our stock-based compensation expense.

We have used the Black-Scholes model to estimate fair value of our stock-based awards which requires various judgmental assumptions including estimating stock price volatility, risk-free interest rate, and expected option life. If we had made different assumptions, the amount of our deferred stock-based compensation, stock-based compensation expense, gross margin, net income (loss) and net income (loss) per share amounts could have been significantly different. We believe that we have used reasonable methodologies, approaches and assumptions to determine the fair value of our common stock and that deferred stock-based compensation and related amortization were recorded properly for accounting purposes. If any of the assumptions used change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. For example, we granted stock options for 393,889 shares of our common stock during the year ended December 31, 2012. Using our assumptions, we calculated approximately $4.2 million of stock compensation expense related to these option grants that will generally be amortized over four years. Given a ten percent change in our volatility assumption, the value of these awards would have differed by approximately $800,000. Given a one-hundred basis point change in our risk-free interest rate assumption, the value of these awards would have differed by approximately $150,000. Given a one year change in our expected option life assumption, the value of these awards would have differed by approximately $500,000. In addition, given a one-hundred basis point change in our weighted-average forfeiture rate assumption, our stock-compensation expense recorded in the year ended December 31, 2012 would have differed by approximately $10,000.

Income Taxes

We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes. Our deferred tax assets are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are expected to be recovered or settled.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to continue to fluctuate as we increase foreign manufacturing and distribution operations. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The impact of an uncertain income tax position is recognized at the largest amount that is “more likely than not” to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

The realization of our deferred tax assets, which have a net carrying value of $28.0 million at December 31, 2012, is dependent upon our ability to generate sufficient future taxable income. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods and jurisdictions in which those temporary differences become deductible. During the fourth quarter of 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. Our expectation is that our operations in the respective foreign jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the majority of our foreign deferred tax assets. As a result, we released $4.9 million

of the valuation allowance on our foreign deferred tax assets. We believe it is more likely than not that the benefit from a portion of our state tax credit and operating loss carry forwards and foreign net operating loss carry forwards will not be realized. In recognition of this risk, we will continue to provide a full valuation allowance on the deferred tax assets relating to these items. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the statement of operations. In the case of an acquired or merged entity, we will record a valuation allowance on a deferred tax asset through purchase accounting as an adjustment to goodwill at the acquisition date, if it is more likely than not that all or a portion of the acquired deferred tax assets will not be realized in the future. Any subsequent change to a valuation allowance established during purchase accounting within the measurement period of the acquisition (not to exceed twelve months) will also be recorded as an adjustment to goodwill, provided that such change relates to new information about the facts and circumstances that existed on the acquisition date.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). This newly issued accounting standard allows an entity the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangibles other than goodwill. Under that option, an entity would no longer be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on that qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. This ASU is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We adopted this standard in the fourth quarter of 2012, which did not have a material impact on our financial or results of operations.

Inflation

We do not believe that inflation has had a material impact on our historical results of operations; however, there can be no assurance that our business will not be materially affected by inflation in the future.



Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

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

We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 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 December 31, 2012 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 borrowings may have their fair market value adversely impacted from changes in interest rates.

At December 31, 2012, we held $516.0 million in cash and cash equivalents and available-for-sale investments of which $471.6 million consisted of highly liquid financial investments with original final maturities of one year or less and the remaining amount was long-term available-for-sale investments with original final maturities over one year. Based upon our balance of cash and cash equivalents and investments, the impact of an increase or decrease in interest rates of 10 basis points would cause a corresponding increase or decrease in our annual interest income of approximately $510,000 from these investments.

We invest in cash and cash equivalents and available-for-sale 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 the majority 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 risk related primarily to our operations in Europe and Japan. 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 year ended December 31, 2012, 14.3% and 32.0% of our revenues were denominated in the euro and yen, respectively, and 9.4% and 13.3% of our operating expenses were denominated in the euro and the yen, respectively. If our yen or euro denominated sales exceed our yen or euro denominated costs, and the U.S. dollar strengthens relative to the yen or euro, there is an adverse effect on our results of operations. Conversely, if the U.S. dollar weakens relative to the yen or euro, there is a positive effect on our results of operations. For example, the average exchange rate of one U.S. dollar to yen decreased 0.4% from 79.6 in 2011 to 79.3 in 2012, which resulted in a net positive impact to our operational results for 2012 in the amount of approximately $300,000. The average exchange rate of one euro to U.S. dollar decreased 7.1% from 1.4 in 2011 to 1.3 in 2012, which resulted in a net negative impact to our operational results for 2012 in the amount of approximately $2.7 million.

Exchange rate fluctuations resulting from the remeasurement of the inter-company balances between Volcano Corporation, our U.S. entity, and Volcano Japan and Volcano Corporation and Volcano Europe, and other non-U.S. dollar denominated liabilities into U.S. dollars are recorded as foreign currency transaction gain or loss and are included in exchange rate gain or loss in the consolidated statement of operations.

Commencing October 2009, we began using foreign exchange forward contracts to manage a portion of the foreign currency risk for foreign subsidiaries with monetary assets and liabilities denominated in the yen and the euro. We only use derivative financial 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 exchange 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 losses or gains 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. For the year ended December 31, 2012, 2011 and 2010, we recorded $4.1 million of exchange rate gain and, $1.3 million and $3.2 million of exchange rate loss, respectively, related to our foreign exchange forward contracts.

We currently hold foreign exchange forward contracts with one 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. At December 31, 2012, we were in a net asset position with our counterparty for $3.5 million.

Market Price Sensitive Instruments

In order to reduce the potential equity dilution that would result upon conversion of our convertible senior notes, we entered into convertible note hedge transactions (the Hedge) entitling us to purchase up to 14 million shares of our common stock at an initial strike price of $32.83 per share and 850,000 shares of common stock at an initial strike price of $29.64 per share, subject to adjustments. Upon conversion of the convertible senior 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 14 million shares of our common stock at an initial strike price of $37.59 and 850,000 shares of our common stock at an initial strike price of $34.88 per share, subject to adjustments. 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 “Financial Statement Details—Debt” for additional information.



Item 8.	Financial Statements and Supplementary Data

VOLCANO CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




	Page
Reports of Independent Registered Public Accounting Firm	60
Consolidated Balance Sheets at December 31, 2012 and 2011	62
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010	63
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010	64
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010	65
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010	66
Notes to Consolidated Financial Statements	68

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Volcano Corporation:

We have audited the accompanying consolidated balance sheets of Volcano Corporation and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Volcano Corporation and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Volcano Corporation's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2013, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

San Diego, California

February 28, 2013

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Volcano Corporation:

We have audited Volcano Corporation's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Volcano Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Volcano Corporation's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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

In our opinion, Volcano Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Volcano Corporation and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 28, 2013, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Diego, California

February 28, 2013

VOLCANO CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



	December 31,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	330,635		$	107,016
Short-term available-for-sale investments	140,960			112,327
Accounts receivable, net	76,348			69,469
Inventories	52,811			41,306
Prepaid expenses and other current assets	21,773			19,939
Total current assets	622,527			350,057
Restricted cash	711			692
Long-term available-for-sale investments	44,385			30,919
Property and equipment, net of accumulated depreciation of $80,652 and $65,027, respectively	104,385			81,097
Intangible assets, net	50,657			15,245
Goodwill	51,577			2,487
Other non-current assets	28,102			16,227
Total assets	$	902,344		$	496,724
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	16,284		$	12,911
Accrued compensation	23,227			20,251
Accrued expenses and other current liabilities	23,476			16,689
Deferred revenues	9,789			7,077
Contingent consideration	2,908			—
Current maturities of long-term debt	53			72
Total current liabilities	75,737			57,000
Convertible senior notes	382,300			95,663
Other long-term debt	1,119			74
Deferred revenues	4,661			3,168
Contingent consideration, non-current portion	27,323			—
Other non-current liabilities	2,859			1,582
Total liabilities	493,999			157,487
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at December 31, 2012 and December 31, 2011	—			—
Common stock, par value of $0.001; 250,000 shares authorized at December 31, 2012 and December 31, 2011; 53,944 and 52,651 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively	54			53
Additional paid-in capital	494,276			430,490
Accumulated other comprehensive loss	(4,083		)	(1,382		)
Accumulated deficit	(81,902		)	(89,924		)
Total stockholders’ equity	408,345			339,237
Total liabilities and stockholders’ equity	$	902,344		$	496,724

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	Years Ended December 31,
	2012			2011			2010
Revenues	$	381,866		$	343,546		$	294,146
Cost of revenues, excluding amortization of intangibles	128,915			114,533			108,860
Gross profit	252,951			229,013			185,286
Operating expenses:
Selling, general and administrative	172,794			147,057			132,990
Research and development	55,469			53,098			42,517
Amortization of intangibles	3,240			3,447			2,559
Acquisition-related items	1,858			—			184
In-process research and development	—			—			(2,935		)
Total operating expenses	233,361			203,602			175,315
Operating income	19,590			25,411			9,971
Interest income	902			908			477
Interest expense	(7,975		)	(7,107		)	(2,192		)
Exchange rate loss	(576		)	(997		)	(904		)
Loss from debt extinguishment	(4,969		)	—			—
Other, net	2,717			(112		)	(25		)
Income before income tax	9,689			18,103			7,327
Income tax (benefit) expense	1,667			(19,990		)	2,087
Net income	$	8,022		$	38,093		$	5,240
Net income per share:
Basic	$	0.15		$	0.73		$	0.10
Diluted	$	0.15		$	0.70		$	0.10
Shares used in calculating net income per share:
Basic	53,475			52,300			50,551
Diluted	55,195			54,596			53,281

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



	Years Ended December 31,
	2012			2011			2010
Net income	$	8,022		$	38,093		$	5,240
Other comprehensive income (loss)
Foreign currency translation adjustments	(2,732		)	(819		)	3,494
Changes in unrealized gain (loss) on available-for-sale investments	31			30			(8		)
Other comprehensive income (loss)	(2,701		)	(789		)	3,486
Comprehensive income	$	5,321		$	37,304		$	8,726

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)



	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2009	48,790	49		352,102			(4,079		)	(133,257		)	214,815
Issuance of common stock under equity compensation plans	1,967	1		16,111									16,112
Employee stock-based compensation cost				11,752									11,752
Non-employee stock-based compensation cost				673									673
Issuance of common stock related to acquisitions	609	1		10,468									10,469
Equity component of convertible senior notes due 2015				22,263									22,263
Call options purchased in connection with convertible senior note due 2015				(27,190		)							(27,190		)
Issuance of warrants in connection with convertible senior notes due 2015				17,149									17,149
Portion of convertible bond issuance costs attributed to equity component				(866		)							(866		)
Tax benefit related to stock-based compensation				433									433
Net income										5,240			5,240
Other comprehensive income							3,486						3,486
Balance at December 31, 2010	51,366	51		402,895			(593		)	(128,017		)	274,336
Issuance of common stock under equity compensation plans	1,285	2		13,024									13,026
Employee stock-based compensation cost				12,855									12,855
Non-employee stock-based compensation cost				115									115
Reversal of valuation allowance related to Convertible Senior Notes and tax benefit related to stock-based compensation				1,601									1,601
Net income										38,093			38,093
Other comprehensive loss							(789		)				(789		)
Balance at December 31, 2011	52,651	53		430,490			(1,382		)	(89,924		)	339,237
Issuance of common stock under equity compensation plans	1,293	1		13,812									13,813
Employee stock-based compensation cost				15,135									15,135
Equity component of convertible senior notes due 2017				89,415									89,415
Portion of convertible bond issuance costs attributed to equity component				(2,840		)							(2,840		)
Net deferred tax recognized in connection with issuance of convertible senior notes due 2017 and retirement of convertible senior notes due 2015				2,599									2,599
Call options purchased in connection with convertible senior notes due 2017				(89,798		)							(89,798		)
Issuance of warrants in connection with convertible senior notes due 2017				53,686									53,686
Portion of retirement of convertible senior notes due 2015 attributed to equity				(21,811		)							(21,811		)
Retirement of call options in connection with retirement of a portion of senior convertible notes due 2015				15,156									15,156
Retirement of warrants in connection with the retirement of a portion of senior convertible notes due 2015				(11,603		)							(11,603		)
Tax benefit related to stock-based compensation				35									35
Net income										8,022			8,022
Other comprehensive loss							(2,701		)				(2,701		)
Balance at December 31, 2012	53,944	$	54	$	494,276		$	(4,083	)	$	(81,902	)	$	408,345

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Years Ended December 31,
	2012			2011			2010
Operating activities
Net income	$	8,022		$	38,093		$	5,240
Adjustments to reconcile net income to net cash provided by operating activities:
In-process research and development expense	—			—			(2,935		)
Depreciation and amortization	23,503			23,214			18,699
Amortization (accretion) of investment premium (discount), net	3,256			3,805			1,130
Accretion of debt discount on convertible senior notes	5,743			4,668			1,211
Loss on debt extinguishment	4,969			—			—
Acquisition-related items	231			—			—
Non-cash stock compensation expense	15,079			12,991			12,467
Other non-cash adjustments	(593		)	(2,350		)	2,711
Deferred income taxes	(1,009		)	(22,771		)	—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(9,971		)	(9,337		)	(6,420		)
Inventories	(13,270		)	831			(946		)
Prepaid expenses and other assets	(651		)	(540		)	(1,507		)
Restricted cash	(7		)	—			—
Accounts payable	157			(2,362		)	714
Accrued compensation	3,386			1,976			4,037
Accrued expenses and other liabilities	6,756			(6,541		)	10,654
Deferred revenues	4,217			1,919			1,128
Net cash provided by operating activities	49,818			43,596			46,183
Investing activities
Purchase of short-term and long-term available-for-sale securities	(298,260		)	(310,573		)	(233,960		)
Sale or maturity of short-term and long-term available-for-sale securities	252,937			365,639			97,204
Capital expenditures	(43,842		)	(43,248		)	(25,302		)
Cash paid for acquisitions, net of cash acquired	(54,462		)	—			(4,200		)
Cash paid for other intangible assets and investments	(5,824		)	(3,482		)	(3,864		)
Proceeds from sale of long-term investments	1,500			—			—
Proceeds from foreign currency exchange contracts	1,260			2,355			1,584
Payment for foreign currency exchange contracts	(525		)	(3,962		)	(4,356		)
Net cash provided by (used in) investing activities	(147,216		)	6,729			(172,894		)
Financing activities
Repayment of capital lease liability	(90		)	(51		)	(30		)
Proceeds from issuance of convertible senior notes	460,000			—			115,000
Payment of debt issuance costs in connection with the convertible senior notes	(14,611		)	—			(4,428		)
Purchase of call options in connection with the convertible senior notes	(89,798		)	—			(27,190		)
Proceeds from warrants issuance in connection with the convertible senior notes	53,686			—			17,149
Repurchase of a portion of 2.875% convertible senior notes due 2015	(104,832		)	—			—
Retirement of call options in connection with the retirement of a portion of 2.875% convertible senior notes due 2015	15,156			—			—
Retirement of warrants in connection with the retirement of a portion of 2.875% convertible senior notes due 2015	(11,603		)	—			—



Proceeds from sale of common stock under employee stock purchase plan	3,880			3,554		2,741
Proceeds from exercise of common stock options	9,933			9,472		13,371
Tax benefit related to stock-based compensation	35			165		433
Increases of restricted cash	—			—		(111		)
Net cash provided by financing activities	321,756			13,140		116,935
Effect of exchange rate changes on cash and cash equivalents	(739		)	122		(2,850		)
Net increase (decrease) in cash and cash equivalents	223,619			63,587		(12,626		)
Cash and cash equivalents, beginning of year	107,016			43,429		56,055
Cash and cash equivalents, end of year	$	330,635		$	107,016	$	43,429
Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,334		$	3,395	$	63
Cash paid for income taxes	$	2,399		$	2,387	$	248
Supplemental disclosures of non-cash investing activities:
Issuance of common stock related to milestone payment	$	—		$	—	$	10,469

See notes to consolidated financial statements.

VOLCANO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Our Company

Volcano Corporation, or we, us, our, Volcano or the Company, was incorporated under the laws of the State of Delaware on January 12, 2000. We design, develop, manufacture and commercialize a broad suite of precision guided therapy tools including 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 diagnostic angiograms, percutaneous interventional, or PCI, therapy procedures in the coronary arteries or peripheral arteries and veins. We are facilitating the adoption of functional PCI, in which our FFR technology is used to determine whether or not a stent is necessary, and IVUS is used to guide stent placement and optimization. We market our products to physicians, nurses and technicians who perform a variety of endovascular based coronary and peripheral interventional 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, image-guided therapy catheters and Medtronic’s Pioneer reentry device.

We also develop and manufacture optical monitors for the telecommunication industry; laser and non-laser light sources, and optical engines used in the medical OCT imaging systems and advanced photonic components and sub-systems used in spectroscopy and other industrial applications.

Basis of Presentation and Principles of Consolidation

Our consolidated financial statements include the accounts of Volcano Corporation and its wholly–owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the allowance for doubtful accounts, inventory reserves, depreciation and amortization, intangible assets, long-term investments in subsidiaries, sales returns, deferred revenues, business combinations, warranty costs, certain accruals, long-lived asset impairment calculations, deferred tax assets and liabilities and contingencies. Actual results could differ materially from the estimates and assumptions we use in the preparation of our consolidated financial statements.

Foreign Currency Translation

The yen and the euro are the functional currencies of Volcano Japan and Volcano Europe, respectively, as they are the primary currencies within the economic environments in which Volcano Japan and Volcano Europe operate. Assets and liabilities of their operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are

translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation are reported in other comprehensive income or loss.

Exchange rate fluctuations resulting from the remeasurement of the inter-company balances between Volcano Corporation, our U.S. entity, and Volcano Japan, and Volcano Corporation and Volcano Europe, and other non-U.S. dollar denominated balances into U.S. dollars are recorded as foreign currency transaction gains or losses and are included in exchange rate gain (loss) in the consolidated statements of operations.

The functional currency of our other foreign subsidiaries is the U.S. dollar since they are an extension of the Company’s U.S. operations.

Cash and Cash Equivalents

Cash primarily consisted of cash in bank deposits. Cash equivalents consist of money market funds and other highly liquid investments with an original maturity of three months or less on the date of acquisition.

Available-for-Sale Investments

Our short-term available-for-sale investments consist of highly liquid financial investments with maturity of one year or less that were not previously classified as cash equivalents. Our long-term available-for-sale investments consist of investments with maturities over one year. All investments are classified as available-for-sale and are recorded at market value using the specific identification method. Unrealized gains or losses are reflected in other comprehensive income or loss.

Financial Instruments

Financial instruments included in our financial statements are comprised of cash and cash equivalents, available-for-sale investments, foreign exchange forward contracts, accounts receivable, accounts payable, certain accrued liabilities and debt. The carrying amounts of cash and cash equivalents, available-for-sale investments, accounts receivable, accounts payable, accrued liabilities and short-term debt approximate their fair values due to the short-term nature of those instruments. The fair value of our long-term investments approximate their carrying values based upon market rates of interest. The fair value of our convertible senior notes is influenced by interest rates, our stock price, and stock price volatility, which is determined by market trading.

In October 2009, we began using foreign exchange forward contracts to manage a portion of the foreign currency risk for our monetary assets denominated in the yen and the euro. We only use derivative financial instruments to reduce the risk that our earnings and cash flows will be affected by changes in exchange rates; we do not hold any derivative financial instruments for trading or speculative purposes. We primarily use forward exchange contracts to hedge foreign currency exposures related to our intercompany receivables, 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 qualified for hedge accounting. These contracts contain net settlement features. We offset fair value amounts recognized for receivables and payables arising from our foreign exchange forward contracts with the counterparty.

We recognize contingent purchase price consideration at fair value at the acquisition date. The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period. Therefore, any changes in the fair value will impact our earnings in such reporting period, thereby resulting in potential variability in our earnings until such contingencies are resolved.

Concentration of Credit Risk

Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, available-for-sale investments and accounts receivable. We have established guidelines to limit our exposure to credit risk by placing investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We 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.

No single customer accounted for more than 10% of our revenues for 2012, 2011 and 2010. No single customer accounted for more than 10% of our trade receivables at December 31, 2012, 2011 and 2010.

We currently hold foreign exchange forward contracts with one 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 counterparty 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 due 2015, or the 2015 Notes, and our 1.75% Convertible Senior Notes due 2017, or the 2017 Notes, or collectively, the Notes, we purchased call options from JPMorgan Chase Bank, National Association, or JPMorgan Chase, and Goldman, Sachs & Co., or Goldman Sachs (in the case of the 2017 Notes). Non-performance by JPMorgan Chase and Goldman Sachs under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price (in the case of the 2015 Notes and the 2017 Notes). See Note 3 “Financial Statement Details—Debt” for additional information.

We purchase integrated circuits and other key components for use in our products. 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 cannot 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.”

Inventories

Restricted Cash

At December 31, 2012 and 2011, we had restricted cash totaling $711,000 and $692,000, respectively, which was restricted as collateral for our performance obligations to customers in foreign jurisdictions. The certificates of deposit and cash in the bank will remain restricted until such time as the current obligation is terminated.

Property and Equipment

Goodwill

Intangible Assets

Intangible assets are recorded at historical cost and amortized over their estimated useful lives. Intangible assets consist of acquired developed technology, licenses, customer relationships, patents and trademarks and covenants-not-to-compete as well as acquired in-process research and development technology. Intangible assets with a definite life are amortized using the straight-line method over their estimated useful lives of up to 20 years.

When we acquire another entity, the purchase price is allocated, as applicable, between acquired in-process research and development, or IPR&D, other identifiable intangible assets, and net tangible assets, with the remainder recognized as goodwill. IPR&D has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

Intangible assets with definite lives are tested for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. No impairment of intangible assets was identified or recorded during the years ended December 31, 2012, 2011 and 2010.

Other Non-Current Assets

At December 31, 2012 and 2011, other non-current assets include $2.0 million and $2.5 million, respectively, of individually immaterial investments we have made in various private entities engaged in emerging product development activities, which are accounted for using the cost method.

Revenue Recognition

For an arrangement containing multiple deliverables that are considered separate units of accounting, we allocate arrangement consideration based on the relative selling prices of the separate units of accounting. Selling prices are determined using fair value, when available, or our estimate of selling price when fair value is not available.

shipment (generally FOB shipping point). No direct sales customers or distributors have price protection. Estimated returns, which are historically nominal, are recorded as an allowance for sales return and as a reduction in revenues.

Shipping and Handling Costs

Shipping and handling costs billed to customers are included in revenues. Shipping and handling costs we incur associated with shipping products to our customers are included in cost of revenues.

Product Warranty Costs

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

Research and Development

Company-sponsored research and development expenses include the costs of technical activities that are useful in developing new products, services, processes or techniques, as well as expenses for technical activities that may significantly improve existing products or processes, and are expensed as incurred.

Clinical Studies

We recognize research and development costs for activities associated with clinical studies performed by third parties as incurred. All other costs relative to setting up clinical study sites are recognized as research and development expense as incurred. Clinical study site costs related to patient enrollment are accrued as patients are entered into the studies. Equipment that has alternative future use and is used at clinical study sites for participation in the studies is capitalized and expensed over the estimated life of the equipment.

Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the fourth quarter of 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. We released $4.9 million of the valuation allowance on our foreign deferred tax assets as we expect our foreign operations in the respective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax assets. We believe it is more likely than not that the benefit from certain international net operating losses and a portion of our state deferred tax assets will not be realized. In recognition of this risk, we will continue to provide a valuation allowance on the deferred tax assets relating to these items. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the statement of operations. In the case of an acquired or merged entity, we will record valuation allowance on a deferred tax asset through purchase accounting procedures as an adjustment to goodwill at the acquisition date, if it is more likely than not that all or a portion of the acquired deferred tax assets will not be realized in the future. Any subsequent change to a valuation allowance established during purchase accounting within the measurement period of the acquisition (not to exceed twelve months) will also be recorded as an adjustment to goodwill, provided that such change relates to new information about the facts and circumstances that existed on the acquisition date.

FASB ASC Topic 740, Income Taxes, or ASC 740, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation

processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We accrue interest and penalties on underpayment of income taxes related to unrecognized tax benefits as a component of income tax expense in our consolidated statements of operations. The amounts recognized for interest and penalties during the years ended December 31, 2012, 2011 and 2010 were $46,000, $34,000, and $25,000, respectively.

Net Income Per Share

Basic and diluted net income per share is presented in accordance with FASB ASC Topic 260, Earnings per Share. Basic net income per share is computed by dividing consolidated net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing consolidated net income by the weighted-average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the period. 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 — Debt”). Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income per share as discussed in the following paragraph. For the years ended December 31, 2012, 2011 and 2010, potentially dilutive shares totaling 9 million, 1.7 million, and 834,000, respectively, have not been included in the computation of diluted net income (loss) per share, as the result would be anti-dilutive.

Diluted net income per common share includes zero, 12,000 and zero incremental shares related to the Notes for the years ended December 31, 2012, 2011 and 2010. Because the principal amount of the Notes will be settled in cash upon conversion, only the conversion spread relating to the Notes may be included in our calculation of diluted net income per common share. As such, 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 for the 2015 Notes and $32.83 for the 2017 Notes, subject to adjustments) of the Notes. During the year ended December 31, 2011, 12,000 shares related to the 2015 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 2015 Notes. The average price of our common stock did not exceed the conversion price of the Notes during any quarter of the years ended December 31, 2012 and 2010 or the other three quarters of 2011.

The diluted net income per common share does not include any incremental shares related to the exercise of the warrants for the years ended December 31, 2012, 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 for the 2015 Notes offering and $37.59 for the warrants issued in connection with the 2017 Notes offering, subject to adjustments). When the market price of our stock exceeds the strike price, 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.

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 — 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 common share calculations for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands, except per share data):



	Years Ended December 31,
	2012		2011		2010
Net income	$	8,022	$	38,093	$	5,240
Weighted average common shares outstanding for basic	53,475		52,300		50,551
Dilutive potential common stock outstanding:
Stock options	1,404		1,896		2,325
Restricted stock units	309		377		391
Employee stock purchase plan	7		11		14
Convertible senior notes	—		12		—
Weighted average common shares outstanding for diluted	55,195		54,596		53,281
Net income per share:
Basic	$	0.15	$	0.73	$	0.10
Diluted	$	0.15	$	0.70	$	0.10

Stock-Based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We adopted ASC 718 on January 1, 2006 using the modified prospective method. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model, or Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates. See Note 5 “Stockholders’ Equity” for a complete discussion of our equity compensation programs and the fair value assumptions used to determine our stock-based compensation expense.

We account for stock-based compensation awards and warrants granted to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, or ASC 505-50. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

Comprehensive Income

Comprehensive income represents the net income for the period plus the results of certain changes to stockholders’ equity that are not reflected in the consolidated statements of operations. Our comprehensive income consists of net income, unrealized net gains and losses on investments and foreign currency translation adjustments. Foreign currency translation adjustments were not adjusted for income taxes as they relate to cumulative losses in foreign subsidiaries which provide no corresponding tax benefit or investments in foreign subsidiaries with earnings which the foreign subsidiaries does not plan on remitting to the parent company.

Recent Accounting Pronouncements

2. Acquisitions

Crux Acquisition

On December 12, 2012 we completed the acquisition of all outstanding equity interests in Crux Biomedical, Inc., or Crux, a privately-held company engaged in the development of filter technology for the vascular, cardiovascular and interventional radiology markets. The primary reason for the acquisition was to diversify our product offerings, allow us the opportunity to better position ourselves in the peripheral vascular market and to increase our IVUS product sales. The transaction was accounted for as a business combination. We recorded $943,000 of acquisition-related costs for this transaction, which were recognized in our statement of operations in the year ended December 31, 2012 as acquisition-related items within operating expense. We recorded $36.7 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. The operating results of Crux from the date of acquisition, including zero revenue and $334,000 net loss, are included in our consolidated financial statements.

We made up-front cash payments totaling $39.1 million in exchange for 100% of Crux's capital stock, of which $3.9 million is being held in escrow to satisfy claims for indemnification for certain matters made within 12 months following the closing. We also have a receivable for a working capital shortfall to target, which is expected to be settled for approximately $1.2 million in 2014. The fair value of this receivable was estimated to be $900,000 at acquisition. A potential post-closing cash milestone payment of $3.0 million will be paid by us upon U.S. Food and Drug Administration, or FDA, clearance of a 510(k) application submitted by us on or before June 30, 2013 for an inferior vena cava filter retrieval device currently being developed by Crux. The fair value of this contingent consideration was estimated to be $2.9 million at acquisition and is recorded as a current liability. Additional contingent payments of an estimated $46.6 million would be due upon reaching various sales milestones. The fair value of this contingent consideration was estimated to be $28.0 million at acquisition and is recorded as a non-current liability. A reconciliation of upfront payments in accordance with the purchase agreement to the total purchase price is presented below (in thousands):



Base payment per agreement	$	36,000
Reimbursement of transaction expenses incurred by Crux	3,100
Total up-front payments	39,100
Estimated fair value of receivable for working capital adjustment	(900		)
Estimated fair value of contingent consideration	30,900
Total purchase price	$	69,100

The working capital receivable in the amount of $900,000 represents the initial estimate of the fair value of the amount by which the working capital acquired in the transaction was less than the target working capital as stated in the Merger Agreement. The receivable will be accreted to its fair value with changes in fair value recorded in acquisition-related items within operating expense. The receivable has a legal right of offset against milestone payments, which are expected to be paid beginning in 2014, and therefore is reflected as a contra liability in non-current liability.

We determined the initial fair values of the contingent consideration relative to FDA clearance and the milestone payments based on commercial sales of Crux products using various estimates, including probabilities of success, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The key assumptions used to determine the fair value of the contingent consideration relative to FDA clearance include a 5% discount rate and probability adjusted milestone payment date ranges from May 31, 2013 to September 30, 2013. For the fair value relative to the milestone payments based on the commercial sales of Crux products, the key assumptions in applying the income approach include a 14% discount rate and probability-weighted expected milestone payment ranges from $25.4 million to $69.3 million based on estimated commercial sales of Crux products ranging from $81.6 million to $245.3 million from 2014 to 2017. As of December 31, 2012, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition, although the fair value of the contingent consideration for the FDA clearance and the commercial sales milestone payments increased by $8,000 and $230,000, respectively, as a result of the passage of time (reduced impact of discounting), which were recorded as acquisition-related items within operating expense.

The preliminary purchase price allocation as of the acquisition date is summarized as follows (in thousands):



	December 12, 2012
Current assets:
Cash and cash equivalents	$	1,474
Other current assets	243
Property and equipment	39
In-process research and development	28,400
Covenant-not-to-compete	200
Deferred tax asset	12,996
Total assets acquired	43,352
Current liabilities:
Accounts payable	(223		)
Accrued expenses	(302		)
Other long term payable	(97		)
Deferred tax liability	(10,307		)
Total liabilities assumed	(10,929		)
Goodwill	36,677
Net assets acquired	$	69,100

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. As of the date of this Annual Report on Form 10-K, the Company is still finalizing the allocation of the purchase price. Changes to this allocation may occur as additional information becomes available related to the valuation of intangible assets, working capital adjustments, indemnification claims and deferred taxes, with such changes recorded as an adjustment to goodwill.

The IPR&D asset we recorded in the amount of $28.4 million represents an estimate of the fair value of in-process technology related to Crux's filter technology and retrieval device programs. The estimated fair value was determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The fair value using the multi-period excess earnings method was dependent on an estimated weighted average cost of capital for Crux of 14%, which represents a rate of return that a market participant would expect for these assets.

Pursuant to ASC 805, intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. Accordingly, amortization of the IPR&D will not occur until it reaches market feasibility. During the period the assets are considered indefinite-lived, they will be tested for impairment on an annual basis, as well as between annual tests if we become aware of any events occurring or changes in circumstances that would indicate that the fair value of the IPR&D projects is less than their respective carrying amounts. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets would be deemed definite-lived and would then be amortized based on their estimated useful lives at that point in time. Costs incurred in connection with this project subsequent to the date of acquisition will be expensed as incurred. If the related project is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed, $36.7 million, represents the goodwill amount resulting from the acquisition. The goodwill attributable to the acquisition has been recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment. We expect to benefit from the acquisition by expanding our product offerings to physicians thereby contributing to an expanded revenue base. Further, we expect to realize synergies by offering the products developed from the acquisition utilizing our existing sales force.

Pro forma financial information (unaudited)

The following unaudited pro forma information presents the combined results of operations for the years ended December 31, 2012 and 2011 as if the acquisition of Crux had been completed as of the beginning of 2011 (in thousands, except per share data):



	Years Ended December 31,
	2012			2011

Revenues	$	381,866		$	343,546
Net income (loss)	$	(515	)	$	31,035
Net income (loss) per share, basic and diluted:
Basic	$	(0.01	)	$	0.59
Diluted	$	(0.01	)	$	0.57
Shares used in computing basic and diluted net income (loss) per share:
Basic	53,475			52,300
Diluted	53,475			54,596

The pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Included in the pro forma net income for the year ended December 31, 2012 are approximately $943,000 of acquisition-related costs, which are not expected to have an ongoing impact.

Sync-Rx Acquisition

On November 26, 2012, we acquired all of the outstanding equity interests in Sync-Rx Ltd., or Sync-Rx, a privately-held company, which is engaged in the development of advanced software applications that optimize and facilitate transcatheter cardiovascular interventions using automated online image processing. The Sync-Rx technology will provide us with a platform on which to build a range of advanced software features that will aid clinical decision-making by providing angiography and intra-body image enhancement, measurement and non-invasive imaging and intravascular co-registration capabilities, and future opportunities in physiology and peripheral and minimally invasive structural heart therapy guidance.

The aggregate purchase price was $17.3 million, of which $3.3 million is being held in escrow to satisfy claims for indemnification for certain matters made within 18 months following the closing. The transaction was accounted for as a business combination and, as such, we recorded $12.4 million of goodwill reflecting the amount by which the purchase consideration exceeded the acquired net assets. We expect to benefit from the acquisition by expanding our product offerings to physicians thereby contributing to an expanded revenue base. Additionally, we expect to realize synergies by offering the products developed from the acquisition utilizing our existing sales force. This goodwill was allocated to our medical segment and is not deductible for income tax purposes. We recorded $684,000 of acquisition-related costs related to this transaction, which were recognized in our statement of operations for the year ended December 31, 2012 as acquisition-related items within operating expense. We have included the operating results associated with the Sync-Rx acquisition in our consolidated financial statements from the date of acquisition.

Additionally, in connection with the acquisition, we recorded a contingent liability of $1.1 million related to a government grant received to develop the underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We expect to generate revenues sufficient to repay the liability in its entirety. The grant was recorded as other long term debt at its present value based on the estimated years of re-payment. The long term liability will be accreted to the re-payment amount of $1.9 million plus interest, with such accretion recorded as interest expense over the expected period of re-payment of 10 to 16 years.

The preliminary purchase price allocation as of the acquisition date is summarized as follows (in thousands):



	November 26, 2012
Current assets:
Cash and cash equivalents	$	423
Accounts receivables and other current assets	72
Property and equipment	37
Developed technology	3,200
In-process research and development	1,300
Covenants not-to-compete	100
Other non-current assets	8
Deferred tax asset	2,391
Total assets acquired	7,531
Current liabilities:
Accounts payable	(56		)
Accrued expenses	(375		)
Other long-term debt	(1,100		)
Deferred tax liability	(1,150		)
Total liabilities acquired	(2,681		)
Goodwill	12,409
Net assets acquired	$	17,259

The $3.2 million developed technology represents an estimate of the fair value of Sync-Rx's image enhancement technology, which is subject to an estimated useful life of ten years. The IPR&D asset represents an estimate of the fair value of in-process technology related to Sync-Rx's co-registration technology, which is still under development. The estimated fair values were determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The rate used to discount net future after-tax cash flows to their present values was based on a discount rate of 19% for developed technology and 20% for the IPR&D. Significant factors considered in the calculation of the discount rates include the weighted average cost of capital, the internal rate of return and the weighted average return on assets, as well as the risks inherent in the development process for the technology.

Pursuant to ASC 805, 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. If the related project is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

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. As of December 31, 2012, all of our investments were classified as available-for-sale and will mature within 22 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 or loss.

At December 31, 2012 and 2011, available-for-sale investments are detailed as follows (in thousands):

At December 31, 2012

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	121,883	$	52	$	5	$	121,930
U.S. Treasury and agency debt securities	19,020		10		—		19,030
Short-term available-for-sale investments	$	140,903	$	62	$	5	$	140,960
Long-term:
Corporate debt securities	$	33,384	$	6	$	17	$	33,373
U.S. Treasury and agency debt securities	11,010		2		—		11,012
Long-term available for sale investments	$	44,394	$	8	$	17	$	44,385

At December 31, 2011

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	74,233	$	44	$	3	$	74,274
U.S. Treasury and agency debt securities	38,050		4		1		38,053
Short-term available-for-sale investments	$	112,283	$	48	$	4	$	112,327
Long-term:
Corporate debt securities	$	20,930	$	1	$	33	$	20,898
U.S. Treasury and agency debt securities	10,017		4		—		10,021
Long-term available for sale investments	$	30,947	$	5	$	33	$	30,919

Available-for-sale investments that are in an unrealized loss position at December 31, 2012 and 2011 are detailed as follows (in thousands):



	At December 31, 2012
	Estimated Fair Value		Gross Unrealized Losses
Corporate debt securities	$	46,987	$	22
U.S. Treasury and agency debt securities	—		—
	$	46,987	$	22

At December 31, 2012, sixteen of our corporate debt securities and none of our U.S. Treasury and agency debt securities are in an unrealized loss position. We fully expect to receive par value with full principal and interest when these securities mature. These investments have been in an unrealized loss position for less than 12 months. We do not consider these investments to be other-than-temporarily impaired at December 31, 2012.



	At December 31, 2011
	Estimated Fair Value		Gross Unrealized Losses
Corporate debt securities	$	27,664	$	36
U.S. Treasury and agency debt securities	9,502		1
	$	37,166	$	37

Derivative Financial Instruments

Our derivative financial instruments include foreign exchange forward contracts. Commencing October 2009, we began using foreign exchange 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 record derivative financial instruments as either assets or liabilities in our consolidated balance sheets and measure them at fair value. At December 31, 2012 and 2011, the notional amount of our outstanding contracts was $64.4 million and $59.3 million, respectively. At December 31, 2012, our outstanding derivatives had maturities of 189 days or less. The fair value of our foreign exchange forward contracts of $3.5 million and $92,000 was included in prepaid and other current assets and $0 and

$71,000 was included in accrued expense and other current liabilities in our consolidated balance sheet at December 31, 2012 and 2011, respectively. For the years ended December 31, 2012, 2011 and 2010, $4.1 million of gains, and $1.3 million and $3.2 million of losses, respectively, related to our derivative financial instruments are included in exchange rate loss in our consolidated statements of operations.

In connection with our convertible debt offering in December 2012 (discussed in more detail below) we purchased call options on our common stock from JPMorgan Chase and Goldman Sachs. The call options give us the right to purchase up to approximately 14.0 million shares of our common stock at $32.8286 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 and Goldman Sachs, which give JPMorgan Chase and Goldman Sachs the right to purchase up to approximately 14.0 million shares of our common stock at $37.59 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.

In connection with our convertible debt offering in September 2010 (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. In December 2012, $90.0 million of the $115 million convertible notes were repurchased by the Company and the proportionate call option and warrant related to the convertible notes were also retired (discussed in more detail below). The remaining call options give us the right to purchase up to approximately 850,000 shares of our common stock at $29.64 per share, subject to certain adjustments, and the remaining warrants give JPMorgan Chase the right to purchase up to approximately 850,000 shares of our common stock at $34.875 per share, subject to certain adjustments. The remaining call options and warrants continue to be classified as equity instruments and are not being marked to market prospectively.

Fair Value Measurements

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. Our Level 3 liability includes contingent consideration related to the Crux acquisition.

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 third-party financial institutions to assist us in obtaining fair value pricing for our foreign currency forward contracts.

Contingent consideration arrangements obligate us to pay former shareholders of an acquired entity if specified future events occur or conditions are met such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. We measure such liabilities using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. We used various key assumptions, such as the probability of achievement of the agreed milestones and the discount rate, in our determination of the fair value of contingent considerations. We monitor the fair value of the contingent considerations and the subsequent revisions will be reflected in our Statements of Operations in the line items commensurate with underlying nature of the milestones. For a further discussion on

the key assumptions used in determining the fair value of the contingent consideration , refer to Note 2, "Acquisitions - Crux Acquisition".

During the years ended December 31, 2012 and 2011, 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 December 31, 2012 and 2011 (in thousands):



	Fair Value Measurements at December 31, 2012
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	41,636	$	41,636	$	—	$	—
Money market funds	288,999		288,999		—		—
Sub-total cash and cash equivalents	330,635		330,635		—		—
Corporate debt securities	121,930		—		121,930		—
U.S. Treasury and agency debt securities	19,030		19,030		—		—
Sub-total short-term investments measured at fair value	140,960		19,030		121,930		—
Foreign currency forward contracts	3,461		—		3,461		—
Sub-total other current assets measured at fair value	3,461		—		3,461		—
Non-current:
Corporate debt securities	33,373		—		33,373		—
U.S. Treasury and agency debt securities	11,012		11,012		—		—
Sub-total long-term investments measured at fair value	44,385		11,012		33,373		—
Total Assets measured at fair value	$	519,441	$	360,677	$	158,764	$	—
Liabilities:
Current:
Contingent consideration, current portion	$	2,908	$	—	$	—	$	2,908
Non-current:
Contingent considerations (1)	27,323		—		—		27,323
Total liabilities measured at fair value	$	30,231	$	—	$	—	$	30,231

(1) This amount is reflected net of the fair value of the working capital receivable in the amount of $907,000 at December 31, 2012.



	Fair Value Measurements at December 31, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	41,744	$	41,744	$	—	$	—
Money market funds	65,272		65,272		—		—
Sub-total cash and cash equivalents	107,016		107,016		—		—
Corporate debt securities	74,274		—		74,274		—
U.S. Treasury and agency debt securities	38,053		38,053		—		—
Sub-total short-term investments measured at fair value	112,327		38,053		74,274		—
Foreign currency forward contracts	92		—		92		—
Sub-total other current assets measured at fair value	92		—		92		—
Long Term:
Corporate debt securities	20,898		—		20,898		—
U.S. Treasury and agency debt securities	10,021		10,021		—		—
Sub-total long-term investments measured at fair value	30,919		10,021		20,898		—
Total Assets measured at fair value	$	250,354	$	155,090	$	95,264	$	—
Liabilities:
Foreign currency forward contracts	$	71	$	—	$	71	$	—

Accounts Receivable, Net

Accounts receivable, net consists of the following (in thousands):



	December 31,
	2012		2011
Trade accounts receivable	$	76,717	$	69,553
Less: allowance for doubtful accounts	369		84
	$	76,348	$	69,469

The change in the allowance for doubtful accounts for the years ended December 31, 2012, 2011 and 2010 is summarized in the following table (in thousands):



	Years Ended December 31,
	2012		2011		2010
Balance at beginning of year	$	84	$	29	$	307
Additions (recoveries) charged to selling, general and administrative expense	285		55		(12		)
Write-offs	—		—		(246		)
Foreign currency translation adjustments	—		—		(20		)
Balance at end of year	$	369	$	84	$	29

Inventories

Inventories consist of the following (in thousands):



	December 31,
	2012		2011
Finished goods (1)	$	19,002	$	17,770
Work-in-process	15,780		9,419
Raw materials	18,029		14,117
	$	52,811	$	41,306


(1)	Finished goods inventory includes consigned inventory of $5.3 million and $4.9 million at December 31, 2012 and 2011, respectively.

Property and Equipment

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



	December 31,
	2012			2011
Medical diagnostic equipment	$	65,548		$	64,375
Other equipment	44,879			33,953
Leasehold improvements	9,289			8,514
Software	5,447			5,113
Land	3,046			3,046
Building	29,098			—
Construction-in-progress (1)	27,730			31,123
	185,037			146,124
Less: Accumulated depreciation and amortization	(80,652		)	(65,027		)
	$	104,385		$	81,097


(1)	At December 31, 2012, construction-in-progress includes $1.0 million of capitalized interest related to the implementation of ERP systems worldwide. At December 31, 2011, construction-in-process includes $1.2 million of capitalized interest related to the construction of our manufacturing facility in Costa Rica and implementation of ERP systems worldwide.

Property and equipment includes certain medical diagnostic equipment that is located at customer premises. We retain the ownership of the equipment and have the right to remove the equipment if it is not being utilized according to expectations. Depreciation expense relating to the equipment of $9.6 million, $10.9 million and $8.2 million is recorded in cost of revenues during the years ended December 31, 2012, 2011 and 2010, respectively. The net book value of this equipment was $21.7 million and $25.9 million at December 31, 2012 and December 31, 2011, respectively. Also included in medical diagnostic equipment is property and equipment used for demonstration and evaluation purposes. Depreciation expense for equipment used for demonstration and evaluation purposes recorded in selling, general and administrative expenses totaled $0.8 million, $1.2 million and $1.5 million during the years ended December 31, 2012, 2011 and 2010, respectively. The net book value of this equipment was $0.9 million and $1.4 million at December 31, 2012 and December 31, 2011, respectively. Medical diagnostic equipment is recorded at our cost to acquire or manufacture the equipment and is depreciated over its estimated useful life (generally three to five years).

Depreciation and amortization expense for the years ended December 31, 2012, 2011 and 2010 was $19.9 million, $19.8 million, and $16.0 million, respectively.

Intangible Assets

Intangible assets consisted of acquired developed technology, licenses, customer relationships, assembled technology, patents and trademarks, covenant not to compete, as well as acquired in-process research and development technology. Intangible assets, except for acquired in-process research and development technology, are amortized using the straight-line method over their estimated useful lives of up to 20 years. Amortization of acquired in-process research and development technology will not commence until the technology reaches market feasibility. If the related project is terminated or abandoned, we may have an impairment related to the in-process research and development technology, calculated as the excess of the asset’s carrying value over its fair value.

During the year ended December 31, 2012, we recorded intangible asset additions of $4.4 million related to developed technology, $150,000 related to licenses, $4.0 million related to internally developed patents and trademarks, $300,000 related to covenant not to compete, and $29.7 million related to in-process research and development technology acquired from acquisitions.

During the year ended December 31, 2011, we recorded intangible asset additions of $1.4 million related to internally developed patents and trademarks, $104,000 related to customer relationships and $161,000 related to licensed technology.

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



	December 31, 2012
Intangible assets subject to amortization	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Developed technology	$	27,051	$	17,408	$	9,643	8.8
Licenses	7,345		6,709		636		10.0
Customer relationships	4,177		3,756		421		6.0
Patents and trademarks	8,029		2,114		5,915		13.2
Covenant not to compete	300		8		292		3.0
	46,902		29,995		16,907		9.4
Intangible assets not yet subject to amortization
In-process research and development	33,750		—		33,750		n/a
	$	80,652	$	29,995	$	50,657



	December 31, 2011
Intangible assets subject to amortization	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Developed technology	$	22,651	$	15,995	$	6,656	8.2
Licenses	7,195		6,054		1,141		10.0
Customer relationships	4,082		3,067		1,015		3.3
Patents and trademarks	4,015		1,632		2,383		9.0
	37,943		26,748		11,195		7.3
Intangible assets not yet subject to amortization
In-process research and development	4,050		—		4,050		n/a
	$	41,993	$	26,748	$	15,245


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

We recorded amortization of intangible assets totaling $3.2 million, $3.4 million and $2.6 million for years ended December 31, 2012, 2011 and 2010, respectively.

At December 31, 2012, future amortization expense related to our intangible assets subject to amortization is expected to be as follows (in thousands):




2013	$	3,128
2014	2,685
2015	2,263
2016	2,008
2017	1,487
Thereafter	5,336
	$	16,907

Goodwill

The change in goodwill for the years ended December 31, 2012 and 2011 is summarized in the following table (in thousands):



	Years Ended December 31,
	2012		2011
Balance at beginning of year	$	2,487	$	2,487
Additions	49,090		—
Balance at end of year	$	51,577	$	2,487

In 2012, goodwill of $12.4 million was recorded in connection with the Sync-Rx acquisition, and goodwill of $36.7 million was recorded in connection with the Crux acquisition.

Accrued Warranty

Accrued warranty liability is included in accrued expenses and other current liabilities in the consolidated balance sheets. The change in the accrued warranty liability for the years ended December 31, 2012, 2011 and 2010 is summarized in the following table (in thousands):



	Years Ended December 31,
	2012			2011			2010
Balance at beginning of year	$	1,077		$	852		$	1,159
Warranties issued	1,898			1,864			1,384
Settlements	(1,799		)	(1,639		)	(1,691		)
Balance at end of year	$	1,176		$	1,077		$	852

Capital Lease Obligations

We lease certain equipment under capital lease arrangements. See Note 4 “Commitments and Contingencies - Leases” for more information.

Debt

1.75% Convertible Note Due December 1, 2017

In December 2012, we issued $460 million aggregate principal amount of 1.75% Convertible Senior Notes due 2017 ("2017 Notes"), in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on June 1 and December 1, commencing on June 1, 2013.

The 2017 Notes are general unsecured obligations that rank the same with our other existing and future unsecured obligations. Prior to August 7, 2017, the 2017 Notes are convertible only upon certain specified events. The initial conversion rate for the 2017 Notes is 30.4612 shares of common stock per $1,000 principal amount of the 2017 Notes, representing an initial effective conversion price of approximately $32.83 per share of common stock. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the 2017 Notes but will not be adjusted for accrued and unpaid interest.

We received net proceeds of $409.3 million from issuance of the 2017 Notes, net of $14.6 million debt issuance costs and net payments of $36.1 million related to our hedge transactions. We recorded total debt issuance costs (including broker fees) of approximately $14.6 million, which have been allocated on a pro-rata basis to the debt ($11.8 million) and equity ($2.8 million) components of the transaction. The long-term debt component is included in non-current liabilities and is being accreted to interest expense over 5 years, the term of the 2017 Notes. The equity component was netted against the proceeds and included in additional paid-in capital.

We may not redeem the 2017 Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the 2017 Notes may require us to purchase all or a portion of their 2017 Notes at a purchase price equal to 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest, if any, to the repurchase date. Holders, who convert their 2017 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.

Prior to August 7, 2017, the 2017 Notes are convertible only under the following circumstances: (1) during any fiscal quarter commencing after March 31, 2013 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “ 2017 Notes Measurement Period”) in which, for each trading day of such 2017 Notes Measurement Period, the trading price per $1,000 principal amount of 2017 Notes on such trading day was less than 98% of the product of the last reported sale price of our common stock on such trading day and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified distributions and corporate events. As of December 31, 2012, none of the conditions allowing holders of the 2017 Notes to convert had been met.

We determined that the embedded conversion option in the 2017 Notes is not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging. However, since the 2017 Notes are within the scope of ASC 470, Topic 20, Debt with Conversion and Other Options, we are required to separate the 2017 Notes into a liability component and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 2017 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest cost over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in ASC 815, Topic 40, Contracts in an Entity’s Own Equity, or ASC 815.

We are using an effective interest rate of 7.00% to calculate the accretion of the bond discount, which is being recorded as interest expense over the expected remaining term of the 2017 Notes. (The amount by which interest expense calculated using the effective interest rate of 7.00% exceeds the interest expense related to the coupon rate of 1.75%, is non-cash interest expense.) The effective rate is based on the interest rate for a similar instrument that does not have a conversion feature. We may be required to pay additional interest upon occurrence of certain events as outlined in the indenture governing the 2017 Notes. As of December 31, 2012, the remaining term of the 2017 Notes is 4.92 years.

Upon conversion of a note, holders of the 2017 Notes will receive up to the principal amount of the converted note in cash and any excess conversion value (conversion spread) in shares of our common stock. The amount of cash and the number of shares of our common stock, if any, will be based on an 80 trading day observation period as described in the indenture. As described in Note 1 “Organization and Summary of Significant Accounting Policies”, the conversion spread will be included in the denominator for the computation of diluted net income per common share, using the treasury stock method, if the effect is dilutive.

As discussed above, to hedge against potential dilution upon conversion of the 2017 Notes, we also purchased call options on our common stock from JPMorgan Chase and Goldman Sachs. The call options give us the right to purchase up to approximately 14.0 million shares of our common stock at $32.83 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the 2017 Notes. We paid an aggregate of $89.8 million to purchase these call options. The call options will expire on December 1, 2017, unless earlier terminated or exercised. To reduce the cost of the hedge, in a separate transaction we sold warrants to JPMorgan Chase and Goldman Sachs. These warrants give JPMorgan Chase and Goldman Sachs the right to purchase up to approximately 14.0 million shares of our common stock at $37.59 per share, subject to certain adjustments. These warrants will be exercisable and will expire in equal installments for a period of 120 trading days beginning on March 15, 2018. We received an aggregate of $53.7 million from the sale of these warrants. In accordance with ASC 815, 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 unless certain conditions as described in the 2017 Notes occur. The net amount of $36.1 million was recorded as a reduction to additional paid-in capital. 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.

2.875 Convertible Note Due September 1, 2015

In September 2010, we issued $115 million aggregate principal amount of 2.875% Convertible Senior Notes due 2015 ("2015 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 2015 Notes are general unsecured obligations that rank the same with our other existing and future unsecured obligations. Prior to June 1, 2015, the 2015 Notes are convertible only upon certain specified events. The initial conversion rate for the 2015 Notes is 33.7339 shares of common stock per $1,000 principal amount of the 2015 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 2015 Notes but will not be adjusted for accrued and unpaid interest.

We received proceeds of $100.5 million from issuance of the 2015 Notes, net of debt issuance costs of $4.4 million and net payments related to our hedge transactions of $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 have been allocated on a pro-rata basis to the debt ($3.5 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 5 years, the term of the 2015 Notes. The equity component was netted against the proceeds and included in additional paid-in capital.

We may not redeem the 2015 Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the 2015 Notes may require us to purchase all or a portion of their 2015 Notes at a purchase price equal to 100% of the principal amount of the 2015 Notes, plus accrued and unpaid interest, if any, to the repurchase date. Holders, who convert their 2015 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.

Prior to June 1, 2015, the 2015 Notes are convertible only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2010 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “2015 Notes Measurement Period”) in which, for each trading day of such 2015 Notes Measurement Period, the trading price per $1,000 principal amount of 2015 Notes on such trading day was less than 98% of the product of the last reported sale price of our common stock on such trading day and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified distributions and corporate events. As of December 31, 2012, the “if-converted” value of the 2015 Notes did not exceed its principal amount and none of the conditions allowing holders of the 2015 Notes to convert had been met.

We determined that the embedded conversion option in the 2015 Notes is not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging. However, since the 2015 Notes are within the scope of ASC 470, Topic 20, Debt with Conversion and Other Options, we are required to separate the 2015 Notes into a liability component and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 2015 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest cost over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in ASC 815, Topic 40, Contracts in an Entity’s Own Equity, or ASC 815.

We are using an effective interest rate of 7.65% to calculate the accretion of the bond discount, which is being recorded as interest expense over the expected remaining term of the 2015 Notes. (The amount by which interest expense calculated using the effective interest rate of 7.65% exceeds the interest expense related to the coupon rate of 2.875%, is non-cash interest expense.) The effective rate is based on the interest rate for a similar instrument that does not have a conversion feature. We may be required to pay additional interest upon occurrence of certain events as outlined in the indenture governing the 2015 Notes. As of December 31, 2012, the remaining term of the 2015 Notes is 2.67 years.

Upon conversion of a note, holders of the 2015 Notes will receive up to the principal amount of the converted note in cash and any excess conversion value (conversion spread) in shares of our common stock. The amount of cash and the number of shares of our common stock, if any, will be based on a 25 trading day observation period as described in the indenture. As described in Note 1 “Organization and Summary of Significant Accounting Policies”, the conversion spread will be included in the denominator for the computation of diluted net income per common share, using the treasury stock method.

As discussed above, to hedge against potential dilution upon conversion of the 2015 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 2015 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 $17.1 million from the sale of these warrants. In accordance with ASC 815, 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 unless certain conditions as described in the 2015 Notes occur. The net amount of $10.0 million paid to JPMorgan Chase was recorded as a reduction to additional paid-in capital. 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.

Concurrently with the issuance of the 2017 Notes in December 2012, the Company repurchased $90.0 million of its 2015 Notes with a $104.9 million cash payment, including $711,000 of accrued interest. Since the 2015 Notes are within the scope of ASC 470, we allocated the consideration to the extinguishment of the liability component and the reacquisition of the equity

component. We recognized a $5.0 million loss on repurchasing the 2015 Notes, which is the difference between the carrying value of the liability component, including any unamortized debt issuance costs, and the consideration attributed to the liability component as loss from debt distinguishment in other expenses in December 2012. The consideration attributed to the liability component of $83.0 million is calculated by measuring the fair value of a similar liability that does not have an associated equity component. The consideration attributable to the equity component of $21.8 million was recorded as a reduction of additional paid-in capital. In addition, the proportionate call options and warrants related to the 2015 Notes were also retired in December 2012. We received an aggregate of $15.2 million for the proportionate call option retirement and paid an aggregate of $11.6 million for buying back the proportionate portion of the warrants. The net amount of $3.6 million was recorded as an addition to additional paid-in capital.

Carrying value and interest expense

The carrying values of the liability and equity components of both the 2017 Notes and the 2015 Notes, together the "Notes", are reflected in our consolidated balance sheets as follows (in thousands):



	December 31, 2012			December 31, 2011
Long-term debt:
2.875% Convertible Senior Notes due 2015:
Principal amount	$	25,000		$	115,000
Unamortized discount of liability component	(2,830		)	(17,275		)
Unamortized debt issuance costs	(326		)	(2,062		)
Carrying value of liability component	$	21,844		$	95,663

1.75% Convertible Senior Notes due 2017:
Principal amount	$	460,000		$	—
Unamortized discount of liability component	(88,536		)	—
Unamortized debt issuance costs	(11,008		)	—
Carrying value of liability component	$	360,456		$	—
Total long-term debt	$	382,300		$	95,663

Equity—net carrying value
2.875% Convertible Senior Notes due 2015	$	452		$	22,263
1.75% Convertible Senior Notes due 2017	$	89,415		$	—

The fair values of the Notes, which are all Level 2 measurements, are summarized as follows (in thousands):



	As of December 31,
	2012		2011
2.875% Convertible Senior Notes due 2015	$	26,950	$	123,500
1.75% Convertible Senior Notes due 2017	462,850		—
Total	$	489,800	$	123,500

Interest expense related to the Notes was included in interest expense on the consolidated statements of operations as follows (in thousands):



	Year Ended December 31, 2012		Year Ended December 31, 2011
Contractual coupon interest	$	3,625	$	3,306
Amortization of debt issuance costs	811		729
Accretion of debt discount	4,932		3,945
Less: capitalized interest	1,638		1,190
	$	7,730	$	6,790

4. Commitments and Contingencies

Litigation-LightLab

On January 7, 2009, LightLab Imaging, Inc., or LightLab, which was acquired by St. Jude Medical, Inc., or St. Jude, in 2010, 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). The complaint included allegations that Volcano interfered with an agreement between Axsun and Lightlab and with LightLab's advantageous business relationship with Axsun, breach of contract by Axsun, 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 attorney's fees (93A).

The Judge ordered that the trial in the Massachusetts Action proceed in four 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 in the trial on liability 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.

In lieu of conducting a trial on damages, the parties agreed and stipulated in April 2010 that the sum of $200,000 would be treated as if it were the jury's verdict against the defendants for damages (the Stipulation).

The injunctive relief phase of the Massachusetts Action commenced in April 2010. In a ruling issued in October 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.

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.

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 and $4.5 million in attorneys' fees, 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.

LightLab has appealed various decisions of the Court including, a) the Court's pre-trial rulings excluding certain lost profits damages evidence that LightLab sought to introduce at trial; b) 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 various rulings requiring evidence of use or intent to use as a prerequisite for injunctive relief; c) the Court's post-trial decisions denying permanent injunctive relief that LightLab requested as terms of the Final Judgment; and; d) 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 did not 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. The Massachusetts Supreme Judicial Court has agreed to hear LightLab's appeal. It is expected the appeal will be heard in late 2013 or early 2014.

In February 2010, Volcano and 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. LightLab then filed a counter-claim that included a claim against Axsun and Volcano for violations of 93A. 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. This case has been stayed indefinitely.

In January 2013, Lightlab filed a motion with the Delaware Chancery Court requesting the Chancery Court lift the stays in the Chancery Court Actions in order for Lightlab to file motions for injunctive relief. Volcano opposed this motion and it remains pending.

Litigation - St. Jude Medical

On July 27, 2010, St. Jude Medical 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 Medical. St. Jude Medical 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 Medical's asserted patents. In addition, Volcano filed a counterclaim in which we have alleged that St. Jude Medical'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 on the St. Jude Medical patents has been scheduled for October 15, 2012 and a trial on Volcano's patents has been scheduled for October 22, 2012.

On October 12, 2012, the court entered summary judgment for Volcano with respect to one of St. Jude Medical's asserted patents. On October 19, 2012, a jury found in favor of Volcano on the remaining four St. Jude Medical patents, finding that two of the patents were invalid and that Volcano did not infringe two of the patents. On October 22, 2012, Volcano voluntarily dismissed its claims against St. Jude Medical with respect to one of Volcano's patents. On October 25, 2012, a jury found in favor of St. Jude Medical with respect to Volcano's asserted patents. In conjunction with the trial, St. Jude Medical agreed that previous versions of its PressureWire® products infringed Volcano's 6,976,965 patent (a pressure sensing guide wire patent). Post-trial motions are pending or remain available to the parties in the case. A trial on damages has been scheduled for January 2014.

On April 9, 2012, St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB and St. Jude Medical S.C. filed a sealed complaint in the United States District Court for the District of Delaware alleging that Volcano Corporation infringes United States Patent No. 6,565,514. A claim construction hearing has been set for March 7, 2013. No trial date has been set in this case.

Litigation - CardioSpectra

On March 27, 2012, Christopher E. Banas, et al., filed a lawsuit against Volcano in federal district court in the Northern District of California, alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on Volcano's acquisition of CardioSpectra in 2007. Specifically, plaintiffs assert that Volcano has failed to comply with the terms and the alleged implied obligations of the Merger Agreement relating to potential milestone payments. CardioSpectra was in the business of developing OCT technology; however, this litigation is separate from the Massachusetts Action.

On May 14, 2012, Volcano moved to dismiss the complaint in its entirety. The motion sought to dismiss the breach of fiduciary duty and implied covenant claims without leave for amendment, and to dismiss the breach of contract claim with leave to amend. By order dated August 6, 2012, the Court granted Volcano's motion as to all issues with leave to amend. The plaintiffs filed a Second Amended Complaint on August 20, 2012, which included a single claim for breach of the Merger Agreement. In addition, the plaintiffs identified in the Second Amended Complaint are listed as Christopher E. Banas and Paul Castella in their respective capacities as Shareholder Representatives under the Merger Agreement. Volcano answered the Second Amended Complaint on September 4, 2012, and in the same document Volcano asserted several affirmative defenses. The court has scheduled a case management conference on December 3, 2012. A trial date has been scheduled for May 2014 for this matter.

Litigation - Other

In November 2012, we became aware through newspaper reports in the Italian media that a current and a former employee of ours were under criminal investigation for an alleged violation of Italian anti-bribery laws. We also learned that Volcano Europe B.V.B.A., our wholly-owned subsidiary, had temporarily been prohibited from establishing new contractual relationships with hospitals that are part of the Italian national health system. Following a court hearing, the temporary prohibition was lifted. The Italian public prosecutor has requested that such prohibition be reinstituted. This request is pending.

The Italian public prosecutor is alleging that the approximately €5,000 that we paid to an Italian state-employed physician for conducting a training session was paid in an effort to influence the outcome of a clinical trial.

The Company believes the lawsuits and other matter described above are without merit, and intends to vigorously defend against or prosecute, as applicable, the matters described above.

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. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter. Based on its experience, the Company also believes that the damage amounts claimed in the lawsuits disclosed above are not a meaningful indicator of the Company's potential liability. At this time, we are not able to predict or estimate the ultimate outcome or range of possible losses relating to the 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, as litigation is inherently unpredictable, and unfavorable outcomes and/or defense costs, depending upon the amount and timing, could have a material adverse effect on our results of operations, financial position, or cash flows in future periods.

Licenses

In July 2003, we entered into a license agreement whereby we were granted the rights to certain IVUS technology and patents for total consideration of $6.5 million. This license fee was recorded as an intangible asset and is being amortized over the estimated useful lives of the patents and technology of ten years. In addition, we are paying royalties during the license period related to the sale of our products using the licensed technology. The royalties are calculated on a per unit basis using a sliding scale. During the years ended December 31, 2012, 2011 and 2010, royalty expense related to the use of this licensed technology of $169,000, $833,000, and $680,000, respectively, was recorded in cost of revenues.

In April 2002, we entered into a license agreement with a medical research clinic whereby we were granted a license to certain patents and technology. During the years ended December 31, 2012, 2011 and 2010, we recorded royalty expense of $440,000, $450,000, and $441,000, respectively, in cost of revenues related to this agreement.

In June 2010, we entered into a license agreement whereby we were granted to certain patents and technology. During the years ended December 31, 2012, 2011 and 2010, we recorded royalty expense of $888,000, $522,000, and $119,000 respectively, in cost of revenues related to this agreement.

We have entered into certain other licensing agreements with third parties which require us to make annual royalty payments based on either a minimum dollar amount or as a percentage of net sales, whichever is higher. None of these other agreements are material to our consolidated results of operations or financial position.

Leases

We lease our domestic and certain foreign facilities and other equipment under non-cancelable capital and operating lease agreements, which expire at various dates through 2023. In addition to the minimum future lease commitments presented below, the leases generally require that we pay property taxes, insurance, maintenance and repair costs. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession such as a rent holiday, rent expense is recognized using the straight-line method over the term of the lease.

At December 31, 2012, future minimum lease commitments under non-cancelable leases are as follows (in thousands):



Year Ending December 31,	Capital		Operating
2013	$	33	$	18,682
2014	18		8,703
2015	7		5,316
2016	5		5,289
2017	—		5,209
Thereafter	—		29,495
Net minimum lease payments	$	63	$	72,694
Less:
Amounts representing interest	9
Current	29
Long-term	$	25

Total rental expense was $7.0 million, $6.9 million, and $6.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Commitments and Other Contractual Obligations

We have obligations under non-cancelable purchase commitments. The majority of these obligations related to inventory, primarily raw materials. At December 31, 2012, the future minimum payments under these non-cancelable purchase commitments totaled $51.0 million. Approximately $38.7 million of these commitments will require payment in 12 months, of which $35.2 million of these commitments will require payment prior to March 31, 2013. The remaining amount will require payments at various dates through 2016.

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 consolidated financial statements.

Sole source suppliers

5. Stockholders’ Equity

Common Stock

The Company is authorized to issue 250,000,000 shares of common stock at $0.001 par value per share.

Stockholders Rights Plan

In May 2006, our stockholders approved a stockholder rights plan and a classified board of directors with staggered terms of election. Pursuant to the stockholder rights plan, we declared and paid a dividend of one right for each share of common

stock. Unless redeemed prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive shares of our preferred stock, or shares of an acquiring entity.

Our increase of the authorized shares to 250,000,000 shares, the stockholder rights plan and the classified board of directors became effective upon the consummation of our initial public offering.

Warrants

In connection with our convertible debt offerings discussed in Note 3 “Financial Statement Details — Debt”, at December 31, 2012, we had warrants for approximately 14.0 million shares of common stock that are exercisable at a price of $37.59 per share, subject to certain adjustments, in equal installments for a period of 120 trading days beginning on March 15, 2018, and warrants for approximately 850,000 shares of common stock that are exercisable at a price of $34.875 per share, subject to certain adjustments, in equal installments for a period of 50 trading days beginning on December 1, 2015.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of undesignated preferred stock at $0.001 par value per share. The Board of Directors may determine the rights, preferences, privileges, qualifications, limitations and restrictions granted or imposed upon any series of preferred stock. As of December 31, 2012 and 2011, no preferred stock was outstanding.

Equity Compensation Plans

In October 2005, our stockholders approved the 2005 Equity Compensation Plan, or the 2005 Plan. Upon adoption of the 2005 Plan, issuance of stock awards under our 2000 Long Term Incentive Plan ceased.

On July 29, 2009, our stockholders approved an amendment and restatement of our 2005 Plan and the plan was renamed to the Amended and Restated 2005 Equity Compensation Plan, or the 2005 Amended Plan. The 2005 Amended Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, or RSU, performance stock awards, performance cash awards and other stock awards. The 2005 Amended Plan does not allow repricing of stock options without express approval of the stockholders and clarifies that a change in control must actually occur in order for change in control benefits to be realized. Our 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. On May 2, 2011, the plan was amended again and 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 December 31, 2012, we have granted stock options and RSUs under the 2005 Amended Plan. Stock options previously granted under the 2000 Long Term Incentive Plan and the 2005 Plan that are canceled or expired will increase the shares available for grant under the 2005 Amended Plan. At December 31, 2012, 3,145,088 shares remained available to grant under the 2005 Amended Plan.

Stock Option Activity

The maximum term of options granted under the 2005 Amended Plan is seven years. For an initial grant to an employee, 25% of the options generally vest on the first anniversary of the original grant date, with the balance vesting monthly over the remaining three years. For subsequent grants to an employee, the options generally vest monthly over a four-year term. We may grant options that are exercisable immediately regardless of the vesting status of the option with us retaining a right to repurchase exercised unvested shares at the original exercise price of the option. Recipients of stock options shall be eligible to purchase shares of our common stock at an exercise price no less than the estimated fair market value of such stock on the date of grant.

Stock option activity for the year ended December 31, 2012 is as follows:



	Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011	4,138,357		$	15.81
Granted	393,889		28.69
Exercised	(790,690	)	12.56
Forfeited or expired	(145,421	)	18.58
Outstanding at December 31, 2012	3,596,135		17.82		3.28	$	24,713
Exercisable at December 31, 2012	2,840,796		15.66		2.75	$	23,860
Vested and expected to vest at December 31, 2012	3,521,716		17.63		3.22	$	24,672

Options outstanding at December 31, 2012 are summarized as follows:



	Options Outstanding				Options Vested
	Number Outstanding	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price		Number Vested Outstanding	Weighted- Average Exercise Price
$0.33–$6.49	436,346	1.50	$	2.66	436,222	$	2.66
$8.50–$13.52	391,742	2.17	12.42		390,075	12.42
$13.60–$14.52	433,011	3.12	13.96		406,138	13.97
$14.72–$18.90	282,896	2.48	16.47		277,446	16.46
$19.07	572,382	4.10	19.07		396,750	19.07
$19.11	460,176	1.07	19.11		460,176	19.11
$19.77–$27.47	476,223	4.50	24.93		293,826	24.21
$27.63–$28.73	444,938	5.99	28.55		126,136	28.42
$29.40-$32.22	84,421	5.93	31.07		19,381	31.98
$32.52	14,000	5.50	32.52		4,958	32.52
$0.33–$32.52	3,596,135	3.28	17.82		2,811,108	15.68

Non-vested stock option activity for the year ended at December 31, 2012 is as follows:



	Non-vested Stock Options		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2011	1,164,513		$	6.85
Granted	393,889		10.78
Vested	(672,014	)	7.99
Forfeited or expired	(101,568	)	8.51
Outstanding at December 31, 2012	784,820		7.63

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010 was $10.78, $11.34 and $8.19, respectively.

Restricted Stock Unit Activity

RSU activity for the year ended December 31, 2012 is as follows:



	Restricted Stock Units
Outstanding at December 31, 2011	865,985
Granted	433,071
Vested	(338,452	)
Forfeited or expired	(42,237	)
Outstanding at December 31, 2012	918,367

These time-vested RSUs entitle the holder to shares of common stock as the units vest in equal annual installments over a four-year period. The weighted-average grant-date fair value of each RSU granted during the years ended December 31, 2012, 2011 and 2010 was $27.87, $26.62 and $19.17, respectively.

On February 27, 2012, our Section 162(m) Committee adopted, under the terms of the 2005 Amended Plan, the 2012 Long Term Incentive Plan, or LTI, and granted a maximum of 61,003 shares of performance-based RSUs under the terms of the LTI. The Committee established the LTI plan to align key management and senior leadership with stockholders' interests and to retain key employees. The measurement period for the LTI Plan is our 2012 fiscal year. If pre-determined performance goals are met, shares of stock subject to the performance-based RSUs granted to the recipient will begin to vest, with one third vesting on the date of certification of achievement of the pre-determined performance goals, and the remaining two thirds vesting evenly on each of December 31, 2013 and December 31, 2014, contingent upon the recipient’s continued service to the Company on each such date.

During the year ended December 31, 2012, we released 338,452 shares of common stock based on the vesting terms of certain RSU agreements.

There was no common stock held in treasury as of December 31, 2012 and 2011.

Employee Stock Purchase Plan Activity

In June 2007, our stockholders approved the adoption of our 2007 Employee Stock Purchase Plan, or Purchase Plan. The Purchase Plan provides eligible employees the opportunity to purchase shares of our common stock at the lower of up to 85% of the fair market value on the first or last day of the applicable offering period, by having withheld from their salary an amount up to 15% of their compensation, without paying brokerage fees or commissions on purchases. Our Purchase Plan is deemed to be compensatory, and therefore, Purchase Plan expense has been included in our consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010. We pay for the administrative expenses of the Purchase Plan. No employee may purchase more than $25,000 worth of common stock (calculated at the time the purchase right is granted) in any calendar year, nor may purchase more than 750 shares in any six-month purchase period.

Commencing January 1, 2008, common stock reserved for issuance under the Purchase Plan automatically increases by the lower of 1/2% of our outstanding common stock or 600,000 shares on the first day of January of each year. In November 2012, 2011 and 2010, the Board of Directors exercised its right not to increase the number of shares of common stock available for issuance under the Purchase Plan that was scheduled to occur on January 1, 2013, January 1, 2012, and January 1, 2011, respectively. As a result, at December 31, 2012, the number of shares of common stock reserved for issuance under the Purchase Plan remained at 1,100,000 shares and 251,380 shares of common stock were available for issuance under the Purchase Plan.

During the years ended December 31, 2012, 2011 and 2010, 163,818, 171,251, and 187,215 shares, respectively, were purchased at an average per share price of $23.69, $20.75, and $14.64, respectively.

Fair Value Assumptions

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



	2012			2011			2010
Risk-free interest rate	0.8		%	1.9		%	2.3		%
Expected life (years)	4.1			4.4			4.6
Estimated volatility	46.9		%	47.4		%	46.4		%
Expected dividends	None			None			None
Weighted-average grant date fair value	$	10.78		$	11.34		$	8.19

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.

We use our historical stock option exercise experience to estimate the expected term of our stock options.

Historically, the estimated volatility was calculated using the historical volatility of the common stock of comparable companies using weekly price observations over a period generally commensurate with the expected term of our options. We did not exclude any period due to discrete historical events. We 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 companies’ common stock. As such, for any options granted subsequent to December 31, 2010, we have solely utilized the volatility of our own common stock in determining the grant date fair value.

We use a zero value of 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 first offering period under the Purchase Plan commenced in September 2007. 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:



	Years Ended December 31,
	2012			2011			2010
Risk-free interest rate	0.1		%	0.1		%	0.2		%
Expected life (years)	0.5			0.5			0.5
Estimated volatility	38.2		%	36.4		%	36.6		%
Expected dividends	None			None			None
Fair value of purchase right	$	7.31		$	6.76		$	5.15

The computation of the expected volatility assumption used in the Black-Scholes model for purchase rights is based on the trading history of our common stock. The expected life assumption is based on the six-month term of each offering period. The risk-free interest rate is based on the 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

With the exception of performance-based RSUs, stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period.

We recognize the estimated compensation cost of performance-based RSUs, net of estimated forfeitures. The performance-based RSUs are earned upon attainment of identified performance goals, some of which contain discretionary metrics. As such, these award are re-valued based on our traded stock price at the end of each reporting period. If the discretion is removed, the award will be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date the award becomes fixed. Expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award.

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



	Years Ended December 31,
	2012		2011		2010
Cost of revenues	$	715	$	459	$	760
Selling, general and administrative	12,666		10,850		10,210
Research and development	1,698		1,682		1,497
	$	15,079	$	12,991	$	12,467

Included in our stock-based compensation expense is $0, $115,000 and $673,000 of stock-based compensation expense related to non-employees in the years ended December 31, 2012, 2011 and 2010, respectively. In the years ended December 31, 2012, 2011 and 2010, we recorded $1.2 million, $1.0 million and $928,000, respectively, of stock-based compensation expense related to the Purchase Plan. At December 31, 2012 and 2011, there was $258,000 and $202,000, 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 years ended December 31, 2012, 2011 and 2010 are based on our historical forfeiture experience.

Stock option excess tax benefits of $35,000, $165,000 and $433,000 were credited to additional paid-in-capital during the year ended December 31, 2012, 2011 and 2010.

The total intrinsic value of stock options exercised during the year ended December 31, 2012, 2011 and 2010 was $12.2 million, $14.7 million and $23.5 million, respectively, and represents the difference between the exercise price of the option and the fair value of our common stock on the dates exercised. The total grant-date fair value of stock options vested during the year ended December 31, 2012, 2011 and 2010 was $5.4 million, $5.6 million and $7.3 million, respectively.

At December 31, 2012, there was $7.6 million, $15.3 million, and $162,000 of total unrecognized employee compensation cost related to stock options, RSUs and the Purchase Plan, respectively, which is expected to be recognized over a weighted average of 2.31 years, 2.52 years, and 0.20 years, respectively.

6. Income Taxes

The income tax expense (benefit) is as follows (in thousands):



	Years Ended December 31,
	2012			2011			2010
Current:
Federal	$	—		$	—		$	—
State	207			498			584
Foreign	2,469			2,283			1,588
	$	2,676		$	2,781		$	2,172
Deferred:
Federal	$	3,940		$	5,735		$	2,727
State	182			(2,147		)	404
Foreign	(214		)	(519		)	(426		)
	$	3,908		$	3,069		$	2,705
Valuation allowance	$	(4,917	)	$	(25,840	)	$	(2,790	)
Income tax expense (benefit)	$	1,667		$	(19,990	)	$	2,087

Losses before income taxes relating to non-U.S. operations were $43,000, $133,000 and $685,000 in the years ended December 31, 2012, 2011 and 2010, respectively.

The income tax expense (benefit) in the accompanying consolidated statements of operations differ from the expense (benefit) calculated by applying the U.S. federal statutory income tax rate of 35% to income (loss) before income taxes expense (benefit) due to the following (in thousands):



	Years Ended December 31,
	2012			2011			2010
U.S. federal statutory income tax expense (benefit)	$	3,391		$	6,339		$	2,564
State income tax expense (benefit), net of federal income tax expense	296			(1,800		)	584
Valuation allowance	(4,917		)	(25,840		)	(2,790		)
Foreign tax rate differential	(342		)	156			196
Credits	—			(1,405		)	(678		)
Acquisition-related items	559			—			—
Other	2,680			2,560			2,211
Income tax expense (benefit)	$	1,667		$	(19,990	)	$	2,087

The components of our deferred tax assets are as follows (in thousands):



	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryovers	$	28,431		$	13,451
Tax credit carryovers	9,704			9,430
Accruals and deferred revenue	7,355			6,284
Stock based compensation	9,021			8,634
Original issue discount	379			1,473
Total deferred tax assets	54,890			39,272
Deferred tax liabilities:
Depreciation and amortization	(20,557		)	(6,506		)
Deferred tax assets:	34,333			32,766
Valuation allowance	(6,309		)	(9,421		)
Net deferred tax assets (liabilities)	$	28,024		$	23,345

The net change in the total valuation allowance was a decrease of $3.1 million in 2012. At December 31, 2012, we concluded that it is more likely than not that the benefits of a portion of our foreign deferred income tax assets will be realized. We expect that our foreign operations in the respective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax asset. Accordingly, we reversed the valuation allowance on the foreign gross deferred income tax assets. At December 31, 2012 and 2011, valuation allowances remained within certain U.S. state jurisdictions and selected international jurisdictions to offset deferred tax assets, as realization of such assets is not more likely than not. In the case of an acquired entity, we recorded a valuation allowance through purchase accounting as an adjustment to goodwill at the acquisition date if it is more likely than not that all or a portion of the acquired deferred tax assets will not be realized in the future. To the extent there is a change in the valuation allowance in the case of an acquired entity during the measurement period, adjustments will be recorded through goodwill provided that such change relates to new information about the facts and circumstances that existed on the acquisition date. In February 2009, the California 2009-2010 budget legislature was enacted into law, allowing companies to elect, for income tax purposes, to apply a single sales factor apportionment for years beginning after January 1, 2011. Based upon its election, we are continuing to maintain a valuation allowance to offset a portion of our California deferred tax assets as realization of a portion of such assets does not meet the more-likely-than-not threshold required under accounting guidelines.

Internal Revenue Code Section 382 places a limitation on the utilization of U.S. and state net operating losses and credit carryforwards when an ownership change, as defined by the tax law occurs. Generally, this occurs when a greater than 50% change in ownership occurs. During 2012, we acquired a greater than 50% ownership in Crux Biomedical, a U.S. corporation. We analyzed our ability to use the NOL's acquired from Crux under Section 382 limitations and concluded that federal and state net operating losses of $31.0 million and $31.1 million were not limited. Based on historical earnings and expected future taxable income, we believe that the net operating loss carryfowards recorded as a federal deferred tax asset will be fully utilized before expiration. We expect that California net operating losses of $31.1 million will expire substantially unused as a result of California's Intrastate appointment and single sales factor statutes. Accordingly, we have established a valuation allowance against the deferred tax asset related to the California net operating loss carryforwards through purchase accounting as an adjustment to goodwill at the acquisition date as realization of a portion of such assets do not meet the more likely than not threshold.

During 2012, we also acquired Sync-Rx, an Israeli corporation. Total pre-acquisition net operating loss carryforwards were approximately $8.4 million. It is expected that the net operating loss carryforward recorded as a deferred tax asset will be fully utilized. Under Israeli law, there are no net operating loss change in control limitations and net operating loss carryforwards do not expire.

At December 31, 2012, we have federal and state net operating loss carry forwards of approximately $100.3 million and $65.4 million, respectively. The federal and state net operating loss carry forwards begin to expire in 2021 and 2013, respectively, unless previously utilized. In addition, we have federal and state research and experimentation tax credit carry forwards of approximately $6.8 million and $8.8 million, respectively. The federal credits begin to expire in 2023. The California state credits carry forward indefinitely. The Massachusetts state credit carry forwards begin to expire in 2019. Foreign net operating losses are approximately $22.1 million and carry forward indefinitely.

Pursuant to Internal Revenue Code Section 382, use of net operating loss carry forwards related to prior acquisitions of approximately $20.1 million may be limited. These carry forwards will expire if we are unable to generate sufficient taxable income within the carry forward period.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2012 and 2011 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by approximately $17.0 million if and when such deferred tax assets are ultimately realized. We use the with-and-without approach ignoring indirect effects for purposes of determining when excess tax benefits have been realized. Stock option excess tax benefits of $35,000 and $165,000 were credited to additional paid-in-capital during the years ended December 31, 2012 and 2011.

During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible notes due 2015 and recognized a loss for tax purposes, which is the difference between the carrying value of the liability for tax purposes compared to the repurchase price. In addition, the deferred tax asset related to the repurchased call option and deferred tax liability related to the warrant sold were recognized. The recognition of the loss for tax purposes (to the extent it related to equity transactions) and the related deferred tax asset and liability totaling $2.5 million was credited to additional paid in capital during the year ended December 31, 2012. The reversal of the valuation allowance related to our convertible senior notes of $1.7 million was credited to additional paid in capital during the year ended December 31, 2011.

At December 31, 2012, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $1.1 million. If recognized, these benefits would affect our effective tax rate. The aggregate change in the balances of these benefits is as follows (in thousands):



	Years Ended December 31,
	2012			2011			2010
Balance at beginning of year	$	1,065		$	878		$	578
Increases related to tax positions taken during the current year	46			205			306
Increases (decreases) related to tax positions taken during a prior period	(40		)	(18		)	(6		)
Balance at end of year	$	1,071		$	1,065		$	878

We are open for audit by the U.S. Internal Revenue Service and state tax jurisdictions from our inception in 2000 through 2012. 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 2012, and by South Africa from the inception of Volcano South Africa in 2008 through 2012. 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 2012. We continue to be open for audit by the Israeli tax authorities from the inception of Sync-Rx in 2005 through 2012.

7. 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. We have two reporting segments, the first being the medical segment which include the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. In addition we have an industrial segment which includes 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 (in thousands):



	Years Ended December 31,						Percentage Change
	2012		2011		2010		2011 to 2012		2010 to 2011
Medical segment:
Consoles	$	40,687	$	40,954	$	40,630	(0.7	)%	0.8	%
Single-procedure disposables:
IVUS	205,843		200,970		167,023		2.4	%	20.3	%
FM	94,885		67,082		46,517		41.4	%	44.2	%
Other	29,716		23,530		16,943		26.3	%	38.9	%
Sub-total medical segment	371,131		332,536		271,113		11.6	%	22.7	%
Industrial segment	10,735		11,010		23,033		(2.5	)%	(52.2	)%
	$	381,866	$	343,546	$	294,146	11.2	%	16.8	%

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:



	Years Ended December 31,						Percentage Change
	2012		2011		2010		2011 to 2012		2010 to 2011
Revenues (1):
United States	$	177,992	$	157,412	$	134,645	13.1	%	16.9	%
Japan	123,558		105,892		79,277		16.7	%	33.6	%
Europe, the Middle East and Africa	57,913		60,249		57,614		(3.9	)%	4.6	%
Rest of world	22,403		19,993		22,610		12.1	%	(11.6	)%
	$	381,866	$	343,546	$	294,146	11.2	%	16.8	%


(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 December 31, 2012, approximately 42% of our long-lived assets, excluding financial assets, are located in the U.S., approximately 42% are located in Costa Rica, 12% are located in Japan, and less than 5% are located in our remaining geographies. At December 31, 2011, approximately 45% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 30% are located in Costa Rica, approximately 21% were located in Japan, and less than 5% were located in our remaining geographies.

At December 31, 2012 and 2011, goodwill of $51.6 million and $2.5 million, respectively, has been allocated entirely to our medical segment and relates to our U.S. operations.

8. Employee Benefits

Defined Contribution Plans

We have a defined contribution 401(k) plan for our U.S. employees who are at least 21 years of age. Employees are eligible to participate in the plan beginning on the first day of the month following their first date of hire. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation or as a fixed amount per pay period. During the years ended December 31, 2012, 2011 and 2010, we have made discretionary contributions equal to 25% of participant contributions up to a maximum of 6% of the participant’s annual salary totaling $1.0 million, $928,000, and $793,000, respectively.

We also sponsor additional defined contribution plans for most of our European employees. Contributions under all such plans were $481,000, $412,000 and $361,000 in the years ended December 31, 2012, 2011 and 2010, respectively.

9. Quarterly Information (Unaudited)

The following table sets forth our unaudited quarterly summary consolidated statements of operations in each of the quarters for the years ended December 31, 2012 and 2011. The information for each of these quarters is unaudited and has been prepared on the same basis as our consolidated financial statements. This data should be read in conjunction with our consolidated financial statements and related notes. These operating results may not be indicative of results to be expected for any future period (amounts in thousands, except per share data).

100



	Quarter Ended (unaudited)									Year ended December 31
2012	March 31		June 30			September 30		December 31 (3)		Year ended December 31
Revenue	$	90,360	$	95,373		$	93,656	$	102,477	$	381,866
Gross profit	60,787		63,397			60,408		68,359		252,951
Operating income	1,921		6,639			5,967		5,063		19,590
Net income	271		3,299			1,975		2,477		8,022
Net income per share:
Basic	$	0.01	$	0.06		$	0.04	$	0.05	$	0.15
Diluted	$	—	$	0.06		$	0.04	$	0.04	$	0.15
Includes the following stock-based compensation expense:
Cost of revenues	$	152	162			202		$	199	$	715
Selling, general and administrative	2,996		3,278			3,331		3,061		12,666
Research and development	469		435			403		391		1,698
	Quarter Ended (unaudited)									Year ended December 31
2011	March 31		June 30 (1)			September 30		December 31 (2)		Year ended December 31
Revenue	$	80,995	$	84,036		$	85,767	$	92,748	$	343,546
Gross profit	53,121		57,273			56,229		62,390		229,013
Operating income	3,718		7,607			5,407		8,679		25,411
Net income	1,156		4,888			2,627		29,422		38,093
Net income per share:
Basic	$	0.02	$	0.10		$	0.05	$	0.56	$	0.73
Diluted	$	0.02	$	0.09		$	0.05	$	0.54	$	0.70
Includes the following stock-based compensation expense:
Cost of revenues	$	163	(4		)	146		$	154	$	459
Selling, general and administrative	2,589		2,747			2,720		2,794		10,850
Research and development	342		451			450		439		1,682


(1)	In March 2011, we changed our estimate for forfeitures which resulted in a total reduction of $218,000 of stock compensation expense. During the three months ended June 30, 2011, $120,000 of this reduction was initially capitalized in inventory and recognized in cost of revenue as the inventory was subsequently sold.


(2)	During the quarter ended December 31, 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future. Therefore, we reversed $22 million of the valuation allowance on the Company’s net federal and certain state deferred income tax assets.


(3)	During the quarter ended December 31, 2012, we recorded $1.9 million acquisition-related expense within operating expenses and $5.0 million loss from debt extinguishment within other expenses.

In addition, during the quarter ended December 31, 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. Therefore, we reversed $4.9 million of the valuation allowance on the Company’s net certain foreign deferred income tax assets.



Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None



Item 9A.	Controls and Procedures

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

101

Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at December 31, 2012, such 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 or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

Management's Annual Report on Internal Control Over Financial Reporting

As required by the SEC rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the U.S. of America. Our internal control over financial reporting includes those policies and procedures that:


(1)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company,


(2)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the U.S. of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and


(3)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in our consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2012. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessments and those criteria, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2012.

Attestation Report of the Independent Registered Public Accounting Firm

KPMG LLP, our independent registered public accounting firm that has audited our consolidated financial statements included herein, has issued an audit report on our internal control over financial reporting as of December 31, 2012, which report is included under Item 8 of this Annual Report on Form 10-K.

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 our last fiscal year. There were no changes in our internal control over financial reporting during the year ended December 31, 2012 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

102



Item 9B.	Other Information

None

103

PART III



Item 10.	Directors, Executive Officers and Corporate Governance.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 15, 2013 under the headings "Executive Officers" and "Information Regarding the Board of Directors and Corporate Governance" and is incorporated in this report by reference.



Item 11.	Executive Compensation.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 15, 2013 under the heading "Executive Compensation" and is incorporated in this report by reference.



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

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 15, 2013 under the heading "Security Ownership of Certain Beneficial Owners and Management" and is incorporated in this report by reference.



Item 13.	Certain Relationships and Related Transactions, and Director Independence.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 15, 2013 under the heading "Certain Relationships and Related Transactions" and is incorporated in this report by reference.



Item 14.	Principal Accounting Fees and Services.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 15, 2013 under the heading "Independent Auditor Fee Information" and is incorporated in this report by reference.

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PART IV



Item 15.	Exhibits, Financial Statement Schedules.


(a)	Index of Financial Statements:


(1)	The financial statements required by Item 15(a) are filed in Item 8 of this Annual Report on Form 10-K.


(2)	Schedules required by Item 15(a) are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto.


(b)	Index of Exhibits:




Exhibit Number		Description

2.1		Asset Purchase Agreement, dated July 10, 2003, by and among Jomed Inc., Jomed N.V., Jomed GmbH, Jomed Benelux S.A. and the Registrant (filed as Exhibit 2.1 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).

2.2†		Asset Transfer Agreement, dated July 3, 2003, by and between Pacific Rim Medical Ventures Corp and Koninklijke Philips Electronics N.V. (filed as Exhibit 2.2 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).

2.3		Agreement and Plan of Merger, dated December 7, 2007, by and among the Registrant, Corazon Acquisition, Inc., CardioSpectra, Inc. and Christopher E. Banas and Paul Castella, as the Shareholders’ Representatives (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K/A (File No. 000-52045), as originally filed on March 4, 2008, and incorporated herein by reference).

2.4		Agreement and Plan of Merger, dated as of May 14, 2008, by and among Volcano Corporation, Lava Merger, Inc., Novelis Inc. and Paul Magnin (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on May 19, 2008, and incorporated herein by reference).

2.5		Agreement and Plan of Merger, dated as of December 22, 2008, by and among Volcano Corporation, Hummingbird Merger, Inc., Axsun Technologies, Inc. and William Seifert (filed as Exhibit 2.5 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 10, 2009, and incorporated herein by reference).

2.6†		Agreement and Plan of Merger, dated as of December 1, 2012, by and among Volcano Corporation, Volcalypso, Inc., a wholly-owned subsidiary of Volcano Corporation, Crux Biomedical, Inc., Shareholder Representative Services LLC, as the Stockholders' Representative, and DPD Newco, LLC (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 13, 2012, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s 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).

105



Exhibit Number		Description

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).

4.8		Second Supplemental Indenture, dated December 10, 2012, by and between Volcano Corporation and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

4.9		Form of 1.75% Convertible Senior Notes due 2017 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.1*		Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 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).

10.2*		2000 Long Term Incentive Plan and forms of Stock Option Agreements thereunder (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3*		Amended and Restated 2005 Equity Compensation Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as filed on August 8, 2011, and incorporated herein by reference).

10.3a*		2005 Equity Compensation Plan Forms of Stock Option Agreements and Stock Grant Agreement thereunder (forms filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3b*		2005 Equity Compensation Plan Form of Grantee Restriction Agreement (filed as Exhibit 10.3a to the Registrant’s Annual Report on Form 10-K, as amended (File No. 000-52045), as originally filed on March 23, 2007, as amended, and incorporated herein by reference).

10.3c*		Amended and Restated 2005 Equity Compensation Plan Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11, 2010, and incorporated herein by reference).

10.3d*		Amended and Restated 2005 Equity Compensation Plan Form of Stock Option Agreement (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11, 2010, and incorporated herein by reference).

10.3e*		Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement with deferred delivery under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2010, and incorporated herein by reference).

10.4*		2007 Employee Stock Purchase Plan (filed as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-145761), filed with the SEC on August 29, 2007, and incorporated herein by reference).

10.5†		License Agreement by and between the Registrant and The Cleveland Clinic Foundation, dated April 30, 2002 (filed as Exhibit 10.15 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).

10.6*		Amended and Restated Employment Agreement by and between the Registrant and R. Scott Huennekens, dated February 28, 2008 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on March 4, 2008, and incorporated herein by reference).

10.7*		Employment Agreement by and between the Registrant and Jorge J. Quinoy, dated December 10, 2008 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on December 12, 2008, and incorporated herein by reference).

106



Exhibit Number		Description

10.8*		Amended and Restated Employment Agreement by and between the Registrant and John T. Dahldorf, dated February 28, 2008 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on March 4, 2008, and incorporated herein by reference).

10.9*		2012 Long Term Incentive Plan (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.10*		2011 Commission Plan between the Registrant and Jorge Quinoy (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 6, 2011, and incorporated herein by reference) .

10.11*		Managing Director Agreement, dated March 20, 2006, by and between Volcano Europe NV and Michel Lussier (filed as Exhibit 10.30 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).

10.12*		Addendum to Managing Director Agreement, dated February 4, 2011, by and between Volcano Europe NV and Michel Lussier (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.13*		Employment Agreement, dated February 4, 2011, by and between the Registrant and Michel Lussier (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.14*		Employment Agreement, dated August 1, 2010, by and between the Registrant and Darin Lippoldt (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.15*		Employment Offer Letter, dated June 23, 2008, by and between the Registrant and David Sheehan (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.16		Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, as amended (filed as Exhibit 10.18 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).

10.17		Third Amendment to Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, dated December 24, 2008 (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.18		Termination Agreement, dated September 22, 2010, by and among the Registrant, Volcano Japan Co., Ltd. and Fukuda Denshi Co., Ltd. (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.19†		Supply Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.21 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).

10.20		License Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.22 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).

10.21		Termination Agreement, dated May 19, 2008, between the Registrant and Goodman Company, Ltd. (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 7, 2008, and incorporated herein by reference).

10.22†		Supply and Distribution Agreement, dated March 16, 2006, between General Electric Medical Systems Scs and the Registrant (filed as Exhibit 10.28 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).

10.23†		Termination of Option to Distribute Agreement, dated January 27, 2006, by and between Medtronic Vascular, Inc. and the Registrant (filed as Exhibit 10.31 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).

10.24*		Software Development and License Agreement, dated May 10, 2006, by and between Paieon, Inc. and the Registrant (filed as Exhibit 10.32 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).

107



Exhibit Number		Description

10.25*		Manufacturing Services Agreement, dated July 14, 2006, by and between Volcano Corporation and Endicott Interconnect Technologies, Inc. (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

10.26*		Director Compensation Policy, as revised.

10.27*		2012 Short Term Incentive Plan and form of Stock Option Agreement thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.28		Sublease Agreement, dated February 12, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2009, and incorporated herein by reference).

10.29		Distributor Termination Agreement, dated July 8, 2009, by and between Volcano Corporation, Volcano Japan Co., Ltd. and Goodman Company, Ltd. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on July 8, 2009, and incorporated herein by reference).

10.30		Office Lease, dated December 28, 2009, by and between the Registrant and Kilroy Realty, L.P. (filed as Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.31		Assignment and Assumption of Sublease, and Consent to Assignment and Assumption of Sublease, dated December 28, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.32		Trust, Land Purchase and Right of First Refusal Agreement by and among Volcarica, Socieded de Responsabilidad Limitada, Zona Franca Coyol, Sociedad Anonima and Banco Improsa, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.33		Fixed Price Building Construction Agreement for Phase One by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.34		Design, Architecture, Engineering and Construction Management Contract by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.35		Base Call Option Transaction Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.36		Base Warrants Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.37		Additional Call Option Transaction Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.6 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).

10.38		Additional Warrants Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.7 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).

10.39		Second Amendment to Office Lease, dated December 14, 2012, between Volcano Corporation and Kilroy Realty, L.P.

10.40†		Supply Agreement, dated December 19, 2012, between Volcano Corporation and Santec Corporation.

10.41		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

108



Exhibit Number		Description

10.42		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).
10.43		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.44		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.45		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.46		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.47		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.48		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.49*		Commission Plan between the Registrant and Jorge Quinoy (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.50*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Grant Agreement under the 2012 Long Term Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.51*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Award Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.52*		Form of Stock Option Grant Notice and form of Stock Option Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

12.1		Ratio of earnings to fixed charges.

21.1		Subsidiaries of the Registrant.

23.1		Consent of Independent Registered Public Accounting Firm.

24.1		Power of Attorney (See signature pages hereto).

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.

109



Exhibit Number		Description

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.



†	Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.



*	Management contract or compensatory plan or arrangement.



**	The certifications attached as Exhibits 32.1 and 32.2 accompany this annual report on Form 10-K 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.

110

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of February, 2013.



		Volcano Corporation
	By:	/s/ R. SCOTT HUENNEKENS
		R. Scott Huennekens
		President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Scott Huennekens and John T. Dahldorf, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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



Signature	Title	Date

/s/ R. SCOTT HUENNEKENS R. Scott Huennekens	President and Chief Executive Officer and Director (principal executive officer)	February 28, 2013

/s/ JOHN T. DAHLDORF John T. Dahldorf	Chief Financial Officer (principal financial officer and principal accounting officer)	February 28, 2013

/s/ KIERAN T. GALLAHUE Kieran T. Gallahue	Director	February 28, 2013

/s/ LESLEY H. HOWE Lesley H. Howe	Director	February 28, 2013

/s/ ALEXIS V. LUKIANOV Alexis V. Lukianov	Director	February 28, 2013



/s/ RONALD A. MATRICARIA Ronald A. Matricaria	Director	February 28, 2013

/s/ JOHN ONOPCHENKO John Onopchenko	Director	February 28, 2013

/s/ ROY T. TANAKA Roy T. Tanaka	Director	February 28, 2013

/s/ ERIC J. TOPOL Eric J. Topol	Director	February 28, 2013

/s/ LESLIE V. NORWALK Leslie V. Norwalk	Director	February 28, 2013

111

EXHIBIT INDEX



Exhibit Number		Description

2.1		Asset Purchase Agreement, dated July 10, 2003, by and among Jomed Inc., Jomed N.V., Jomed GmbH, Jomed Benelux S.A. and the Registrant (filed as Exhibit 2.1 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).

2.2†		Asset Transfer Agreement, dated July 3, 2003, by and between Pacific Rim Medical Ventures Corp and Koninklijke Philips Electronics N.V. (filed as Exhibit 2.2 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).

2.3		Agreement and Plan of Merger, dated December 7, 2007, by and among the Registrant, Corazon Acquisition, Inc., CardioSpectra, Inc. and Christopher E. Banas and Paul Castella, as the Shareholders’ Representatives (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K/A (File No. 000-52045), as originally filed on March 4, 2008, and incorporated herein by reference).

2.4		Agreement and Plan of Merger, dated as of May 14, 2008, by and among Volcano Corporation, Lava Merger, Inc., Novelis Inc. and Paul Magnin (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on May 19, 2008, and incorporated herein by reference).

2.5		Agreement and Plan of Merger, dated as of December 22, 2008, by and among Volcano Corporation, Hummingbird Merger, Inc., Axsun Technologies, Inc. and William Seifert (filed as Exhibit 2.5 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 10, 2009, and incorporated herein by reference).

2.6†		Agreement and Plan of Merger, dated as of December 1, 2012, by and among Volcano Corporation, Volcalypso, Inc., a wholly-owned subsidiary of Volcano Corporation, Crux Biomedical, Inc., Shareholder Representative Services LLC, as the Stockholders' Representative, and DPD Newco, LLC (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 13, 2012, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s 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).

112



Exhibit Number		Description

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).

4.8		Second Supplemental Indenture, dated December 10, 2012, by and between Volcano Corporation and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

4.9		Form of 1.75% Convertible Senior Notes due 2017 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.1*		Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 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).

10.2*		2000 Long Term Incentive Plan and forms of Stock Option Agreements thereunder (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3*		Amended and Restated 2005 Equity Compensation Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as filed on August 8, 2011, and incorporated herein by reference).

10.3a*		2005 Equity Compensation Plan Forms of Stock Option Agreements and Stock Grant Agreement thereunder (forms filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3b*		2005 Equity Compensation Plan Form of Grantee Restriction Agreement (filed as Exhibit 10.3a to the Registrant’s Annual Report on Form 10-K, as amended (File No. 000-52045), as originally filed on March 23, 2007, as amended, and incorporated herein by reference).

10.3c*		Amended and Restated 2005 Equity Compensation Plan Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11, 2010, and incorporated herein by reference).

10.3d*		Amended and Restated 2005 Equity Compensation Plan Form of Stock Option Agreement (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11, 2010, and incorporated herein by reference).

10.3e*		Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement with deferred delivery under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2010, and incorporated herein by reference).

10.4*		2007 Employee Stock Purchase Plan (filed as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-145761), filed with the SEC on August 29, 2007, and incorporated herein by reference).

10.5†		License Agreement by and between the Registrant and The Cleveland Clinic Foundation, dated April 30, 2002 (filed as Exhibit 10.15 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).

10.6*		Amended and Restated Employment Agreement by and between the Registrant and R. Scott Huennekens, dated February 28, 2008 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on March 4, 2008, and incorporated herein by reference).

10.7*		Employment Agreement by and between the Registrant and Jorge J. Quinoy, dated December 10, 2008 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on December 12, 2008, and incorporated herein by reference).

113



Exhibit Number		Description

10.8*		Amended and Restated Employment Agreement by and between the Registrant and John T. Dahldorf, dated February 28, 2008 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on March 4, 2008, and incorporated herein by reference).

10.9*		2012 Long Term Incentive Plan (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.10*		2011 Commission Plan between the Registrant and Jorge Quinoy (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 6, 2011, and incorporated herein by reference) .

10.11*		Managing Director Agreement, dated March 20, 2006, by and between Volcano Europe NV and Michel Lussier (filed as Exhibit 10.30 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).

10.12*		Addendum to Managing Director Agreement, dated February 4, 2011, by and between Volcano Europe NV and Michel Lussier (filed as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.13*		Employment Agreement, dated February 4, 2011, by and between the Registrant and Michel Lussier (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.14*		Employment Agreement, dated August 1, 2010, by and between the Registrant and Darin Lippoldt (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.15*		Employment Offer Letter, dated June 23, 2008, by and between the Registrant and David Sheehan (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.16		Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, as amended (filed as Exhibit 10.18 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).

10.17		Third Amendment to Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, dated December 24, 2008 (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.18		Termination Agreement, dated September 22, 2010, by and among the Registrant, Volcano Japan Co., Ltd. and Fukuda Denshi Co., Ltd. (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.19†		Supply Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.21 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).

10.20		License Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.22 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).

10.21		Termination Agreement, dated May 19, 2008, between the Registrant and Goodman Company, Ltd. (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 7, 2008, and incorporated herein by reference).

10.22†		Supply and Distribution Agreement, dated March 16, 2006, between General Electric Medical Systems Scs and the Registrant (filed as Exhibit 10.28 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).

10.23†		Termination of Option to Distribute Agreement, dated January 27, 2006, by and between Medtronic Vascular, Inc. and the Registrant (filed as Exhibit 10.31 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).

10.24*		Software Development and License Agreement, dated May 10, 2006, by and between Paieon, Inc. and the Registrant (filed as Exhibit 10.32 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).

114



Exhibit Number		Description

10.25*		Manufacturing Services Agreement, dated July 14, 2006, by and between Volcano Corporation and Endicott Interconnect Technologies, Inc. (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

10.26*		Director Compensation Policy, as revised.

10.27*		2012 Short Term Incentive Plan and form of Stock Option Agreement thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.28		Sublease Agreement, dated February 12, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2009, and incorporated herein by reference).

10.29		Distributor Termination Agreement, dated July 8, 2009, by and between Volcano Corporation, Volcano Japan Co., Ltd. and Goodman Company, Ltd. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on July 8, 2009, and incorporated herein by reference).

10.30		Office Lease, dated December 28, 2009, by and between the Registrant and Kilroy Realty, L.P. (filed as Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.31		Assignment and Assumption of Sublease, and Consent to Assignment and Assumption of Sublease, dated December 28, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.32		Trust, Land Purchase and Right of First Refusal Agreement by and among Volcarica, Socieded de Responsabilidad Limitada, Zona Franca Coyol, Sociedad Anonima and Banco Improsa, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.33		Fixed Price Building Construction Agreement for Phase One by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.34		Design, Architecture, Engineering and Construction Management Contract by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.35		Base Call Option Transaction Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.36		Base Warrants Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.37		Additional Call Option Transaction Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.6 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).

10.38		Additional Warrants Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.7 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).

10.39		Second Amendment to Office Lease, dated December 14, 2012, between Volcano Corporation and Kilroy Realty, L.P.

10.40†		Supply Agreement, dated December 19, 2012, between Volcano Corporation and Santec Corporation.

10.41		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

115



Exhibit Number		Description


10.42		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).
10.43		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.44		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.45		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.46		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.47		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.48		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.49*		Commission Plan between the Registrant and Jorge Quinoy (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.50*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Grant Agreement under the 2012 Long Term Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.51*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Award Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.52*		Form of Stock Option Grant Notice and form of Stock Option Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

12.1		Ratio of earnings to fixed charges.

21.1		Subsidiaries of the Registrant.

23.1		Consent of Independent Registered Public Accounting Firm.

24.1		Power of Attorney (See signature pages hereto).

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.

116



Exhibit Number		Description
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.



†	Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.



*	Management contract or compensatory plan or arrangement.



**	The certifications attached as Exhibits 32.1 and 32.2 accompany this annual report on Form 10-K 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.

117