UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549


Form 10-K





R
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended March 31, 2009or£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period
      from          to





Commission
file number: 000-51323


Micrus
Endovascular Corporation


(Exact
name of registrant as specified in its charter)





Delaware
            23-2853441(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)821
      Fox Lane
            95131San Jose,
      California
              (Address
      of principal executive offices)
            (Zip
      Code)





(408) 433-1400


(Registrant’s
telephone number, including area code)


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





Title of each class
            Name of each exchange on which
      registeredCommon
      Stock, $0.01 par value per share
            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 £     No R




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




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 R     No £




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




Indicate
by check mark 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. £




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):





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





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





As of
September 30, 2008, the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant was $104.6 million based on
the closing sale price of such stock as reported on the NASDAQ Global Market.
Shares of common stock held by each officer and director as of that date and by
each person who owned 5% or more of the registrant’s outstanding common stock as
of September 30, 2008 have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.





As of
May 29, 2009 registrant had outstanding 15,842,052 shares of common stock,
$0.01 par value per share.





DOCUMENTS
INCORPORATED BY REFERENCE





The
Registrant has incorporated by reference portions of its Proxy Statement for its
2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the fiscal year covered by
this annual report.








MICRUS
ENDOVASCULAR CORPORATION





TABLE OF CONTENTS





PagePART IItem 1.
                        Business
                        
                        
                        3Item 1A.
                        Risk
      Factors
                        
                        
                        22Item 1B.
                        Unresolved Staff
      Comments
                        
                        
                        37Item 2.
                        Properties
                        
                        
                        37Item 3.
                        Legal
      Proceedings
                        
                        
                        37Item 4.
                        Submission of Matters to a Vote of Security
      Holders
                        
                        
                        38PART IIItem 5.
                        Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                        
                        
                        39Item 6.
                        Selected Financial
      Data
                        
                        
                        42Item 7.
                        Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                        
                        
                        43Item 7A.
                        Quantitative and Qualitative Disclosures about Market
      Risk
                        
                        
                        58Item 8.
                        Financial Statements and Supplementary
      Data
                        
                        
                        59Item 9.
                        Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                        
                        
                        92Item 9A.
                        Controls and
      Procedures
                        
                        
                        92Item 9B.
                        Other
      Information
                        
                        
                        92PART IIIItem 10.
                        Directors, Executive Officers and Corporate
      Governance
                        
                        
                        93Item 11.
                        Executive  Compensation
                        
                        
                        93Item 12.
                        Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                        
                        
                        93Item 13.
                        Certain Relationships and Related Transactions, and
      Director
      Independence
                        
                        
                        93Item 14.
                        Principal Accountant Fees and
      Services
                        
                        
                        93PART IVItem 15.
                        Exhibits and Financial Statement
      Schedules
                        
                        
                        93SIGNATURES
                        
                        
                        94


EXHIBIT
10.38


EXHIBIT
10.39


EXHIBIT
10.40


EXHIBIT
21.1


EXHIBIT
23.1


EXHIBIT
31.1


EXHIBIT
31.2


EXHIBIT
32.1


2


Table of Contents





FORWARD-LOOKING
STATEMENTS





Certain information contained in or
incorporated by reference in this Report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Report that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), including statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included
in this Report are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Our
actual results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in Item 1A, Risk Factors, and elsewhere in this Report. References herein to
“Micrus,” “the Company,” “we,” “our,” “us” and similar words or phrases are
references to Micrus Endovascular Corporation and its subsidiaries, unless the context
otherwise requires. Unless otherwise provided in this Report, trademarks identified
by® andTM are registered trademarks or trademarks,
respectively, of Micrus Endovascular Corporation or its subsidiaries. All other trademarks
are the properties of their respective owners.





PART I





Item 1.Business.





The
Company





We
develop, manufacture and market implantable and disposable medical devices used
in the treatment of cerebral vascular diseases. Our products are used by
interventional neuroradiologists, interventional neurologists and endovascular
trained neurosurgeons to treat both cerebral aneurysms responsible for
hemorrhagic stroke and intracranial atherosclerosis which may lead to ischemic
stroke. Hemorrhagic and ischemic stroke are both significant causes of death and
disability worldwide.





Our
product lines consist of endovascular devices that enable a physician to gain
access to the brain in a minimally invasive manner through the vessels of the
arterial system. We believe that our products provide a safe and reliable
alternative to more invasive neurosurgical procedures for treating aneurysms.
Our proprietary line of embolic coils anatomically conform and rapidly deploy
within an aneurysm, forming a scaffold and filling that conforms to a wide
diversity of aneurysm shapes and sizes. In addition, our Cerecyte® microcoil
product line incorporates bioactive filaments of an absorbable material called
polyglycolic acid (“PGA”), which reside within the central lumen of our
microcoils. We believe, based on pre-clinical data and single center peer review
journal publications, that the inclusion of these bioactive filaments within the
lumen of the coil may promote faster aneurysm healing and may reduce the risk of
recanalization, or retreatment.





We
continue to expand our product line beyond microcoils and access systems. In
January 2006, we entered into a license, development and distribution agreement
with Biotronik AG (“Biotronik”) which provides us with exclusive access to
certain stent technologies for neurovascular applications. In February 2006,
Biotronik received CE Mark authorization for the PHAROSTM stent for both the
treatment of cerebral aneurysms and the treatment of ischemic disease
(atherosclerosis). In March 2006, we launched our PHAROSTM stent in certain
countries that recognize the CE Mark, providing us with our first commercial
product for the treatment of ischemic disease. The PHAROSTM VitesseTM is our
second generation balloon-expandable stent for intracranial ischemic stenosis
and wide-neck aneurysm treatment. In June 2008, we launched the PHAROSTM VitesseTM
intracranial stent for commercial distribution in the European Union and all
other countries that recognize the CE Mark. In July 2008, we received U.S. Food
and Drug Administration (“FDA”) conditional approval of our investigational
device exemption for the PHAROSTM VitesseTM Intracranial Stent Study for Ischemic
Therapy (“VISSIT”). The VISSIT study is the first industry-sponsored,
randomized, prospective clinical trial designed to compare the clinical outcomes
between patients who are stented for intracranial ischemic stenosis versus
treated with medical therapy. We are in the process of initiating study sites in
the United States, Europe and China.





On
November 30, 2006, we completed the acquisition of VasCon, LLC (“VasCon”),
a privately held company engaged in the development and manufacture of vascular
access and delivery devices. The acquisition of VasCon adds expertise in
developing clinically advanced access and catheter systems to our core
competencies and provides us with manufacturing capabilities that will
facilitate cost reductions for a wide range of our products. In connection with
the acquisition, we formed Micrus Design Technology, Inc. (“MDT”) to develop and
manufacture neurovascular access and delivery products for us, including our
family of Courier® microcatheters and AscentTM balloon catheter. On January 1,
2009, we merged MDT into Micrus Endovascular Corporation.









3


Table of Contents





In
October 2007, we entered into a Stock Purchase Agreement with The Cleveland
Clinic Foundation (“The Cleveland Clinic”) and acquired ReVasc Technologies,
Inc. (“ReVasc”), a wholly-owned subsidiary of The Cleveland Clinic. This
acquisition provides us with an exclusive license to revascularization
technology for the treatment of intra-cranial thrombus or clot which can also
cause ischemic stroke. In January 2008, we entered into a license, development
and commercialization agreement with Genesis Medical Interventional, Inc.
(“Genesis”). Under the terms of the agreement, we licensed the rights to
Genesis’ F.A.S.T. Funnel Catheter and clot retrieval system for the treatment of
ischemic stroke.





In fiscal
2008, we launched the CashmereTM bare platinum and Cerecyte® microcoil systems
and the Courier® ENZOTM deflectable microcatheter. The CashmereTM is a conformable
and stretch-resistant platinum or Cerecyte® microcoil designed to provide stable
framing or filling of aneurysms that may require a softer microcoil, such as
aneurysms with irregular shapes or ruptured aneurysms. The ENZOTM deflectable
microcatheter is designed to offer improved maneuverability through the brain’s
tortuous vasculature and to enable in vivo repositioning of the microcatheter in
the aneurysm, allowing physicians to more efficiently fill aneurysms, which may
lead to improved outcomes. We believe that ENZOTM is the only deflectable
microcatheter available for use in the neurointerventional market.





In fiscal
2009, we launched the Neuropath® guide catheter, which combines robust proximal
support with a highly flexible and visible tip designed to facilitate atraumatic
vascular access. The Neuropath® guide catheter is used as a conduit for
delivery of the microcatheter or other devices, such as coils, stents and
balloons, to the aneurysm. We intend to continue to pursue this non-embolic
product line expansion with the goal of increasing our revenue opportunity per
procedure. We also launched the DeltaPaqTM bare platinum and Cerecyte® microcoil
system for the treatment of cerebral aneurysms. Our DeltaPaqTM microcoil system
is designed to enable physicians to achieve greater coil packing density within
the aneurysm which may reduce the rate of recanalization and the need for
re-treatment. The DeltaPaqTM microcoil system supplements our framing and
finishing coils in the filling segment of the coil market. We also introduced a
new detachment control box and remote control cable.  The new ECB
(electronic control box) features updated electronic controls, a new ergonomic
interface as well as a single long life lithium ion battery system which
obviates the need to replace batteries for each case.  The new remote
cable enables physicians to detach the coil using an in-the-sterile-field
control system. In fiscal 2009, we received both 510(k) clearances and CE Mark
authorizations for our DeltaPlush microcoils, EnPower detachment system, AscentTM
balloon catheter and One2OneTM family of guidewires.





In fiscal
2009, we also completed enrollment in the Cerecyte Randomized Trial, which will
evaluate the differences in clinical outcomes between our Cerecyte microcoils
and bare platinum microcoils. In October 2008, we also initiated the Presidio®
And Cerecyte® (“PAC”) large and giant aneurysm study, which is a prospective
registry designed to evaluate the differences in clinical outcomes between our
Cerecyte® microcoils and bare platinum microcoils specifically in large and
giant aneurysms.





In
December 2007, we received regulatory approval to sell our stretch-resistant
microcoils in Japan and in July 2008, we received approval from Ministry of
Health, Labor and Welfare (“MHLW”) to sell our Cerecyte® microcoils in Japan. We
currently market our products through a direct sales force in the United States,
Canada, the United Kingdom, Germany, Austria and France. We market through a
network of distributors in the rest of Europe, Latin America, Asia and the
Middle East, and entered into an exclusive distribution agreement with Goodman
Co., Ltd. (“Goodman”) to market our products in the Japanese
market.





We have
executive offices in San Jose, California and sales offices in Switzerland
and the United Kingdom as well as a development and manufacturing facility in
Miramar, Florida. We were incorporated under the laws of the State of Delaware
in 1996.





Information
on revenues, gross profits and total assets for our business segments and by
geographic area appears in Note 14 of the “Notes to Consolidated Financial
Statements” for the year ended March 31, 2009, which are included in
“Item 8 – Financial Statements and Supplementary Data” of this report and
are incorporated herein by reference.





Industry
Overview





Strokes
consist of either aneurysms (hemorrhagic stroke) or blockages (ischemic stroke)
of vessels within or leading to the brain often resulting in irreversible
neurological impairment or death. According to the American Heart Association,
stroke is the third leading cause of death in the United States. Patients who
survive a stroke are often left with disabilities, including paralysis, coma,
impaired cognition, decreased coordination, loss of visual acuity, loss of
speech, loss of sensation or some combination of these conditions. A significant
need for effective prevention and treatment of stroke exists because of the
severity of the disorder, its prevalence in society, the shortcomings of current
therapies and the high cost of treatment and care.









4


Table of Contents





Hemorrhagic
stroke may be caused by the rupture of cerebral aneurysms. A cerebral aneurysm
is an outward bulging of an artery in the brain that can develop at weak points
in the arterial wall. In some cases, the patient will experience symptoms such
as headache, blurred vision or dizziness as the aneurysm grows, but in many
cases patients will have no symptoms. The most devastating complication of a
cerebral aneurysm occurs when the aneurysm ruptures, decreasing blood flow to
brain tissue and leading to increased pressure on the brain. Rupture of a
cerebral aneurysm typically occurs suddenly and without warning, often leading
to catastrophic brain injury or death.





Historically,
patients diagnosed with a cerebral aneurysm underwent a craniotomy and
aneurysmal clipping, a highly-invasive surgical procedure in which a
neurosurgeon creates an opening in the skull, dissects or retracts brain tissue
to gain access to the aneurysm, and places a metal clip at the base of the
aneurysm to stop further blood flow into the aneurysm, halting its growth and
preventing future rupture. This procedure is typically performed by a
neurosurgeon at a specialized hospital or medical center. Aneurysmal clipping
requires a lengthy recovery time and has the significant expense, morbidity and
complication risks associated with a major neurosurgical procedure.





In the
1990s, interventional neuroradiologists and to a lesser extent endovascularly
trained neurosurgeons, who collectively are referred to in the industry as
“neurointerventionalists,” started using an alternative procedure to clipping,
known as embolic coiling, to treat cerebral aneurysms. Rather than reaching the
aneurysm by opening the skull and moving aside the brain tissue, access to the
aneurysm in an embolic coiling procedure is obtained through a catheterization
procedure in which the physician inserts a guidewire followed by a catheter into
the femoral artery of the upper leg and threads them under fluoroscopy through
the arterial system to the brain and ultimately into the opening of the
aneurysm. The neurointerventionalist then advances embolic coils through the
microcatheter to fill the aneurysm. Embolic coils are small platinum coils that
typically range in size from approximately 1.5 mm to 20 mm and once released
into the aneurysm assume complex shapes filling the aneurysm. The coils form a
barrier at the neck of the aneurysm which decreases or stops blood flow into the
aneurysm, enabling formation of a clot and scar tissue which prevent further
growth or rupture of the aneurysm. Since the mid-1990s, embolic coiling has
become a widely accepted treatment for cerebral aneurysms because it is a less
invasive procedure than surgical clipping and results in lower overall treatment
cost, shorter recovery times, and less trauma to the patient.





In 2002,
The Lancet, a leading
medical journal, published the results of the International Subarachnoid
Aneurysm Trial, an independent, randomized clinical trial involving
2,143 patients in Europe, North America and Australia that compared
aneurysm clipping with embolic coiling as a method of treating cerebral
aneurysms. Known as ISAT, this trial concluded, based on a survey of patients
published in The Lancetin October 2002, that
among the patients participating in the trial, endovascular intervention with
detachable platinum coils resulted in a 23% relative and 7% absolute reduction
in the risk of major brain injury or death compared with neurosurgical clipping
of the aneurysm at one year follow up. The seven-year follow up data published
in The Lancetin
September 2005 indicated a continued clinical advantage for patients who
underwent coiling versus clipping procedures.





Market
Opportunity





According
to the American Heart Association, approximately 720,000 strokes occur annually
in the United States. Ischemic stroke affects approximately
620,000 patients annually while hemorrhagic stroke affects approximately
100,000 patients. We believe that a majority of the hemorrhagic strokes are
caused by cerebral aneurysms. We believe that embolic coiling is being used to
treat approximately 45% of the patients diagnosed with cerebral aneurysms in the
United States. Industry sources also indicate that approximately 65-70% of
patients diagnosed with cerebral aneurysms in certain European countries are
treated using embolic coiling procedures. We believe that embolic coiling
procedures can be used to treat a similar percentage of patients with cerebral
aneurysms in the United States as awareness grows among patients and physicians
of the advantages of embolic coiling. Industry sources estimate that in Japan
embolic coiling is growing at an annual rate of approximately 15% and in China
coiling procedures appear to be growing at greater than 20% year over year.
Industry sources further estimate that the worldwide sale of endovascular
devices for the treatment of hemorrhagic stroke was between $600 million to
$700 million in 2008.





We
believe that growth drivers in the market for embolic coiling products include
the overall trend towards less invasive procedures, an increased number of
neurointerventionalists trained to perform embolic coiling procedures, and the
aging population in whom aneurysms occur with greater frequency.





The key
challenges of embolic coiling procedures are the following:









5


Table of Contents





•
            Access to the Aneurysm
      Site.  Specialized products are required to access the
      complex vasculature of the brain, properly access the aneurysm site and
      perform a coiling procedure. These access products include microcatheters
      and guidewires. In order to navigate the complex vascular anatomy of the
      brain, access products must have enough column strength to be pushed
      significant distances through this vasculature, yet be flexible enough to
      travel to distal portions of the brain without injuring blood
      vessels.





•
            Framing and Filling the
      Aneurysm.  In order to effectively treat an aneurysm, the
      neurointerventionalist must fill the aneurysm with a sufficient volume of
      coils to disrupt blood flow and occlude the aneurysm. Aneurysms vary in
      shape and size and, consequently, neurointerventionalists seek an embolic
      coiling solution that enables coils to conform to the aneurysm’s shape
      without requiring extensive manipulation of the coil. Coils that frame, or
      conform to, the aneurysm wall reduce the risk of rupture and facilitate
      the retention of additional coils in the
  aneurysm.





•
            Coverage of the Neck of the
      Aneurysm.  It is important to effectively cover the neck
      of the aneurysm with coils to help reduce recanalization and improve the
      chances of a better clinical
outcome.





•
            Deployment.  Once
      embolic coils are placed in the aneurysm, the neurointerventionalist must
      be able to quickly and reliably detach the coils from the device
      positioning unit (“DPU”) within the aneurysm. Unreliable detachment
      mechanisms can lead to inadvertent retraction of the embolic coil as the
      neurointerventionalist withdraws the positioning unit only to discover
      that the coil is still attached. Further, any delay in deployment may
      increase procedure time and its attendant
risks.





•
            Recanalization.  Industry
      sources estimate that recanalization, or the continued or renewed growth
      of the aneurysm, occurs in approximately 15% to 25% of aneurysms treated
      with embolic coiling. Experts believe that one of the reasons for
      recanalization is due to incomplete filling of the aneurysm with the
      embolic coils. Studies have shown that while the recanalization rate is
      higher for patients treated with embolic coiling procedures compared to
      aneurysm clipping, embolic coiling has been demonstrated to be a safer
      treatment approach for aneurysms. Therefore, embolic coiling solutions
      that decrease recanalization rates and reduce the need for retreatment are
      highly desirable.





•
            Risk of
      Rupture.  Embolic coiling solutions that enhance safety
      and limit the risk of rupture or re-rupture in the treatment of aneurysms
      are also essential. Successful framing and filling of the aneurysm
      requires precise placement of the embolic coil. Neurointerventionalists
      seek embolic coiling solutions that minimize stress on the aneurysm wall
      in the course of placing or repositioning the coil in order to reduce the
      risk of rupture.




The
Micrus Solution


We are
focused on a broad range of cerebral vascular treatments and have developed a
proprietary embolic coiling solution, stents and access products that are
designed to effectively access and treat cerebral aneurysms and ischemic
disease. Complimenting our bare platinum microcoil product line, we have also
developed a line of microcoils that incorporate bioactive filaments which we
believe may improve healing and reduce the need for retreatment. In addition, we
have recently introduced the proprietary DeltaPaqTM microcoil system which is
designed to enable physicians to achieve greater coil packing
density.





Our
solutions have the following key features:





Anatomically Conforming
Coils.  Our proprietary spherical MicruSphere®, CashmereTM and
Presidio® microcoils deploy into a three-dimensional configuration that assumes
an aneurysm’s shape upon deployment and are designed to provide uniform framing
of the aneurysm. Our microcoils require very little manipulation for effective
placement, thereby reducing the need for microcoil manipulation and attendant
stress on the aneurysm wall.





Enhanced Coverage of the Neck of the
Aneurysm.  We believe that effective neck coverage reduces the
rate of recanalization. Our microcoils are designed to facilitate coverage of
the neck of the aneurysm in two ways. First, the three dimensional configuration
of our spherical MicruSphere®, CashmereTM and Presidio® microcoils provide the
framework to stabilize the neck of the aneurysm. Second, our UltiPaq® finishing
coils and DeltaPaqTM microcoils are both soft and flexible, permitting coverage
across the neck of the aneurysm.









6


Table of Contents





Unique Framing and Filling
Technology Designed to Increase Packing Density.  Our Presidio®
10 and 18 microcoils are each a single, stretch resistant Cerecyte® microcoil
designed to deliver stable, predictable aneurysm framing and filling to increase
coverage of the aneurysm wall and neck with a single coil deployment. As the
Presidio® 10 and 18 are also Cerecyte® microcoils, their bioactive filament may
also induce a beneficial tissue response. In addition, we have introduced a
completely new coil technology to the market, called “Delta
Wind.”  This unique triangular shaped primary wind allows the
DeltaPaqTM to change directions every .3mm, far surpassing traditional round
primary winds.  The Delta WindTM technology is designed to increase
packing density, which in previous studies has led to less
recanalization.





Proprietary Finishing Coils.Our UltiPaq® and DeltaPlushTM microcoils are extra-soft, stretch-resistant
finishing coils used to provide additional aneurysm neck coverage and to more
thoroughly fill in the aneurysm after placement of one or more MicruSphere®,
Presidio®, CashmereTM  and/or DeltaPaqTM microcoils.  We have
recently initiated beta use of our DeltaPlushTM microcoil which has been designed
to be our softest finishing coil, enabling the more efficient and safe aneurysm
treatment.





Deployment
Technology.  Our proprietary electronic microcoil deployment
system employs a resistive heating fiber deployment mechanism that enables
neurointerventionalists to quickly and reliably deploy the microcoil. Our
electronic microcoil deployment system has been designed so that microcoil
deployment time remains consistent regardless of the number of coils used in the
procedure. We believe that our electronic microcoil deployment system enables
neurointerventionalists to more rapidly deploy microcoils and generally reduce
procedure time. We have undertaken a manufacturing automation program which we
believe will provide both an enhanced delivery system and a component cost
saving which is expected to be introduced in our microcoil products in fiscal
year 2010.





Bioactive
Technology.  Cerecyte® is our proprietary microcoil product
line that incorporates filaments comprised of PGA within the lumen of the
microcoils. MicruSphere®, CashmereTM, Presidio®, HeliPaq® and UltiPaq®, DeltaPaqTM
and DeltaPlushTM are all available in Cerecyte® versions. Initial data from
single center studies presented at major scientific meetings suggest that
Cerecyte® may promote more thorough aneurysm healing and may reduce the risk of
recanalization or the need for retreatment. To improve on the scientific rigor
of these early data points, we are conducting two post market studies, a
prospective randomized trial and a registry, which will provide additional data
regarding the potential benefits of Cerecyte®. Both the Cerecyte® Coil Trial
(“CCT”) and Cerecyte® Registry were completed in early 2009 and the data is
being assembled for submission to peer review journals in fiscal year
2010.





Stent
Platform.  Our PHAROSTM stent is a rapid exchange
balloon-delivered device which enables the neurointerventionalist to deliver and
deploy a stent in one step, eliminating the need for pre-dilation of the
constricted vasculature. We believe this feature may reduce overall procedural
time and cost. We believe that the balloon catheter marker bands combined with
the radiopacity of the stainless steel stent provide for excellent visibility
resulting in improved placement accuracy of deployment. We also believe that the
combination of PHAROSTM Rapid Exchange TechnologyTM and trackable tip will enable
a physician to effectively access the tortuous and distal anatomy of the brain.
In March 2006, we launched the PHAROSTM stent in certain countries outside of the
United States that recognize the CE Mark. In March 2008, we filed an
Investigational Device Exemption (“IDE”) with FDA for our next generation stent,
the PHAROSTM VitesseTM, for the treatment of neurovascular stenoses. In July 2008,
we received FDA conditional approval of our investigational device exemption for
the PHAROSTM VISSIT study. The VISSIT study is the first industry sponsored,
randomized, prospective clinical trial designed to compare the clinical outcomes
between patients who receive a stent for the treatment of their intracranial
ischemic stenosis versus being treated with medical therapy. We are in the
process of initiating study sites in the United States, Europe and
China.





Improved Access
Products.  We launched an access product line which includes
the Courier® ENZOTM deflectable microcatheter, the Courier® line of
microcatheters, the Neuropath® guide catheter and the Watusi® line of
guidewires. We believe that our Courier® microcatheters provide
neurointerventionalists with more predictable and secure access to the complex
and distal anatomy of the cerebral vasculature. The Neuropath® guide catheter
combines robust proximal support with a highly flexible and visible tip designed
to facilitate atraumatic vascular access. The Neuropath® guide catheter is
used as a conduit for delivery of the microcatheter or other devices such as
coils to the aneurysm. We intend to continue to pursue this non-embolic product
line expansion with the goal of increasing our revenue opportunity per
procedure.





Micrus
Strategy





Our
objective is to develop and commercialize innovative, minimally invasive medical
devices that provide a comprehensive solution to physicians for the treatment of
hemorrhagic and ischemic stroke. The key elements of our strategy to achieve our
objective include:









7


Table of Contents





Expand Our Hemorrhagic Market Share
through Continued Product Innovation.  We believe that our
microcoils, catheters, wires, and stents offer safer, more effective and less
technically demanding treatment options for neurointerventionalists which have
resulted in the rapid growth of our revenues. We believe that continued product
innovations such as the introductions of our Cerecyte® line of bioactive
microcoils, CashmereTM microcoils, the Presidio® microcoils, the DeltaPaqTM
microcoils and DeltaPlushTM microcoils, ENZOTM deflectable catheter, AscentTM
balloon catheter and Neuropath® guide catheters will allow us to further grow
our market share. We are continuing to develop new technologies which we believe
may further enhance aneurysm occlusion and reduce the rate of
recanalization.





Increase Our Per-Procedure
Revenues.  6% of our revenue for fiscal 2009 has come from the
sale of non-embolic products. This product line expansion includes stents,
microcatheters and guidewires and accessories that we believe have increased our
per-procedure revenue opportunity from approximately 40% to 80% of every
procedure dollar.





Enter the Ischemic Stroke
Market.  Through our agreement with Biotronik, we launched our
first product addressing the ischemic stroke market, our PHAROSTM stent. We
intend to continue developing additional stent platforms for this market. In
October 2007, we acquired an exclusive license to revascularization technology
for the treatment of ischemic stroke through the acquisition of ReVasc from The
Cleveland Clinic. In January 2008, we entered into a license, development and
commercialization agreement with Genesis. Under the terms of the agreement, we
licensed the rights to Genesis’ F.A.S.T. Funnel Catheter and clot retrieval
system for the treatment of ischemic stroke. In March 2008, we filed an IDE with
the FDA for our next generation stent, the PHAROSTM VitesseTM, for the treatment
of intracranial stenoses.





Leverage Our Sales and Marketing
Expansion.  We intend to continue to expand our direct sales
force in North America, Europe and Asia as necessary and further increase our
presence in the Asian markets through distributors. This expansion should
provide us access to more hospitals, garner more per-procedure revenues and
expand our market share.





Continue to Penetrate Asian
Market.  We believe that Japan and China represent significant
potential markets for our products and, in March 2006, we launched our sales and
marketing efforts in Japan through our distribution partner, Goodman. In
December 2007, we received regulatory approval to sell our stretch-resistant
microcoils in Japan and we received regulatory approval for our Cerecyte®
microcoils in July 2008. We will begin selling our products in China upon
receiving regulatory approvals.





License or Acquire Complementary
Products and Technologies.  In addition to growing our business
through internal product development efforts, we will continue to look for
opportunities to license and/or acquire technologies to provide solutions for
the treatment of a variety of cerebral vascular conditions. In July 2005, we
acquired certain deflectable catheter technologies from Vascular FX. In January
2006, we entered into a license, development and distribution agreement with
Biotronik, a company with stent design and manufacturing expertise, pursuant to
which we collaborate with Biotronik to develop certain neurovascular stent
products. This agreement provides us with the exclusive worldwide right to
market stent products developed jointly by Biotronik and us. In November 2006,
we acquired certain neurovascular catheter patent and process technology through
the acquisition of VasCon. In October 2007, we acquired an exclusive license to
revascularization technology for the treatment of ischemic stroke through the
acquisition of ReVasc from The Cleveland Clinic. In January 2008, we entered
into a license, development and commercialization agreement with Genesis. Under
the terms of the agreement, we licensed the rights to Genesis’ F.A.S.T. Funnel
Catheter and clot retrieval system for the treatment of ischemic stroke. In
April 2008, we entered into a co-development agreement with Chemence Medical
Products, Inc. (“Chemence”) to jointly develop a liquid embolic product for the
treatment of cerebral aneurysms using Chemence’s cyanoacrylate technology,
development capabilities and intellectual property. By continuing to acquire
complementary products, we believe that we can address a broader range of
physician and patient needs.





Products





The
following table shows our principal products and indicates significant
applications for these products. Most of our products are intended for single
use and are either disposed of or, in the case of microcoils, remain in the
patient after the procedure. All of our products set forth in the following
table have received CE Mark authorization and, except for our PHAROSTM stent, are
covered by the FDA 510(k) process.









8


Table of Contents





Product Line
                            
                            Sizes
                            
                            Product
      Descriptiongraphic
                              MicruSphere®Microcoil
                            
                            2-18
      mm diameter
                            
                            Three-dimensional
      framing microcoil; stabilizes the aneurysm. Available in bare platinum and
      Cerecyte®.graphic
                              Presidio®Microcoil
                            
                            4-20
      mm diameter
                            
                            Framing
      and filling coil to deliver more neck and wall coverage in a single
      deployment. Available in Cerecyte®.graphic
                              CashmereTM
      Complex
      Microcoil
                            
                            2-12
      mm diameter
                            
                            Three-dimensional
      framing and filling complex coil for aneurysms which requirea
      softer coil. Available in Cerecyte® and stretch resistant
      platinum.graphicDeltaPaqTM
      Microcoil
                            
                            1.5-10
      mm diameter, up to 25cm in length
                            
                            Filling
      microcoil featuring the new Delta Wind triangular primary wind featuring
      natural deflection points allowing the coil to change direction more
      easily, facilitating greater packing density.  Available in bare
      platinum and Cerecyte®.graphic
                              DeltaPlushTM Microcoil
                            
                            1.5mm-4mm,
      up to 8cm in length
                            
                            Designed
      for finishing, DeltaPlushTM microcoil combine our exclusive Delta WindTM
      technology with our softest platinum wire. The result is a 10 system
      microcoil with the softness and flexibility to find and fill the empty
      gaps and open spaces, helping provide superior finishing at the aneurysm
      neck.  Available in bare platinum and
  Cerecyte®.









9


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graphic
                          UltiPaq®Microcoil
                        
                        2-4
      mm diameter
                        
                        Finishing
      microcoil; soft, stretch resistant, pliable microcoil designed to complete
      filling of the aneurysm. Available in bare platinum and
      Cerecyte®.graphic
                          HeliPaq®HeliPaq
      SR®Microcoil
                        
                        HeliPaq®
      2-20 mm diameter; HeliPaq SR® 2-10 mm
    diameter
                        
                        Filling
      microcoil; occludes aneurysm following framing. Available in bare platinum
      and Cerecyte®.graphic
                          InterPaq®Microcoil
                        
                        4
      and 6 mm diameter
                        
                        Filling
      microcoil; occludes aneurysm following framing. Available in bare
      platinum.graphic
                          Cerecyte®Microcoil
                        
                        2-20
      mm diameter
                        
                        Available
      in MicruSphere®, CashmereTM, Presidio®, Ultipaq®, DeltaPaq,
      DeltaPlushTM  and HeliPaq SR®. Includes filaments comprised of
      PGA, a bioactive material.graphic
                          Courier®ENZOTM Microcatheter
                        
                        .0170"
      and 0190” inner diameter and 150cm
      length
                        
                        Unique
      deflectable device used to deliver embolics into the
    aneurysm.graphic
                          Courier®Microcatheter
                        
                        .0170”
      and .0190” inner diameter and 150cm
      length
                        
                        Device
      used to deliver embolics into the
aneurysm.










10


Table of Contents





graphic
                    Neuropath®Guide
      Catheter
                  
                  5
      and 6 french internal diameter and a 90 and 100cm length
                  
                  The
      Neuropath® guide catheter uses Progressive Shaft TechnologyTM
      to facilitate the smooth delivery of multiple devices from microcatheters,
      balloons, guidewires and microcoils. It comes in a variety of tip shapes
      and sizes.graphic
                    Watusi®Guidewire
                  
                  .014”
      diameter and 205 cm length
                  
                  Device
      used to guide microcatheters and other devices to the aneurysm or stenosis
      site.graphic
                    PHAROSTMVitesseTMStent
      System
                  
                  2.5
      mm - 4.0 mm outer diameter and 8 mm – 20 mm length
                  
                  For
      use as scaffolding of wide-neck aneurysms to ensure that the microcoil is
      not dislodged and for use in opening intracranial arteries that have
      narrowed.graphic
                    AscentTM 
      Balloon Catheter
                  
                  4
      mm diameter and higher. Multiple lengths
                  
                  A
      coaxial dual lumen balloon catheter designed for use over
      any 0.014-inch guidewire. It is intended for use for temporary
      vascular occlusion and to assist in delivery of diagnostic and therapeutic
      agents.graphic
                    EnPowerTM
      Detachment
      Control Boxand
      Connecting Cable
                  
                  
                  
                  Next-generation
      control box provides electronic control via a lithium ion battery and
      initiates detachment of our proprietary microcoil system. The EnPowerTM
      also features remote cable which enables  physicians to detach
      the coils from the patient
field.









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Table of Contents





Microcoil
Products





We offer
a range of microcoils designed to enable neurointerventionalists to treat a wide
variety of aneurysms. These include our MicruSphere®, CashmereTM, DeltaPaqTM,
DeltaPlushTM  and Ultipaq® microcoil systems which are available in
bare platinum and Cerecyte® versions, and the Presidio® line of microcoils which
also incorporates our proprietary Cerecyte® technology. All of our microcoils
utilize our rapid deployment system and perform certain specific
functions:





•
            Frame.  Our
      MicruSphere®, Presidio® and CashmereTM microcoils are typically the first
      microcoils used by neurointerventionalists to frame the aneurysm. The
      MicruSphere® microcoil folds automatically into a spherical
      three-dimensional shape that conforms to the shape of the aneurysm. This
      conforming shape reduces the need for the clinician to manipulate and
      reposition the coil multiple times, shortens procedure time, and reduces
      the potential for complications. Additional microcoils may then be placed
      within the first microcoil in smaller sizes in an approach known as the
      “Russian doll technique,” sequentially filling the
    aneurysm.





•
            Frame and
      Fill.  Our Presidio® and CashmereTM microcoils feature
      longer lengths and their own unique shapes required to frame and fill the
      aneurysm. This can allow for more platinum to be deployed at the neck of
      the aneurysm, as well as greater packing
  density.





•
            Fill.  The
      CashmereTM microcoil is a stretch resistant complex coil which may also be
      used as a filling coil. The CashmereTM combines extra coil softness with a
      3 dimensional secondary shape in a 14 system coil. Attributes of a 14
      system coil help deliver more packing density per cm of coil compared with
      smaller system microcoils. The DeltaPaqTM features a completely new coil
      technology to the market, called “Delta Wind.” This unique triangular
      shaped primary wind allows the DeltaPaqTM to change directions rapidly, far
      surpassing traditional round primary winds. The Delta Wind technology is
      designed to increase packing density, which in previous studies has led to
      less recanalizations. Our proprietary DeltaPaqTM, HeliPaq® and HeliPaq SR®
      products are filling microcoils used to fill gaps which may remain in the
      center of the aneurysm after placement of one or more of our MicruSphere®
      microcoils. Both the HeliPaq® and the HeliPaq SR® automatically form a
      helical shape upon deployment, which allows filling of complex gaps in the
      aneurysm. The HeliPaq SR® employs a stretch-resistant system designed to
      prevent the microcoil from stretching in an unwanted manner while being
      positioned in the aneurysm. InterPaq® microcoils are filling coils used in
      larger size aneurysms requiring a greater volume of coil mass in order to
      be adequately filled.





•
            Finish.  Our
      UltiPaq® microcoil is an extra-soft, stretch-resistant finishing coil,
      used to provide additional aneurysm neck coverage and to more thoroughly
      fill in the aneurysm after placement of one or more MicruSphere®,
      Presidio®, CashmereTM  and/or HeliPaq® microcoils. The
      DeltaPlushTM microcoil is designed to be our softest finishing coil,
      enabling the more efficient and safe aneurysm
  treatment.





•
            Cerecyte®.  Our
      proprietary Cerecyte® microcoil product line incorporates filaments
      comprised of PGA into most of our current line of microcoils —
      MicruSphere®, Presidio®, CashmereTM, DeltaPaqTM, DeltaPlushTM, HeliPaq®,
      HeliPaq SR® and UltiPaq®. Because the PGA filaments run through the center
      of our microcoils, our Cerecyte microcoils possess the same handling
      characteristics as our standard platinum microcoils. Initial data from
      single center studies published in peer review journals and presented at
      major scientific meetings suggest that Cerecyte® may improve clinical
      outcomes compared to bare platinum coils. We are conducting two
      post-market clearance studies (CCT and Cerecyte® Registry) to collect
      human clinical data for the purpose of demonstrating accelerated healing
      by our Cerecyte® microcoil product
line.





In
January 2009, we completed the enrollment of 500 patients in our CCT. The CCT is
a prospective randomized multi-center trial which directly compares Micrus
Cerecyte® bioactive coils to Micrus bare platinum coils for the treatment of
intracranial aneurysms. Similarly, we also completed the enrollment of 250
patients in our Cerecyte® Registry in January 2009. The Cerecyte® Registry is a
prospective non-randomized United States multi-center registry designed to
document the clinical and angiographic outcomes of intracranial aneurysms
treated with our Cerecyte® bioactive coils. The Cerecyte® Registry plans to
enroll a total of 250 patients to assess patient outcomes one year after
treatment.





PHAROSTM Balloon-Expandable
Stent





Our
PHAROSTM stent is a balloon-delivered device which can be used both to treat
ischemic disease and for scaffolding of wide-neck aneurysms to ensure that the
microcoil is not dislodged. For the treatment of ischemic disease, our PHAROSTM
stent dilates intracranial arteries that have narrowed and allows the
neurointerventionalist to deliver and deploy a stent in one step. We believe
this feature will help reduce overall procedural time and cost. We believe that
the balloon catheter marker bands combined with the radiopacity of the stent
provide for excellent visibility resulting in improved accuracy of
deployment.









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We
believe that PHAROSTM Rapid Exchange Technology and trackable tip will enable a
physician to access tortuous and distal anatomy. In March 2006, we launched the
PHAROSTM stent in certain countries outside the United States that recognize the
CE Mark. In July 2008, we received FDA conditional approval of our
investigational device exemption for the PHAROSTM VISSIT study. The VISSIT study
is the first industry sponsored, randomized, prospective clinical trial designed
to compare the clinical outcomes between patients who are stented for
intracranial ischemic stenosis versus treated with medical therapy. We are in
the process of initiating study sites in the United States, Europe and
China.





Access
Products





We offer
the following products:





•
            Courier® Microcatheter.  Our
      Courier® microcatheter is a device used to deliver microcoils to the
      aneurysm. Our Courier® microcatheter features our proprietary EnduranceTM
      technology designed to enhance both tip shaping and tip shape retention,
      both of which are vital to optimal coil delivery. It is available in
      straight and pre-shaped configurations. Our Courier® Microcatheter has
      been designed to provide the neurointerventionalist with the ability to
      navigate the tortuous vasculature of the brain. The microcatheter’s design
      and hydrophilic coating enable a high level of stability, tip shape
      retention and overall tracking.





•
            Neuropath® Guide
      catheter.  The Neuropath® guide catheter uses Progressive
      Shaft TechnologyTM
      and facilitates the smooth delivery of multiple devices from
      microcatheters, balloons, guidewires and micro coils. It comes in a
      variety of tip shapes as well as varying sizes. It is currently available
      in a 5 and 6 french internal diameter and a 90 and 100cm
      length.





•
            Courier®ENZOTM Microcatheter.
      Introduced to the United States in 2007 and to Europe in January 2008, the
      ENZOTM  deflectable tip microcatheter is designed to offer
      improved maneuverability through the brain’s tortuous vasculature and to
      enable in vivo
      repositioning of the microcatheter in the aneurysm, allowing physicians to
      more efficiently fill aneurysms, which may lead to improved outcomes. We
      believe that ENZOTM is the only deflectable tip microcatheter available for
      use in the neurointerventional
market.





•
            AscentTMBalloon Catheter. The
      AscentTM
      balloon catheter is a coaxial dual lumen balloon catheter designed for use
      over any 0.014 inch guidewire. It is intended to be used for temporary
      vascular occlusion and to assist in delivery of microcoils into the
      aneurysm.





Microcoil
Delivery System and Deployment Mechanism





In
addition to the detachable microcoil, our microcoil delivery system is comprised
of a DPU, a connecting cable and the EnPower deployment control box. Our DPU is
a flexible catheter to which a Micrus microcoil is attached. The DPU allows
transport of the microcoil through the vasculature to the brain and final
positioning within the aneurysm. Deployment of the microcoil occurs when the
neurointerventionalist activates a resistive heater at the tip of the DPU,
shearing the polyethylene fiber that holds the microcoil onto the DPU. Our
deployment technology results in fast and reliable deployment of the microcoil
from the DPU.





Sales
and Marketing





We market
our products to interventional neuroradiologists and neurosurgeons who generally
practice at centers located in major metropolitan areas. There are currently
approximately 300 - 400 neurointerventionalists in the United States who perform
embolic coiling procedures. We believe that less than one-third of these
physicians perform a substantial majority of the total number of embolic coiling
procedures performed in the United States each year.





We have
developed relationships with a number of these neurointerventionalists who
perform a large number of cerebral vascular procedures. In fiscal 2009, a
substantial portion of our product sales in the United States was to
approximately 116 hospitals. In order to encourage the continued adoption of our
products, we believe that we need to continue to build and maintain
relationships with these neurointerventionalists. We believe that these
relationships are enhanced by the presence of our direct sales organization.
Sales of embolic coiling products involve a long-term relationship between the
sales representative and neurointerventionalist where the sales representative
must initially be present for product demonstrations and to monitor procedures.
We recruit our sales representatives based on their experience with minimally
invasive devices and prior success in the medical device industry. We provide
ongoing sales and product training to our employees and distributors and
continually monitor their performance. We also market our products at various
industry trade shows and conferences.









13


Table of Contents







In the
United States and Canada, we market our products through our direct sales force
to neurointerventionalists, while in Europe, we rely on both a direct sales
force and a distribution network. In Asia Pacific and Latin America, we market
our products through a distribution network. We currently have a North American
direct sales force of 37, a European direct sales force of 18, an Asia Pacific
direct sales force of four and one direct sales person in Latin
America.  We may add clinical and sales support personnel at both the
direct and distributor level in Asia Pacific and Europe to ensure a high level
of global physician support for all our products.





We have
entered into agreements with distributors in Italy, Spain and other European
countries, as well as portions of the Middle East, Asia and Latin America. Our
distributors are experienced in the interventional device markets and have
relationships with leading neurointerventionalists and institutions in those
countries. Our standard distribution agreement generally (i) provides our
distributors with an exclusive right to distribute our products in a certain
territory; (ii) restricts them from selling products that are competitive
with our products for the limited duration of our agreement with them;
(iii) obligates them to obtain the necessary authorizations, licenses and
approvals to import, market and distribute our products within the applicable
territory; and (iv) obligates them to promote and distribute our products
within the applicable territory.





We
believe that Japan represents a significant market for our products. On
September 30, 2005, we entered into a five-year, exclusive distribution
agreement with Goodman to promote and market our products in Japan. In February
2006, we received the requisite local regulatory approvals to sell certain of
our products in Japan through Goodman, and the sale of such products in Japan
commenced in March 2006. On September 20, 2007, we amended the distribution
agreement with Goodman to, among other things, extend the duration of the
distribution agreement to six years from the original date of the distribution
agreement. In December 2007, we received regulatory approval to sell our
stretch-resistant microcoils in Japan, and we received regulatory approval for
our Cerecyte® microcoils in July 2008.





Information
about our revenues from sales to unaffiliated customers is included in
Note 14 of the “Notes to Consolidated Financial Statements,” which are
included in “Item 8 – Financial Statements and Supplementary Data” of this
report.





We
generate revenues from sales to hospitals and third-party distributors. Once a
sale has occurred, the customer has no right of return. We provide the customers
with limited warranty privileges.




Goodman,
our distributor in Japan, accounted for 12% and 15% of revenues for the years
ended March 31, 2009 and 2007, respectively. No customer accounted for 10%
or more of our revenues for the year ended March 31, 2008.





Research
and Development





Our
product development efforts are focused on designing microcoils, guidewires,
microcatheters, balloons, thrombectomy devices and stents for the treatment of
hemorrhagic and ischemic stroke. We are working to develop next generation
microcoils to frame and fill the aneurysm more efficiently and thoroughly. Also
under development are next-generation balloon expandable stents for the
treatment of intracranial atherosclerosis, self-expanding stents and covered
stents as well as occlusion balloons to augment the treatment of aneurysms with
microcoils.





Additionally,
we are developing technologies to treat acute ischemic stroke. In October 2007,
we acquired an exclusive license to revascularization technology for the
treatment of ischemic stroke through the acquisition of ReVasc from The
Cleveland Clinic. In January 2008, we entered into a license, development and
commercialization agreement with Genesis. Under the terms of the agreement, we
licensed the rights to Genesis’ F.A.S.T. Funnel Catheter and clot retrieval
system for the treatment of ischemic stroke. In April 2008, we entered into a
co-development agreement with Chemence to jointly develop a liquid embolic
product for the treatment of cerebral aneurysms using Chemence’s cyanoacrylate
technology, development capabilities and intellectual property.





As of
March 31, 2009, we had 36 full-time employees engaged in research and
development activities. Research and development expenses for the fiscal years
ended March 31, 2009, 2008 and 2007 were $10.2 million, $13.7 million
and $7.9 million, respectively.





Biotronik
Collaboration





In
January 2006, we entered into a license, development and distribution agreement
with Biotronik, pursuant to which we will collaborate with Biotronik to develop
certain neurovascular products and we will be the exclusive worldwide
distributor for jointly developed neurovascular products. Biotronik granted us
an exclusive license to certain patents, know-how and other proprietary
technology in the neurovascular field.









14


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Under the
terms of our agreement, we paid an up-front licensing fee of approximately
$0.6 million to Biotronik and were required to make milestone payments to
Biotronik upon receipt of approvals to market stent products we jointly
developed for the treatment of neurovascular disease and royalty payments on the
products sold. In February 2006, Biotronik received CE Mark authorization for
the PHAROSTM stent intended for both the treatment of aneurysms and the treatment
of ischemic diseases. As a consequence, we made milestone payments to Biotronik
of approximately $0.7 million in both March and April 2006. We paid an
additional cost associated with the PHAROSTM stent development of $102,000 in the
first quarter of fiscal 2007. Additionally, we have incurred royalties to
Biotronik of approximately $169,000, $150,000 and $34,000 for the products sold
in fiscal 2009, 2008 and 2007, respectively. There is no future milestone
payments to Biotronik related to the PHAROSTM stent. Additionally, we will
continue to fund ongoing project development based on the terms of this
agreement.





ReVasc
Acquisition





In
October 2007, we entered into a Stock Purchase Agreement (the “ReVasc
Agreement”) with The Cleveland Clinic and acquired ReVasc, a wholly-owned
subsidiary of The Cleveland Clinic for an aggregate up-front purchase price of
$1.0 million. Pursuant to the ReVasc Agreement, we also agreed to pay The
Cleveland Clinic up to an additional $5.0 million in payments upon the
achievement of certain milestones set forth in the ReVasc Agreement, with
minimum milestone payments of at least $2.0 million due to The Cleveland
Clinic by October 2010. The first milestone payment in the amount of $500,000
was paid in March 2008. The remaining minimum milestone payment of $1.5 million
has been accrued at March 31, 2009.





ReVasc
was a party to a license agreement with The Cleveland Clinic (the “ReVasc
License Agreement”) pursuant to which The Cleveland Clinic granted ReVasc an
exclusive license to its revascularization technology for the treatment of
ischemic stroke. In connection with the acquisition, the parties amended the
ReVasc License Agreement to provide, among other matters, for the payment to The
Cleveland Clinic of certain royalties for sales of products based on the
technology subject to the ReVasc License Agreement.





On
December 7, 2007, we merged ReVasc into Micrus. Following the merger,
Micrus became the direct recipient of the license of the revascularization
technology from The Cleveland Clinic under the ReVasc License Agreement. In
fiscal 2010, we plan to finalize our development and validation work and intend
to perform safety studies outside the United States.





Genesis
Collaboration





In
January 2008, we entered into a license, development and commercialization
agreement with Genesis. Under the terms of the agreement, we licensed the rights
to Genesis’ F.A.S.T. Funnel Catheter, a revascularization platform and clot
retrieval system for the treatment of ischemic stroke. In fiscal 2010, we plan
to finalize our development and validation work on these Ischemic products and
intend to perform safety studies outside the United States. The transaction with
Genesis includes an initial up-front payment of $0.8 million, a development
milestone payment of $150,000, which was paid in October 2008, and royalties on
potential future product sales. Additionally, we paid $351,000 in consulting
fees to Genesis in fiscal 2009 for the funnel catheter product
development.





Disposition
of Cardiac and Peripheral Catheter Platform Assets





In
January 2008, we entered into an Asset Purchase and Supply Agreement (the “Merit
Agreement”) with Merit Medical Systems, Inc. (“Merit”) pursuant to which we sold
certain cardiac and peripheral catheter platform assets and technology (the
“Merit Transaction”). The majority of the assets sold were originally acquired
by us in November 2006 in connection with our purchase of VasCon. Pursuant to
the Merit Agreement, we received an up-front payment of $1.5 million and
received an additional $1.5 million in December 2008 upon the completion of
our obligation to help Merit build a production line for coronary guide
catheters. Under the terms of the Merit Agreement, we also agreed to manufacture
and supply certain guide catheters to Merit for a period of up to one year
following the closing. This obligation expired in January 2009, and we no longer
supply guide catheters to Merit.





In
connection with the Merit Transaction, we also entered into a license agreement
granting Merit the right to use certain non-patented intellectual property in
the cardiology and peripheral radiology fields and a non-competition agreement,
whereby we agreed not to engage in certain competitive business activities in
the fields of cardiology and peripheral radiology for a period of five
years.





If
requested by Merit, we must provide reasonable assistance to help Merit build
production lines for peripheral guiding sheaths and/or cardiovascular
microcatheters. Merit must inform us within six months following the completion
of the coronary guide catheters production line that this assistance will be
needed. In October 2008, we amended the Merit Agreement extending the
termination date for this obligation to September 30, 2009.









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Table of Contents







Though
certain elements, namely the acquired assets, licensing rights and the
production line assistance for coronary guide catheters, have been delivered to
Merit as of March 31, 2009, we are still obligated to deliver the regulatory
documentation and production line assistance for the peripheral guiding sheaths
and/or cardiovascular microcatheters. We anticipate that the remaining
obligations will be completed in the second quarter of fiscal 2010.





Chemence
Collaboration





In April
2008, we entered into a co-development agreement with Chemence to jointly
develop a liquid embolic product for the treatment of cerebral aneurysms using
Chemence’s cyanoacrylate technology, development capabilities and intellectual
property. We will be responsible for overseeing the regulatory and clinical
process and will be the exclusive worldwide distributor for the neurovascular
product developed based on this collaborative agreement. Under the terms of the
agreement, we have made an up-front payment of $100,000 to Chemence and will
make additional payments of up to $200,000 upon achieving certain development
milestones.





Physician
Advisors





We rely
extensively on our physician advisors to advise on our research and development
efforts and to provide feedback on the clinical use of our products. Our
advisors are experts in interventional neuroradiology and cerebral vascular
diseases. We regularly consult with our physician advisors regarding our
research and development efforts, preclinical trials and clinical
trials.





Some of
our physician advisors have been granted options to purchase shares of our
common stock and/or receive a consulting fee. All of our physician advisors are
reimbursed for reasonable expenses. In addition, our medical advisors receive
compensation for clinical studies they conduct for us. All of our medical
advisors are employed by other organizations and may have commitments to or have
consulting arrangements with other companies, including our competitors, which
may limit their availability to consult with us. Although these advisors may
contribute significantly to our business, we generally do not expect them to
devote more than a small portion of their time to us. We also routinely seek
advice, input and feedback on our products and business from a larger broader
group of physicians and advisors, some of whom may also receive appropriate
compensation for their time and expert opinions.





Manufacturing





We
manufacture and/or assemble, inspect, test and package all our proprietary
microcoils and microcatheters at our headquarters in San Jose, California,
or in Miramar, Florida. Most of our non-embolic products are manufactured in
Miramar, Florida. As of March 31, 2009, we had 153 employees in
manufacturing, quality control, manufacturing engineering and materials and
logistics.





We have
substantial design, manufacturing and applications engineering expertise in the
development of small vessel access and delivery systems and intend to continue
to leverage this expertise to develop new products. By designing and
manufacturing most of the components of our products, we have been able to
maintain greater control of quality and manufacturing process changes. Our
microcoils are very small in size, ranging from 1.0 mm to 20.0 mm in diameter
and are manufactured using microfabrication techniques. We have developed
proprietary manufacturing technologies and processes in the areas of platinum
memory shaping, metal fabrication, balloon fabrication and microcatheter and
stent fabrication.





Trained
product personnel assemble and test each of our components and products in
controlled environment rooms. At various assembly stages each lot of product
undergoes thorough testing to ensure compliance with applicable regulations,
including Quality System Regulations (“QSR”) requirements in the United States
and ISO 13485 certification standards in Europe. These standards specify the
requirements necessary for a quality management system to consistently provide
product that meet customer requirements and to include processes for achieving
the outputs of the quality management system that are required in order to
obtain a CE Mark to sell medical devices within the European Union. Our quality
assurance group verifies that product fabrication and inspection process steps
meet our stringent quality specifications and applicable regulatory
requirements. Upon successful completion of these steps, the products are
packaged, sterilized and prepared for shipment. We typically ship products as
orders are received.





We have
implemented quality control systems as part of our manufacturing processes,
which we believe are in substantial compliance with United States Good
Manufacturing Practices (“GMP”) or QSR requirements. Our San Jose facility
has also been inspected by the California Department of Health Services on
behalf of the State of California and under contract with the FDA, and is
registered with the State of California to manufacture our products. We believe
that we are in compliance with the FDA GMP for medical devices, and our
facilities are subject to inspection by the FDA. The most recent of such
inspections occurred in September 2008 in San Jose and in September 2007 in
our Doral facility, prior to the relocation of that plant to Miramar. However,
we cannot assure that we will remain in compliance with GMP and our failure to
do so could have a material adverse effect on our business, operating results
and financial condition.









16







We
purchase the raw materials required for production from various qualified
outside vendors. In addition, the deployment control box is manufactured by an
outside supplier. We rely on single sources for some of our critical components,
including the deployment control box, the platinum used to manufacture the
microcoils and certain custom hypodermic tubing material. In addition, we have a
sole source subcontract arrangement for sterilization services. We believe that
we have alternative sources for most of the components purchased from single
sources currently and generally maintain adequate supply of products to avoid
production interruptions. Where we do not have a qualified second source vendor
for a product component and depending on the exact component, we believe that it
would take us from two days to a month to either manufacture the product
component ourselves or have a readily available new supply of the product
component. Any unanticipated interruption in the supply of these components and
services could have a material adverse effect on us.





Patents
and Proprietary Rights





Our
success depends in part on our ability to obtain and maintain proprietary
protection for our products, technology and know-how, to operate without
infringing on the proprietary rights of others and to prevent others from
infringing our proprietary rights. Our policy is to seek protection of our
proprietary position by filing United States and foreign patent applications to
protect technology, inventions and improvements that are important to our
business. We also rely on trade secrets, know-how and continuing technological
innovation to develop and maintain our proprietary position. We hold 70 issued
United States patents and 104 issued foreign patents expiring between 2015 and
2026. In addition, we have 40 United States and 60 foreign patent applications
pending covering various aspects of our products and technology.





The
issued patents relate, among other things, to subject matter in the following
areas:





•
            vaso-occlusive
      microcoils and devices and methods for manufacturing such coils and
      devices;





•
            microcoil
      deployment systems;





•
            bioactive
      microcoils;





•
            intracranial
      vascular stents;





•
            catheters
      for neurovascular intervention;





•
            embolic
      clot retrieval devices; and





•
            bioactive
      material placement systems and
methods.





In
addition to developing our own technology, we have obtained licenses to certain
patents and other intellectual property, including for materials used as coating
on our guidewires and for certain types of coils. These licenses grant us the
right to use the licensed patents to make, use and sell products that contain
the licensed technology. We pay for these licenses through a combination of
fixed payments and royalties on sales of covered products. Each of these
licenses continues until expiration of the licensed patents. Payments under
these license arrangements currently do not account for a material portion of
our expenses.





Although
we work aggressively to protect our technology, there is no assurance that any
patents will be issued from current pending patent applications or from future
patent applications. We also cannot assure that the scope of any patent
protection will exclude competitors or provide competitive advantages to us,
that any of our patents will be held valid if subsequently challenged, or others
will not claim rights in or ownership of our patents and proprietary rights.
Furthermore, there can be no assurance that others have not developed or will
develop similar products, duplicate any of our products or design around our
patents.





The
medical device industry has been characterized by extensive litigation regarding
patents and other intellectual property rights, and many companies in the
industry have employed intellectual property litigation to gain a competitive
advantage. In September 2004, Boston Scientific Corporation and Target
Therapeutics, Inc., a subsidiary of Boston Scientific Corporation,
(collectively, “Boston Scientific”) filed a patent infringement suit against us.
On September 22, 2008, we entered into a Settlement and License Agreement (the
“Settlement and License Agreement”) with Boston Scientific and a Settlement and
Release Agreement (the “Settlement and Release Agreement”) with The Regents of
the University of California (the “Regents”) in order to resolve pending patent
litigation between Boston Scientific and us (the “Patent Litigation”).









17


Table of Contents





On October 8, 2008, the
Court entered an order dismissing the Patent Litigation with prejudice, as
described in greater detail in “Item 3 - Legal Proceedings.” We may in the
future be subject to further litigation from other companies in our industry.
The defense and prosecution of patent suits, United States Patent and Trademark
Office interference proceedings and related administrative proceedings can be
costly and time consuming. An adverse determination in our litigation with
Boston Scientific or in any other litigation or administrative proceedings with
any other third party could subject us to significant liabilities or require us
to seek licenses. There is no assurance that any such licenses will be available
on satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, operating results and financial
condition.





In
addition to patents, we rely on trademark, trade secret and other intellectual
property laws, nondisclosure agreements and other measures to protect our
intellectual property rights. We believe that in order to have a competitive
advantage, we must develop and maintain the proprietary aspects of our
technologies. We require our employees, consultants and advisors to execute
confidentiality agreements in connection with their employment, consulting or
advisory relationships with us. We also require our employees, consultants and
advisors who we expect to work on our products to agree to disclose and assign
to us all inventions conceived while working for us, using our property or which
relate to our business. Despite any 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.





Competition





We
compete primarily with Boston Scientific, Codman, a division of
Johnson & Johnson (“Codman”), ev3/Micro Therapeutics and
Terumo/MicroVention. Boston Scientific, Codman and ev3/Micro Therapeutics offer
broad product lines consisting of embolic microcoils, microcatheters, stents,
balloons and guidewires. Boston Scientific, Codman, ev3/Micro Therapeutics and
Terumo/MicroVention currently market a variety of microcatheters which are
compatible with our coil systems.





Currently,
Boston Scientific is the only company besides Micrus to sell bioactive
microcoils. Boston Scientific markets the Matrix coil which features a platinum
core coated with an absorbable suture material intended to cause a tissue
reaction. Terumo/MicroVention markets the HydroCoil® which is an embolic
microcoil that swells in the presence of fluid to provide greater volumetric
occlusion to an aneurysm. Codman markets a bare platinum line of microcoils but
does not market bioactive or stretch resistant microcoils. Through its
acquisition by Terumo, MicroVention now markets microcatheters, guide catheters
and guidewires as well, joining Boston Scientific, Codman, ev3 and Micrus in
this market segment. Boston Scientific has received from the FDA a Humanitarian
Device Exemption (“HDE”) to market stents for the treatment of hemorrhagic and
ischemic stoke. Codman has received an HDE to market a stent indicated for the
treatment of hemorrhagic stroke.





Boston
Scientific, Terumo/MicroVention, ev3 and Codman are all large publicly traded
companies or divisions of large publicly traded companies and enjoy several
competitive advantages over us, including: greater financial and personnel
resources; significantly greater name recognition; established relationships
with neurointerventionalists; established distribution networks; greater
resources for product research and development; greater experience in, and
resources for, launching, marketing, distributing and selling products; and more
broad-based and deeper product lines.





We
believe that the principal competitive factors in the market for medical devices
used in the treatment of cerebral vascular diseases include:





•
            improved
      patient outcomes as a result of physician use of the
    device;





•
            access
      to and acceptance by leading
physicians;





•
            depth
      of product line;





•
            product
      quality and reliability;





•
            ease
      of use for physicians;





•
            sales
      and marketing capability; and





•
            brand
      recognition and reputation.









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Table of Contents







Our
current or potential competitors may succeed in developing technologies and
products that are more effective than those developed by us or that would render
our products obsolete or noncompetitive. Additionally, there can be no assurance
that we will be able to effectively compete with such competitors in the
manufacturing, marketing and sale of our products. At any time, other companies
may develop alternative treatments, products or procedures for the treatment of
cerebral aneurysms that compete directly or indirectly with our products. If
alternative treatments prove to be superior to our products, adoption of our
products could be negatively affected and our future revenues could
suffer.





Our
ability to develop safe, effective and reliable products in a timely manner is
the key to our competitive position. Consequently, our success will depend on
how quickly we are able to respond to medical and technological changes through
the development, clinical evaluation and commercialization of new products.
Product development involves a high degree of risk and there can be no assurance
that our research and development efforts will result in commercially successful
products.





Government
Regulation





United
States





The
research, development, manufacture, labeling, distribution and marketing of our
products are subject to extensive regulation by the FDA and other regulatory
bodies. Our current products are regulated by the FDA as medical devices, and we
are required to obtain review and clearance or approval from the FDA prior to
commercializing our devices.





FDA’s
Premarket Clearance and Approval Requirements





Unless an
exemption applies, each medical device we wish to commercially distribute in the
United States will require either prior 510(k) clearance or prior premarket
approval (“PMA”) from the FDA. The FDA classifies medical devices into one of
three classes. Class I devices are subject to general controls (e.g.
establishment registration and device listing, labeling, medical devices
reporting (“MDR”), 510(k) premarket notification and prohibitions against
adulteration and misbranding). Many class I devices are exempt from 510(k)
premarket notification. Class II medical devices are subject to both
general controls and special controls and typically require prior 510(k)
clearance before they may be commercially marketed. The FDA will clear marketing
of a medical device through the 510(k) process if it is demonstrated that the
new product is substantially equivalent to another legally marketed device,
including a 510(k)-cleared product, and otherwise meets the FDA’s requirements.
Devices deemed by the FDA to pose a great risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a legally marketed device are placed in class III, most of
which require premarket approval. Both premarket clearance and premarket
approval applications are subject to the payment of user fees, paid at the time
of submission for FDA review. The FDA officially reclassified neurovascular
embolization devices such as our microcoils products to class II medical
devices effective January 28, 2005. For our microcoil products, catheter
products and guidewire product, we have obtained multiple 510(k)
clearances.





510(k)
Clearance





To obtain
510(k) clearance, we must submit a premarket notification demonstrating that the
proposed device is substantially equivalent to a previously cleared 510(k)
device or a device that was in commercial distribution before May 28, 1976
for which the FDA has not yet called for the submission of premarket approval
applications. The FDA’s 510(k) clearance pathway usually takes from three to
twelve months from the date the application is submitted, but it can take
significantly longer.





After a
device receives 510(k) clearance, any modification that could significantly
affect its safety or effectiveness, or that would constitute a significant
change in its intended use, will require a new 510(k) clearance or could require
premarket approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can
disagree with a manufacturer’s determination. If the FDA disagrees with a
manufacturer’s determination, the FDA can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance or premarket
approval is obtained. If the FDA requires us to seek 510(k) clearance or
premarket approval for any modifications to a previously cleared product, we may
be required to cease marketing or recall the modified device until we obtain
this clearance or approval. Also, in these circumstances, we may be subject to
significant regulatory fines or penalties.





Premarket
Approval





A PMA
application must be submitted if the device cannot be cleared through the 510(k)
process. A PMA application must be supported by extensive data including, but
not limited to, technical, preclinical, clinical trials, manufacturing and
labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness
of the device for its intended use.









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Table of Contents







After a
PMA application is accepted for filing, the FDA begins an in-depth review of the
submitted information, which generally takes between one and three years, but
may take significantly longer. During this review period, the FDA may request
additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA may
be convened to review and evaluate the application and provide recommendations
to the FDA as to the approvability of the device. In addition, the FDA will
conduct a pre-approval inspection of the manufacturing facility to ensure
compliance with quality system regulations. New PMA applications or PMA
supplements are required for significant modifications to the manufacturing
process, labeling or design of an approved device. PMA supplements often require
submission of the same type of information as a PMA
application, except that the supplement is limited to information needed to
support any changes from the device covered by the original PMA application, and
may not require as extensive clinical data or the convening of an advisory
panel.





Continuing
FDA Regulation





After a
device is placed on the market, numerous regulatory requirements apply. These
include:





•
            quality
      system regulation (QSR), which requires manufacturers to follow design,
      testing, control, documentation and other quality assurance procedures
      during the manufacturing process (otherwise known as Good Manufacturing
      Practices or GMPs);





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





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





Failure
to comply with applicable regulatory requirements can result in enforcement
action by the FDA, which may include any of the following
sanctions:





•
            fines,
      injunctions, and civil penalties;





•
            recall
      or seizure of our products;





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





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





•
            withdrawing
      510(k) clearance or premarket approvals that are already
      granted; and





•
            criminal
      prosecution.





We are
also subject to unannounced inspections by the FDA and the Food and Drug Branch
of the California Department of Health Services, and these inspections may
include the manufacturing facilities of our subcontractors.





International





International
sales of medical devices are subject to foreign government regulations, which
vary substantially from country to country. The time required to obtain market
authorization by a foreign country may be longer or shorter than that required
for FDA market authorization, and the requirements may differ. For example, in
China, we have submitted market applications for our microcoils and the PHAROSTM
intracranial stent. The regulatory process in China includes administrative
review of technical documentation, test reports and labeling and also physical
testing of products to test standards before a license for commercial
distribution is granted.  The regulations in Central and South American
countries vary substantially from country to country.  We have received
market authorizations for our microcoils and certain other products in the
following Central and South American countries: Argentina, Brazil, Chile,
Colombia, Costa Rica, Mexico, Peru and Venezuela.









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Table of Contents







The
primary regulatory environment in Europe is that of the European Union, which
consists of countries encompassing most of the major countries in Europe. The
European Union has adopted numerous directives and standards regulating the
design, manufacture, clinical trials, labeling, and adverse event reporting for
medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear CE conformity marking, indicating that the
device conforms with the essential requirements of the applicable directives
and, accordingly, can be commercially distributed throughout Europe. The method
of assessing conformity varies depending on the class of the product, but
normally involves a combination of self-assessment by the manufacturer and a
third-party assessment by a “Notified Body.” This third-party assessment may
consist of an audit of the manufacturer’s quality system and specific testing of
the manufacturer’s product. An assessment by a Notified Body in one country
within the European Union is required in order for a manufacturer to
commercially distribute the product throughout the European Union.





In Japan,
medical devices must be approved prior to importation and commercial sale by the
MHLW. Manufacturers of medical devices outside of Japan must utilize a
contractually bound Japanese entity to submit an application for device approval
to the MHLW. The MHLW evaluates each device for safety and efficacy. As part of
its approval process, the MHLW may require that the product be tested in
Japanese laboratories. The approval process for products such as our existing
microcoil products is typically 12-15 months once an application has been
accepted for review. Other medical devices may require a longer review period
for approval. Once approved, the manufacturer may import the device into Japan
for sale by the manufacturer’s contractually bound importer or
distributor.





After a
device is approved for importation and commercial sale in Japan, the MHLW
continues to monitor sales of approved products for compliance with labeling
regulations, which prohibit the promotion of devices for unapproved uses and
reporting regulations, which require reporting of product malfunctions,
including serious injury or death caused by any approved device. Failure to
comply with applicable regulatory requirements can result in enforcement action
by the MHLW, which may include fines, injunctions, and civil penalties, recall
or seizure of our products, operating restrictions, partial suspension or total
shutdown of sales in Japan, or criminal prosecution.





In
addition to MHLW oversight, the regulation of medical devices in Japan is also
governed by the Japanese Pharmaceutical Affairs Law (“PAL”). PAL was
substantially revised in July 2002, and the new provisions were implemented in
stages through April 2005. Revised provisions of the approval and licensing
system of medical devices in Japan, which constitutes the core of import
regulations, came into effect on April 1, 2005. The revised law changes
class categorizations of medical devices in relation to risk, introduces a third
party certification system, strengthens safety countermeasures for biologically
derived products, and reinforces safety countermeasures at the time of resale or
rental. The revised law also abolishes the ICC system and replaces it with the
“primary distributor” system. Under the revised PAL, manufacturers outside of
Japan must now appoint a “primary distributor” located in Japan that holds a
primary distributor license for medical devices to provide primary distribution
services, including conducting quality assurance and safety control tasks for
each product at the time an application for the approval of such product is
submitted to the MHLW. We are unable at this time to determine the impact of
such changes on our approved products, products for which we have already
applied for approval in Japan or future products. We do not anticipate that
these changes will have a material impact on our existing level of third-party
reimbursement for sales of our products in Japan.





Third-Party
Reimbursement





We
believe that the procedures performed using our products are generally already
reimbursable under government programs and most private health insurance plans.
Accordingly, we believe that providers in the United States will generally not
be required to obtain new billing authorizations or codes in order to be
compensated for performing medically necessary procedures using our products on
insured patients or patients covered under government programs such as Medicare
and Medicaid. We also believe that our procedures will be generally reimbursable
under governmental programs and private health insurance plans in Japan. In
Japan, we are required to obtain regulatory clearance for our products to be
eligible for reimbursements by third party payors, even though reimbursement for
embolic coiling procedure is already in place. In China, there is only limited
healthcare reimbursement available for the treatment of stroke.





We cannot
assure that reimbursement polices of third party payors will not change in the
future with respect to some or all of the procedures using our products and
systems. See “Item 1A - Risk Factors” — If neurointerventionalists are
unable to obtain sufficient reimbursement for procedures performed with our
products, it is unlikely that our products will be widely used” for a discussion
of various risks associated with reimbursement from third party
payors.









21


Table of Contents







Product
Liability and Insurance





We
maintain general liability insurance, product liability insurance, directors and
officers liability insurance, workers compensation insurance and other insurance
coverage that we believe are customary in type and amounts for the business of
the type we operate. Medical device companies are subject to an inherent risk of
product liability and other liability claims in the event that the use of their
products results in personal injury claims. Any such claims could have an
adverse impact on us. There can be no assurance that product liability or other
claims will not exceed such insurance coverage limits or that such insurance
will continue to be available on commercially acceptable terms, if at
all.





Environmental





Our
company is subject to a variety of federal, state and local environmental
protection measures. We believe that our operations comply in all material
respects with applicable environmental laws and regulations. Our compliance with
these requirements did not during the past fiscal year, and is not expected to
have a material effect upon our capital expenditures, cash flows, earnings or
competitive position. Given the scope and nature of these laws, however, there
can be no assurance that our compliance with environmental laws and regulations
will not have a material impact on our results of operations.





Employees





As of
March 31, 2009, in the United States we had 298 full time employees,
including 52 in sales and marketing, 153 in operations and manufacturing, 36 in
research and development, 18 in quality assurance and regulatory compliance, and
39 in general and administrative functions. As of March 31, 2009, we had
35 employees in Europe, including 22 in sales and marketing and 13 in
general and administrative functions. None of our employees are represented by a
collective bargaining agreement and we have never experienced a work
stoppage.





Seasonality





Our
worldwide sales do not reflect any significant degree of seasonality; however,
in Europe we traditionally experience somewhat lower demand in the second fiscal
quarter than throughout the rest of the fiscal year as a result of the European
summer holiday schedule.





Available
Information





We are
required to file reports under the Exchange Act with the Securities and Exchange
Commission (the “SEC”). You may read and copy our materials on file with the SEC
at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC
20549. You may obtain information regarding the SEC’s Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at
http://www.sec.gov that contains reports, proxy and information statements and
other information.





You may
also obtain copies of our annual report on Form 10-K, our quarterly reports
on Form 10-Q, our current reports on Form 8-K and amendments to these
reports as soon as reasonably practicable after such material is electronically
filed with or furnished to the SEC free of charge by visiting the investor
relations page on our website, www.micrusendovascular.com. Information contained
on our website is not part of this annual report on Form 10-K.





Item 1A.Risk
Factors.





Certain
Factors that May Affect Our Business and Future Results





Some of
the information included herein contains forward-looking statements as defined
in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on the beliefs of, estimates made by and
information currently available to our management and are subject to certain
risks, uncertainties and assumptions. Any statements contained herein
(including, without limitation, statements to the effect that the Company, we,
or management “may,” “will,” “expects,” “anticipates,” “estimates,” “predicts,”
“continues,” “plans,” “believes,” or “projects,” “should,”  “could,”
“would,” “intends” or statements concerning “potential” or “opportunity,” and
any variations thereof, comparable terminology or the negative thereof) that are
not statements of historical fact should be construed as forward-looking
statements. Our actual results may vary materially from those expected in these
forward-looking statements. The realization of such forward-looking statements
may be impaired by risks including, but not limited to the
following:









22







Current worldwide economic
conditions may adversely affect our business, operating results and financial
condition, as well as further decrease our stock price.





General
worldwide economic conditions have experienced a downturn due to the effects of
the subprime lending crisis, general credit market crisis, collateral effects on
the finance and banking industries, concerns about inflation, slower economic
activity, decreased consumer confidence, reduced corporate profits and capital
spending, adverse business conditions and liquidity concerns. Our business is
not immune. Some of the procedures that use our products are elective and
therefore can be deferred by patients. In light of the current economic
conditions, patients who do not have insurance covering the total cost of
elective procedures may chose to defer or forego them.  In addition, in the
U.S. and other countries where healthcare coverage is heavily dependent on
employment status, increasing numbers of patients may have no or reduced
healthcare coverage.





The
worldwide economic crisis also may have other adverse implications on our
business. For example, our customers’ and distributors’ ability to borrow money
from their existing lenders or to obtain credit from other sources to purchase
our products may be impaired. Although we maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments and such losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same loss rates that we have in the past, especially
given the current turmoil in the worldwide economy. A significant change in the
liquidity or financial condition of our customers could cause unfavorable trends
in our receivable collections and additional allowances may be required, which
could adversely affect our operating results. In addition, the worldwide
economic crisis may adversely impact our suppliers’ ability to provide us with
materials and components, which could adversely affect our business and
operating results. Like the stock prices of many other companies, our stock
price has decreased substantially recently and if investors have concerns that
our business, operating results and financial condition will be negatively
impacted by a worldwide economic downturn, our stock price could further
decrease.





Our future success is dependent on
the continued growth in embolic coiling procedures and our ability to convince a
concentrated customer base of neurointerventionalists to use our products as an
alternative to other available products.





Our
future success and revenue growth are significantly dependent upon an increase
in the use of embolic coiling as a procedure to treat cerebral aneurysms. If the
number of embolic coiling procedures does not increase or if a new procedure
that does not employ our products becomes a more acceptable alternative among
neurointerventionalists, our business would be seriously harmed.





The
number of interventional neuroradiologists and neurosurgeons trained to conduct
embolic coiling procedures is relatively small, both in the United States and
abroad. There are currently approximately 300 neurointerventionalists in the
United States who perform embolic coiling procedures. We believe that less than
one-third of these physicians perform a substantial majority of the total number
of embolic coiling procedures per year. For the year ended March 31, 2009,
a substantial portion of our product sales in the United States were to
approximately 116 hospitals. The growth in the number of interventional
neuroradiologists and neurosurgeons in the United States is constrained by the
lengthy training programs required to educate these physicians. Accordingly, our
revenue growth will be primarily dependent on our ability to increase sales of
our products to our existing customers and to increase sales of products to
trained neurointerventionalists that currently use products offered by our
competitors. We believe that neurointerventionalists who do not currently use
our products will not widely adopt our products unless they determine, based on
experience, clinical data and published peer reviewed journal articles, that our
products provide benefits or an attractive alternative to the clipping of
aneurysms or the use of competitors’ products. We believe that
neurointerventionalists base their decision to use an alternative procedure or
product on the following criteria, among others:





•
            extent
      of clinical evidence supporting patient
  benefits;





•
            their
      level of experience with the alternative
  product;





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





•
            availability
      of reimbursement within healthcare payment
    systems; and





•
            costs
      associated with the purchase of new products and
  equipment.









23


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In
addition, we believe that recommendations and support of our products by
influential physicians are essential for market acceptance and adoption. If we
do not receive continued support from such influential physicians,
neurointerventionalists and hospitals may not use our products. In such
circumstances, we may not achieve expected revenue levels and our business will
suffer.





Our
industry is experiencing increased scrutiny by governmental authorities, which
has led to increased compliance costs and potentially more rigorous
regulation





The
medical device industry is subject to rigorous regulation by the FDA and
numerous other federal, state and foreign governmental
authorities.  These authorities have been increasing their scrutiny of
certain activities of medical device companies, including their conduct of
clinical trials, their handling of conflicts of interests and financial
arrangements with health care providers and consultants, and their product
promotional practices.  We anticipate that government authorities will
continue to scrutinize our industry closely and we may be subject to more
rigorous regulation by governmental authorities in the future.  This
increased government scrutiny has lead us to incur increased costs on
compliance, human resources costs and the diversion of management and employee
focus and we anticipate that such costs will continue to
increase.  Though we have adopted a number of compliance procedures in
response to the increased scrutiny, we cannot assure that our activities will
not be subject to inquiry or greater action or oversight by governmental
authorities or that we will be able to comply with any new
regulations.  Any failure by us to adopt appropriate compliance
procedures and ensure that our employees and agents comply with applicable laws
and regulations could result in substantial penalties and/or restrictions in our
business activities and the sales of our products.





The
fourth quarter of fiscal year 2009 marked our first profitable quarter, but
there is no assurance that we will continue to be profitable in the foreseeable
future.





We were
incorporated in the State of Delaware in 1996, and began commercial sales of our
microcoil products in 2000. We have incurred annual net losses since our
inception, including net losses of $11.1 million, $16.3 million, and $5.5
million in fiscal 2009, 2008, and 2007, respectively. At March 31, 2009, we
had an accumulated deficit of $82.4 million. There is no assurance that we
will continue to be profitable in the foreseeable future as we expect our
operating expenses to increase as we, among other things:





•
            grow
      our internal and third-party sales and marketing forces to expand the
      sales of our products in the United States and
      internationally;





•
            increase
      our research and development efforts to improve upon our existing products
      and develop new products;





•
            perform
      clinical research and trials on our existing products and product
      candidates;





•
            expand
      our regulatory resources in order to obtain governmental approvals for our
      existing product enhancements and new
products;





•
            acquire
      and/or license new
technologies; and





•
            expand
      manufacturing.





As a
result of these activities, we may not be able to sustain or increase
profitability on an ongoing basis.





Our quarterly
operating and financial results and our gross margins are likely to fluctuate
significantly in future periods.





Our
quarterly operating and financial results are difficult to predict and may
fluctuate significantly from period to period. The level of our revenues, gross
margins and results of operations at any given time will be based primarily on
the following factors:





•
            neurointerventionalist
      and patient acceptance of our
products;





•
            changes
      in the number of embolic coiling procedures performed to treat cerebral
      aneurysms;





•
            the
      seasonality of our product sales;





•
            the
      mix of our products sold;









24


Table of Contents





•
            stocking
      patterns for distributors;





•
            the
      development of new procedures to treat cerebral
  aneurysms;





•
            results
      of clinical research and trials on our existing products and products in
      development;





•
            demand
      for, and pricing of, our products;





•
            levels
      of third-party reimbursement for our
products;





•
            timing
      of new product offerings, acquisitions, licenses or other significant
      events involving us or our
competitors;





•
            increases
      in the costs of manufacturing and selling our
  products;





•
            the
      amount and timing of our operating
expenses;





•
            litigation
      expenses;





•
            fluctuations
      in foreign currency exchange rates;





•
            regulatory
      approvals and legislative changes affecting the products we may offer or
      those of our competitors;





•
            the
      effect of competing technological and market
  developments;





•
            changes
      in our ability to obtain and maintain FDA and other domestic and foreign
      regulatory approval or clearance for our
  products;





•
            inventory
      adjustments we may have to make in any
quarter;





•
            interruption
      in the manufacturing or distribution of our
  products;





•
            our
      ability to maintain and expand our sales force and operational
      personnel;





•
            the
      ability of our suppliers to timely provide us with an adequate supply of
      materials and components; and





•
            amount
      and timing of capital expenditures and other costs relating to any
      potential expansion of our
operations.





Many of
the products we may seek to develop and introduce in the future will require FDA
approval or clearance and will be required to meet similar regulatory
requirements in other countries where we seek to market our products, without
which we cannot begin to commercialize them. Forecasting the timing of sales of
our products is difficult due to the delay inherent in seeking FDA and other
clearance or approval, or the failure to obtain such clearance or approval. In
addition, we will be increasing our operating expenses as we build our
commercial capabilities. Accordingly, we may experience significant,
unanticipated quarterly losses. Because of these factors, our operating results
in one or more future quarters may fail to meet the expectations of securities
analysts or investors, which could cause our stock price to decline
significantly.





We may not be
able to develop new products or product enhancements that will be accepted by the
market.





Our
success will depend in part on our ability to develop and introduce new products
and enhancements to our existing products. We cannot assure that we will be able
to successfully develop or market new products or that any of our future
products will be accepted by the neurointerventionalists who use our products or
the payors who reimburse for many of the procedures performed with our products.
The success of any new product offering or enhancement to an existing product
will depend on several factors, including:





•
            our
      ability to properly identify and anticipate neurointerventionalist and
      patient needs;





•
            our
      ability to develop new products or enhancements in a timely
      manner;









25


Table of Contents







•
            our
      ability to obtain the necessary regulatory approvals for new products or
      product enhancements;





•
            our
      ability to provide adequate training to potential users of our
      products;





•
            our
      ability to receive adequate reimbursement for our
    procedures;





•
            results
      of clinical research and trials on our existing products and products in
      development;





•
            demand
      for, and pricing of, our products;





•
            levels
      of third-party reimbursement for our products;
  and





•
            our
      ability to develop an effective marketing and distribution
      network.





If we do
not develop new products or product enhancements in time to meet market demand
or if there is insufficient demand for our products or enhancements, we may not
achieve expected revenue levels and our business will suffer.





Our relationships
with physicians and other consultants
require us to comply with a number of United States and international
regulations.





We are
required to comply with a number of United States and international laws and
regulations related to our financial relationships with physicians and other
healthcare providers. In addition, we must comply with the Foreign Corrupt
Practices Act (“FCPA”) which prohibits United States companies or their agents
and employees from providing anything of value to a foreign official for the
purposes of influencing him or her to help obtain or retain business, direct
business to any person or corporate entity, or obtain any unfair
advantage.   While we have taken numerous steps to ensure compliance
with these laws and regulations, they are subject to evolving interpretations,
making it difficult to ensure compliance.  If we are found to be in
violation of any of these laws or regulations, we may face serious consequences,
including civil and criminal penalties for us and our officers and directors,
exclusion of our products from government-funded healthcare programs,
termination of customer contracts, and reputational harm.





In August
2004, while reviewing our sales and payment procedures, we identified certain
payments we made to physicians located in France, Germany, Spain and Turkey that
may have violated the applicable laws in those foreign jurisdictions and may
possibly have violated laws in Switzerland, where our Swiss subsidiary is
located. We are not able to determine at this time what penalties or other
sanctions, if any, authorities in France, Germany, Spain, or Turkey may impose
on us, as a result of such violations. Such amounts could be material to our
financial position, results of operations or cash flows. We have been notified
by the Swiss Federal Prosecutor that it does not intend to bring any action or
impose any penalties on us relating to our activities in Switzerland. The
payments were disclosed to the United States Department of Justice in 2004 and
resulted in our entry into a Deferred Prosecution Agreement, which is described
in our prior filings with the SEC and which expired in 2008.





We operate in a
highly competitive market segment, face competition from large, well-established
medical device manufacturers with significant resources, and may not
be able to
increase penetration in our markets or otherwise compete
effectively.





The
market for medical devices for treatment of cerebral vascular diseases is
intensely competitive, subject to rapid change and significantly affected by new
product introductions and other market activities of industry participants. We
compete primarily with the Target Therapeutics division of Boston Scientific,
the market leader, as well as Codman, ev3/Micro Therapeutics and
Terumo/MicroVention. At any time, other companies may develop alternative
treatments, products or procedures for the treatment of cerebral aneurysms that
compete directly or indirectly with our products. If alternative treatments
prove to be superior to our microcoil or other products, continued use or
adoption of our products could be negatively affected and our future revenues
could suffer.





In
addition, most of our current and potential competitors are either large
publicly traded or divisions or subsidiaries of large publicly traded companies
and enjoy several competitive advantages over us, including:





•
            greater
      financial and personnel resources;





•
            significantly
      greater name recognition;









26





•
            established
      relationships with
neurointerventionalists;





•
            established
      distribution networks;





•
            greater
      experience in obtaining and maintaining FDA, and other regulatory
      approvals for products and product enhancements, and greater experience in
      developing compliance programs for compliance with numerous federal,
      state, local and similar laws in non-United States
      jurisdictions;





•
            greater
      resources for product research and
development;





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





•
            broader
      product lines.





Except
for our agreements with our distributors, we have no material long-term purchase
agreements with our customers, who may at any time switch to the use of our
competitors’ products.





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





Our sales
      in international markets subject us to foreign currency exchange and
      other risks and
      costs that could harm our
business.





A
substantial portion of our revenues are derived from outside the United States.
For the fiscal years ended March 31, 2009, 2008 and 2007, revenues from
customers outside the United States represented approximately 50%, 51% and 51%,
respectively, of our revenues. We anticipate that revenues from international
customers will continue to represent a substantial portion of our revenues as we
continue to expand in new international markets including China and Japan.
Because we generate revenues in foreign currencies, we are subject to the
effects of exchange rate fluctuations. For the fiscal year ended March 31,
2009, approximately 31% of our revenues were denominated in currencies other
than the U.S. dollar. The functional currency of our Swiss subsidiary is
the Swiss franc. The functional currency of our UK subsidiary is the British
pound.





In
Europe, our revenues are denominated in Swiss francs, euros, British pounds and
U.S. dollars. Accordingly, we are exposed to market risk related to changes
between the Swiss franc and these other currencies in which we conduct business.
If the Swiss franc appreciates against the currencies in which our receivables
are denominated, we will recognize foreign currency losses. For the preparation
of our consolidated financial statements, the financial results of our Swiss and
UK subsidiaries are translated into U.S. dollars based on average exchange
rates during the applicable period. If the U.S. dollar appreciates against
the Swiss franc and British pound, the revenues we recognize from sales by our
European subsidiaries will be adversely impacted.





Historically,
we have also been exposed to risks from fluctuations in currency exchange rates
due to intercompany loans made to Micrus Endovascular SA (“Micrus SA”), our
Swiss subsidiary, in 2001 in connection with its incorporation. These loans are
denominated in Swiss francs and will fluctuate in value against the
U.S. dollar, causing us to recognize foreign exchange gains and losses.
Foreign exchange gains or losses as a result of exchange rate fluctuations in
any given period could harm our operating results and negatively impact our
revenues. Additionally, if the effective price of our products were to increase
as a result of fluctuations in foreign currency exchange rates, demand for our
products could decline and adversely affect our results of operations and
financial condition.





In fiscal
2009, we entered into foreign currency forward contracts to buy U.S. dollars to
minimize the impact of the currency movements on intercompany payables for our
Micrus SA subsidiary. We use derivative instruments only for risk management
purposes and do not use them for speculation or for trading. Our hedging
activities involve risk and may not limit our underlying exposure from currency
fluctuations or minimize our net sales and earnings volatility associated with
foreign currency exchange rate changes.





We are
subject to various additional risks as a consequence of doing business
internationally which could harm our business, including the
following:





•
            unexpected
      delays or changes in regulatory
requirements;









27


Table of Contents







•
            local
      economic and political instability or other potentially adverse
      conditions;





•
            lack
      of experience in certain geographical
markets;





•
            increased
      difficulty in collecting accounts receivables in certain foreign
      countries;





•
            delays
      and expenses associated with tariffs and other trade
    barriers;





•
            difficulties
      and costs associated with attracting and maintaining third party
      distributors;





•
            compliance
      with foreign laws and
regulations; and





•
            adverse
      tax consequences or overlapping tax
structures.





If we fail to
increase our direct sales force in a timely manner, our business could
suffer.





We have a
limited domestic and international direct sales force. We also have a
distribution network for sales in the major markets in Europe, Latin America,
Asia and the Middle East. As we launch new products and increase our marketing
efforts with respect to existing products, we will need to expand the number of
our direct sales personnel on a worldwide basis. The establishment and
development of a more extensive sales force will be expensive and time
consuming. There is significant competition for sales personnel experienced in
interventional medical device sales. If we are unable to attract, motivate and
retain qualified sales personnel and thereby increase our sales force, we may
not be able to increase our revenues.





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





We have
experienced, and may continue to experience, periods of rapid growth and
expansion, which have placed, and will likely continue to place, a significant
strain on our limited personnel and other resources. In particular, the
expansion of our fabrication facility and the continuing expansion of our direct
sales force will require significant management, technical and administrative
resources. Any failure by us to manage our growth effectively could have an
adverse effect on our ability to achieve our development and commercialization
goals.





To
achieve our revenue goals, we must successfully increase production in our
fabrication facility as required by customer demand. We may in the future
experience difficulties in increasing production, including problems with
production yields and quality control and assurance and in satisfying and
maintaining compliance with regulatory requirements. These problems could result
in delays in product availability and increases in expenses. Any such delay or
increased expense could adversely affect our ability to generate
revenues.





Future
growth will also impose significant added responsibilities on management,
including the need to identify, recruit, train and integrate additional
employees. In addition, rapid and significant growth will place a strain on our
administrative and operational infrastructure. In order to manage our operations
and growth we will need to continue to improve our operational, financial and
management controls, reporting systems and procedures. If we are unable to
manage our growth effectively, it may be difficult for us to execute our
business strategy and our operating results and business could
suffer.





We are required
to evaluate our internal control over financial reporting under Section 404
of the Sarbanes-Oxley Act of 2002 and are exposed to future risks of
non
compliance.





Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we
are required to furnish a report by our management on our internal control over
financial reporting. The report contains, among other matters, an assessment of
the effectiveness of our internal control over financial reporting as of the end
of our fiscal year, including a statement as to whether or not our internal
control over financial reporting is effective. This assessment must include
disclosure of any material weaknesses in our internal control over financial
reporting identified by management. The report must also contain a statement
that our independent registered public accounting firm has issued an attestation
report on the effectiveness of internal control over financial
reporting.









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We
completed our assessment of our internal control over financial reporting as
required by Section 404 for the fiscal year ended March 31, 2009. Our
assessment, testing and evaluation resulted in our conclusion that as of
March 31, 2009, our internal control over financial reporting was
effective. Our independent registered accounting firm has also expressed the
opinion that our internal controlsover financial reporting were
effective during that period. However, our controls may not prove to be adequate
for the future periods, and we cannot predict the outcome of our testing in
future periods. If our internal controls are deemed to be ineffective in future
periods, our financial results or the market price of our stock could be
adversely affected. In any event, we will incur additional expenses and
commitment of management’s time in connection with further evaluations, which
may adversely affect our future operating results and financial
condition.





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





We
believe that our current cash position, together with the cash to be generated
from expected product sales and the funds available under our credit facility
(subject to compliance with conditions and covenants of the credit agreement)
will be sufficient to meet our projected operating requirements for at least the
next 12 months. However, after such period we may be required to seek
additional funds from public and private stock or debt offerings, borrowings
under lease lines or other sources. Our capital requirements will depend on many
factors, including:





•
            the
      revenues generated by sales of our
products;





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





•
            the
      expenses we incur in manufacturing and selling our
    products;





•
            the
      costs of developing and acquiring new products or
      technologies;





•
            the
      cost of obtaining and maintaining FDA and other domestic and foreign
      approval or clearance of our products and products in
      development;





•
            the
      expenses we incur related to compliance with the United States FCPA and
      laws and regulations in non-United States
  jurisdictions;





•
            costs
      associated with compliance with the Sarbanes-Oxley Act of 2002 and rules
      and regulations affecting public companies promulgated by the SEC and The
      NASDAQ Stock Market;





•
            the
      costs associated with our facilities expansion, if
      any; and





•
            the
      costs associated with increased capital
  expenditures.





As a
result of these factors, we may need to raise additional funds, and such funds
may not be available on favorable terms, or at all. Furthermore, if we issue
equity or debt securities to raise additional funds, our existing stockholders
may experience dilution, and the new equity or debt securities may have rights,
preferences and privileges senior to those of our existing stockholders. In
addition, if we raise additional funds through collaboration, licensing or other
similar arrangements, it may be necessary to relinquish valuable rights to our
potential products or proprietary technologies, or grant licenses on terms that
are not favorable to us. If we cannot raise funds on acceptable terms, we may
not be able to develop or enhance our products, execute our business plan, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated customer requirements. In these events, our ability to achieve our
development and commercialization goals would be adversely
affected.





We
face a risk of non-compliance with certain financial covenants in our credit
agreement with Wells Fargo Bank. If we are unable to meet the financial or other
covenants under the credit agreement or negotiate future waivers or amendments
of the covenants, an event of default would occur under the credit agreement,
which would give Wells Fargo Bank a range of remedies, including without
limitation declaring all outstanding debt to be immediately due and payable,
foreclosing on the assets securing the obligation arising under the credit
agreement and/or ceasing to provide the additional revolving loans, which could
have a material adverse effect on us.





On
November 5, 2008, we entered into a credit agreement with Wells Fargo Bank to
provide us with a revolving line of credit (the “Credit Agreement”). The Credit
Agreement provides for maximum borrowings outstanding at any time in an amount
of up to $15.0 million. As of March 31, 2009, we had outstanding borrowings of
$2.5 million under the Credit Agreement. If borrowings under the Credit
Agreement exceed $7.5 million, all borrowings are subject to a borrowing base
which is based on eligible accounts receivable.









29


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Borrowings
are secured by a first priority security interest in all of our assets (except
for certain permitted liens that are senior to the Wells Fargo Bank’s security
interest). At our option, borrowings bear interest at either 2.25% over the
bank’s prime rate or 3.50% over the one-month, two-month or three-month LIBOR.
The Credit Agreement requires that we comply with certain financial and other
covenants for borrowings to be permitted. The more significant financial
covenants include (i) maintaining a minimum modified quick ratio and (ii)
achieving not more than a certain amount of loss through March 31, 2009, and
thereafter a minimum profitability, in each case excluding certain non-cash
items. On May 20, 2009, we amended the Credit Agreement with Wells Fargo Bank
extending the maturity date to August 1, 2010 and adjusting the minimum limits
for the financial covenants based on our financial forecast for fiscal
2010.





Although
we were in compliance with all covenants at March 31, 2009, it is possible that
we may not be in compliance or failure to comply with certain covenants or other
agreements in the future. If we are unable to meet the financial or other
covenants under the Credit Agreement or negotiate future waivers or amendments
of such covenants, an event of default could occur under the Credit Agreement.
Upon the occurrence and during the continuance of an event of default under the
Credit Agreement, Wells Fargo Bank has available a range of remedies customary
in these circumstances, including without limitation declaring all outstanding
debt, together with accrued and unpaid interest thereon, to be immediately due
and payable, foreclosing on the assets securing the obligations arising under
the Credit Agreement and/or ceasing to provide additional revolving loans, which
could have a material adverse effect on us.





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





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





Our
operations are subject to environmental, health and safety, and other laws and
regulations, with which compliance is costly and which expose us to penalties
for non-compliance.





Our
business, properties and products are subject to foreign, federal, state and
local laws and regulations relating to the protection of the environment,
natural resources and worker health and safety and the use, management, storage,
and disposal of hazardous substances, wastes, and other regulated materials.
Because we operate real property, various environmental laws also may impose
liability on us for the costs of cleaning up and responding to hazardous
substances that may have been released on our property, including releases
unknown to us. These environmental laws and regulations also could require us to
pay for environmental remediation and response costs at third-party locations
where we disposed of or recycled hazardous substances. The costs of complying
with these various environmental requirements, as they now exist or may be
altered in the future, could adversely affect our financial condition and
operating results.





We are dependent
on single source suppliers for components and materials used in our devices, and the
loss of any of these suppliers, or their inability to supply us with
an adequate
supply of materials, could harm our business.





We rely
on third-party suppliers for components and materials used in our products and
rely on single sources for many of the microcoil and delivery system components,
including tubing, connectors and sterilization services. Our dependence on
third-party suppliers involves several risks, including limited control over
pricing, availability, quality, delivery schedules and supplier compliance with
regulatory requirements. Any delays in delivery of such components or provision
of such services or shortages of such components could cause delays in the
shipment of our products, which could significantly harm our business. We
generally acquire our single source components pursuant to purchase orders
placed in the ordinary course of business, and we have no guaranteed supply
arrangements with any of our single source suppliers. Because of our reliance on
these vendors, we may also be subject to increases in component costs. These
increases could significantly harm our business. For us to be successful, our
third-party suppliers must also be able to provide us with the materials and
components of our products in substantial quantities, in compliance with
regulatory requirements, in accordance with agreed upon specifications, at
acceptable cost and on a timely basis. Our anticipated growth may strain the
ability of suppliers to deliver an increasingly large supply of materials and
components.









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Table of Contents





If we are
unable to obtain sufficient quantities of high quality components and materials
to meet customer demand on a timely basis, we could lose customers, our
reputation may be harmed and our business could suffer. If any one or more of
our third-party suppliers cease to provide us with sufficient quantities of our
materials or components in a timely manner or on terms acceptable to us, we
would have to seek alternative sources of supply. We could incur delays while we
locate and engage alternative qualified suppliers and we might be unable to
engage alternative suppliers on favorable terms. Any such disruption or
increased expenses could harm our commercialization efforts and adversely affect
our ability to generate revenues.





We rely
on independent contract manufacturers for the manufacture and assembly of
certain of our products and components. Reliance on independent contract
manufacturers involves several risks, including the potential inadequacy of
capacity, the unavailability of or interruptions in access to certain process
technologies and reduced control over product quality, compliance with
regulatory requirements, delivery schedules, manufacturing yields and costs.
Such manufacturers have possession of and at times title to molds for certain
manufactured components of our products. Shortages of raw materials, production
capacity constraints or delays by our contract manufacturers could negatively
affect our ability to meet our production obligations and result in increased
prices for affected parts. Any such reduction, constraint or delay may result in
delays in shipments of our products or increases in the prices of components,
either of which could have a material adverse effect on our business, operating
results and financial condition. We have no supply agreements with our current
contract manufacturers and utilize purchase orders which are subject to supplier
acceptance. The unanticipated loss of any of our contract manufacturers could
cause delays in our ability to deliver product while we identify and qualify a
replacement manufacturer. If our current or future independent contract
manufacturers are unable to meet our requirements for manufactured components,
our business could suffer.





Our operations
are currently conducted at several locations that may be at risk from
earthquakes
or other natural disasters.





We
currently conduct our manufacturing, development and management activities at
two locations in Silicon Valley, California, near known earthquake fault zones,
and in Miramar, Florida, where there is a risk of hurricanes. We have taken
precautions to safeguard our facilities, including insurance, health and safety
protocols, and off-site storage of computer data. However, any future natural
disaster, such as an earthquake or hurricane, could cause substantial delays in
our operations, damage or destroy our equipment or inventory, and cause us to
incur additional expenses. A disaster could seriously harm our business and
results of operations.





If we are unable
to effectively manage our inventory held on consignment by our intended
customers, we will not achieve our expected results.





A
significant portion of our inventory is held on consignment by hospitals that
purchase the inventory as they use it. In these consignment locations, we do not
have physical possession of the consigned inventory. We therefore have to rely
on information from our customers as well as periodic inspections by our sales
personnel to determine when our products have been used. We have in the past
experienced problems managing appropriate consigned inventory levels and as a
result we recorded an impairment of inventory for anticipated obsolescence in
fiscal 2004 and an impairment of excess inventory in both fiscal 2004 and 2005.
If we are not able to effectively manage appropriate consigned inventory levels,
we may suffer inventory losses that will reduce our gross profit levels. There
can be no assurance that any efforts to strengthen our monitoring and management
of consigned inventory will be adequate to meaningfully reduce the risk of
inventory loss.





We are dependent
on our senior management team, key clinical advisors and scientific personnel, and
the loss of any of them could harm our business.





Our
continued success depends in part upon the continued availability and
contributions of our senior management team and the continued participation of
our key clinical advisors. We have entered into agreements with certain members
of our senior management team, but none of these agreements guarantee the
services of the individual for a specified period of time. We also rely on the
skills and talents of our scientific personnel because of the complexity of our
products. The loss of members of our senior management, key clinical advisors or
scientific personnel, or our inability to attract or retain other qualified
personnel or advisors could have a material adverse effect on our results of
operations and financial condition.









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The medical
device industry is characterized by patent litigation, which could be
costly,
result in the diversion of management’s time and efforts and require us
to pay
damages.





The
medical device industry is characterized by extensive litigation and
administrative proceedings over patent and other intellectual property rights.
Accordingly, we may in the future be subject to further litigation and
administrative proceedings over such rights with other companies in our
industry. Our competitors may assert that at least one of our products, its
components, or the methods we employ in the use or manufacture of our products
are covered by and infringe the competitors’ United States or foreign patents
held by them. In addition, should our patents or applications have claims that
encompass the same scope as claims pending or issued to a third party
competitor, that third party may claim that its claims have priority over ours
because they invented the claimed subject matter first. Because patent
applications generally take many years to issue, there may be third party
applications presently pending of which we are unaware, that may in the future
result in issued patents that at least one of our products, its components, or
the methods we employ in the use or manufacture of our product(s) may infringe.
There could also be issued patents that one or more components of our products
may inadvertently be infringing, of which we are unaware. As the number of
participants in the market for cerebral vascular treatments and the number of
issued patents in this technology area grows, the possibility of being charged
with patent infringement increases.





Any
infringement claims against us may cause us to incur substantial costs, could
place a significant strain on our financial resources, divert the attention of
management from our core business and harm our reputation. If the relevant
patent claims are upheld as valid and enforceable and we are found to infringe,
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 commercialize one or more of our products or practice the methods
we employ in the use or manufacture of our products.





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 procure proprietary rights to
the technologies used in our products. 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 be sufficient to adequately protect our intellectual property or permit us
to gain or keep any competitive advantage. For example, any of our pending
United States or foreign patent applications may ultimately not issue as a
patent or, alternatively, may issue with claims that are of little or no value
to us. In addition, once issued, a valuable patent may be challenged
successfully by third parties and invalidated. In addition, our patent
protection for material aspects of our products and methods is presently being
pursued with applications that have been filed but not issued, such that these
material aspects are not presently protected by patents. Competitors may further
be able to get around having to license our technology in order to avoid
infringement by designing around our issued and published patent claims, thereby
staying clear of our proprietary rights. Similarly, competitors may develop
products and methods that are equivalent or superior to ours. Our
confidentiality agreements and intellectual property assignment agreements with
our employees, consultants and advisors may not be enforceable or may not
provide meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure or other breaches of
the agreements. Furthermore, the laws of some foreign countries may not protect
our intellectual property rights to the same extent as do the laws of the United
States. Both the process of procuring patent rights and the process of managing
patent disputes can be time consuming and expensive.





In the
event a competitor infringes upon our patent or other intellectual property
rights, enforcing those rights may be difficult and time consuming. Even if
successful, litigation to enforce our intellectual property rights or to defend
our patents against challenge could be prolonged, costly and could divert our
management’s attention. We may not have sufficient resources to enforce our
intellectual property rights or to defend our patents against a
challenge.









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If we fail to
obtain, or experience significant delays in obtaining, FDA clearances
or
approvals for our future products or product enhancements, or to comply
with similar
regulatory requirements in other countries where we market our products,
our ability to
commercially distribute and market our products could
suffer.





Our
medical devices are subject to rigorous regulation by the FDA and numerous other
federal, state and foreign governmental authorities. Our failure to comply with
such regulations could lead to the imposition of injunctions, suspensions or
loss of regulatory clearances or approvals, product recalls, termination of
distribution or product seizures or the need to invest substantial resources to
comply with various existing or new requirements. In the more egregious cases,
criminal sanctions, civil penalties, disgorgement of profits or closure of our
manufacturing facilities are possible. The process of obtaining regulatory
clearances or approvals to market a medical device, particularly from the FDA,
can be costly and time consuming, and there can be no assurance that such
clearances or approvals will be granted on a timely basis, if at all. In
particular, the FDA permits commercial distribution of most new medical devices
only after the device has received 510(k) clearance or is the subject of an
approved pre-market approval application, or PMA. The FDA will clear the
marketing of a medical device through the 510(k) process if it is demonstrated
that the new product has the same intended use, is substantially equivalent to
another legally marketed device, including a 510(k)-cleared product, and
otherwise meets the FDA’s requirements. The PMA approval process is more costly,
lengthy and uncertain than the 510(k) clearance process and requires the
development and submission of clinical studies supporting the safety and
effectiveness of the device. Product modifications may also require the
submission of a new 510(k) clearance, or the approval of a PMA before the
modified product can be marketed. Changes in labeling and manufacturing site for
a PMA approved device may require the submission and approval of a PMA
supplement. Any products we develop that require regulatory clearance or
approval may be delayed, if approved at all. In addition, we believe that some
of our new products will require an approved PMA before we can commercially
distribute the device and we cannot assure that any new products or any product
enhancements we develop will be subject to the shorter 510(k) clearance process
instead of the more lengthy PMA requirements. Additionally, certain of our
products under development may involve both device and drug or biologic
regulation and we will need to comply with drug and biologic regulations in
addition to medical device requirements. Accordingly, we anticipate that the
regulatory review and approval process for some of our future products or
product enhancements may take significantly longer than anticipated or that we
have experienced in the past. We will also be required to pay a medical device
user fee and may also be required to pay a drug or biologic user fee. There is
no assurance that the FDA will not require that a certain new product or product
enhancement go through the lengthy and expensive PMA approval process. We have
no experience in obtaining PMA approval. We also have no experience in obtaining
drug or biologic approval, and will need to rely on third party assistance in
navigating the regulatory approval pathway for future combination
products.





Further,
pursuant to FDA regulations, we can only market our products for cleared or
approved uses. Certain of our products may be used by physicians for indications
other than those cleared or approved by the FDA, but we cannot promote the
products for such off-label uses.





Modifications to
our marketed products may require new 510(k) clearances or pre-market
approvals, or may require us to cease marketing or recall the modified
products
until clearances are obtained.





Any
modification to a 510(k)-cleared device that could significantly affect its
safety or effectiveness, or that would constitute a change in its intended use,
requires a new 510(k) clearance or, possibly, PMA approval. The FDA requires
every manufacturer to make this determination in the first instance, but the FDA
may review a manufacturer’s decision. The FDA may not agree with any of our past
or future decisions regarding whether new clearances or approvals are necessary.
If the FDA requires us to seek 510(k) clearance or PMA approval for any
modification to a previously cleared product, we may be required to cease
marketing and/or to recall the modified product until we obtain clearance or
approval, and we may be subject to significant regulatory fines or penalties.
Further, our products could be subject to recall if the FDA determines, for any
reason, that our products are not safe, including but not limited to new safety
data from use of the product, or manufacturing defects. Any recall or FDA
requirement that we seek additional approvals or clearances could result in
delays, fines, costs associated with modification of a product, loss of revenue
and potential operating restrictions imposed by the FDA.









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If we or our
suppliers fail to comply with the FDA’s quality system regulations, the
manufacture
of our products could be delayed.





We and
our suppliers are required to comply with the FDA’s quality system regulations,
which cover the methods and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, storage and shipping of our
products. The FDA enforces these quality system regulations through unannounced
inspections. If we or one of our suppliers fail a quality system regulations
inspection or if any corrective action plan is not sufficient, or is very
expensive or time consuming to implement, the manufacture of our products could
be delayed until satisfactory corrections are made, or in the event we are
unable to correct the problems we may not be able to continue manufacturing and
distributing the particular device or devices. Such a delay potentially could
disrupt our business, harm our reputation and adversely affect our sales and
revenues.





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





Successful
sales of our products will depend on the availability of adequate reimbursement
from third-party payors. Healthcare institutions that purchase medical devices
for treatment of their patients generally rely on third-party payors to cover
the use of the product for the particular procedure and reimburse all or part of
the costs and fees associated with the procedures performed with these devices.
Currently, the costs of our products distributed domestically are being
reimbursed by third party payors. There is no guarantee that coverage and
adequate reimbursement will be available in the future for our existing and/or
new products. Both public and private insurance reimbursement plans are central
to new product acceptance. Hospitals are unlikely to use our products if they do
not receive reimbursement adequate to cover the cost of our products and related
procedures.





In
international markets, market acceptance may depend, in part, upon the
availability of reimbursement within prevailing healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary
significantly by country, and include both government sponsored healthcare and
private insurance. Currently, the costs of our products distributed
internationally, other than in some Latin American countries, are being
reimbursed by public and private healthcare insurers. We may not obtain
international reimbursement approvals in a timely manner, if at all, our failure
to receive international reimbursement approvals would negatively impact market
acceptance of our products in the international markets in which those approvals
are sought.





In
addition, in certain countries, such as France, Germany, China and Japan, we are
required to obtain regulatory clearance for our products to be eligible for
reimbursements by third party payors, even though reimbursement for embolic
coiling procedures is already in place.





Future
reimbursement may be subject to increased restrictions both in the United States
and in international markets. Third-party reimbursement and coverage may not be
available or adequate in either the United States or international markets.
Future legislation, regulation or reimbursement policies of third-party payors
may adversely affect the demand for our existing products or our products
currently under development and limit our ability to sell our products on a
profitable basis.





Changes to
existing accounting pronouncements or taxation rules or practices may
affect how
we conduct our business and affect our reported results of
operations.





New
accounting pronouncements or tax rules and varying interpretations of accounting
pronouncements or taxation practice have occurred and may occur in the future. A
change in accounting pronouncements or interpretations or taxation rules or
practices can have a significant effect on our reported results and may even
affect our reporting of transactions completed before the change is effective.
Changes to existing rules and pronouncements, future changes, if any, or the
questioning of current practices or interpretations may adversely affect our
reported financial results or the way we conduct our business.









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We may become
subject to product liability claims which could require us to pay damages that
exceed our insurance coverage.





Our
business exposes us to potential product liability claims that are inherent in
the testing, manufacture and sale of medical devices for neurointerventional
procedures. These procedures involve significant risk of serious complications,
including intracranial bleeding, brain injury, paralysis and even death. Any
product liability claim brought against us, with or without merit, could result
in the increase of our product liability insurance rates or the inability to
secure coverage in the future. In addition, we could have to pay an amount in
excess of policy limits, which would have to be paid out of cash reserves. If
longer-term patient results and experience indicate that our products or any
component cause tissue damage, motor impairment or other adverse effects, we
could be subject to significant liability. Finally, even a meritless or
unsuccessful product liability claim could harm our reputation in the industry,
lead to significant legal fees and could result in the diversion of management’s
attention from managing our business.





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





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





The price of our
common stock has fluctuated and we expect will continue to fluctuate
substantially and
you may not be able to sell your shares at or above your purchase price.





The
market price of our common stock has been and we expect will continue to be
highly volatile and may fluctuate substantially due to many factors,
including:





•
            volume
      and timing of orders for our
products;





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





•
            disputes
      or other developments with respect to intellectual property
      rights;





•
            our
      ability to develop, obtain regulatory clearance for, and market, new and
      enhanced products on a timely
basis;





•
            product
      liability claims or other
litigation;





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





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





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





•
            changes
      in the availability of third-party reimbursement in the United States or
      other countries;





•
            changes
      in revenues or earnings estimates or recommendations by securities
      analysts; and





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





Furthermore,
to the extent there is an inactive market for our common stock, the value of
your shares and your ability to sell your shares at the time you wish to sell
them may be impaired. An inactive market may also impair our ability to raise
capital by selling shares and may impair our ability to acquire other companies,
products or technologies by using our shares as consideration.









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Because of their
significant stock ownership, our executive officers, directors and principal
stockholders may be able to exert control over us and our significant
corporate
decisions.





Based on
shares outstanding at March 31, 2009, our executive officers, directors,
and stockholders holding more than 5% of our outstanding common stock and their
affiliates, in the aggregate, beneficially owned approximately 44% of our
outstanding common stock. As a result, these persons, acting together, may have
the ability to determine the outcome of matters submitted to our stockholders
for approval, including the election and removal of directors and any merger,
consolidation, or sale of all or substantially all of our assets. This
concentration of ownership may harm the market price of our common stock by,
among other things:





•
            delaying,
      deferring or preventing a change in control of our
  company;





•
            impeding
      a merger, consolidation, takeover or other business combination involving
      our company; or





•
            causing
      us to enter into transactions or agreements that are not in the best
      interests of all stockholders.





Future
sales of our common stock may depress our stock price.





Our
current stockholders hold a substantial number of shares of our common stock
that they are able to sell in the public market. A significant portion of these
shares are held by a small number of stockholders. Sales by our current
stockholders of a substantial number of shares could significantly reduce the
market price of our common stock. Moreover certain holders of our common stock
have the right to require us to file registration statements covering their
shares or to include their shares in registration statements that we may file
for ourselves or other stockholders.





We have
registered 6,749,963 shares of common stock that we may issue under our
1998 Stock Plan (“1998 Plan”), 2005 Equity Incentive Plan (“2005 Plan”) and 2005
Employee Stock Purchase Plan (“Purchase Plan”). These shares can be freely sold
in the public market upon issuance. The sale by any of these holders of a large
number of securities in the public market could reduce the trading price of our
common stock and impede our ability to raise future capital.





We
do not intend to pay cash dividends.





We have
never declared or paid cash dividends on our capital stock. We currently intend
to retain all available funds and any future earnings for us in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of any future debtor credit
facility may preclude us from paying any dividends. As a result, capital
appreciation, if any, of our common stock will be your sole source of potential
gain for the foreseeable future.





We may become
involved in securities class action litigation that could divert management’s
attention and harm our business.





The stock
market in general, The NASDAQ Stock Market and the market for medical device
companies in particular, continues to experience extreme price and volume
fluctuations that are unrelated or disproportionate to companies’ operating
performance. Further, the market prices of securities of medical device
companies have been particularly volatile. These broad market and industry
factors may materially harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the
market price of a particular company’s securities, securities class action
litigation has often been brought against that company. We may become involved
in this type of litigation in the future. Litigation often is expensive and
diverts management’s attention and resources, which could materially harm our
financial condition and results of operations.





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





Our
amended and restated certificate of incorporation and amended bylaws contain
provisions that could delay or prevent a change of control of our company or
changes in our board of directors that our stockholders might consider
favorable. Some of these provisions:





•
            authorize
      the issuance of preferred stock which can be created and issued by the
      board of directors without prior stockholder approval, with rights senior
      to those of the common stock;









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•
            provide
      for a classified board of directors, with each director serving a
      staggered three-year term;





•
            prohibit
      our stockholders from filling board vacancies, calling special stockholder
      meetings, or taking action by written
consent;





•
            prohibit
      our stockholders from making certain changes to our amended and restated
      certificate of incorporation or bylaws except with 66 2/3% stockholder
      approval; and





•
            require
      advance written notice of stockholder proposals and director
      nominations.





In
addition, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, which may prohibit certain business combinations with
stockholders owning 15% or more of our outstanding voting stock. These and other
provisions in our amended and restated certificate of incorporation, restated
bylaws and Delaware law could make it more difficult for stockholders or
potential acquirers to obtain control of our board of directors or initiate
actions that are opposed by our then-current board of directors, including
delaying or impeding a merger, tender offer, or proxy contest involving our
company. Any delay or prevention of a change of control transaction or changes
in our board of directors could cause the market price of our common stock to
decline.





Item 1B.Unresolved
Staff Comments.





None.





Item 2.Properties.





Our
worldwide headquarters are located in San Jose, California. On June 6,
2005, we entered into a non-cancelable seven-year lease pursuant to which we
lease approximately 42,000 square feet of building space, which we
currently use for administrative, sales, marketing, research and
development,  manufacturing and distribution facilities.





On
March 11, 2008, we entered into a non-cancelable ten-year lease in Miramar,
Florida. The facility comprises a total of approximately 27,000 square
feet, which we currently use for administrative, manufacturing, research and
development and distribution facilities.





On
December 4, 2007, our wholly owned subsidiary, Micrus SA, entered into a
non-cancelable eight-year lease for office space in Switzerland. The office
space comprises a total of approximately 5,500 square feet and provides
space for sales, marketing and administrative functions.





Additionally,
we lease office space for our wholly-owned subsidiary, Micrus Endovascular UK
Limited (“Micrus UK”), under a non-cancelable lease agreement with a term
through December 2010. We use this space for our sales, marketing and
administrative functions.





We
otherwise believe that our existing facilities are adequate to meet our current
and near term future needs.





Item 3.Legal
Proceedings.





Patent
Litigation





On
September 22, 2008, we entered into a Settlement and License Agreement (the
“Settlement and License Agreement”) with Boston Scientific Corporation and
Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation
(collectively “Boston Scientific”) and a Settlement and Release Agreement (the
“Settlement and Release Agreement”) with The Regents of the University of
California (the “Regents”) in order to resolve pending patent litigation between
Boston Scientific and us (the “Patent Litigation”). On October 8, 2008, the
Court entered an order dismissing the Patent Litigation with prejudice. The
Patent Litigation is described in detail in our prior filings with the
SEC.









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Under the
Settlement and License Agreement, we agreed to cross license certain patents
asserted in the Patent Litigation and release all claims (as defined in the
Settlement and License Agreement) arising prior to the effective date (as
defined in the Settlement and License Agreement) to which the rights,
licenses, releases, and covenants expressly granted under the Settlement
and License Agreement would be a complete defense had such claims arisen on or
after the effective date.  The Settlement and License
Agreement includes a mutual release of claims and covenants not to sue
with respect to certain specified patents.  Boston Scientific
also covenants not to sue end users of our products for claims of infringement
of specified patents.





In
connection with the Settlement and License Agreement, we entered into the
Settlement and Release Agreement with the Regents.  The Settlement and
Release Agreement provided for the cash payment of approximately $1.7 million to
the Regents in exchange for a mutual release of claims and a mutual covenant not
to sue with respect to certain specified patents.  The Regents also
agreed not to sue end users of our products for claims under the patents owned
by the Regents and exclusively licensed to Boston Scientific and asserted by
Boston Scientific in the Patent Litigation against us. We made the cash payment
to the Regents on September 24, 2008.





The
foregoing discussion of material terms does not constitute a complete summary of
the terms of the Settlement and License Agreement and Settlement and Release
Agreement, and reference is made to the Settlement and License Agreement and
Settlement and Release Agreement which are filed as exhibits to Form 10-Q for
the quarter ended September 30, 2008.





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





None.









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Table of Contents





PART II





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





Our
common stock is traded on The NASDAQ Stock Market under the symbol “MEND.” The
following table sets forth the high and low daily bid prices per share of our
common stock, as reported by The NASDAQ Stock Market.




Fiscal
      Year Ended March 31, 2009
                  
                  High
                  
                  
                  LowFirst
      Quarter
                  
                  $
                  14.99
                  
                  
                  $
                  9.92Second
      Quarter
                  
                  $
                  16.00
                  
                  
                  $
                  10.97Third
      Quarter
                  
                  $
                  14.12
                  
                  
                  $
                  8.70Fourth
      Quarter
                  
                  $
                  11.95
                  
                  
                  $
                  4.13
 
 Fiscal
      Year Ended March 31, 2008
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    25.45
                    
                    
                    $
                    20.06Second
      Quarter
                    
                    $
                    26.00
                    
                    
                    $
                    15.88Third
      Quarter
                    
                    $
                    21.45
                    
                    
                    $
                    16.87Fourth
      Quarter
                    
                    $
                    20.55
                    
                    
                    $
                    10.70




The last
reported sale price of our common stock on The NASDAQ Stock Market on
May 29, 2009 was $9.01 per share. As of May 29, 2009, there were
approximately 56 holders of record of our common stock.





Dividend
Policy





We have
never declared a divided or paid any cash dividends on our common stock. Because
we currently intend to retain any future earnings to fund the development and
growth of our business, we do not anticipate paying any cash dividends in the
near future.





Unregistered
Securities Sold in Fiscal 2009





None





Issuer
Purchases of Equity Securities





We do not
have a stock repurchase program and did not repurchase any of our equity
securities during the year ended March 31, 2009.





Securities
Authorized for Issuance Under Equity Compensation Plans




Plan
      Category
                                                      
                                                      Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
                                                      
                                                      
                                                      Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights
                                                      
                                                      
                                                      Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in Colum
      (a))Equity
      compensation plans approved by security holders
                                                      
                                                      
                                                      4,021,718
                                                      (1
                                                      )
                                                      $
                                                      12.68
                                                      
                                                      
                                                      
                                                      1,845,686
                                                      (2
                                                      )Equity
      compensation plans not approved by security holders
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Total
                                                      
                                                      
                                                      4,021,718
                                                      (1
                                                      )
                                                      $
                                                      12.68
                                                      
                                                      
                                                      
                                                      1,845,686
                                                      (2
                                                      )







39


Table of Contents


______





(1)
            Includes
      1,045,893 shares subject to options outstanding under our 1998 Plan
      and 2,975,825 shares subject to options and restricted stock units
      outstanding under our 2005 Plan.(2)
            Includes
      1,286,846 shares of common stock reserved for future issuance under
      our 2005 Plan and 558,840 shares of common stock reserved for future
      issuance under our Purchase Plan. As of April 1, 2009, the number of
      shares available for issuance under the foregoing plans automatically
      increased to 1,953,512 shares available for issuance under the 2005
      Plan and 781,062 shares available for issuance under the Purchase
      Plan.









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Table of Contents





Stock
Performance Graph





Notwithstanding
any statement to the contrary in any of our previous or future filings with the
Securities and Exchange Commission, the following information relating to the
price performance of our common stock shall not be deemed “filed” with the
Commission or “soliciting material” under the Securities Exchange Act of 1934
and shall not be incorporated by reference into any such filings.





The
following graph shows a comparison of cumulative total return for our common
stock, The NASDAQ Composite Index, The NASDAQ Medical Equipment Index and The
Russell 2000 Index. Such returns are based on historical results and are not
intended to suggest future performance. The graph assumes $100 was invested in
our common stock and in each of the indexes on June 16, 2005 (the date our
common stock commenced trading on The NASDAQ Stock Market). Data for The NASDAQ
Composite Index, The NASDAQ Medical Equipment Index and The Russell 2000 Index
assume reinvestment of dividends. We have never paid dividends on our common
stock and have no present plans to do so.








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Table of Contents





Item 6.Selected Financial
Data.





The
following selected consolidated financial data should be read in conjunction
with “Item 7 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and the notes
thereto included in this report. The selected consolidated statements of
operations data for the fiscal years ended March 31, 2009, 2008 and 2007
and the selected consolidated balance sheet data as of March 31, 2009 and
2008 are derived from the audited consolidated financial statements that are
included elsewhere in this report. The selected consolidated statements of
operations data for the fiscal years ended March 31, 2006 and 2005 and the
selected consolidated balance sheet data as of March 31, 2007, 2006 and
2005 are derived from our audited consolidated financial statements not included
in this report. The historical results are not necessarily indicative of the
results of operations to be expected in any future periods. All per share
amounts for all periods presented have been restated to reflect the 1-for-2.25
reverse stock split that became effective on June 10, 2005.





Consolidated
Statements of Operations





Years
      Ended March 31,2009
      (2)
                                                          
                                                          
                                                          2008
      (2)
                                                          
                                                          
                                                          2007
      (2)(3)
                                                          
                                                          
                                                          2006
      (4)
                                                          
                                                          
                                                          2005
      (5)(In
      thousands, except per share amounts)Revenues
                                                          
                                                          $
                                                          78,196
                                                          
                                                          
                                                          $
                                                          69,213
                                                          
                                                          
                                                          $
                                                          58,795
                                                          
                                                          
                                                          $
                                                          32,781
                                                          
                                                          
                                                          $
                                                          24,012Cost
      of goods sold (1)
                                                          
                                                          
                                                          20,847
                                                          
                                                          
                                                          
                                                          17,301
                                                          
                                                          
                                                          
                                                          15,361
                                                          
                                                          
                                                          
                                                          9,710
                                                          
                                                          
                                                          
                                                          8,003Gross
      profit
                                                          
                                                          
                                                          57,349
                                                          
                                                          
                                                          
                                                          51,912
                                                          
                                                          
                                                          
                                                          43,434
                                                          
                                                          
                                                          
                                                          23,071
                                                          
                                                          
                                                          
                                                          16,009Operating
      expenses:Research
      and development (1)
                                                          
                                                          
                                                          10,243
                                                          
                                                          
                                                          
                                                          13,718
                                                          
                                                          
                                                          
                                                          7,904
                                                          
                                                          
                                                          
                                                          6,589
                                                          
                                                          
                                                          
                                                          2,360Sales
      and marketing (1)
                                                          
                                                          
                                                          29,312
                                                          
                                                          
                                                          
                                                          29,385
                                                          
                                                          
                                                          
                                                          24,121
                                                          
                                                          
                                                          
                                                          15,171
                                                          
                                                          
                                                          
                                                          8,781General
      and administrative (1)
                                                          
                                                          
                                                          26,983
                                                          
                                                          
                                                          
                                                          26,971
                                                          
                                                          
                                                          
                                                          19,308
                                                          
                                                          
                                                          
                                                          10,307
                                                          
                                                          
                                                          
                                                          11,884Impairment
      of intangible assets
                                                          
                                                          
                                                          462
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Total
      operating expenses
                                                          
                                                          
                                                          67,000
                                                          
                                                          
                                                          
                                                          70,074
                                                          
                                                          
                                                          
                                                          51,333
                                                          
                                                          
                                                          
                                                          32,067
                                                          
                                                          
                                                          
                                                          23,025Loss
      from operations
                                                          
                                                          
                                                          (9,651
                                                          )
                                                          
                                                          
                                                          (18,162
                                                          )
                                                          
                                                          
                                                          (7,899
                                                          )
                                                          
                                                          
                                                          (8,996
                                                          )
                                                          
                                                          
                                                          (7,016
                                                          )Interest
      and investment income
                                                          
                                                          
                                                          258
                                                          
                                                          
                                                          
                                                          1,223
                                                          
                                                          
                                                          
                                                          1,618
                                                          
                                                          
                                                          
                                                          1,295
                                                          
                                                          
                                                          
                                                          177Interest
      expense
                                                          
                                                          
                                                          (52
                                                          )
                                                          
                                                          
                                                          (3
                                                          )
                                                          
                                                          
                                                          (14
                                                          )
                                                          
                                                          
                                                          (12
                                                          )
                                                          
                                                          
                                                          (29
                                                          )Other
      income (expense), net
                                                          
                                                          
                                                          (2,111
                                                          )
                                                          
                                                          
                                                          488
                                                          
                                                          
                                                          
                                                          565
                                                          
                                                          
                                                          
                                                          (632
                                                          )
                                                          
                                                          
                                                          164Loss
      before income taxes
                                                          
                                                          
                                                          (11,556
                                                          )
                                                          
                                                          
                                                          (16,454
                                                          )
                                                          
                                                          
                                                          (5,730
                                                          )
                                                          
                                                          
                                                          (8,345
                                                          )
                                                          
                                                          
                                                          (6,704
                                                          )Income
      tax benefit
                                                          
                                                          
                                                          (502
                                                          )
                                                          
                                                          
                                                          (194
                                                          )
                                                          
                                                          
                                                          (247
                                                          )
                                                          
                                                          
                                                          (84
                                                          )
                                                          
                                                          
                                                          -Net
      loss
                                                          
                                                          
                                                          (11,054
                                                          )
                                                          
                                                          
                                                          (16,260
                                                          )
                                                          
                                                          
                                                          (5,483
                                                          )
                                                          
                                                          
                                                          (8,261
                                                          )
                                                          
                                                          
                                                          (6,704
                                                          )Accretion
      of redeemable convertiblepreferred
      stock to redemption valueincluding
      beneficial conversion feature
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (659
                                                          )
                                                          
                                                          
                                                          (588
                                                          )Net
      loss attributable to common stockholders
                                                          
                                                          $
                                                          (11,054
                                                          )
                                                          
                                                          $
                                                          (16,260
                                                          )
                                                          
                                                          $
                                                          (5,483
                                                          )
                                                          
                                                          $
                                                          (8,920
                                                          )
                                                          
                                                          $
                                                          (7,292
                                                          )Net
      loss per share attributable to common stockholders:basic
      and diluted
                                                          
                                                          $
                                                          (0.70
                                                          )
                                                          
                                                          $
                                                          (1.05
                                                          )
                                                          
                                                          $
                                                          (0.38
                                                          )
                                                          
                                                          $
                                                          (0.79
                                                          )
                                                          
                                                          $
                                                          (5.22
                                                          )Weighted-average
      number of shares used in per sharecalculation:
      basic and diluted
                                                          
                                                          
                                                          15,692
                                                          
                                                          
                                                          
                                                          15,438
                                                          
                                                          
                                                          
                                                          14,621
                                                          
                                                          
                                                          
                                                          11,240
                                                          
                                                          
                                                          
                                                          1,397







42


Table of Contents





March
      31,2009
                
                
                2008
                
                
                2007
      (3)
                
                
                2006
      (4)
                
                
                2005(In
      thousands)Consolidated
      Balance Sheet Data:Total
      assets
                
                $
                61,506
                
                
                $
                72,332
                
                
                $
                73,097
                
                
                $
                62,114
                
                
                $
                29,774Mandatorily
      redeemable convertible preferred stock
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                58,442Total
      stockholders' equity (deficit)
                
                $
                42,574
                
                
                $
                48,180
                
                
                $
                56,294
                
                
                $
                51,316
                
                
                $
                (37,561
                )Accumulated
      deficit
                
                $
                (82,416
                )
                
                $
                (71,362
                )
                
                $
                (55,102
                )
                
                $
                (49,619
                )
                
                $
                (40,975
                )





(1)
      Non-cash stock-based compensation expense included in results of
      operations is as follows:Years
      Ended March 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(In
      thousands)Cost
      of goods sold
                
                $
                560
                
                
                $
                471
                
                
                $
                218
                
                
                $
                26
                
                
                $
                26Research
      and development
                
                $
                592
                
                
                $
                533
                
                
                $
                222
                
                
                $
                22
                
                
                $
                69Sales
      and marketing
                
                $
                1,498
                
                
                $
                1,325
                
                
                $
                802
                
                
                $
                169
                
                
                $
                134General
      and administrative
                
                $
                2,995
                
                
                $
                2,629
                
                
                $
                1,332
                
                
                $
                172
                
                
                $
                3,210





(2)
            In
      fiscal 2009, 2008 and 2007, loss from operations, net loss and basic and
      diluted net loss per share include the impact of Statement of Financial
      Accounting Standard (“SFAS”) No. 123 (“SFAS 123R”), which was
      not present in prior years. Refer to Notes 2 and 12 of the “Notes to
      Consolidated Financial Statements.”(3)
            On
      November 30, 2006, we completed our acquisition of VasCon. In
      connection with the acquisition, we formed MDT. The results of operations
      of MDT are included in the accompanying consolidated statements of
      operations for all periods or partial periods subsequent to the
      acquisition date. Additionally, the acquired assets and liabilities
      assumed in the acquisition are included in the consolidated balance sheets
      subsequent to the acquisition date. See Note 3 of the “Notes to
      Consolidated Financial Statements,” which are included in “Item 8 –
      Financial Statements and Supplementary Data” of this report for further
      details regarding the transaction. On January 1, 2009, we merged MDT into
      Micrus Endovascular Corporation.





(4)
            On
      September 20, 2005, we completed our acquisition of Neurologic UK
      Limited (“Neurologic”). In connection with the acquisition, we formed
      Micrus UK, our subsidiary in the United Kingdom. The results of operations
      of Micrus UK are included in the accompanying consolidated statements of
      operations for all periods or partial periods subsequent to the
      acquisition date. Additionally, the acquired assets and liabilities
      assumed in the acquisition are included in the consolidated balance sheets
      subsequent to the acquisition date. See Note 3 of the “Notes to
      Consolidated Financial Statements,” which are included in “Item 8 –
      Financial Statements and Supplementary Data” of this report for further
      details regarding the transaction.(5)
            In
      fiscal 2005, loss from operations, net loss and basic and diluted net loss
      per share include the impact of a stock-based compensation charge of
      $3.0 million related to stock options modified in connection with the
      settlement agreement with our former CEO.




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





The following discussion and
analysis of the financial condition and results of operations of the Company should be
read in conjunction with the consolidated financial statements and the related
notes included elsewhere in this report, and with other factors described from
time to time in our other filings with the Securities and Exchange Commission.
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. Actual results and the timing of events may
differ materially from those contained in the forward-looking statements due to a
number of factors, including those discussed in Part I, Item 1A “Risk
Factors” above and elsewhere in this Annual Report on Form 10-K.









43


Table of Contents







Overview





We
develop, manufacture and market implantable and disposable medical devices used
in the treatment of cerebral vascular diseases. Our products are used by
interventional neuroradiologists, interventional neurologists and neurosurgeons
to treat both cerebral aneurysms responsible for hemorrhagic stroke and
intracranial atherosclerosis which may lead to ischemic stroke. Hemorrhagic and
ischemic stroke are both significant causes of death and disability worldwide.
Our product lines consist of endovascular systems that enable a physician to
gain access to the brain in a minimally invasive manner through the vessels of
the arterial system. We believe that our products provide a safe and reliable
alternative to more invasive neurosurgical procedures for treating aneurysms.
Our proprietary three-dimensional, embolic coils anatomically conform and
rapidly deploy within an aneurysm, forming a scaffold that conforms to a wide
diversity of aneurysm shapes and sizes. We also supply accessories for use with
our microcoils and other products for the treatment of neurovascular disease
including microcatheters, balloon catheters, guidewires and stents. We plan on
growing our business by continuing to penetrate our existing hemorrhagic and
ischemic stroke markets, bringing new products and technologies to
interventional neuroradiologists, interventional neurologists and neurosurgeons,
and by entering new geographic territories such as Asia where we commenced
selling our products in Japan through our distribution partner, Goodman, in
March 2006. We also plan to market our products in China upon receiving
regulatory approvals.





Our
revenues are derived primarily from sales of our microcoils. We also sell
stents, access products and accessories for use with our microcoils, which
accounted for approximately 6%, 5% and 3% of our revenues in fiscal 2009, 2008
and 2007, respectively. Geographically, our revenues are generally from sales to
customers in the Americas, Europe and Asia. Our products are shipped from our
facilities in the United States, Switzerland, the United Kingdom, and a
logistics facility in the Netherlands, to either hospitals or
distributors.  In select hospitals, our products are held on
consignment, and remain on site, free of charge until used. Revenue is generally
recognized upon shipment after the receipt of a purchase order. In arrangements
which specify the title transfer upon delivery, revenue is not recognized until
the product is delivered. In the case of consigned goods, revenue is recognized
when a replenishment order is made.





We
anticipate that our cost of goods sold will generally increase in absolute
dollars during those quarters in which our sales increase or we incur additional
manufacturing costs in anticipation of the commercial introduction of new
products. Furthermore, our gross margin percentage may decrease in those
quarters in which we initiate sales of new products or product lines, or enter
new geographic territories. Our gross margin percentage may also decrease in
those quarters in which we have a higher proportion of sales to distributors
with lower average selling prices.





Our
product development efforts are primarily focused on expanding our product
offerings for the hemorrhagic and ischemic stroke markets. In August 2004, we
introduced our Cerecyte® microcoil product line and we have launched ten new
products in the last 24 months, including microcoils, stents,
microcatheters, guidewires and balloon catheters. During fiscal 2009, we
launched the Neuropath® guide catheter, which combines robust proximal support
with a highly flexible and visible tip designed to facilitate atraumatic
vascular access. The Neuropath® guide catheter is used as a conduit for
delivery of the microcatheter or other devices, such as coils, stents and
balloons, to the aneurysm. We intend to continue to pursue this non-embolic
product line expansion with the goal of increasing our revenue opportunity per
procedure. We also launched Cerecyte and stretch resistant versions of our
DeltaPaqTM microcoil system for the treatment of cerebral aneurysms. Our DeltaPaq
microcoil system is designed to enable physicians to achieve greater coil
packing density within the aneurysm which may reduce the rate of recanalization
and the need for re-treatment. The DeltaPaq microcoil system supplements our
framing and finishing coils in the filling segment of the coil market.
Additionally, we launched the PHAROSTM VitesseTM intracranial stent for commercial
distribution in the European Union and all other countries recognizing the CE
Mark. The PHAROSTM VitesseTM is our second generation balloon-expandable stent for
intracranial ischemic stenosis and wide-neck aneurysm treatment. We have
received FDA conditional approval of our investigational device exemption for
the PHAROSTM VISSIT study. The VISSIT study is the first industry sponsored,
randomized, prospective clinical trial designed to compare the clinical outcomes
between patients who are stented for intracranial ischemic stenosis versus
treated with medical therapy. We are in the process of initiating study sites in
the United States, Europe and China.









44


Table of Contents





We intend
to continue to expand our direct sales force in North America, Europe and Asia
as necessary and further increase our presence in the Asian markets through
distributors. In March 2006, we launched our sales and marketing efforts in
Japan through our distribution partner, Goodman. In December 2007, we received
regulatory approval to sell our stretch-resistant microcoils in Japan, and in
July 2008, we received regulatory approval to sell our Cerecyte microcoils in
Japan. We recorded product sales to Goodman of $9.3 million, $6.3 million
and $8.7 million in fiscal 2009, 2008 and 2007, respectively. We plan to
begin selling our products in China upon receiving regulatory approvals. The
timing of these approvals is uncertain due to a pending review by the Chinese
State Food and Drug Administration (“SFDA”) of drug and medical device approvals
granted during the term of the former SFDA minister. We believe that this review
process, along with more stringent approval procedures, will delay review and
approval of applications for new products. As a result, we did not recognize
revenues from sales in China during fiscal 2009 and we may not recognize
revenues from China in fiscal 2010.





We
currently anticipate that the broadening of our product line and our further
expansion into the Asian market will be primarily funded with our currently
available cash and cash expected to be generated from operations. We introduced
our first proprietary, three-dimensional microcoil in May 2000. Our revenues
have grown from $1.8 million in fiscal 2001 to $78.2 million in fiscal
2009.





We have
incurred annual net losses since our inception, including net losses of $11.1
million, $16.3 million, and $5.5 million in fiscal 2009, 2008, and 2007,
respectively. However, in the fourth quarter of fiscal 2009 we achieved our
first profitable quarter of $0.6 million as a result of our revenue growth and
expense management, and we expect to achieve profitability for the full year in
fiscal 2010. As of March 31, 2009, we had cash and cash equivalents of
$17.1 million. We believe that our current cash position and the cash
expected to be generated from operations will be sufficient to meet our working
capital and capital expenditure requirements for at least the next twelve
months. There is no assurance that we will continue to be profitable in the
foreseeable future as we expand our research and development, manufacturing, and
sales activities and expand geographically. As of March 31, 2009, we had an
accumulated deficit of $82.4 million.





Recent
Developments





On
September 22, 2008, we entered into a Settlement and License Agreement (the
“Settlement and License Agreement”) with Boston Scientific Corporation and
Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation
(collectively “Boston Scientific”) and a Settlement and Release Agreement (the
“Settlement and Release Agreement”) with The Regents of the University of
California (the “Regents”) in order to resolve pending patent litigation between
Boston Scientific and us (the “Patent Litigation”). On October 8, 2008, the
Court entered an order dismissing the Patent Litigation with prejudice. For
further discussion of the Settlement and License Agreement, please see “Patent
Litigation” under “Item 3 – Legal Proceedings,” above.





On
November 5, 2008, we entered into a credit agreement with Wells Fargo Bank
to provide us with a revolving line of credit (the “Credit Agreement”). The
Credit Agreement provides for maximum borrowings in the amount of up to $15.0
million. If borrowings under the Credit Agreement exceed $7.5 million, all
borrowings are subject to a borrowing base which is based on eligible accounts
receivable. Borrowings are secured by a first priority security interest in all
of our assets (except for certain permitted liens that are senior to the bank’s
security interest). At our option, borrowings bear interest at either 2.25% over
the bank’s prime rate or 3.50% over the one-month, two-month or three-month
LIBOR. The Credit Agreement requires that we comply with certain financial and
other covenants for borrowings to be permitted. The more significant financial
covenants include (i) a minimum modified quick ratio and (ii) a minimum
profitability, excluding certain non-cash items. On May 20, 2009, we amended the
Credit Agreement with Wells Fargo Bank extending the maturity date to August 1,
2010 and adjusting the minimum limits for the financial covenants based on our
financial forecast for fiscal 2010.





On
January 1, 2009, we merged MDT into Micrus Endovascular
Corporation.





On
July 28, 2005, we entered into a Technology Transfer Agreement with
Vascular FX, a Delaware limited liability company (“Vascular FX”), pursuant to
which we purchased the intellectual property of Vascular FX. The transaction
included a cash purchase price of $1.5 million paid at closing followed by
milestone payments of $2.5 million paid on January 31 and May 31, 2006, and
royalty payments on potential future product sales. There are no future
milestone payments to Vascular FX under the terms of the agreement.









45


Table of Contents







On
January 28, 2009, we amended the Technology Transfer Agreement with Vascular FX
to modify the royalty provision and eliminate the claw-back provisions that
would have required us to license back the acquired technology to Vascular FX
under certain circumstances. Under the amended agreement, we will pay Vascular
FX a royalty equal to 25% of the aggregate net sales of deflectable catheter
products sold during the royalty period subject to the mandatory minimum
provision not less than $250,000 per year. The royalty period is six years
beginning from November 1, 2007.





Results
of Operations





The
following table sets forth the results of our operations, expressed as
percentages of revenues, for the fiscal years ended March 31, 2009, 2008
and 2007:




Years
      Ended March 31,2009
                            
                            
                            2008
                            
                            
                            2007%
                            
                            
                            %
                            
                            
                            %Consolidated
      Statements of Operations Data:Revenues
                            
                            
                            100
                            %
                            
                            
                            100
                            %
                            
                            
                            100
                            %Cost
      of goods sold
                            
                            
                            27
                            %
                            
                            
                            25
                            %
                            
                            
                            26
                            %Gross
      profit
                            
                            
                            73
                            %
                            
                            
                            75
                            %
                            
                            
                            74
                            %Operating
      expenses:Research
      and development
                            
                            
                            13
                            %
                            
                            
                            20
                            %
                            
                            
                            13
                            %Sales
      and marketing
                            
                            
                            37
                            %
                            
                            
                            42
                            %
                            
                            
                            41
                            %General
      and administrative
                            
                            
                            35
                            %
                            
                            
                            39
                            %
                            
                            
                            33
                            %Impairment
      of intangible assets
                            
                            
                            1
                            %
                            
                            
                            0
                            %
                            
                            
                            0
                            %Total
      operating expenses
                            
                            
                            86
                            %
                            
                            
                            101
                            %
                            
                            
                            87
                            %Loss
      from operations
                            
                            
                            (13
                            )
      %
                            
                            
                            (26
                            )
      %
                            
                            
                            (13
                            )
      %Interest
      and investment income
                            
                            
                            0
                            %
                            
                            
                            2
                            %
                            
                            
                            3
                            %Interest
      expense
                            
                            
                            (0
                            )
      %
                            
                            
                            0
                            %
                            
                            
                            0
                            %Other
      income (expense), net
                            
                            
                            (2
                            )
      %
                            
                            
                            1
                            %
                            
                            
                            1
                            %Loss
      before income taxes
                            
                            
                            (15
                            )
      %
                            
                            
                            (23
                            )
      %
                            
                            
                            (9
                            )
      %Income
      tax benefit
                            
                            
                            (1
                            )
      %
                            
                            
                            0
                            %
                            
                            
                            0
                            %Net
      loss
                            
                            
                            (14
                            )
      %
                            
                            
                            (23
                            )
      %
                            
                            
                            (9
                            )
      %




Fiscal
Years Ended March 31, 2009 and 2008





Revenues





Years
      Ended March 31,
                        
                        
                        Change2009
                        
                        
                        2008
                        
                        
                        $
                        
                        
                        
                        %(In
      thousands, except percentages)Americas
                        
                        $
                        44,067
                        
                        
                        $
                        37,565
                        
                        
                        $
                        6,502
                        
                        
                        
                        17
                        %Europe
      (excluding the United Kingdom)
                        
                        
                        15,930
                        
                        
                        
                        15,095
                        
                        
                        
                        835
                        
                        
                        
                        6
                        %United
      Kingdom
                        
                        
                        7,531
                        
                        
                        
                        9,100
                        
                        
                        
                        (1,569
                        )
                        
                        
                        (17
                        )
      %Asia
      Pacific
                        
                        
                        10,668
                        
                        
                        
                        7,453
                        
                        
                        
                        3,215
                        
                        
                        
                        43
                        %$
                        78,196
                        
                        
                        $
                        69,213
                        
                        
                        $
                        8,983
                        
                        
                        
                        13
                        %





Our
revenues are derived primarily from sales of our microcoils used in the
treatment of cerebral vascular diseases. The overall increase in revenues in
fiscal 2009 compared to fiscal 2008 was primarily due to an increase in the
number of microcoil products sold. Factors driving the increase included growth
in the overall market for embolic coils, an increase in market share in both the
Americas and Asia Pacific, and the introduction of new products.









46


Table of Contents





Revenues
from the Americas increased 17% to $44.1 million and revenues from Europe
increased 6% to $15.9 million, both  compared to fiscal 2008. Revenues
from the United Kingdom decreased 17% to $7.5 million as compared with $9.1
million for fiscal 2008, primarily due to the unfavorable impact on revenues
from the weakening of the British pound against the U.S. dollar. Revenues from
Asia Pacific increased 43% to $10.7 million and included product sales to our
distributor in Japan of $9.3 million, compared with revenues of $7.5 million for
fiscal 2008 which included sales to our distributor in Japan of $6.3 million. We
plan to begin selling our products in China upon receiving regulatory approvals.
We did not recognize revenues from sales to China during fiscal
2009.





Revenues
from Latin America increased to $3.1 million in fiscal 2009 compared with
revenues of $1.6 million in fiscal 2008 due to an overall increase in product
sales to our distributors in the region and a change in our revenue recognition
policy for sales made to Latin American distributors from a cash collection
basis to upon shipment basis (see Note 2 of the “Notes to Consolidated Financial
Statements,” which are included in “Item 8 – Financial Statements and
Supplementary Data”). As a result of the change in our revenue recognition
policy for sales made to Latin American distributors, we recognized
approximately $0.7 million of Latin American deferred revenue in the first
quarter of fiscal 2009.





Revenues
from embolic coils increased 12% to $73.1 million for fiscal 2009 as
compared to fiscal 2008 primarily due to the launch of the DeltaPaqTM microcoil
system and increased market penetration of both the CashmereTM and the Presidio®
microcoil systems, partially offset by the unfavorable impact of foreign
currency exchange rates, most notably the weakening of the British pound against
the U.S. dollar. Revenues from our non-embolic and accessories products
increased to $4.9 million in fiscal 2009 compared with revenues of
$3.7 million in fiscal 2008 primarily due to the launch of the
Neuropath®  guide catheter and PHAROSTM VitesseTM stent, and volume
increases across multiple product lines. We expect our embolic and non-embolic
sales to increase in the future as a result of market growth, continued market
penetration of products released during the past two years, including our launch
of the next-generation DeltaPaqTM microcoil system and an AscentTM balloon
catheter family.





New
products continue to represent an important component of our growth strategy,
with 16% of our revenues in fiscal 2009 coming from products introduced in the
past 24 months. Among these, our Cashmere microcoil line represented 8% of the
total revenue for fiscal 2009.  We are also pleased with the strong
reception for our newly launched DeltaPaq microcoil system, which comprised 6%
of fiscal year 2009 revenues.  With the launch of the Neuropath® guide
catheter and the AscentTM balloon catheter, we are now in a position to capture a
significantly greater portion of hemorrhagic procedure revenues.





Gross
Profit





Years
      Ended March 31,
                  
                  
                  Change2009
                  
                  
                  2008
                  
                  
                  $
                  
                  
                  
                  %(In
      thousands, except percentages)Cost
      of goods sold
                  
                  $
                  20,847
                  
                  
                  $
                  17,301
                  
                  
                  $
                  3,546
                  
                  
                  
                  20
                  %Gross
      profit
                  
                  $
                  57,349
                  
                  
                  $
                  51,912
                  
                  
                  $
                  5,437
                  
                  
                  
                  10
                  %




Cost of
goods sold consists primarily of materials, direct labor, depreciation, overhead
costs associated with manufacturing, impairments of inventory, warranty
expenses, amortization of intangible assets that were acquired by us as part of
the acquisition of VasCon, amortization of capitalized license technology
associated with our PHAROSTM stent product and royalties related to certain
access device products. The increase in cost of goods sold during fiscal 2009 as
compared to fiscal 2008 was primarily related to the increase in sales of our
products as well as an increase of $235,000 in royalties.





Gross
margin was 73% in fiscal 2009 and 75% in fiscal 2008. The decrease was primarily
due to higher levels of distributor sales of lower margin products primarily in
Japan and certain European markets. We expect our gross margin to fluctuate in
future periods based on the mix of our product sales.









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Table of Contents





Operating
Expenses





Research
and Development




Years
      Ended March 31,
                  
                  
                  Change2009
                  
                  
                  2008
                  
                  
                  $
                  
                  
                  
                  %(In
      thousands, except percentages)Research
      and development
                  
                  $
                  10,243
                  
                  
                  $
                  13,718
                  
                  
                  $
                  (3,475
                  )
                  
                  
                  (25
                  )
      %





Research
and development expenses consist primarily of costs associated with the design,
development, and testing of new products. Such costs are expensed as they are
incurred and include salaries and related personnel costs, fees paid to outside
consultants, and other direct and indirect costs related to research and product
development. Research and development expenses decreased in fiscal 2009 compared
to fiscal 2008 primarily due to a decrease of $3.9 million in technology
acquisition costs mainly due to a $3.0 million charge in fiscal 2008 for
in-process research and development in connection with the acquisition of ReVasc
Technologies, Inc. to obtain the rights to pre-regulatory approved
revascularization technology and a $0.9 million charge in fiscal 2008 associated
with the acquisition of thrombectomy technologies from Genesis. In addition,
there was a decrease in outside services of $0.9 million primarily associated
with the development of our stent product. This decrease was partially offset by
an increase of $0.9 million in personnel cost due to increased headcount at our
Florida operations as we ramp up research and development efforts for
neurovascular access and delivery products, and an increase of $303,000 in
consulting fees.




Sales and
Marketing




Years
      Ended March 31,
                  
                  
                  Change2009
                  
                  
                  2008
                  
                  
                  $
                  
                  
                  
                  %(In
      thousands, except percentages)Sales
      and marketing
                  
                  $
                  29,312
                  
                  
                  $
                  29,385
                  
                  
                  $
                  (73
                  )
                  
                  
                  0
                  %




Sales and
marketing expenses consist primarily of compensation costs of our direct sales
force and marketing personnel, as well as overhead costs related to these
activities. Also included are costs associated with promotional literature and
videos, trade show participation, and education and training of physicians.
Sales and marketing expenses decreased slightly in fiscal 2009 compared to
fiscal 2008 primarily due to termination costs of $0.7 million related to sales
personnel in Europe in fiscal 2008, as well as a decrease of $232,000 in
recruiting expense and a decrease of $154,000 in education and training expense.
These decreases were partially offset by higher sales incentives compensation of
$0.6 million resulting from higher level of sales and changes in the sales
compensation structure, an increase of $213,000 in product samples and an
increase of $174,000 in stock-based compensation expense.





General
and Administrative




Years
      Ended March 31,
                  
                  
                  Change2009
                  
                  
                  2008
                  
                  
                  $
                  
                  
                  
                  %(In
      thousands, except percentages)General
      and administrative
                  
                  $
                  26,983
                  
                  
                  $
                  26,971
                  
                  
                  $
                  12
                  
                  
                  
                  0
                  %




General
and administrative expenses consist primarily of compensation and related costs
for finance, human resources, facilities, information technology, insurance, and
professional services. Professional services are principally comprised of
outside legal, audit, Sarbanes Oxley compliance and information technology
consulting. General and administrative expenses remained essentially unchanged
in fiscal 2009 compared to fiscal 2008. General and administrative expenses
included increases of $1.7 million in patent litigation settlement cost in
connection with the patent litigation with Boston Scientific, higher finance and
administrative personnel costs of $1.2 million due to increased headcount and
salary increases for current employees, additional expense of $0.5 million for
estimated sales tax in certain states and an increase of $367,000 in stock-based
compensation expense. These increases were partially offset by a decrease of
$3.7 million in legal fees primarily resulting from the settlement of the
patent litigation with Boston Scientific in September 2008 and the conclusion of
the United States Department of Justice monitorship in July 2008.









48


Table of Contents





Impairment
of Intangibles Assets





In the
fourth quarter of fiscal 2009, we performed an assessment of our intangible
assets acquired from Neurologic. Management concluded from the assessment that
an impairment existed for the intangible asset group (distribution agreement,
customer relationships and non-compete agreements) as the undiscounted value was
less than its carrying value. As a result, we recorded an impairment charge of
$462,000 for this asset group based on the amount by which the carrying amount
of these assets exceeded their fair value. There was no impairment charges
related to intangible assets in fiscal 2008.





Other
Income (Expense), Net





Years
      Ended March 31,
                        
                        
                        Change2009
                        
                        
                        2008
                        
                        
                        $
                        
                        
                        
                        %(In
      thousands, except percentages)Interest
      and investment income
                        
                        $
                        258
                        
                        
                        $
                        1,223
                        
                        
                        $
                        (965
                        )
                        
                        
                        (79
                        )
      %Interest
      expense
                        
                        
                        (52
                        )
                        
                        
                        (3
                        )
                        
                        
                        (49
                        )
                        
                        
                        1633
                        %Other
      income (expense), net
                        
                        
                        (2,111
                        )
                        
                        
                        488
                        
                        
                        
                        (2,599
                        )
                        
                        
                        (533
                        )
      %Total
      other income (expense), net
                        
                        $
                        (1,905
                        )
                        
                        $
                        1,708
                        
                        
                        $
                        (3,613
                        )
                        
                        
                        (212
                        )
      %





Interest
and investment income consists of interest earned on interest bearing accounts.
Interest and investment income decreased in fiscal 2009 compared to fiscal 2008
due to lower cash and investment balances earning interest.





Other
income (expense), net consists primarily of foreign exchange gains and losses
resulting from differences in exchange rates between the time of recording of
the transaction and the settlement of foreign currency denominated receivables
and payables. Other income (expense), net decreased in fiscal 2009 compared to
fiscal 2008 primarily due to foreign exchange losses resulting from the
re-measurement of foreign currency transactions, most notably the impact of the
weakening of the British pound against the U.S. dollar.





Income
Taxes




Years
      Ended March 31,2009
                  
                  
                  2008(In
      thousands, except percentages)Income
      tax benefit
                  
                  $
                  (502
                  )
                  
                  $
                  (194
                  )Effective
      tax rate
                  
                  
                  (4
                  )%
                  
                  
                  (1
                  )%





We have
incurred net operating losses for both federal and state purposes since
inception and, as a result, we have paid no federal or state income taxes. We
had an income tax benefit of approximately $502,000 and $194,000 in fiscal 2009
and 2008, respectively. The net income tax benefit in fiscal 2009 consists
primarily of deferred tax benefit for the tax effect of the amortization related
to the intangible assets acquired in the Neurologic transaction which is not
deductible, the reduction in deferred tax liability due to the impairment of
such intangible assets, and losses from our United Kingdom subsidiary. The net
income tax benefit in fiscal 2008 includes a deferred income tax expense of
approximately $72,000 for the Swiss subsidiary’s operating profits and a
deferred tax benefit of approximately $266,000 for the tax effect of the
amortization related to the intangible assets acquired in the Neurologic
transaction which is not deductible and the tax benefit of operating losses for
our United Kingdom subsidiary.





As of
March 31, 2009, we had federal, state and foreign net operating loss
carryforwards (“NOLs”) of approximately $40.5 million, $30.5 million
and $4.6 million, respectively. The federal NOLs will expire at various
dates beginning in 2012, the state NOLs expire beginning in 2013 and the foreign
NOLs will expire beginning in 2013. We also had federal and state research and
development tax credit carryforwards of approximately $1.3 million and
$1.3 million, respectively, as of March 31, 2009. The federal credits
will expire beginning in 2012 and the state credits can be carried forward
indefinitely. Due to the uncertainty of our ability to generate sufficient
taxable income to realize the carryforwards prior to their expiration, we have
recorded a valuation allowance at March 31, 2009 to offset our federal,
state and Swiss deferred tax assets.









49


Table of
Contents





Fiscal
Years Ended March 31, 2008 and 2007





Revenues





Years Ended March 31,
                          
                          
                          Change2008
                          
                          
                          2007
                          
                          
                          $
                          
                          
                          
                          %(In
      thousands, except percentages)Americas
                          
                          $
                          37,565
                          
                          
                          $
                          31,618
                          
                          
                          $
                          5,947
                          
                          
                          
                          19
                          %Europe
      (excluding the United Kingdom)
                          
                          
                          15,095
                          
                          
                          
                          11,226
                          
                          
                          
                          3,869
                          
                          
                          
                          34
                          %United
      Kingdom
                          
                          
                          9,100
                          
                          
                          
                          6,448
                          
                          
                          
                          2,652
                          
                          
                          
                          41
                          %Asia
      Pacific
                          
                          
                          7,453
                          
                          
                          
                          9,503
                          
                          
                          
                          (2,050
                          )
                          
                          
                          (22
                          )%$
                          69,213
                          
                          
                          $
                          58,795
                          
                          
                          $
                          10,418
                          
                          
                          
                          18
                          %





Our
revenues are derived primarily from sales of our microcoils used in the
treatment of cerebral vascular diseases. The overall increase in revenues in
fiscal 2008 compared to fiscal 2007 was primarily due to an increase in the
number of microcoil products sold during this period. Factors driving the
increase included growth in the overall market for embolic coils, an increase in
our share of both the domestic and foreign markets in which we participate,
expansion of our direct and distributor sales force and the introduction of new
products.





Revenues
from embolic coils increased 15% to $65.4 million for fiscal 2008 as
compared to fiscal 2007 primarily due to the launch of the CashmereTM microcoil
system and increased market penetration of the Presidio® microcoil system.
Revenues from our non-embolic and accessories products increased to
$3.7 million in fiscal 2008 compared with revenues of $1.6 million in
fiscal 2007 primarily due to the launch of the ENZOTM deflectable microcatheter
and volume increases across multiple product lines including our guiding
catheters, guidewires and stents. Additionally, the increase in revenues was
partially due to higher average selling prices as a result of increased sales of
our more expensive Cerecyte® product sales in fiscal 2008. Products introduced
in the past 24 months comprised 21% of our revenues in fiscal
2008.





In
December 2007, we received regulatory approval to sell our stretch-resistant
microcoils in Japan. In July 2008, we received regulatory approval for our
Cerecyte® microcoils. The delay in these product approvals had an adverse impact
on the revenues previously anticipated from sales in Japan for fiscal 2008. We
sold $6.3 million of our regulatory approved products in Japan in fiscal
2008, compared with revenues of $8.7 million in fiscal 2007.





We plan
to begin selling our products in China upon receiving regulatory approvals. We
did not recognize revenues from sales in China in fiscal 2008.





Gross
Profit





Years Ended March 31,
                      
                      
                      Change2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      
                      %(In
      thousands, except percentages)Cost
      of goods sold
                      
                      $
                      17,301
                      
                      
                      $
                      15,361
                      
                      
                      $
                      1,940
                      
                      
                      
                      13
                      %Gross
      profit
                      
                      $
                      51,912
                      
                      
                      $
                      43,434
                      
                      
                      $
                      8,478
                      
                      
                      
                      20
                      %





The
increase in cost of goods sold during fiscal 2008 as compared to fiscal 2007 was
primarily due to an increase of $0.8 million resulting from an increase in
sales of our products as well as an increase of $0.6 million in
amortization of intangible assets and an increase of $187,000 in royalties. Cost
of goods sold in fiscal 2008 and 2007 includes $0.8 million and $273,000,
respectively, related to the amortization of intangibles acquired from the
acquisition of VasCon on November 30, 2006. Additionally, stock-based
compensation expense included in cost of goods sold was $471,000 and $218,000 in
fiscal 2008 and 2007, respectively.





Gross
margin was 75% in fiscal 2008 and 74% in fiscal 2007. The increase was primarily
due to an increase in revenue from sales of higher margin products, partially
offset by higher levels of distributor sales of lower margin products primarily
in Japan and certain European markets.









50


Table of Contents







Operating
Expenses





Research
and Development





Years Ended March 31,
                          
                          
                          Change2008
                          
                          
                          2007
                          
                          
                          $
                          
                          
                          
                          %(In
      thousands, except percentages)Research
      and development
                          
                          $
                          13,718
                          
                          
                          $
                          7,904
                          
                          
                          $
                          5,814
                          
                          
                          
                          74
                          %





Research
and development expenses increased in fiscal 2008 compared to fiscal 2007
primarily due to an increase of $2.4 million for technology acquisition
costs related to an in-process research and development charge in connection
with the acquisition of ReVasc to obtain the rights to pre-regulatory approved
revascularization technology and the costs associated with the acquisition of
occlusion technology from Genesis. In addition, there was an increase of
$1.6 million related to increased headcount, an increase of
$1.1 million related to product testing, outside services and supplies, as
well as an increase of $311,000 in stock-based compensation expense. In fiscal
2008 and 2007, approximately 16% and 4%, respectively, of our research and
development costs were attributable to our subsidiary, MDT, formed on
November 30, 2006 in connection with the acquisition of
VasCon.





Sales
and Marketing





Years Ended March 31,
                      
                      
                      Change2008
                      
                      
                      2007
                      
                      
                      $
                      
                      
                      
                      %(In
      thousands, except percentages)Sales
      and marketing
                      
                      $
                      29,385
                      
                      
                      $
                      24,121
                      
                      
                      $
                      5,264
                      
                      
                      
                      22
                      %





Sales and
marketing expenses increased in fiscal 2008 compared to fiscal 2007 primarily
due to an increase of $3.6 million in travel, recruiting and personnel
costs due to an increase in sales and marketing personnel in the North America,
Europe and Asia, an increase of $0.9 million in sales incentives resulting
from higher level of sales and changes in the sales compensation structure, an
increase of $0.8 million in trade show, meeting and conference costs, an
increase of $0.7 million in market research costs, as well as an increase
of $523,000 in stock-based compensation expense. These increases were partially
offset by an aggregate decrease of $340,000 in outside service, consulting and
graphic design costs.





General
and Administrative





Years Ended March 31,
                    
                    
                    Change2008
                    
                    
                    2007
                    
                    
                    $
                    
                    
                    
                    %(In
      thousands, except percentages)General
      and administrative
                    
                    $
                    26,971
                    
                    
                    $
                    19,308
                    
                    
                    $
                    7,663
                    
                    
                    
                    40
                    %





General
and administrative expenses increased in fiscal 2008 compared to fiscal 2007
primarily due to an increase of $2.6 million related to higher finance and
administrative personnel costs due to increased headcount, as well as an
increase of $2.6 million in legal fees primarily related to professional
fees for the services of attorneys and third-party accountants in connection
with the United States Department of Justice monitorship. In fiscal 2008, we
incurred professional fees of $3.7 million related to the United States
Department of Justice monitorship, which was concluded in July 2008. Stock based
compensation expense increased $1.3 million in fiscal 2008 as compared to
fiscal 2007. In fiscal 2008 and 2007, approximately 7% and 3%, respectively, of
our general and administrative costs were attributable to our subsidiary,
MDT.





Other
Income, Net





Years Ended March 31,
                    
                    
                    Change2008
                    
                    
                    2007
                    
                    
                    $
                    
                    
                    
                    %(In
      thousands, except percentages)Interest
      and investment income
                    
                    $
                    1,223
                    
                    
                    $
                    1,618
                    
                    
                    $
                    (395
                    )
                    
                    
                    (24
                    )%Interest
      expense
                    
                    
                    (3
                    )
                    
                    
                    (14
                    )
                    
                    
                    11
                    
                    
                    
                    (79
                    )%Other
      income, net
                    
                    
                    488
                    
                    
                    
                    565
                    
                    
                    
                    (77
                    )
                    
                    
                    (14
                    )%Total
      other income, net
                    
                    $
                    1,708
                    
                    
                    $
                    2,169
                    
                    
                    $
                    (461
                    )
                    
                    
                    (21
                    )%





Interest
and investment income decreased in fiscal 2008 compared to fiscal 2007 due to
lower cash and investment balances earning interest.









51


Table of Contents







Other
income, net decreased in fiscal 2008 compared to fiscal 2007 primarily due to
higher foreign exchange losses related to a loan made to Micrus SA, partially
offset by an increase in foreign exchange gains resulting from differences in
exchange rates between the time of the recording of the transaction and
settlement of foreign currency denominated receivables and
payables.





Income
Taxes




Years
      Ended March 31,2008
                  
                  
                  2007(In
      thousands, except percentages)Income
      tax benefit
                  
                  $
                  (194
                  )
                  
                  $
                  (247
                  )Effective
      tax rate
                  
                  
                  (1
                  )%
                  
                  
                  (4
                  )%




We had an
income tax benefit of approximately $194,000 and $247,000 in fiscal 2008 and
2007, respectively. The net income tax benefit in fiscal 2008 includes a
deferred income tax expense of approximately $72,000 for the Swiss subsidiary’s
operating profits and a deferred tax benefit of approximately $266,000 for the
tax effect of the amortization related to the intangible assets acquired in the
Neurologic transaction which is not deductible and the tax benefit of operating
losses for our United Kingdom subsidiary. The net income tax benefit in fiscal
2007 includes a current tax benefit of approximately $63,000 arising from losses
in the UK and a deferred tax benefit of approximately $184,000 primarily
attributable to the tax effect of the amortization related to the intangible
assets acquired in the Neurologic transaction which are not deductible for tax
purposes.





Liquidity
and Capital Resources




Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007(In
      thousands)Cash
      flow activities:Net
      cash used in operating activities
                  
                  $
                  (9,279
                  )
                  
                  $
                  (7,524
                  )
                  
                  $
                  (556
                  )Net
      cash used in investing activities
                  
                  $
                  (5,007
                  )
                  
                  $
                  (3,437
                  )
                  
                  $
                  (5,451
                  )Net
      cash provided by financing activities
                  
                  $
                  4,128
                  
                  
                  $
                  3,165
                  
                  
                  $
                  5,098




Since our
inception, we have funded our operations primarily through issuances of stock
and related warrants, and product sales. As of March 31, 2009, we had cash
and cash equivalents of $17.1 million, compared to $25.5 million at
March 31, 2008. We believe that our current cash position and the cash
expected to be generated from operations will be sufficient to meet our working
capital and capital expenditure requirements for at least the next twelve
months.





Net cash
used in operating activities during fiscal 2009 was $9.3 million as
compared to $7.5 million and $0.6 million during fiscal 2008 and 2007,
respectively. Net cash used in operating activities during fiscal 2009 resulted
primarily from: operating losses; an increase in accounts receivable which
resulted from the sale of a greater number of microcoil products and timing of
collections for those sales; an increase in inventory resulting from an increase
in the number of consignment locations due to the addition of new customers and
the launch of new products; a decrease in accounts payable due to the timing of
payments to our vendors; a decrease in accrued payroll and other related
expenses primarily due to lower accrued bonuses and accrued commissions; a
decrease in accrued liabilities and other non-current liabilities primarily due
to lower accrued legal fees primarily resulting from the settlement of the
patent litigation with Boston Scientific and the conclusion of the United States
Department of Justice monitorship. These factors were partially offset by a
decrease in prepaid expense and non-cash items such as stock-based compensation
expense, depreciation and amortization, deferred income taxes and impairment of
intangible assets.









52


Table of Contents







Net cash
used in operating activities during fiscal 2008 resulted primarily from:
operating losses; an increase in accounts receivable which resulted from the
sale of a greater number of microcoil products and timing of collections for
those sales; an increase in inventory due to an increase in the number of
consignment locations and the buildup of finished goods in anticipation of
future sales; an increase in prepaid expenses and other current assets,
primarily due to deposits paid in advance of our global sales meeting; and an
increase in other non-current assets, primarily due to payments of a broker’s
commission and a security deposit in connection with the lease at our new
Florida facility. These factors were partially offset by an increase in accounts
payable due to the timing of our payments to our vendors; an increase in accrued
payroll and other related expenses which was attributable to increased headcount
and the timing of payroll payments; an increase in accrued liabilities and other
non-current liabilities primarily due to accrued milestone payments to ReVasc
and Genesis and higher accrued professional fees associated with legal fees; and
non-cash items such as stock-based compensation expense, depreciation and
amortization and our provision for excess and obsolete inventories.





Net cash
used in operating activities during fiscal 2007 resulted primarily from:
operating losses; an increase in inventory due to the buildup of finished goods
in anticipation of future sales and an increase in the number of consignment
locations; an increase in prepaid expenses and other current assets primarily
related to the payment of directors and officers insurance premiums; a decrease
in accounts payable due to the timing of our payments to our vendors; and a
decrease in other non current liabilities. These factors were partially offset
by a decrease in accounts receivable due to improved collection efforts which
resulted in lower days sales outstanding; an increase in accrued payroll and
related expenses which was attributable to increased headcount and the timing of
payroll payments; an increase in accrued liabilities due to higher accrued
professional fees associated with legal fees and Sarbanes Oxley compliance and
higher VAT payables; and non-cash items such as stock-based compensation expense
primarily due to the adoption of SFAS 123R in fiscal 2007, depreciation and
amortization, and our provision for excess and obsolete
inventories.





Net cash
used in investing activities during fiscal 2009 was $5.0 million as compared to
$3.4 million and $5.5 million during fiscal 2008 and 2007,
respectively. Net cash used in investing activities during fiscal 2009 was
related to the earn-out payments associated with the purchase of Neurologic and
VasCon and the purchase of capital equipment, partially offset by proceeds from
the sale of certain assets and technologies to Merit and the sale of property
and equipment to third parties.





Net cash
used in investing activities during fiscal 2008 was related to the earn-out
payment associated with the purchase of Neurologic, the purchase of capital
equipment and prepayments made related to leasehold improvements in connection
with the lease at our new Florida facility, partially offset by proceeds from
the sale of certain assets and technologies to Merit and the sale of property
and equipment to third parties.





Net cash
used in investing activities during fiscal 2007 was primarily related to the
purchase of VasCon, the earn-out payment associated with the purchase of
Neurologic, the milestone payment to Biotronik which has been capitalized as
licensed technology and the purchase of capital equipment, partially offset by
proceeds from the sale of marketable securities.





Net cash
provided by financing activities during fiscal 2009 was $4.1 million as compared
to $3.2 million and $5.1 million during fiscal 2008 and 2007,
respectively. Net cash provided by financing activities during fiscal 2009
consisted of borrowings under the line of credit with Wells Fargo Bank, exercise
of stock options and the purchase of common stock under our employee stock
purchase plan.





Net cash
provided by financing activities during fiscal 2008 consisted of proceeds from
the exercise of stock options and the purchase of common stock under our
employee stock purchase plan.





Net cash
provided by financing activities during fiscal 2007 consisted of net proceeds
from the exercise of the over-allotment option by the underwriters in connection
with our secondary offering, and proceeds from the exercise of stock options and
the purchase of common stock under our employee stock purchase
plan.





As
discussed in Note 7 of the “Notes to Consolidated Financial Statements,”
which are included in “Item 8 – Financial Statements and Supplementary
Data”, on November 5, 2008, we entered into a Credit Agreement with Wells Fargo
Bank to provide us with a revolving line of credit. The Credit Agreement
provides for maximum borrowings in an amount up to $15.0 million. If borrowings
under the Credit Agreement exceed $7.5 million, all borrowings are subject to a
borrowing base which is based on eligible accounts receivable. The Credit
Agreement requires that we comply with certain financial and other covenants for
borrowings to be permitted. At March 31, 2009, we had outstanding borrowings of
$2.5 million under the line of credit and were in compliance with all covenants
of the Credit Agreement. On May 20, 2009, we amended the Credit Agreement with
Wells Fargo Bank extending the maturity date to August 1, 2010, and adjusting
the minimum limits for the financial covenants based on our financial forecast
for fiscal 2010. We
believe that we will be able to maintain compliance with the debt covenants of
the credit agreement for at least the next twelve months from March 31,
2009.









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To the
extent that existing cash and cash generated from operations are
insufficient to fund our future activities, we would seek to borrow funds
under our credit facility. However, given that certain financial and other
covenants of the credit agreement are required to be met, these funds may not be
available to us. Accordingly, we may need to reduce discretionary spending and
raise additional funds through public or private equity or debt financing.
Although we are currently not a party to any definitive agreement with respect
to potential investments in, or acquisitions of, complementary businesses,
services or technologies, we may enter into such agreements in the future.
Additional funds may not be available on terms favorable to us, or at all.
Failure to manage the discretionary spending or raise additional capital as
required may adversely impact our ability to achieve our intended business
objectives.


Critical
Accounting Policies and Estimates





We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States (“GAAP”). In doing so, we
have to make estimates and assumptions that affect our reported amounts of
assets, liabilities, revenues and expenses, as well as related disclosure of
contingent assets and liabilities. In many cases, we could reasonably have used
different accounting policies and estimates. In some cases, changes in the
accounting estimates are reasonably likely to occur from period to period.
Accordingly, actual results could differ materially from our estimates. To the
extent that there are material differences between these estimates and actual
results, our financial condition or results of operations will be affected. We
base our estimates on past experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates on an
ongoing basis. We refer to accounting estimates of this type as critical
accounting policies and estimates, which we discuss below. Our management has
reviewed our critical accounting policies and estimates with our accounting
advisors, audit committee and board of directors.





Although
our significant policies are more fully described in Note 2 of the “Notes
to Consolidated Financial Statements,” which are included in “Item 8 –
Financial Statements and Supplementary Data,” we believe that the following
accounting policies to be critical to the judgment and estimates used in the
preparation of our consolidated financial statements.





Revenue
Recognition.Our revenues are derived
primarily from the sale of our microcoil product line to hospitals and
third-party distributors. We also sell access products and accessories for use
with our microcoils. Revenues are recognized when evidence of an arrangement
exists, delivery to the customer has occurred, the selling price is fixed or
determinable and collectibility is reasonably assured. Revenue is generally
recognized upon shipment after the receipt of a purchase order. In arrangements
which specify the title transfer upon delivery, revenue is not recognized until
the product is delivered. In the case of consigned goods, revenue is recognized
when a replenishment order is made.Sales toourLatin American distributors are made
according to similar contractual terms as sales to other distributors. However,
due to historically longer delays in receiving payments and a higher level ofreceivablewrite-offs relating to our Latin
American distributors,wehad concluded that through March 31,
2008 collectibility was not reasonably assured at the time that the distributor
took title to the inventory. Accordingly,wehad recognized revenues from sales to
Latin American distributors when cash was collected.Wehaveevaluatedourexperience with Latin American
distributors and haveconcluded that collectibility is now
reasonably assured upon shipment, and began recognizing revenue upon shipment to
these distributors beginning in thefirst quarter of fiscal
2009.Revenuerecognized upon shipment toour Latin American distributors
was$2.5millionfor fiscal 2009. Additionally, the deferred revenue
balance at March 31, 2008 of $0.7 million for these distributors and the
related cost of goods sold of $273,000 that had been deferred has been
recognized as revenue and cost of goods sold, respectively, in thefirst quarter of fiscal
2009. Revenue recognized
on a cash basis on sales made toourLatin American distributors
was$1.6million forfiscal 2008.





Allowance for Doubtful
Accounts.  In estimating the collectibility of our accounts
receivable, we analyze historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends, and changes in customer payment
terms. We regularly review the adequacy of our accounts receivable allowance
after considering changes in customers’ financial condition and the aging of
account receivable balances. If there are unanticipated future events, this
allowance may need to be adjusted.





Excess and Obsolete
Inventory.  We calculate an inventory provision for estimated
obsolescence or excess inventories based upon historical scrap rates and
assumptions about future demand for our products and market conditions. Our
microcoil products have a five-year shelf life and our access products have a
shelf life between one and three years. Our products are subject to demand
fluctuations based on the availability and demand for alternative products. Our
inventory, which consists primarily of microcoils, is at risk of obsolescence
following the introduction and development of new or enhanced products. Our
estimates and assumptions for excess and obsolete inventory are reviewed and
updated on a quarterly basis. The estimates we use for demand are also used for
near-term capacity planning and inventory purchasing and are consistent with our
revenue forecasts. Future product introductions and related inventories may
require additional provision based upon changes in market demand or introduction
of competing technologies. Provision for excess and obsolete inventories result
in a corresponding expense to cost of goods sold.









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Valuation of Goodwill and
Intangibles.  When we acquire another company, the purchase
price is allocated, as applicable, between acquired in-process research and
development, other identifiable intangible assets, tangible net assets and
goodwill as required by GAAP. In-process research and development is the value
assigned to those projects for which the related products have not received
regulatory approval and have no alternative future use. In-process research and
development is recorded as a charge on the date of
acquisition.  Through March 31, 2009, there has been no in-process
research and development acquired by us in a business combination. Goodwill is
capitalized, subject to periodic review for impairment. Under our accounting
policy, we perform an annual review of goodwill in the fourth quarter of each
fiscal year, or more often if indicators of impairment exist. We evaluate our
identifiable intangible assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be recoverable. Evaluations of possible impairment and, if applicable,
adjustments to carrying values require us to estimate, among other factors,
future cash flows over the life of the assets being evaluated, useful lives, and
fair market values of our reporting units and assets. When we conduct our
evaluation of goodwill, the fair value of goodwill is assessed using valuation
techniques that require management judgment and actual results may differ from
assumed or estimated amounts. Should conditions be different from management’s
last assessment, significant write-downs of goodwill may be required. Through March 31, 2009, we
determined that there has been no impairment related to goodwill. However, we
determined that $462,000 of intangible assets related to the acquisition of
Neurologic in September 2005 were impaired and recorded a non-cash impairment
charge.Our impairment testing conducted in fiscal 2008 and 2007
indicated no such impairment. See Note 6 of the “Notes to Consolidated Financial
Statements,” which are included in “Item 8 – Financial Statements and
Supplementary Data” for further discussion of the impairment
charges.





Accounting for Income
Taxes.  Significant management judgment is required in
determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax
assets. We have recorded a  valuation allowance on our federal, state
and Swiss net deferred tax assets as of March 31, 2009 and our federal and
state net deferred tax assets as of March 31, 2008 due to the uncertainties
related to our ability to utilize our deferred tax assets in the foreseeable
future. These deferred tax assets primarily consist of certain net operating
loss carry forwards and accruals deductible in different periods.





Stock-based
Compensation.  We adopted the provisions of, and account for
stock-based compensation in accordance with, SFAS 123R on April 1,
2006. We elected the modified-prospective method, under which prior periods are
not revised for comparative purposes. Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense on
a straight-line basis over the requisite service period, which is generally the
vesting period.





Due to
the adoption of SFAS 123R, some exercises result in tax deductions in
excess of previously recorded benefits based on the option value at the time of
grant (“windfall” tax benefits). We recognize windfall tax benefits associated
with the exercise of stock options directly to stockholders’ equity only when
realized. Accordingly, deferred tax assets are not recognized for net operating
loss carryforwards resulting from windfall tax benefits occurring from
April 1, 2006 onward. A windfall tax benefit occurs when the actual tax
benefit realized by the company upon an employee’s disposition of a share-based
award exceeds the deferred tax asset, if any, associated with the award that the
company had recorded. When assessing whether a tax benefit relating to
share-based compensation has been realized, we have elected to follow the tax
law ordering method, under which current year share-based compensation
deductions are assumed to be utilized before net operating loss carryforwards
and other tax attributes. Also, we have elected to ignore the indirect tax
effects of share-based compensation deductions in computing our research and
development tax credit. We will recognize the full effect of these deductions in
the statements of operations when the valuation allowance is
released.





The fair
value of stock options and employee stock purchase plan shares is estimated on
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes model requires that we make certain assumptions that are factored
into the valuation analysis, including estimating the length of time employees
will retain their vested stock options before exercising them (“expected term”)
and the estimated volatility of our common stock price over the expected term
and the number of options that will ultimately not complete their vesting
requirements (“forfeitures”). Changes in the subjective assumptions can
materially affect the estimate of fair value of stock-based compensation and
consequently, the related amount recognized in the consolidated statements of
income.










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We determine expected
volatilites based on median results of a peer group analysis of companies
similar in size and financial leverage to us. W e have elected to use the
simplified method for estimating our expected term as allowed by Staff
Accounting Bulletin (“SAB”) 107, and extended by SAB 110. SAB 110
permits the use of the “simplified” method under certain conditions including a
company’s inability to rely on historical exercise data. We will continue to use
the simplified method until we have sufficient historical exercise data to
provide a reasonable basis upon which to estimate the expected term of our
options. The risk-free rate is indexed to the five-year Treasury note interest
at the date of grant and expected forfeiture rate is based on our historical
forfeiture information.





All
stock-based payment awards are amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the vesting
periods. See Note 12 of the “Notes to Consolidated Financial Statements,”
which are included in “Item 8 – Financial Statements and Supplementary
Data” for further information regarding the SFAS 123R.





Recent
Accounting Pronouncements





In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value
Option for Financial Assets and Financial Liabilities,” which expands
opportunities to use fair value measurements in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 became effective for us on April 1, 2008. The
adoption of SFAS 159 did not have a material impact on our
consolidated financial position, results of operations or cash
flows.





In
December 2007, the FASB issued SFAS No. 141R (“SFAS 141R”), “Business
Combinations,” which replaces SFAS 141. SFAS 141R requires the acquiring entity
in a business combination to recognize at full fair value all the assets
acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose information
needed to evaluate and understand the nature and financial effect of the
business combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008 and is to be applied prospectively to business combinations
completed on or after the date of adoption. This provision will only impact our
accounting for any acquisition after April 1, 2009.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2
(“FSP SFAS 157-2”), “Effective Date for FASB Statement No. 157.” This FSP
permits the delayed application of SFAS No. 157, "Fair Value Measurements,"
(“SFAS 157”) for all nonrecurring fair value measurements of non-financial
assets and non-financial liabilities until fiscal years beginning
after November 15, 2008. We are currently evaluating the impact of
adopting the provisions of FSP SFAS 157-2 for non-financial assets and
liabilities that are recognized or disclosed on a non-recurring
basis.





In
March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133.” SFAS 161 requires enhanced disclosures about a
company’s derivative and hedging activities. SFAS 161 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. We
are currently evaluating the impact of the adoption of the enhanced disclosures
requirements of SFAS 161 and do not expect the adoption to have a material
impact on our consolidated financial statements.





In April
2008, the FASB issued FSP SFAS No. 142-3 (“FSP SFAS 142-3”), “Determination
of the Useful Life of Intangible Assets.” FSP SFAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No.
142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141R, “Business Combinations” and other GAAP. FSP
SFAS 142-3 is effective for us on April 1, 2009. We are currently
evaluating the impact of adopting FSP SFAS 142-3 on our consolidated
financial position, results of operations and cash flows.





In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of
Generally Accepted Accounting Principles,” which becomes effective 60 days
following the SEC’s approval of the PCAOB amendments to U.S. AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This standard is not expected to have an
impact on our consolidated financial position, results of operations or
cash flows.









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In April
2009, the FASB issued FSP SFAS No. 157-4 (“FSP SFAS 157-4”), “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly,”
which addresses the determination of fair values when there is no active market
or where the price inputs represent distressed sales. FSP SFAS 157-4 reaffirms
the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become
inactive. FSP SFAS 157-4 is effective for financial statements issued for
interim and annual periods ending after June 15, 2009. We are currently
evaluating the impact of adopting FSP SFAS 157-4 on our consolidated
financial position, results of operations and cash flows.





In April 2009, the FASB
issued FSP SFAS 107-1 and Accounting Principles Board (“APB”) No. 28-1
(“FSP SFAS 107-1 and APB 28-1”), “Interim Disclosures about Fair Value of
Financial Instruments.”FSP SFAS 107-1 and APB 28-1 enhance
consistency in financial reporting by increasing the frequency of fair value
disclosures to a quarterly instead of annual basis for any financial instruments
that are not currently reflected on the balance sheet at fair value. FSP
SFAS 107-1 and APB 28-1 are effective for financial statements issued for
interim and annual periods ending after June 15, 2009. We are currently
evaluating the impact of adopting FSP SFAS 107-1 and APB 28-1 on our
consolidated financial position, results of operations and cash
flows.





In April 2009, the FASB
issued FSP SFAS 115-2 and SFAS 124-2 (“FSP SFAS 115-2 and SFAS
124-2”), “Recognition and Presentation of Other-Than-Temporary
Impairments.” FSP SFAS 115-2 and SFAS 124-2 provide
additional guidance designed to create greater consistency to the timing of
impairment recognition and provide greater clarity about the credit and
noncredit components of impaired debt securities that are not expected to be
sold. FSP SFAS 115-2 and SFAS 124-2 are effective for financial statements
issued for interim and annual periods ending after June 15, 2009. We are
currently evaluating the impact of adopting FSP SFAS 115-2 and SFAS 124-2
on our consolidated financial position, results of operations and cash
flows.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements as of March 31, 2009.





Contractual
Obligations





We have
obligations under non-cancelable operating leases with various expiration dates
through 2013 and purchase commitments for inventory, capital equipment and
operating expenses, such as materials for research and development and
consulting.





As of
March 31, 2009, our contractual obligations were as follows (in
thousands):


Payments
      Due by PeriodLess
      than
                        
                        
                        1-3
                        
                        
                        3-5
                        
                        
                        BeyondContractual
      obligations:
                        
                        Total
                        
                        
                        1
      year
                        
                        
                        years
                        
                        
                        years
                        
                        
                        5
      yearsNon-cancelable
      operating lease obligations
                        
                        $
                        6,452
                        
                        
                        $
                        1,038
                        
                        
                        $
                        2,910
                        
                        
                        $
                        1,003
                        
                        
                        $
                        1,501Purchase
      obligations
                        
                        
                        3,373
                        
                        
                        
                        3,373
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Minimum
      milestone payments to The Cleveland Clinic
                        
                        
                        1,500
                        
                        
                        
                        1,500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Royalty
      payments to Vascular FX, LLC
                        
                        
                        1,250
                        
                        
                        
                        250
                        
                        
                        
                        750
                        
                        
                        
                        250
                        
                        
                        
                        -Total
                        
                        $
                        12,575
                        
                        
                        $
                        6,161
                        
                        
                        $
                        3,660
                        
                        
                        $
                        1,253
                        
                        
                        $
                        1,501


The
future earn-out payments to the former VasCon shareholders will be an amount not
to exceed $10.0 million based on the sales and manufacturing performance as
set forth in the asset purchase agreement. These future earn-out payments will
be paid over three years. As of March 31, 2009, we have accrued for the second
year earn-out payment of $0.9 million. We paid the first year earn-out amount of
$378,000 in April 2008.





We are
required to pay The Cleveland Clinic up to $5.0 million in payments upon
the achievement of certain milestones set forth in the ReVasc Agreement, with
minimum milestone payments of at least $2.0 million to The Cleveland Clinic
upon the earlier of achieving the milestones or October 26, 2010. The
first milestone payment in the amount of $500,000 was paid in March
2008.









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We are
required to pay Vascular FX, LLC a royalty equal to 25% of the greater of (i)
the applicable aggregate mandatory minimum sales of $1.0 million or (ii) the
actual net sales of our deflectable catheter product, both on an annual basis.
The royalty period is six years beginning in November 2007. As of March 31,
2009, we accrued royalty payments of approximately $87,000 to Vascular
FX.





Item 7A.Quantitative and
Qualitative Disclosures about Market Risk.





Foreign Currency Exchange
Risks.  Historically, we have been exposed to risks from
fluctuations in currency exchange rates due to intercompany loans made to Micrus
SA, our Swiss subsidiary, in 2001 in connection with its incorporation. These
loans are denominated in Swiss francs and will fluctuate in value against the
U.S. dollar, causing us to recognize foreign exchange gains and losses. The
functional currency of our Swiss subsidiary is the Swiss franc. The functional
currency of our UK subsidiary is the British pound. In Europe, our revenues are
denominated in the Swiss franc, euro, British pound and other currencies.
Accordingly, we are exposed to market risk related to changes between the Swiss
franc and these other currencies. If the Swiss franc appreciates against the
currencies in which our receivables are denominated, we will recognize foreign
currency losses. For the preparation of our consolidated financial statements,
the financial results of our Swiss subsidiary are translated into
U.S. dollars based on average exchange rates during the applicable period.
A hypothetical 10% decline in the value of the Swiss franc versus the
U.S. dollar would cause us to recognize a loss of $177,000 related to our
loan with Micrus SA and a $184,000 decrease in our comprehensive loss from our
investment in Micrus SA as of March 31, 2009. A hypothetical 10% decline in
the value of the British pound versus the U.S. dollar would cause us to
recognize a $447,000 increase in our comprehensive loss from our investment in
Micrus UK as of March 31, 2009. A hypothetical 10% decline in the value of
the euro versus the Swiss franc would cause us to recognize a loss of $279,000
based on our foreign denominated receivables as of March 31,
2009.





In fiscal
2009, approximately 31% of our revenues were denominated in currencies other
than the U.S. dollar. In future periods, we believe that a greater portion of
our revenues could be denominated in currencies other than the U.S. dollar,
thereby increasing our exposure to exchange rate gains and losses on non-U.S.
currency transactions.





In fiscal
2009, we entered into foreign currency forward contracts to buy U.S. dollars to
minimize the impact of the currency movements on intercompany payables for our
Micrus SA subsidiary. The use of foreign currency forward contracts allows us to
offset exposure to rate fluctuations because the gains or losses incurred on the
derivative instruments will offset, in whole or in part, losses or gains on the
underlying foreign currency exposure.  We use derivative instruments only
for risk management purposes and do not use them for speculation or for
trading.





As of
March 31, 2009, we had outstanding foreign currency forward contracts to sell
0.6 million euro for approximately $0.8 million, expiring through June
19, 2009. If we were to settle our euro-based contracts at the
reporting date, an immaterial unrealized income or expense would need to be
recognized. A sensitivity analysis of changes in the fair value of our euro
forward contracts at March 31, 2009 indicates that, if the U.S. dollar uniformly
strengthened/weakened by 10% against the euro, the fair value of these contracts
would decrease/increase by $80,000, respectively.





Interest Rate
Risk.  Our cash is invested in bank deposits and money market
funds denominated in U.S. dollars. The carrying value of these cash
equivalents approximates fair market value. Our investments in marketable
securities are subject to interest rate risk, which is the risk that our
financial condition and results of operations could be adversely affected due to
movements in interest rates.





At March
31, 2009, our cash and cash equivalent balance was $17.1 million. Based on our
annualized average interest rate, a 10% decrease in the interest rate on such
balances would result in a reduction in interest income of approximately $10,000
on an annual basis.









58


Table of Contents





Item 8.Financial Statements and
Supplementary Data.





Index
to Consolidated Financial Statements





PageReport
      of Independent Registered Public Accounting Firm
              
              
              60Consolidated
      Balance Sheets
              
              
              61Consolidated
      Statements of Operations
              
              
              62Consolidated
      Statements of Changes in Stockholders’ Equity
              
              
              63Consolidated
      Statements of Cash Flows
              
              
              64Notes
      to Consolidated Financial Statements
              
              
              65Supplementary
      DataSchedule II —
      Valuation and Qualifying Accounts
              
              
              95





59


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the
Board of Directors and Stockholders


of Micrus
Endovascular Corporation





In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Micrus
Endovascular Corporation and its subsidiariesat March 31, 2009
and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 2009in conformity with
accounting principles generally accepted in the United States of
America.  In addition, in our opinion, the financial statement
schedule listed in the accompanying indexpresents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidatedfinancial
statements.  Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
March 31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A.  Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our integrated audits.  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.





As
discussed in Note 8 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions in fiscal
year 2008.





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





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











/s/
PricewaterhouseCoopers LLP





San Jose,
California


June 10,
2009


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Table of Contents





MICRUS
ENDOVASCULAR CORPORATION





Consolidated Balance Sheets





March
      31,2009
                        
                        
                        2008(In
      thousands, except shareand
      per share amounts)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        17,050
                        
                        
                        $
                        25,526Accounts
      receivable, net of allowance for doubtful accountsof
      $119 and $95 at March 31, 2009 and 2008, respectively
                        
                        
                        12,205
                        
                        
                        
                        11,297Inventories
                        
                        
                        11,857
                        
                        
                        
                        11,495Prepaid
      expenses and other current assets
                        
                        
                        1,237
                        
                        
                        
                        1,570Total
      current assets
                        
                        
                        42,349
                        
                        
                        
                        49,888Property
      and equipment, net
                        
                        
                        6,982
                        
                        
                        
                        5,285Goodwill
                        
                        
                        6,762
                        
                        
                        
                        8,549Intangible
      assets, net
                        
                        
                        4,684
                        
                        
                        
                        7,153Deferred
      tax assets
                        
                        
                        260
                        
                        
                        
                        9Other
      assets
                        
                        
                        469
                        
                        
                        
                        1,448Total
      assets
                        
                        $
                        61,506
                        
                        
                        $
                        72,332LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
                        
                        $
                        2,138
                        
                        
                        $
                        3,680Accrued
      payroll and other related expenses
                        
                        
                        5,515
                        
                        
                        
                        7,930Deferred
      tax liabilities
                        
                        
                        -
                        
                        
                        
                        43Short-term
      borrowings
                        
                        
                        2,500
                        
                        
                        
                        -Accrued
      liabilities
                        
                        
                        7,877
                        
                        
                        
                        9,431Total
      current liabilities
                        
                        
                        18,030
                        
                        
                        
                        21,084Deferred
      tax liabilities
                        
                        
                        -
                        
                        
                        
                        314Other
      non-current liabilities
                        
                        
                        902
                        
                        
                        
                        2,754Total
      liabilities
                        
                        
                        18,932
                        
                        
                        
                        24,152Commitments
      and contingencies (Note 9)Stockholders'
      equity:Preferred
      stock, $0.01 par value;Authorized:
      1,000,000 shares; none issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $0.01 par value;Authorized:
      50,000,000 sharesIssued
      and outstanding:15,820,369 shares and 15,614,760 sharesat
      March 31, 2009 and 2008, respectively
                        
                        
                        158
                        
                        
                        
                        156Additional
      paid-in capital
                        
                        
                        127,121
                        
                        
                        
                        119,897Accumulated
      other comprehensive loss
                        
                        
                        (2,289
                        )
                        
                        
                        (511
                        )Accumulated
      deficit
                        
                        
                        (82,416
                        )
                        
                        
                        (71,362
                        )Total
      stockholders' equity
                        
                        
                        42,574
                        
                        
                        
                        48,180Total
      liabilities and stockholders' equity
                        
                        $
                        61,506
                        
                        
                        $
                        72,332





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


61


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MICRUS
ENDOVASCULAR CORPORATION





Consolidated Statements of
Operations








Years
      Ended March 31,2009
                
                
                2008
                
                
                2007(In
      thousands, except per share amounts)Revenues
                
                $
                78,196
                
                
                $
                69,213
                
                
                $
                58,795Cost
      of goods sold
                
                
                20,847
                
                
                
                17,301
                
                
                
                15,361Gross
      profit
                
                
                57,349
                
                
                
                51,912
                
                
                
                43,434Operating
      expenses:Research
      and development
                
                
                10,243
                
                
                
                13,718
                
                
                
                7,904Sales
      and marketing
                
                
                29,312
                
                
                
                29,385
                
                
                
                24,121General
      and administrative
                
                
                26,983
                
                
                
                26,971
                
                
                
                19,308Impairment
      of intangible assets
                
                
                462
                
                
                
                -
                
                
                
                -Total
      operating expenses
                
                
                67,000
                
                
                
                70,074
                
                
                
                51,333Loss
      from operations
                
                
                (9,651
                )
                
                
                (18,162
                )
                
                
                (7,899
                )Interest
      and investment income
                
                
                258
                
                
                
                1,223
                
                
                
                1,618Interest
      expense
                
                
                (52
                )
                
                
                (3
                )
                
                
                (14
                )Other
      income (expense), net
                
                
                (2,111
                )
                
                
                488
                
                
                
                565Loss
      before income taxes
                
                
                (11,556
                )
                
                
                (16,454
                )
                
                
                (5,730
                )Income
      tax benefit
                
                
                (502
                )
                
                
                (194
                )
                
                
                (247
                )Net
      loss
                
                $
                (11,054
                )
                
                $
                (16,260
                )
                
                $
                (5,483
                )Net
      loss per share:Basic
      and diluted
                
                $
                (0.70
                )
                
                $
                (1.05
                )
                
                $
                (0.38
                )Weighted-average
      number of shares used in per share calculations:Basic
      and diluted
                
                
                15,692
                
                
                
                15,438
                
                
                
                14,621




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


62


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MICRUS
ENDOVASCULAR CORPORATION





Consolidated Statements of Changes in Stockholders’
Equity


AccumulatedAdditional
                          
                          
                          Deferred
                          
                          
                          Other
                          
                          
                          
                          
                          
                          TotalCommon
      Stock
                          
                          
                          Paid-in
                          
                          
                          Stock-based
                          
                          
                          Comprehensive
                          
                          
                          Accumulated
                          
                          
                          Stockholders'Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Compensation
                          
                          
                          Loss
                          
                          
                          Deficit
                          
                          
                          Equity(In
      thousands)Balance
      at March 31, 2006
                          
                          
                          14,190
                          
                          
                          $
                          142
                          
                          
                          $
                          101,430
                          
                          
                          $
                          (397
                          )
                          
                          $
                          (240
                          )
                          
                          $
                          (49,619
                          )
                          
                          $
                          51,316Comprehensive
      loss:Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (5,483
                          )
                          
                          
                          (5,483
                          )Translation
      adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (283
                          )
                          
                          
                          -
                          
                          
                          
                          (283
                          )Change
      in unrealized loss on available-for-sale investments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          11
                          
                          
                          
                          -
                          
                          
                          
                          11Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (5,755
                          )Exercise
      of over-allotment by underwriters
                          
                          
                          190
                          
                          
                          
                          2
                          
                          
                          
                          2,037
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,039Issuance
      of common stock in connection with VasCon acquisition
                          
                          
                          157
                          
                          
                          
                          2
                          
                          
                          
                          2,970
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,972Exercise
      of common stock warrants
                          
                          
                          15
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Exercise
      of stock options
                          
                          
                          619
                          
                          
                          
                          6
                          
                          
                          
                          2,298
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,304Issuance
      of common stock under employee stock purchase plan
                          
                          
                          78
                          
                          
                          
                          -
                          
                          
                          
                          755
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          755Stock-based
      compensation under SFAS 123R (including amount capitalized in inventory of
      $89)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,293
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,293Amortization
      of deferred stock-based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          213
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          213Deferred
      stock-based compensation associated with stock options
      forfeited
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (20
                          )
                          
                          
                          20
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Non-employee
      stock-based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          157
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          157Balance
      at March 31, 2007
                          
                          
                          15,249
                          
                          
                          
                          152
                          
                          
                          
                          111,920
                          
                          
                          
                          (164
                          )
                          
                          
                          (512
                          )
                          
                          
                          (55,102
                          )
                          
                          
                          56,294Comprehensive
      loss:Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (16,260
                          )
                          
                          
                          (16,260
                          )Translation
      adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          1Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (16,259
                          )Exercise
      of stock options
                          
                          
                          270
                          
                          
                          
                          3
                          
                          
                          
                          2,152
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,155Issuance
      of common stock under employee stock purchase plan
                          
                          
                          93
                          
                          
                          
                          1
                          
                          
                          
                          1,009
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,010Restricted
      stock awards issued
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          21
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          21Restricted
      stock units released
                          
                          
                          3
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Restricted
      stock withheld for minimum taxes
                          
                          
                          (1
                          )
                          
                          
                          -
                          
                          
                          
                          (29
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (29
                          )Stock-based
      compensation under SFAS 123R (including amount capitalized in inventory of
      $51)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,821
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,821Amortization
      of deferred stock-based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          163
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          163Deferred
      stock-based compensation associated with stock options
      forfeited
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1
                          )
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Non-employee
      stock-based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4Balance
      at March 31, 2008
                          
                          
                          15,615
                          
                          
                          
                          156
                          
                          
                          
                          119,897
                          
                          
                          
                          -
                          
                          
                          
                          (511
                          )
                          
                          
                          (71,362
                          )
                          
                          
                          48,180Comprehensive
      loss:Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (11,054
                          )
                          
                          
                          (11,054
                          )Translation
      adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,705
                          )
                          
                          
                          -
                          
                          
                          
                          (1,705
                          )Swiss
      pension plan adjustment
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (73
                          )
                          
                          
                          
                          
                          
                          
                          (73
                          )Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (12,832
                          )Exercise
      of stock options
                          
                          
                          83
                          
                          
                          
                          1
                          
                          
                          
                          747
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          748Issuance
      of common stock under employee stock purchase plan
                          
                          
                          120
                          
                          
                          
                          1
                          
                          
                          
                          879
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          880Restricted
      stock awards issued
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          9
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          9Restricted
      stock units released
                          
                          
                          3
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Restricted
      stock withheld for minimum taxes
                          
                          
                          (2
                          )
                          
                          
                          -
                          
                          
                          
                          (17
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (17
                          )Stock-based
      compensation under SFAS 123R (including amount released from inventory of
      $8)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,606
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,606Balance
      at March 31, 2009
                          
                          
                          15,820
                          
                          
                          $
                          158
                          
                          
                          $
                          127,121
                          
                          
                          $
                          -
                          
                          
                          $
                          (2,289
                          )
                          
                          $
                          (82,416
                          )
                          
                          $
                          42,574
 The
accompanying notes are an integral part of these consolidated financial
statements.


63


Table of Contents





MICRUS
ENDOVASCULAR CORPORATION





Consolidated Statements of Cash Flows




Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007(In
      thousands)Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (11,054
                  )
                  
                  $
                  (16,260
                  )
                  
                  $
                  (5,483
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  3,383
                  
                  
                  
                  3,178
                  
                  
                  
                  2,143Provision
      for doubtful accounts
                  
                  
                  49
                  
                  
                  
                  (145
                  )
                  
                  
                  (84
                  )Loss
      on disposal of equipment
                  
                  
                  28
                  
                  
                  
                  35
                  
                  
                  
                  4Provision
      for excess and obsolete inventories
                  
                  
                  74
                  
                  
                  
                  240
                  
                  
                  
                  279Realized
      gain on investments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4
                  )Impairment
      of intangible assets
                  
                  
                  462
                  
                  
                  
                  -
                  
                  
                  
                  -Stock-based
      compensation
                  
                  
                  5,645
                  
                  
                  
                  4,958
                  
                  
                  
                  2,574Deferred
      income taxes
                  
                  
                  (608
                  )
                  
                  
                  (209
                  )
                  
                  
                  (329
                  )Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                  
                  
                  (1,962
                  )
                  
                  
                  (2,115
                  )
                  
                  
                  601Inventories
                  
                  
                  (1,041
                  )
                  
                  
                  (2,786
                  )
                  
                  
                  (3,810
                  )Prepaid
      expenses and other current assets
                  
                  
                  270
                  
                  
                  
                  (156
                  )
                  
                  
                  (545
                  )Other
      assets
                  
                  
                  (21
                  )
                  
                  
                  (148
                  )
                  
                  
                  19Accounts
      payable
                  
                  
                  (1,425
                  )
                  
                  
                  1,920
                  
                  
                  
                  (437
                  )Accrued
      payroll and other related expenses
                  
                  
                  (2,077
                  )
                  
                  
                  1,582
                  
                  
                  
                  2,936Accrued
      liabilities
                  
                  
                  (147
                  )
                  
                  
                  1,403
                  
                  
                  
                  1,818Other
      non-current liabilties
                  
                  
                  (855
                  )
                  
                  
                  979
                  
                  
                  
                  (238
                  )Net
      cash used in operating activities
                  
                  
                  (9,279
                  )
                  
                  
                  (7,524
                  )
                  
                  
                  (556
                  )Cash
      flows from investing activities:Proceeds
      from maturities of available-for-sale securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,000Acquisition
      of property and equipment
                  
                  
                  (2,688
                  )
                  
                  
                  (2,013
                  )
                  
                  
                  (1,343
                  )Advance
      payments for leasehold improvements at new Florida
facility
                  
                  
                  -
                  
                  
                  
                  (802
                  )
                  
                  
                  -Proceeds
      from sale of property and equipment
                  
                  
                  13
                  
                  
                  
                  110
                  
                  
                  
                  -Proceeds
      from sale of assets and technologies
                  
                  
                  1,500
                  
                  
                  
                  1,500
                  
                  
                  
                  -Purchase
      of VasCon, LLC, net of cash acquired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,860
                  )Earn-out
      payment in connection with acquisition of VasCon, LLC
                  
                  
                  (378
                  )
                  
                  
                  -
                  
                  
                  
                  -Purchase
      of Neurologic UK Ltd., net of cash acquired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (11
                  )Earn-out
      payment in connection with acquisition of Neurologic UK
    Ltd.
                  
                  
                  (3,454
                  )
                  
                  
                  (2,232
                  )
                  
                  
                  (1,403
                  )Payment
      to Biotronik AG for developed technology
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (834
                  )Net
      cash used in investing activities
                  
                  
                  (5,007
                  )
                  
                  
                  (3,437
                  )
                  
                  
                  (5,451
                  )Cash
      flows from financing activities:Borrowings
      under bank line of credit
                  
                  
                  2,500
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from exercise of stock options
                  
                  
                  748
                  
                  
                  
                  2,155
                  
                  
                  
                  2,304Proceeds
      from employee stock purchase plan
                  
                  
                  880
                  
                  
                  
                  1,010
                  
                  
                  
                  755Proceeds
      from issuance of common stock, net of issuance costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,039Net
      cash provided by financing activities
                  
                  
                  4,128
                  
                  
                  
                  3,165
                  
                  
                  
                  5,098Effect
      of foreign exchange rate changes on cash
                  
                  
                  1,682
                  
                  
                  
                  (1,214
                  )
                  
                  
                  (659
                  )Net
      decrease in cash and cash equivalents
                  
                  
                  (10,158
                  )
                  
                  
                  (7,796
                  )
                  
                  
                  (909
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  25,526
                  
                  
                  
                  34,536
                  
                  
                  
                  36,104Cash
      and cash equivalents at end of year
                  
                  $
                  17,050
                  
                  
                  $
                  25,526
                  
                  
                  $
                  34,536Supplemental
      disclosure of cash flow information:Interest
      paid
                  
                  $
                  38
                  
                  
                  $
                  3
                  
                  
                  $
                  14Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of common stock for purchase of VasCon, LLC
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,972Accrued
      earn-out payment in connection with the acquisition of VasCon,
      LLC
                  
                  $
                  886
                  
                  
                  $
                  378
                  
                  
                  $
                  -Accrued
      earn-out payment in connection with the acquisition of Neurologic UK
      Ltd.
                  
                  $
                  -
                  
                  
                  $
                  2,997
                  
                  
                  $
                  2,232


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


64


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






Note 1 —
Formation and Business of the Company





Micrus
Endovascular Corporation (the “Company”) was incorporated under the laws of the
state of Delaware in June 1996. The Company develops, manufactures and markets
both implantable and disposable medical devices used in the treatment of
cerebral vascular diseases. The Company’s products are used by interventional
neuroradiologists, interventional neurologists, and neurosurgeons to treat both
cerebral aneurysms responsible for hemorrhagic stroke and intracranial
atherosclerosis, which may lead to ischemic stroke. Hemorrhagic and ischemic
stroke are both significant causes of death and disability
worldwide.





Liquidity





The
Company has incurred annual net losses since its inception. In the fourth
quarter of fiscal 2009, the Company achieved its first profitable quarter but
there are no assurances that the Company will continue to be profitable in the
foreseeable future. Management believes that the Company’s current cash position
as of March 31, 2009 and the cash expected to be generated from operations will
be sufficient to meet the Company’s working capital and capital expenditure
requirements for at least the next twelve months from March 31, 2009. To the
extent that existing cash and cash generated from operations are insufficient to
fund its future activities, the Company would seek to borrow funds under the
credit facility. However, given that certain financial and other covenants of
the credit agreement (see Note 7) are required to be met, these funds may not be
available to the Company. Accordingly, the Company may need to reduce
discretionary spending and raise additional funds through public or private
equity or debt financing. Any additional equity financing may be dilutive to
stockholders and debt financing, if available, may involve covenants that would
restrict the Company. Additional funds may not be available on terms favorable
to the Company or at all. Failure to manage discretionary spending or raise
additional capital as required may adversely impact the Company’s ability to
achieve its intended business objectives. The Company believes that it will be
able to maintain compliance with the debt covenants of the credit agreement for
at least the next twelve months from March 31, 2009.





Note 2 —
Summary of Significant Accounting Policies





Principles
of consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.





The
Company’s international subsidiaries use their local currency as the functional
currency. Assets and liabilities are translated at exchange rates prevailing at
the balance sheet dates. Revenue, expense, gain and loss accounts are translated
at average exchange rates during the period. Resulting translation adjustments
are recorded directly to accumulated other comprehensive income
(loss).




Reclassifications





Certain
amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassifications had no impact on previously reported stockholders’ equity or
net loss.





Use
of estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 dates of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from these estimates. These estimates and assumptions include reserves and
write-downs related to accounts receivable and inventories, the recoverability
and fair value of long-term assets, and deferred tax assets and related
valuation allowances.









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ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Revenue
recognition





The
Company generates revenue primarily from the sale of its microcoil product line.
The Company also sells stents, access products and accessories for use with its
microcoils. Revenue is generated from sales to hospitals and third-party
distributors.





Revenue
is recognized when evidence of an arrangement exists, delivery to the customer
has occurred, the selling price is fixed or determinable and collectibility is
reasonably assured. Revenue is generally recognized upon shipment after the
receipt of a purchase order. In arrangements which specify the title transfer
upon delivery, revenue is not recognized until the product is delivered. In the
case of consigned goods, revenue is recognized when a replenishment order is
made.





The
evidence of an arrangement generally consists of a contract or a purchase order
approved by the customer.





Delivery
to the customer occurs when the customer takes title to the product. Generally
title passes upon shipment, but may occur when the product is received by the
customer based on the terms of the agreement with the customer.





The
selling price for all sales are fixed and agreed with the customer prior to
shipment and are generally based on established list prices.





The
Company performs credit checks on new customers and periodic credit checks on
existing customers. Accordingly, collectibility is generally assured prior to
shipment. In the event a sale is made to a customer for whom collectibility is
not reasonably assured, the Company either requires prepayment of the order or
revenue is deferred and recognized upon collection. The Company maintains a
reserve for amounts which may not be collectible.





The
Company maintains inventory at various hospital locations under the custody of
hospital personnel for use in procedures. The Company recognizes revenue on
sales to these customers when the revenue criteria have been met, which occurs
when the hospital informs the Company that product has been removed from
inventory and used in a procedure.





Once a
sale has occurred, the customer has no right of return.





Sales to
distributors are recognized at the time of shipment, provided that the Company
has received an order, the price is fixed or determinable and collectibility is
reasonably assured. Non-refundable fees received from distributors upon entering
into multi-year distribution agreements, where there is no culmination of a
separate earnings process, are deferred and amortized over the term of the
distribution agreement or the expected period of performance, whichever is
longer.





Sales
made to the Company’s Latin American distributors are made according to similar
contractual terms as sales made to other distributors. However, due to
historically longer delays in receiving payments and a higher level of
receivable write-offs relating to its Latin American distributors, the Company
had concluded that through March 31, 2008 collectibility was not reasonably
assured at the time that the distributor took title to the inventory.
Accordingly, the Company had recognized revenues from sales to Latin American
distributors when cash was collected. The Company has evaluated its
experience with Latin American distributors and has concluded that
collectibility is now reasonably assured upon shipment, and began recognizing
revenue upon shipment to these distributors beginning in the first quarter of
fiscal 2009. Revenue recognized upon shipment to its Latin American distributors
was $2.5 million for fiscal 2009. Additionally, the deferred revenue
balance at March 31, 2008 of $0.7 million for these distributors and the
related cost of goods sold of $273,000 that had been deferred was recognized as
revenue and cost of goods sold, respectively, in the first quarter of fiscal
2009. Revenue recognized on a cash basis on sales made to its Latin American
distributors was $1.6 million and $1.1 million for fiscal 2008 and 2007,
respectively.




Product
warranty





The
Company provides its customers with limited warranty privileges. To date,
product returns under warranty have not been significant. The warranty accrual
as of March 31, 2009 and 2008 was immaterial to the financial position of the
Company and the change in the accrual balance for the current and two
prior fiscal years was immaterial to the Company’s results of operations
and cash flows.









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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




Cost
of goods sold





The
Company’s cost of goods sold includes the cost of products sold to customers
including materials, direct labor, depreciation, overhead costs associated with
manufacturing, impairments of inventory and warranty expenses. Cost of goods
sold also includes amortization of capitalized license technology and acquired
intangible assets resulting from transactions with Biotronik AG (“Biotronik”)
and VasCon, LLC (“VasCon”), respectively (see Note 3).





Concentration
of credit risk





Financial
instruments which potentially subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains cash and cash equivalents with various major financial institutions.
Deposits in these banks may exceed the amount of insurance provided on such
deposits. The Company has not experienced any losses on its deposits of cash and
cash equivalents.





The
Company grants credit to its customers, which are primarily located in the
United States, Europe, Asia Pacific and Latin America, and performs ongoing
credit evaluations on its customers and collateral is generally not required for
trade receivables. The Company maintains an allowance for potential credit
losses and such losses have been within the Company’s expectations.





The
Company had one customer which accounted for 12% of revenues for the year ended
March 31, 2009 and had one customer which accounted for 20% of accounts
receivable at March 31, 2009. The Company had no customer which accounted
for more than 10% of revenues for the year ended March 31, 2008 and one
customer which accounted for 15% of revenues for the year ended March 31,
2007. The Company had one customer which accounted for 16% of accounts
receivable at March 31, 2008 and none which accounted for more than 10% of
accounts receivable at March 31, 2007.





Certain
significant risks and uncertainties





Most of
the Company’s products require approval from the Food and Drug Administration
and foreign regulatory agencies prior to commercialized sale and are subject to
continued regulations once approved. There can be no assurance that the
Company’s new products or new versions of previous products will receive these
required approvals. If the Company was denied such approvals or such approvals
were delayed, it could have a materially adverse impact on the
Company.





A portion
of the Company’s sales operations are based outside of the United States,
principally in Europe, Asia Pacific and Latin America. As a result, the Company
must comply with a wide variety of foreign laws and regulations. In particular,
the Company may be materially adversely affected by changes in the political,
social and economic conditions in these countries, and by changes in government
policies with respect to such matters as laws and regulations, methods to
address inflation, currency conversion and restrictions and rates and methods of
taxation.





Certain
of the components and materials used in the Company’s devices are provided by
single source suppliers. The loss of any of these suppliers, or their inability
to supply the Company with an adequate supply of materials could have a
materially adverse impact on the Company.





Cash
and cash equivalents





The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash equivalents are
generally invested in money market funds. Cash equivalents are carried at cost,
which approximates fair value.





Fair
value of financial instruments





The
carrying amounts of certain of the Company’s financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities, approximate fair value due to their short
maturities.





Allowance
for doubtful accounts





The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company provides an allowance for specific customer accounts where collection is
doubtful and also


provides
an allowance for other accounts based on historical collection and write-off
experience. If the financial condition of customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.







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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Inventories





Inventories
of raw materials, work-in-progress and finished goods are stated at the lower of
cost or market, cost being determined under a standard cost method, which
approximates actual cost on a first-in, first-out basis.





The
Company calculates an inventory provision for estimated obsolescence or excess
inventories based upon historical scrap rates and assumptions about future
demand for its products and market conditions. The Company’s microcoil products
have a five-year shelf life and its stents and access products have a shelf life
between one and three years. The Company’s products are subject to demand
fluctuations based on the availability and demand for alternative products. The
Company’s inventory, which consists primarily of microcoils, is at risk of
obsolescence following the introduction and development of new or enhanced
products. The Company’s estimates and assumptions for excess and obsolete
inventory are reviewed and updated on a quarterly basis. The estimates that the
Company uses for demand are also used for near-term capacity planning and
inventory purchasing and are consistent with its revenue forecasts. Future
product introductions and related inventories may require additional provision
based upon changes in market demand or introduction of competing technologies.
Provision for excess and obsolete inventories result in a corresponding expense
to cost of goods sold.





Property
and equipment





Property
and equipment are stated at cost and depreciated on a straight-line basis over
the estimated useful lives of the related assets, which is generally three to
seven years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term or the
estimated useful life of the related assets. Construction in progress is not
depreciated until the related asset is placed in service. Upon sale or
retirement of assets, the costs and related accumulated depreciation and
amortization are removed from the consolidated balance sheets and the resulting
gain or loss is reflected in the statements of operations. Maintenance and
repairs are expensed as incurred.




Goodwill
and intangible assets





Goodwill
represents the excess of the purchase price over the fair value of in-process
research and development, and the net tangible and identifiable intangible
assets acquired in a business combination. Negative goodwill represents the
excess fair value of the net assets acquired in a business combination over the
purchase price. If the acquisition involves contingent consideration, the
negative goodwill is recorded as a deferred credit in the consolidated balance
sheet and is reduced by the contingent consideration that is paid, with any
additional contingent consideration being recorded as goodwill. In accordance
with Statement of Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets,” goodwill is not subject to amortization.





In-process
research and development is the value assigned to those projects for which the
related products have not received regulatory approval and have no alternative
future use. In-process research and development is recorded as a charge on the
date of acquisition.





Intangible
assets resulting from acquisitions are estimated by management based on the fair
value of the assets received. Intangible assets from acquisitions are comprised
of existing process technology, distribution agreements, non-compete agreements
and customer relationships, and are carried at cost less accumulated
amortization. Amortization is computed using the straight-line method over their
estimated useful lives ranging from five to seven years.





Intangible
assets not resulting from acquisitions are comprised of patents and licensed
technology, and are carried at cost less accumulated amortization. Amortization
of patents is computed using the straight-line method over their estimated
useful lives of ten years. Patent application, maintenance costs and costs
incurred in obtaining the license rights to technology in the research phase are
expensed as incurred. Amortization of licensed technology is computed using the
straight-line method over its estimated useful life of seven years when the
Company began selling the product and generating revenue, which was essentially
when it became available for its intended use.









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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Impairment
of long-lived assets





The
Company evaluates its goodwill for possible impairment on an annual basis or
more frequently when events or changes in circumstances indicate that the
carrying amounts may not be fully recoverable. The Company performs the
impairment test annually in the fourth quarter of its fiscal year. Any
impairment charges resulting from the application of this test are immediately
recorded as a charge to earnings in the Company’s consolidated statements of
operations. Through March 31, 2009, there has been no impairment charges related
to goodwill.





The
Company reviews long-lived assets, excluding goodwill, for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. An impairment loss is recognized when
the estimated undiscounted future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount.
Impairment, if any, is measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value.Any impairment charges
are immediately recorded as a charge to earnings in the Company’s consolidated
statements of operations. As discussed in Note 6, the Company recorded a
non-cash impairment charge of $462,000 in the fourth quarter of fiscal 2009
related to intangible assets acquired from Neurologic UK Limited
(“Neurologic”).





Comprehensive
loss





Comprehensive
loss generally represents all changes in stockholders’ equity except those
resulting from investments or contributions by stockholders. The Company’s
foreign currency translation adjustments and the Swiss pension plan benefit
adjustment  represent the only components of comprehensive loss
excluded from reported net loss. These components of comprehensive loss are
presented in the statements of stockholders’ equity.





The
balance of accumulated other comprehensive loss consisted of the following
components:




March
      31,2009
                  
                  
                  2008Foreign
      currency translation adjustments
                  
                  $
                  (2,216
                  )
                  
                  $
                  (511
                  )Swiss
      pension plan benefit adjustment (Note 13)
                  
                  
                  (73
                  )
                  
                  
                  -$
                  (2,289
                  )
                  
                  $
                  (511
                  )





Research
and development





Research
and development costs are charged to operations as incurred and consist
primarily of costs associated with evaluating in-process technology, purchases
of intellectual property, personnel costs and supplies.





Advertising
costs





Advertising
costs are expensed as incurred and are included in sales and marketing
expenses.





Shipping
and handling of products





Amounts
billed to customers for shipping and handling of products are included in
revenues. Costs incurred related to shipping and handling of products are
included in cost of goods sold.





Foreign
currency transactions





Other
income (expense), net, includes foreign currency gains or losses related to a
loan with the Company’s Swiss subsidiary, and currency gains or losses resulting
from differences in exchange rates between the time of recording of the
transaction and the cash settlement of foreign currency denominated receivables
and payables. The Company recorded currency gains (losses) for the years ended
March 31, 2009, 2008 and 2007 of $(2.1 million), $546,000 and $0.7 million,
respectively.









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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Income
taxes





The
Company accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to effect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.





Net
loss per share





Basic net
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by giving effect to all
potential dilutive common shares, including stock options and restricted stock
units. There is no difference between basic and diluted net loss per share for
all periods presented due to the Company’s net losses.





Anti-dilutive
securities





The
following outstanding stock options and restricted stock units were excluded
from the computation of diluted net loss per common share for the periods
presented because their impact would have been anti-dilutive (in
thousands):




Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007Shares
      issuable upon exercise of common stock options
                  
                  
                  4,018
                  
                  
                  
                  3,656
                  
                  
                  
                  3,182Shares
      issuable upon settlement of restricted stock units
                  
                  
                  4
                  
                  
                  
                  7
                  
                  
                  
                  104,022
                  
                  
                  
                  3,663
                  
                  
                  
                  3,192




Stock-based
compensation





The
Company has adopted various stock plans that provide for the grant of stock
awards to employees, non-employee directors and consultants. The Company also
has an employee stock purchase plan which enables employees to purchase the
Company’s common stock.





On
April 1, 2006, the Company adopted the provisions of, and accounts for
stock-based compensation in accordance with the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 —
revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaced Statement
of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting
for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”),
“Accounting for Stock Issued to Employees.” Under the fair value recognition
provisions of SFAS 123R, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense on
a straight-line basis over the requisite service period, which is generally the
vesting period. The Company elected the modified-prospective method of
transition, under which prior periods were not revised for comparative purposes.
The valuation provisions of SFAS 123R apply to new grants and to grants
that were outstanding prior to the effective date and are subsequently modified.
Estimated compensation for grants that were outstanding as of the effective date
is recognized over the remaining service period using the compensation cost
estimated for the SFAS 123 pro forma disclosures.





Recent
accounting pronouncements





In
February 2007, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets
and Financial Liabilities,” which expands opportunities to use fair value
measurements in financial reporting and permits entities to choose to measure
many financial instruments and certain other items at fair value. SFAS 159
became effective for the Company on April 1, 2008. The adoption of SFAS 159 did
not have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.




In
December 2007, the FASB issued SFAS No. 141R (“SFAS 141R”), “Business
Combinations,” which replaces SFAS 141. SFAS 141R requires the
acquiring entity in a business combination to recognize at full fair value all
the assets acquired and liabilities assumed in the transaction; establishes the
acquisition date fair value as the measurement objective for all assets
acquired and liabilities assumed; and requires the acquirer to disclose
information needed to evaluate and understand the nature and financial effect of
the business combination. SFAS 141R is effective for fiscal years beginning
after December 15, 2008 and is to be applied prospectively to business
combinations completed on or after the date of adoption. This provision will
only impact the Company’s accounting for any acquisition after April 1,
2009.









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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


In
February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2
(“FSP SFAS 157-2”), “Effective Date for FASB Statement No. 157.” This FSP
permits the delayed application of SFAS No. 157, “Fair Value
Measurements,” (“SFAS 157”) for all nonrecurring fair value measurements of
non-financial assets and non-financial liabilities until fiscal years beginning
after November 15, 2008. The Company is currently evaluating the impact of
adopting the provisions of FSP SFAS 157-2 for non-financial assets and
liabilities that are recognized or disclosed on a non-recurring
basis.





In
March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133.”  SFAS 161 requires enhanced disclosures about
a company’s derivative and hedging activities. SFAS 161 is effective for
financial statements issued for fiscal years beginning after December 15,
2008. The Company is currently evaluating the impact of the adoption of the
enhanced disclosures requirements of SFAS 161 and does not expect the adoption
to have a material impact on its consolidated financial statements.





In April
2008, the FASB issued FSP SFAS No. 142-3 (“FSP SFAS 142-3”), “Determination
of the Useful Life of Intangible Assets.”FSP SFAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, “Business Combinations” and other GAAP.
FSP SFAS 142-3 is effective for the Company beginning on April 1,
2009. The Company is currently evaluating the impact of adopting FSP
SFAS 142-3 on the Company’s consolidated financial position, results of
operations and cash flows.





In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of
Generally Accepted Accounting Principles,” which becomes effective
60 days following the SEC’s approval of the Public Company Accounting
Oversight Board (“PCAOB”) amendments to U.S. Auditing Standards (“AU”)
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This standard is not expected to have an
impact on the Company’s consolidated financial position, results of operations
or cash flows.





In April
2009, the FASB issued FSP SFAS No. 157-4 (“FSP SFAS 157-4”), “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly,”
which addresses the determination of fair values when there is no active market
or where the price inputs represent distressed sales. FSP SFAS 157-4 reaffirms
the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become
inactive. FSP SFAS 157-4 is effective for financial statements issued for
interim and annual periods ending after June 15, 2009. The Company is currently
evaluating the impact of adopting FSP SFAS 157-4 on the Company’s
consolidated financial position, results of operations and cash
flows.





In April 2009, the FASB
issued FSP SFAS 107-1 and Accounting Principles Board (“APB”) No. 28-1
(“FSP SFAS 107-1 and APB 28-1”), “Interim Disclosures about Fair Value of
Financial Instruments.”FSP SFAS 107-1 and APB 28-1 enhance
consistency in financial reporting by increasing the frequency of fair value
disclosures to a quarterly instead of annual basis for any financial instruments
that are not currently reflected on the balance sheet at fair value. FSP
SFAS 107-1 and APB 28-1 are effective for financial statements issued for
interim and annual periods ending after June 15, 2009. The Company is currently
evaluating the impact of adopting FSP SFAS 107-1 and APB 28-1 on the
Company’s consolidated financial position, results of operations and cash
flows.





In April 2009, the FASB
issued FSP SFAS 115-2 and SFAS 124-2 (“FSP SFAS 115-2 and SFAS
124-2”), “Recognition and Presentation of Other-Than-Temporary
Impairments.” FSP SFAS 115-2 and SFAS 124-2 provide
additional guidance designed to create greater consistency to the timing of
impairment recognition and provide greater clarity about the credit and
noncredit components of impaired debt securities that are not expected to be
sold. FSP SFAS 115-2 and SFAS 124-2 are effective for financial statements
issued for interim and annual periods ending after June 15, 2009. The Company is
currently evaluating the impact of adopting FSP SFAS 115-2 and SFAS 124-2
on the Company’s consolidated financial position, results of operations and cash
flows.









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MICRUS
ENDOVASCULAR CORPORATION





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Note 3 — Business
Combinations, Assets Disposition and Technology Acquisition and License
Agreements





Fiscal
2007 Business Combination





VasCon





On
November 30, 2006, the Company completed the acquisition of VasCon, a
privately held company engaged in the development and manufacture of vascular
access and delivery devices located in Florida. The acquisition of VasCon added
expertise in developing clinically advanced access and catheter systems to the
Company’s core competencies and provided the Company with manufacturing
capabilities that will facilitate cost reductions for a wide range of the
Company’s products. VasCon’s non-neurological cardio and peripheral catheter
products were sold through non-Micrus distribution channels until the Company
sold these assets and related technology to Merit Medical Systems, Inc.
(“Merit”) in January 2008 (see Assets Disposition – Meritbelow). In connection with the acquisition, the Company formed Micrus
Design Technology, Inc. (“MDT”) to develop and manufacture neurovascular access
and delivery products including the Company’s family of Courier® microcatheters
and AscentTM balloon catheter. The Company has also undertaken a manufacturing
automation program at this facility which the Company believes will provide both
an enhanced delivery system and a component cost savings which is expected
to  be introduced in the Company’s microcoil products in fiscal 2010.
On January 1, 2009, the Company merged MDT into Micrus Endovascular
Corporation.





The
acquisition of VasCon included an up-front payment and additional contingent
earn-out payments. The total consideration paid of approximately $5.9 million as
of March 31, 2007, consisted of the up-front payment of approximately $2.5
million in cash, the issuance of 156,666 shares of the Company’s common
stock having an aggregate value of approximately $3.0 million calculated based
on the average closing price two days before and the day of the acquisition and
$404,000 in acquisition-related closing costs. Additionally, VasCon may receive
certain earn-out payments in an amount not to exceed $10.0 million based on
sales and manufacturing performance as set forth in the asset purchase agreement
entered into by the parties. At March 31, 2009 and 2008, the Company
accrued for the second and first year earn-out payments to the former VasCon
shareholders of approximately $378,000 and $0.9 million, respectively, both of
which were recorded as a reduction of the contingent purchase price balance. The
Company paid the first year earn-out payment in April 2008. The second year
earn-out will be paid in June 2009.





The
results of operations of MDT are included in the accompanying consolidated
statements of operations for all periods or partial periods subsequent to the
acquisition date. The purchase price was allocated to the net tangible and
identifiable intangible assets acquired and the liabilities assumed based on
their estimated fair values at the date of acquisition as determined by
management. At the acquisition date, the fair value of the net assets acquired
exceeded the purchase consideration resulting in negative goodwill in the amount
of $1.6 million. Because the acquisition involved contingent consideration that
may exceed the negative goodwill amount, the negative goodwill was recorded as a
deferred credit in the consolidated balance sheet and is being reduced by any
earned contingent consideration of up to $10.0 million that will be paid over
three years, with any additional contingent consideration being recorded as
goodwill. The contingent purchase price balance as of March 31, 2009 was
$332,000 and is expected to be earned during fiscal 2010.





Fiscal
2006 Business Combination





Neurologic





On
September 20, 2005, the Company entered into a Share Purchase Agreement
(“Neurologic Purchase Agreement”) acquiring all of the outstanding capital stock
of Neurologic, a privately held distributor of the Company’s products in the
United Kingdom (“UK”). The acquisition of Neurologic, which was the Company’s
largest distributor, provided the Company with additional leverage and a
strengthened presence in the UK market and the Company has used this acquisition
as a platform to expand sales to existing accounts and support sales to
customers using alternative procedures and competing products. Following the
acquisition of Neurologic, the Company changed the acquired entity’s name to
Micrus Endovascular UK Limited (“Micrus UK”).





The
acquisition of Neurologic included an initial cash payment of approximately $4.7
million, additional consideration of approximately $131,000 as a result of
certain purchase price adjustments, and future multi-year revenue based earn-out
payments. All earn-out payments shall be equal to one-third of Neurologic’s
product sales during specified periods. At March 31, 2008, 2007 and 2006,
the Company accrued for additional considerations under the earn-out provisions
of approximately $3.0 million, $2.2 million and $1.4 million for the third,
second and first year earn-out payments, respectively, all of which were
recorded as additions to goodwill (See Note 6). The Company paid the first,
second and third year earn-out payments in April 2006, April 2007 and April
2008, respectively. The final earn-out payment of $457,000 was made in June
2008.









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MICRUS
ENDOVASCULAR CORPORATION





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Assets
Disposition





Merit





On
January 31, 2008, the Company entered into an Asset Purchase and Supply
Agreement (the “Merit Agreement”) with Merit pursuant to which the Company sold
its non-neurological cardiac and peripheral catheter assets and technology (the
“Merit Transaction”). The majority of the assets sold were originally acquired
by the Company in November 2006 in connection with its purchase of VasCon.
Pursuant to the Merit Agreement, the Company received an up-front payment of
$1.5 million and received an additional payment of $1.5 million in December 2008
upon the completion of its obligation to help Merit build a production line for
coronary guide catheters. Under the terms of the Merit Agreement, the Company
also agreed to manufacture and supply certain guide catheters to Merit for a
period of up to one year following the closing. This obligation expired on
January 31, 2009, and the Company no longer supplies guide catheters to
Merit.


Additionally,
if requested by Merit, the Company must provide reasonable assistance to help
Merit build production lines for peripheral guiding sheaths and/or
cardiovascular microcatheters. In October 2008, the Company amended the Merit
Agreement extending the termination date for this obligation  to
September 30, 2009.





Though
certain elements of this transaction (namely the acquired assets and
licensing rights, and the production line assistance for coronary guide
catheters) have been delivered as of March 31, 2009, the Company is still
obligated to deliver the regulatory documentation and production line assistance
for the peripheral guiding sheaths and/or cardiovascular microcatheters. The
remaining obligations will expire in the second quarter of fiscal 2010.
Because the Company lacks the ability to separate the multiple obligations
(elements) of this transaction, the potential gain from the up-front payment of
$1.5 million and the additional payment of $1.5 million, net of direct and
incremental costs incurred and the net book value of assets transferred to
Merit, has been deferred until such time as all elements of the transaction are
delivered.





Technology
Acquisition and License Agreements





Genesis





On
January 16, 2008, the Company entered into a license, development and
commercialization agreement (the “Genesis Agreement”) with Genesis Medical
Interventional, Inc. (“Genesis”). Under the terms of the Genesis Agreement, the
Company licensed the rights to Genesis’s F.A.S.T. Funnel Catheter and clot
retrieval system for the treatment of ischemic stroke. The transaction included
an initial up-front payment of $0.8 million, a future development milestone
payment of $150,000 payable upon the earlier to occur of the date of first
commercial sale or September 30, 2008 and royalties on potential future
product sales. Both the initial up-front payment of $0.8 million and future
milestone payment of $150,000 were recorded as research and development expense
upon the effective date of the Genesis Agreement.





ReVasc





On
October 26, 2007, the Company entered into a Stock Purchase Agreement (the
“ReVasc Agreement”) with The Cleveland Clinic Foundation (“The Cleveland
Clinic”) and ReVasc Technologies, Inc. (“ReVasc”), a wholly-owned subsidiary of
The Cleveland Clinic, pursuant to which the Company acquired all of the
outstanding stock of ReVasc from The Cleveland Clinic for an aggregate up-front
purchase price of $1.0 million. ReVasc did not have the necessary set of
activities to be considered as a business and as such this transaction was
classified as a technology acquisition. Pursuant to the ReVasc Agreement, the
Company also agreed to pay The Cleveland Clinic up to an additional $5.0 million
in payments upon the achievement of certain milestones set forth in the ReVasc
Agreement, with minimum milestone payments of at least $2.0 million due to The
Cleveland Clinic by October 2010.





ReVasc
was a party to a license agreement with The Cleveland Clinic (the “ReVasc
License Agreement”) pursuant to which The Cleveland Clinic granted ReVasc an
exclusive license to its revascularization technology for the treatment of
ischemic stroke. In connection with the acquisition, the parties amended the
ReVasc License Agreement to provide, among other matters, for the payment to The
Cleveland Clinic of certain royalties for sales of products based on the
technology subject to the ReVasc License Agreement.





The
Company acquired only pre-regulatory approved technology and did not assume any
other assets or liabilities in connection with the acquisition of ReVasc.
Accordingly, the ReVasc Agreement was accounted for as a purchase of in-process
research and development and $3.0 million, representing the up-front purchase
price of $1,000,000 plus future minimum milestone payments of $2.0 million, was
recorded as research and development expense during fiscal 2008. In March 2008,
the Company paid the first


milestone
payment of $500,000 to The Cleveland Clinic. The remaining minimum milestone
payments of $1.5 million are included in accrued liabilities at March 31,
2009 (see Note 5).









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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





On
December 7, 2007, the Company merged ReVasc into Micrus. Following the
merger, Micrus became the direct recipient of the license of the
revascularization technology from The Cleveland Clinic under the ReVasc License
Agreement.





Biotronik
AG





On
January 6, 2006, the Company entered into a License, Development and
Distribution Agreement (the “Biotronik Agreement”) with Biotronik, a Swiss
corporation, pursuant to which the Company will collaborate with Biotronik to
develop certain neurovascular products and the Company will be the exclusive
worldwide distributor for neurovascular products. Pursuant to the terms of the
agreement, Biotronik granted to the Company an exclusive license to certain
patents, know-how and other proprietary technology in the neurovascular field.
The term of the Biotronik Agreement is perpetual unless terminated by the
parties or by operation of law.





Under the
terms of the Biotronik Agreement, the Company paid an up-front licensing fee of
$0.6 million, and was required to make milestone payments to Biotronik upon
receipt of approvals to market stent products jointly developed for the
treatment of neurovascular disease and royalty payments on the products sold.
The Company recorded the up-front licensing fee as research and development
expense in the fiscal year ended March 31, 2006 as there were no regulatory
clearances for a product at that time. In February 2006, Biotronik met the
established milestones of the agreement when it received CE Mark authorization
for the PHAROSTM product intended for both the treatment of aneurysms and the
treatment of ischemic diseases. As a consequence the Company paid milestone
payments to Biotronik of $0.7 million and $0.7 million in March and April 2006,
respectively. The Company recorded the milestone payments of approximately $1.5
million as capitalized licensed technology at March 31, 2006. Under the
terms of this agreement, there are no future milestone payments to Biotronik
related to the PHAROSTM stent. The Company capitalized additional costs
associated with the PHAROSTM stent development of $102,000 in the first quarter
of fiscal 2007. The Company commenced amortization of the capitalized licensed
technology in the third quarter of fiscal 2007 when it began selling the PHAROSTM
product and generating revenue, which was essentially when it became available
for its intended use. This capitalized licensed technology will be amortized
over its estimated useful life of seven years. Additionally, the Company
incurred royalties to Biotronik of approximately $169,000, $150,000 and $34,000
for the products sold in fiscal 2009, 2008 and 2007, respectively. The Company
records the earned royalty as a component of its cost of goods
sold.





Vascular
FX





On
July 28, 2005, the Company entered into a Technology Transfer Agreement
with Vascular FX, a Delaware limited liability company (“Vascular FX”), pursuant
to which the Company purchased the intellectual property of Vascular FX. The
$4.0 million cash purchase price included a $1.5 million payment at closing
followed by milestone payments to be made over time, in addition to royalty
payments on potential future product sales. On January 31 and May 31, 2006,
the Company made milestone payments of $1.0 million and $1.5 million,
respectively. The Company recorded the initial and milestone payments in the
corresponding accounting periods as research and development expense since there
are currently no FDA approved products being sold and the intellectual property
has no alternative future use. There are no future milestone payments to
Vascular FX under the terms of the agreement.





On
January 28, 2009, the Company amended the Technology Transfer Agreement with
Vascular FX to modify the royalty provision and eliminate the claw-back
provisions that would have required the Company to license back the acquired
technology to Vascular FX under certain circumstances. Under the amended
agreement, the Company will pay Vascular FX a royalty equal to 25% of the
aggregate net selling price of deflectable catheter products sold during the
royalty period subject to the mandatory minimum provision not less than $250,000
per year. The royalty period is six years beginning from November 1, 2007. The
Company incurred royalties to Vascular FX of approximately $288,000 and $75,000
for the products sold in fiscal 2009 and 2008, respectively. The Company records
the earned royalty as a component of its cost of goods sold.





Note
4 — Fair Value Measurements





Effective
April 1, 2008, the Company adopted the provisions of SFAS 157 for financial
assets and liabilities, as well as for any other assets and liabilities that are
carried at fair value on a recurring basis. The adoption of the provisions of
SFAS 157 did not materially impact the Company’s consolidated financial
position and results of operations.









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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes
a fair value hierarchy, which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. SFAS 157 describes three levels of inputs that may be used to
measure fair value:


Level
      1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities.Level
      2
              Quoted
      prices in markets that are not active; or other inputs that are
      observable, either directly or indirectly, for substantially the full term
      of the asset or liability.Level
      3
              Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and
unobservable.





The
Company’s cash equivalents are classified within Level 1 of the fair value
hierarchy because they are invested in money market funds and valued using
quoted market prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency.





In fiscal
2009, the Company entered into foreign currency forward contracts to buy U.S.
dollars at fixed intervals in the retail market in an over-the-counter
environment. As of March 31, 2009, the Company had foreign currency forward
contracts to sell 0.6 million euros in exchange for approximately $0.8
million U.S. dollars maturing in April through June 2009. The counterparty
to these contracts is UBS AG located in Switzerland. The Company’s foreign
currency forward contracts are classified within Level 2 as the valuation
inputs are based on quoted prices of similar instruments in active markets and
do not involve management judgment. The Company recorded the fair value of the
contracts in accrued liabilities on its consolidated balance sheet as of March
31, 2009. The Company recorded a net realized gain of approximately $1,400
for the fiscal year ended March 31, 2009.





The Swiss
pension plan unfunded benefit obligation is classified within Level 3 since
there is no observable market for the asset or liability and requires the
Company to develop its relevant assumptions.





The
following table presents assets measured at fair value on a recurring basis
at March 31, 2009 (in thousands):




Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalAssets:Money
      market funds
                
                $
                9,739
                
                
                $
                -
                
                
                $
                -
                
                
                $
                9,739Liabilities:Swiss
      pension plan unfunded benefit obligation (Note 13)
                
                $
                -
                
                
                $
                -
                
                
                $
                148
                
                
                $
                148




The
following table summarizes the change in fair value of Level 3 financial
liabilities (in thousands):





Level
      3Fair
      value beginning of year
                  
                  $
                  82Change
      in benefit obligation
                  
                  
                  228Change
      in plan assets
                  
                  
                  (162
                  )Fair
      value end of year
                  
                  $
                  148





The fair
value of foreign currency forward contracts at March 31, 2009 was not
material.









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MICRUS
ENDOVASCULAR CORPORATION





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Note 5 —
Balance Sheet Components





Inventories





Inventories
consisted of the following (in thousands):





March
      31,2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  1,918
                  
                  
                  $
                  2,154Work-in-progress
                  
                  
                  1,968
                  
                  
                  
                  1,667Finished
      goods
                  
                  
                  2,741
                  
                  
                  
                  3,002Consigned
      inventory
                  
                  
                  5,230
                  
                  
                  
                  4,331Inventory
      held by distributors
                  
                  
                  -
                  
                  
                  
                  341$
                  11,857
                  
                  
                  $
                  11,495





Consigned
inventory is held at customer locations, primarily hospitals, and is under the
physical control of the customer. The Company retains title to the inventory
until used and purchased by the customer, generally when used in a medical
procedure.





No
inventory was held by distributors at March 31, 2009. Inventory held by
distributors at March 31, 2008 consisted of $273,000 in inventory that was
held by the Company’s Latin American distributors and $68,000 in inventory that
was held by the Company’s Chinese distributor.





Property
and equipment





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





March
      31,2009
                
                
                2008Computer
      equipment and software
                
                $
                1,955
                
                
                $
                1,728Furniture,
      fixtures and equipment
                
                
                7,542
                
                
                
                5,403Leasehold
      improvements
                
                
                2,132
                
                
                
                1,010Construction
      in progress
                
                
                108
                
                
                
                447Total
      cost
                
                
                11,737
                
                
                
                8,588Less
      accumulated depreciation and amortization
                
                
                (4,755
                )
                
                
                (3,303
                )$
                6,982
                
                
                $
                5,285





Depreciation
and amortization expense related to property and equipment was $1.7 million,
$1.3 million and $0.9 million for the years ended March 31, 2009, 2008 and
2007, respectively.





Accruals





Accrued
payroll and other related expenses consisted of the following (in
thousands):




March
      31,2009
                  
                  
                  2008Accrued
      bonuses
                  
                  $
                  1,437
                  
                  
                  $
                  2,642Accrued
      salaries
                  
                  
                  1,106
                  
                  
                  
                  1,071Accrued
      vacation
                  
                  
                  2,000
                  
                  
                  
                  1,750Accrued
      commissions
                  
                  
                  544
                  
                  
                  
                  1,660Accrued
      payroll taxes
                  
                  
                  428
                  
                  
                  
                  807$
                  5,515
                  
                  
                  $
                  7,930





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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Accrued
liabilities consisted of the following (in thousands):





March
      31,2009
                  
                  
                  2008Deferred
      gain from Merit transaction
                  
                  $
                  1,866
                  
                  
                  $
                  340Milestone
      payments to The Cleveland Clinic
                  
                  
                  1,500
                  
                  
                  
                  500Earn-out
      payment in connection with acquisition of VasCon
                  
                  
                  886
                  
                  
                  
                  378Sales
      tax and VAT payable
                  
                  
                  876
                  
                  
                  
                  560Professional
      fees
                  
                  
                  277
                  
                  
                  
                  1,715Accrued
      travel and entertainment
                  
                  
                  270
                  
                  
                  
                  492Deferred
      revenue from Goodman Co., Ltd. distribution agreement
                  
                  
                  113
                  
                  
                  
                  113Earn-out
      payment in connection with acquisition of Neurologic
                  
                  
                  -
                  
                  
                  
                  2,997Other
                  
                  
                  2,089
                  
                  
                  
                  2,336$
                  7,877
                  
                  
                  $
                  9,431





Other
non-current liabilities





Other
non-current liabilities consisted of the following (in thousands):





March
      31,2009
                  
                  
                  2008Contingent
      purchase price  (Note 3)
                  
                  $
                  332
                  
                  
                  $
                  1,218Milestone
      payments to The Cleveland Clinic
                  
                  
                  -
                  
                  
                  
                  1,000Deferred
      revenue from Goodman Co., Ltd. distribution agreement
                  
                  
                  169
                  
                  
                  
                  281Swiss
      pension plan unfunded benefit obligation
                  
                  
                  148
                  
                  
                  
                  82Other
      non-current liabilities
                  
                  
                  253
                  
                  
                  
                  173$
                  902
                  
                  
                  $
                  2,754





On
September 30, 2005, the Company entered into a five-year, exclusive
Distribution Agreement with Goodman Co., Ltd. (“Goodman”). Under the terms of
the Distribution Agreement, Goodman will promote and market the Company’s full
line of products, as such products are approved, in Japan and will purchase a
minimum of $27.3 million of such products over the five year term of the
agreement, ranging from $2.0 million during the fiscal year ended March 31,
2006 to $9.0 million during the fiscal year ending March 31, 2010. On
September 20, 2007, the Company amended the distribution agreement with
Goodman to, among other things, extend the duration of the distribution
agreement to six years from the original date of the distribution agreement. In
connection with the Distribution Agreement, Goodman paid the Company an up-front
cash payment of $0.8 million which has been recorded as deferred revenue. The
Company is recognizing the deferred revenue on a straight-line basis over the
six year term of the agreement.





Note 6 —
Goodwill and Intangible Assets





Goodwill





Activity
related to goodwill consisted of the following (in thousands):




March
      31,2009
                  
                  
                  2008Balance
      beginning of year
                  
                  $
                  8,549
                  
                  
                  $
                  5,552Addition
      related to earn-out payment in connection with acquisition of
      Neurologic
                  
                  
                  457
                  
                  
                  
                  2,997Foreign
      currency translation
                  
                  
                  (2,244
                  )
                  
                  
                  -Balance
      end of year
                  
                  $
                  6,762
                  
                  
                  $
                  8,549





All of
the Company’s goodwill has been allocated to the United Kingdom business
segment.









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MICRUS
ENDOVASCULAR CORPORATION


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




The
Company performs its annual impairment test of goodwill in the fourth quarter of
its fiscal year. Through March 31, 2009, there have been no impairment charges
related to goodwill.





Intangible
assets





Intangible
assets consisted of the following (in thousands):




Gross
      Carrying Amount
                        
                        
                        Accumulated
      Amortization
                        
                        
                        NetUseful
                        
                        March
                        
                        
                        
                        
                        Foreign
                        
                        
                        March
                        
                        
                        March
                        
                        
                        
                        
                        
                        Foreign
                        
                        
                        March
                        
                        
                        March
                        
                        
                        MarchLife
                        
                        31,
                        
                        Impairment
                        
                        
                        currency
                        
                        
                        31,
                        
                        
                        31,
                        
                        
                        (Additions)
                        
                        
                        currency
                        
                        
                        31,
                        
                        
                        31,
                        
                        
                        31,(Years)
                        
                        2008
                        
                        
                        
                        
                        translation
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        
                        
                        
                        translation
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2008Existing
      process technology
                        
                        7
                        
                        $
                        4,590
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        4,590
                        
                        
                        $
                        (874
                        )
                        
                        $
                        (656
                        )
                        
                        $
                        -
                        
                        
                        $
                        (1,530
                        )
                        
                        $
                        3,060
                        
                        
                        $
                        3,716Distribution
      agreements
                        
                        5
                        
                        
                        2,300
                        
                        
                        (254
                        )
                        
                        
                        (488
                        )
                        
                        
                        1,558
                        
                        
                        
                        (1,164
                        )
                        
                        
                        (439
                        )
                        
                        
                        325
                        
                        
                        
                        (1,278
                        )
                        
                        
                        280
                        
                        
                        
                        1,136Capitalized
      license fee
                        
                        7
                        
                        
                        1,565
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,565
                        
                        
                        
                        (336
                        )
                        
                        
                        (223
                        )
                        
                        
                        -
                        
                        
                        
                        (559
                        )
                        
                        
                        1,006
                        
                        
                        
                        1,229Patents
      - microcoil
                        
                        10
                        
                        
                        1,100
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,100
                        
                        
                        
                        (880
                        )
                        
                        
                        (110
                        )
                        
                        
                        -
                        
                        
                        
                        (990
                        )
                        
                        
                        110
                        
                        
                        
                        220Non-compete
      agreements
                        
                        6
                        
                        
                        700
                        
                        
                        (108
                        )
                        
                        
                        (148
                        )
                        
                        
                        444
                        
                        
                        
                        (294
                        )
                        
                        
                        (111
                        )
                        
                        
                        80
                        
                        
                        
                        (325
                        )
                        
                        
                        119
                        
                        
                        
                        406Customer
      relationships
                        
                        5
                        
                        
                        900
                        
                        
                        (100
                        )
                        
                        
                        (191
                        )
                        
                        
                        609
                        
                        
                        
                        (454
                        )
                        
                        
                        (172
                        )
                        
                        
                        126
                        
                        
                        
                        (500
                        )
                        
                        
                        109
                        
                        
                        
                        446$
                        11,155
                        
                        $
                        (462
                        )
                        
                        $
                        (827
                        )
                        
                        $
                        9,866
                        
                        
                        $
                        (4,002
                        )
                        
                        $
                        (1,711
                        )
                        
                        $
                        531
                        
                        
                        $
                        (5,182
                        )
                        
                        $
                        4,684
                        
                        
                        $
                        7,153





In the
fourth quarter of fiscal 2009, the Company performed an assessment of its
long-lived intangible assets acquired from Neurologic. Management concluded from
the assessment that impairment existed for the intangible asset group
(distribution agreement, customer relationships and non-compete agreements) as
the undiscounted value was less than its carrying value. As a result, the
Company recorded an impairment charge of $462,000 for this asset group based on
the amount by which the carrying amount of these assets exceeded their fair
value. The Company determined the fair value of the asset group using future
revenue assumptions and a valuation analysis based on established valuation
techniques accepted in the technology industry.





Amortization
of intangible assets included in the results of operations is as follows (in
thousands):





Years
      Ended March 31,2009
                
                
                2008
                
                
                2007Cost
      of goods sold
                
                $
                879
                
                
                $
                974
                
                
                $
                385Operating
      expenses
                
                
                832
                
                
                
                867
                
                
                
                879$
                1,711
                
                
                $
                1,841
                
                
                $
                1,264





The
amortization expense of the intangible assets related to existing technology in
the manufacturing process and design of products resulting from the acquisition
of VasCon in the amount of $0.7 million, $0.8 million and $273,000 is included
in cost of goods sold for fiscal 2009, 2008 and 2007.





The
amortization expense related to the capitalized license technology in the amount
of $223,000, $224,000 and $112,000 is included in cost of goods sold for fiscal
2009, 2008 and 2007.





The
expected future amortization of intangible assets is as follows (in
thousands):




For
      Years Ending March 31,
                  
                  Amortization2010
                  
                  $
                  1,3022011
                  
                  
                  1,0522012
                  
                  
                  9022013
                  
                  
                  8792014
                  
                  
                  549$
                  4,684





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MICRUS
ENDOVASCULAR CORPORATION





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Note
7— Line of Credit





On
November 5, 2008, the Company entered into a credit agreement with Wells
Fargo Bank to provide the Company with a revolving line of credit (the “Credit
Agreement”). The Credit Agreement provides for maximum borrowings in an amount
up to $15.0 million. If borrowings under the Credit Agreement exceed $7.5
million, all borrowings are subject to a borrowing base which is based on
eligible accounts receivable. Borrowings are collateralized by a first priority
security interest in all of the Company’s assets (except for certain permitted
liens that are senior to the Wells Fargo Bank’s security interest). At the
Company’s option, borrowings bear interest at either 2.25% over the bank’s prime
rate or 3.50% over the one-month, two-month or three-month LIBOR. The Credit
Agreement requires that the Company comply with certain financial and other
covenants for borrowings to be permitted. The more significant financial
covenants include (i) a minimum modified quick ratio and (ii) a minimum
profitability, excluding certain non-cash items. At March 31, 2009, the Company
had outstanding borrowings of $2.5 million under the line of credit, and was in
compliance with all covenants of the Credit Agreement. The interest rate on
the borrowings as of March 31, 2009 was 6.0%.





On May
20, 2009, the Company amended the Credit Agreement with Wells Fargo Bank
extending the maturity date to August 1, 2010 and adjusting the minimum limits
for the financial covenants based on the Company’s financial forecast for fiscal
2010. The Company has the ability and the intent to repay the outstanding
borrowings of $2.5 million within the next twelve months from March 31,
2009.





Note 8 —
Income Taxes





As of
March 31, 2009, the Company had federal, state and foreign net operating
loss carryforwards (“NOLs”) of approximately $40.5 million, $30.5 million and
$4.6 million, respectively. The federal NOLs will expire at various dates
beginning in 2012, the state NOLs expire beginning in 2013 and the foreign NOLs
will expire beginning in 2013. The federal and state loss carryforwards that are
attributable to excess tax deductions from stock option exercises are not
included in the deferred tax assets shown below. The benefit of approximately
$10.3 million and $8.1 million of federal and state loss carryforwards,
respectively, will be credited to equity when realized.





The
Company also had federal and state research and development tax credit
carryforwards of approximately $1.3 million and $1.3 million, respectively, as
of March 31, 2009. The federal credits will expire beginning in 2012 and
the state credits can be carried forward indefinitely.





The Tax
Reform Act of 1986 limits the use of net operating loss and tax credit
carryforwards in the case of an “ownership change” of a corporation. An
ownership change, as defined, may restrict utilization of tax attribute
carryforwards. The Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code, in May 2002, but the previously
limited net operating loss and tax credit carryovers have now become available
to offset taxable income in future periods. If an ownership change has occurred
subsequent to May 2002, all net operating loss carryovers and all tax credit
carryovers arising prior to the ownership change would be subject to limitation
in the post change period for US tax purposes.





The
related benefit from income taxes consisted of the following (in
thousands):





Years
      Ended March 31,2009
                    
                    
                    2008
                    
                    
                    2007CurrentFederal
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -State
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    73
                    
                    
                    
                    -
                    
                    
                    
                    (63
                    )Total
      current income tax provision (benefit)
                    
                    
                    73
                    
                    
                    
                    -
                    
                    
                    
                    (63
                    )DeferredFederal
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -State
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    (575
                    )
                    
                    
                    (194
                    )
                    
                    
                    (184
                    )Total
      deferred income tax benefit
                    
                    
                    (575
                    )
                    
                    
                    (194
                    )
                    
                    
                    (184
                    )Total
      income tax benefit
                    
                    $
                    (502
                    )
                    
                    $
                    (194
                    )
                    
                    $
                    (247
                    )







79


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The
Company has incurred net operating losses for both federal and state purposes
since inception and, as a result, the Company has paid no federal or state
income taxes. In fiscal 2009, the Company recorded an income tax benefit of
approximately $502,000. The net income tax benefit consists primarily of a
deferred tax benefit for the tax effect of the amortization related to the
intangible assets acquired in the Neurologic transaction which is not
deductible, the reduction in deferred tax liability due to the impairment of
such intangible assets, and the United Kingdom subsidiary’s operating losses. In
fiscal 2008, the Company recorded an income tax benefit of approximately
$194,000. The net income tax benefit includes a deferred income tax expense of
approximately $72,000 for the Swiss subsidiary’s operating profits and a
deferred tax benefit of approximately $266,000 for the tax effect of the
amortization related to the intangible assets acquired in the Neurologic
transaction which is not deductible and the tax benefit of operating losses for
its United Kingdom subsidiary. In fiscal 2007, the Company recorded an income
tax benefit of approximately $247,000. The net income tax benefit includes a
current tax benefit of approximately $63,000 arising from losses in the United
Kingdom subsidiary and a deferred tax benefit of approximately $184,000
primarily attributable to the tax effect of the amortization related to the
intangible assets acquired in the Neurologic transaction which is not deductible
for tax purposes.





Net
deferred tax assets (liabilities) consisted of the following (in
thousands):





March
      31,2009
                    
                    
                    2008Deferred
      tax assets:Net
      operating loss carryforwards
                    
                    $
                    14,048
                    
                    
                    $
                    13,099Basis
      difference in fixed assets
                    
                    
                    3,143
                    
                    
                    
                    2,850Accruals
      deductible in different periods
                    
                    
                    4,960
                    
                    
                    
                    3,973Credit
      carryforwards
                    
                    
                    2,136
                    
                    
                    
                    1,755Total
      deferred tax assets
                    
                    
                    24,287
                    
                    
                    
                    21,677Less
      valuation allowance
                    
                    
                    (23,696
                    )
                    
                    
                    (21,419
                    )Net
      deferred tax assets
                    
                    
                    591
                    
                    
                    
                    258Deferred
      tax liabilities:Accruals
      deductible in different periods
                    
                    
                    (188
                    )
                    
                    
                    (125
                    )Basis
      difference in fixed and intangible assets
                    
                    
                    (143
                    )
                    
                    
                    (481
                    )Total
      deferred tax liabilities
                    
                    
                    (331
                    )
                    
                    
                    (606
                    )Net
      deferred tax assets (liabilities)
                    
                    $
                    260
                    
                    
                    $
                    (348
                    )





The
Company has recorded a valuation allowance against its federal, state and Swiss
deferred tax assets as of March 31, 2009 and its federal and state deferred
tax assets as of March 31, 2008, due to the uncertainty surrounding the
realization of such assets. Management evaluates on a periodic basis the
recoverability of deferred tax assets. At such time as it is determined that it
is more likely than not that deferred tax assets are realizable, the valuation
allowance will be reduced.





The
effective tax rate differs from the United States federal statutory rate as a
result of the following:




Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  200087Income
      tax benefit at statutory rate
                  
                  
                  (35
                  )%
                  
                  
                  (35
                  )%
                  
                  
                  (35
                  )%State
      taxes, net of federal benefit
                  
                  
                  (5
                  )%
                  
                  
                  (4
                  )%
                  
                  
                  (4
                  )%In
      process research and development write-off
                  
                  
                  0
                  %
                  
                  
                  7
                  %
                  
                  
                  -Technology
      acquisition
                  
                  
                  0
                  %
                  
                  
                  2
                  %
                  
                  
                  -Non-US
      income taxed at different rates
                  
                  
                  9
                  %
                  
                  
                  1
                  %
                  
                  
                  (14
                  )%Change
      in valuation allowance
                  
                  
                  17
                  %
                  
                  
                  24
                  %
                  
                  
                  40
                  %Nondeductible
      deferred compensation
                  
                  
                  10
                  %
                  
                  
                  6
                  %
                  
                  
                  12
                  %Other
                  
                  
                  0
                  %
                  
                  
                  (2
                  )%
                  
                  
                  (3
                  )%Effective
      income tax rate
                  
                  
                  (4
                  )%
                  
                  
                  (1
                  )%
                  
                  
                  (4
                  )%







80


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






The
domestic and foreign components of loss before income taxes were as follows (in
thousands):





Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007Domestic
                  
                  $
                  (7,093
                  )
                  
                  $
                  (15,474
                  )
                  
                  $
                  (7,168
                  )Foreign
                  
                  
                  (4,463
                  )
                  
                  
                  (980
                  )
                  
                  
                  1,438Loss
      before income taxes
                  
                  $
                  (11,556
                  )
                  
                  $
                  (16,454
                  )
                  
                  $
                  (5,730
                  )





Effective
April 1, 2007, the Company adopted Financial Accounting Standards
Interpretation No. 48 (“FIN 48”), which requires that the Company
recognize the financial statement effects of a tax position when it becomes more
likely than not, based on the technical merits, that the position will be
sustained upon examination. As a result of the implementation of FIN 48,
the Company recognized a $192,000 increase in its unrecognized tax benefits.
None was accounted for as an increase in the April 1, 2007 balance of
accumulated deficit since the benefit relates to attribute carryovers for which
the related deferred tax asset was subject to a full valuation allowance. At the
adoption date of April 1, 2007 and at March 31, 2009, the Company had
zero and $9,000 of accrued interest and penalties related to tax contingencies,
respectively. Prior to the fiscal year ended March 31, 2009, since the
unrecognized tax benefit relates to attribute carryovers for which the related
deferred tax asset was subject to a full valuation allowance, the recognition of
the unrecognized tax benefits will not affect the Company’s effective tax
rate.For
the fiscal year ended March 31, 2009, $73,000 of the $128,000 increase in
unrecognized tax benefits will affect the Company’s effective tax rate if
recognized. The Company has elected to include interest and penalties as a
component of tax expense. The Company does not anticipate that the amount of
unrecognized tax benefits relating to tax positions existing at March 31,
2009 will significantly increase or decrease within the next 12 months.
Because of net operating loss and credit carryforwards, substantially all of the
Company’s tax years, dating to inception in 1996, remain open to federal tax
examination. Most state and foreign jurisdictions have 3 to 10 open tax years at
any point in time.





Tax
filings are based on tax laws which are subject to significant and varied
interpretation. It is often unclear whether a particular position taken in a tax
return will ultimately be sustained. The Company has reviewed its filing
positions and believes that it has adequately accrued for such
uncertainties.





The
following table summarizes the activity related to the Company’s unrecognized
tax benefit for the year ended March 31, 2009 and 2008 (in
thousands):





March
      31,2009
                  
                  
                  2008Unrecognized
      tax benefits at beginning of year
                  
                  $
                  232
                  
                  
                  $
                  192Gross
      increases - prior year tax positions
                  
                  
                  -
                  
                  
                  
                  -Gross
      increases - current year tax positions
                  
                  
                  128
                  
                  
                  
                  40Settlements
      with taxing authorities
                  
                  
                  -
                  
                  
                  
                  -Expiration
      of statute of limitations
                  
                  
                  -
                  
                  
                  
                  -Unrecognized
      tax benefits at end of year
                  
                  $
                  360
                  
                  
                  $
                  232





Note 9 —
Commitments and Contingencies





Lease
commitments





On
June 6, 2005, the Company entered into a non-cancelable seven-year
operating lease agreement (“Lease”). Pursuant to the Lease, the Company has
leased approximately 42,000 square feet of building space which is being
used as the Company’s headquarters in the United States. The Lease commenced in
January 2006. The Lease provides a right to extend the term for one period of
sixty months that may be exercised by the Company.





The Lease
provides for a base rent that increases periodically and averages approximately
$41,445 monthly over the lease period and is accounted for on a
straight-line basis. The Lease also provides for certain additional payments
including the Company’s share of landlord’s operating expenses, including
project costs, property taxes and overhead management fees.









81


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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






On
March 11, 2008, the Company entered into a non-cancelable ten-year lease in
Miramar, Florida, which commenced in September 2008. The facility comprises a
total of approximately 27,000 square feet. The operating lease provides for
a base rent that increases periodically and averages approximately
$17,935 monthly over the lease period and is accounted for on a
straight-line basis. The operating lease also provides for certain additional
payments including the Company’s share of landlord’s operating expenses and
applicable sales tax.





On
December 4, 2007, the Company’s wholly owned subsidiary, Micrus
Endovascular SA (“Micrus SA”), entered into a non-cancelable eight-year lease
for office space in Switzerland. The office space comprises a total of
approximately 5,500 square feet.





Additionally,
the Company leases office space for its wholly-owned subsidiary, Micrus UK,
under a non-cancelable lease agreement with a term through December
2010.





The
combined annual rent for Micrus SA and Micrus UK operating leases is
approximately $196,000. The leases also provide for certain additional payments
including the Company’s share of the landlord’s operating expenses.





Future
minimum lease payments are as follows (in thousands):




MinimumFor
      Years Ending March 31,
                  
                  Lease
      Payments2010
                  
                  $
                  1,0382011
                  
                  
                  1,0282012
                  
                  
                  9782013
                  
                  
                  9042014
                  
                  
                  496Thereafter
                  
                  
                  2,008$
                  6,452





Rent
expense for the years ended March 31, 2009, 2008 and 2007 was $1.0 million,
$0.7 million and $0.7 million, respectively.





Indemnification





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





Litigation





The
Company is from time to time subject to various lawsuits. The Company does not
believe that it is probable that resolution of pending litigation will have a
material adverse effect on the Company’s consolidated financial statements,
however, the outcome of litigation is inherently uncertain.





Patent
litigation





On
September 22, 2008, the Company entered into a Settlement and License Agreement
(the “Settlement and License Agreement”) with Boston Scientific Corporation and
Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation
(collectively “Boston Scientific”) and a Settlement and Release Agreement (the
“Settlement and Release Agreement”) with The Regents of the University of
California (the “Regents”) in order to resolve pending patent litigation between
Boston Scientific and the Company (the “Patent Litigation”). On October 8, 2008,
the Court entered an order dismissing the Patent Litigation with prejudice.







82


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Under the
Settlement and License Agreement, the Company and Boston Scientific agreed to
cross license certain patents asserted in the Patent Litigation and release all
claims (as defined in the Settlement and License Agreement) arising prior
to the effective date (as defined in the Settlement and License
Agreement) to which the rights, licenses, releases, and covenants expressly
granted under the Settlement and License Agreement would be a complete
defense had such claims arisen on or after the effective date.  The
Settlement and License Agreement includes a mutual release of claims
and covenants not to sue with respect to certain
specified patents.  Boston Scientific also covenants not to sue
end users of the Company’s products for claims of infringement of specified
patents.





In
connection with the Settlement and License Agreement, the Company entered into
the Settlement and Release Agreement with the Regents.  The Settlement
and Release Agreement provided for the cash payment of approximately $1.7
million to the Regents in exchange for a mutual release of claims and a mutual
covenant not to sue with respect to certain specified patents.  The
Regents also agreed not to sue end users of the Company’s products for claims
under the patents owned by the Regents and exclusively licensed to Boston
Scientific and asserted by Boston Scientific in the Patent Litigation against
the Company. The Company made the cash payment to the Regents on September 24,
2008.




Note 10 —
Preferred Stock





The
Company’s Certificate of Incorporation, as amended, authorizes the Company to
issue 1,000,000 shares of $0.01 par value preferred stock. As of
March 31, 2009, there are no shares of preferred stock issued or
outstanding.





Note 11 —
Common Stock





The
Company’s Certificate of Incorporation, as amended, authorizes the Company to
issue 50,000,000 shares of $0.01 par value common stock. Each holder
of common stock has the right to one vote and is also entitled to receive
dividends whenever funds are legally available and when declared by the Board of
Directors, subject to the prior rights of holders of all classes of stock
outstanding having priority rights as to dividends. No dividends have been
declared or paid as of March 31, 2009.





On
July 19, 2006, the Company completed a secondary public offering in which
certain stockholders sold 1,270,211 shares of common stock at the public
offering price of $11.89 per share. On July 19, 2006, the underwriters
purchased 190,531 shares of common stock from the Company pursuant to the
exercise of their over-allotment option. The Company did not receive any
proceeds from the sale of common stock by the selling stockholders. The total
cash proceeds from the exercise of the over-allotment option were approximately
$2.0 million, net of the underwriting discount and offering expenses. Common
stock offering expenses of $0.6 million were incurred by the Company on behalf
of the selling stockholders and were expensed to general and administrative
expense in the second quarter of fiscal 2007.





Note 12 —
Stock Option Plans and Other Employee Benefits





Stock
Option Plans





The
Company’s stock option program is a long-term retention program that is intended
to attract, retain and provide incentives for talented employees, officers and
directors, and to align stockholder and employee interests. The Company
considers the stock option program critical to its operations and productivity.
As of March 31, 2009, the Company has three stock option plans: the 1996
Stock Option Plan (the “1996 Plan”), the 1998 Stock Plan (the “1998 Plan”), and
the 2005 Equity Incentive Plan as amended (the “2005 Plan”). Currently, the
Company grants options from the 2005 Plan, which permits the Company to grant
options to all employees, including executive officers, and outside consultants,
and directors. Effective June 16, 2005, no new options may be granted under
the 1996 plan or the 1998 Plan. Stock options issued under the Company’s stock
option plans generally vest based on 4 years of continuous service and have
ten-year contractual terms.









83


Table of Contents


MICRUS
ENDOVASCULAR CORPORATION


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


1996
Stock Option Plan





As of
June 16, 2005, no new stock option grants were permitted under the 1996
Plan. There are no outstanding options under the 1996 Plan and, as of the
effectiveness of the Company’s initial public offering (“IPO”), there were no
outstanding options under the 1996 Plan.





1998
Stock Plan





As of
June 16, 2005, no new stock option grants were permitted under the 1998
Plan. However, all options previously granted under the 1998 Plan continue to be
administered under the 1998 Plan. As of March 31, 2009, options to purchase
1,045,893 shares of common stock were outstanding under the 1998
Plan.





2005
Equity Incentive Plan





The 2005
Plan became effective upon the Company’s IPO. The 2005 Plan provides for the
issuance of stock options, stock appreciation rights, stock awards (stock and
stock units) and cash awards. The Company initially reserved a total of
2,395,020 shares of its common stock for issuance under the 2005 Plan. In
addition, the 2005 Plan provides for an automatic annual increase in the number
of shares reserved for issuance thereunder on each April 1st by an amount equal
to the lesser of (i) 5% of the Company’s total number of outstanding shares
on the immediately preceding March 31st; (ii) 666,666 shares, or
(iii) a number of shares determined by the Company’s Board of Directors.
The shares reserved under the 2005 Plan will also be increased as a result of
the forfeiture or repurchase of shares issued under the 1998 Plan and the
cancellation of unexercised options under the 1998 Plan. As of March 31,
2009, there were 4,262,671 remaining shares reserved for issuance under the 2005
Plan, of which 1,286,846 were available for grant, 2,972,492 shares were
subject to outstanding options and 3,333 shares were subject to outstanding
restricted stock units.





Acceleration
Agreements





On
January 29, 2008, the Company entered into agreements with certain
executive officers (the “Accelerated Employees”) to fully accelerate the vesting
of options to purchase its common stock issued under the Company’s 2005 Equity
Incentive Plan and/or 1998 Stock Plan and held by such Accelerated Employees if,
within the period 3 months prior to or 12 months following a change of
control of the Company or sale of substantially all of the Company’s assets, an
Accelerated Employee ceases being employed by the Company because either such
Accelerated Employee is involuntary terminated by the Company (or any
subsidiary) without “cause” or such Accelerated Employee voluntarily quits
within 60 days of an event which constitutes “good reason.”





2005
Employee Stock Purchase Plan





The 2005
Employee Stock Purchase Plan (the “Purchase Plan”) became effective upon the
Company’s IPO. The Purchase Plan provides employees with an opportunity to
purchase the Company’s common stock through accumulated payroll
deductions.





The
Company initially reserved a total of 222,222 shares of common stock for
issuance under the Purchase Plan. The Purchase Plan provides for annual
increases in the total number of shares available for issuance under this plan
on April 1st of each year beginning on April 1, 2006, by a number
of shares that is equal to the lesser of: (1) 2% of the outstanding shares
of the Company’s common stock on the immediately preceding March 31st;
(2) 222,222 shares; or (3) a lesser number determined by the
Company’s Board of Directors. As of March 31, 2009, there were
558,840 shares reserved for issuance under the Purchase Plan.





The
Purchase Plan permits participants to purchase the Company’s common stock
through payroll deductions of up to 15% of the participant’s compensation,
provided that no participant may purchase shares with a value that exceeds
$25,000 per year, or more than 1,111 shares per purchase period. Amounts
deducted and accumulated for the participant’s account are used to purchase
shares of the Company’s common stock on the last trading day of each purchase
period at a price of at least 85% of the lesser of the fair market values of the
common stock at the beginning of the offering period or at the end of the
purchase period.





The
Purchase Plan provides for offering periods of 12 months and purchase
periods of 6 months or such shorter period as may be established by the
Company’s Board of Directors. The offering periods start on
April 1st and October 1st of each year. During the year
ended March 31, 2009, there were 119,732 shares issued at a purchase
price ranging from $5.07 to $10.51 per share and during the year ended
March 31, 2008, there were 92,598 shares issued at a purchase price
ranging from $10.51 to $15.53 per share under the Purchase Plan.







84


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Stock-Based
Compensation





The
Company currently uses the Black-Scholes option pricing model to determine the
fair value of employee stock options and employee stock purchase plan shares.
The Black-Scholes model requires that the Company makes certain assumptions that
are factored into the valuation analysis, including estimating the length of
time employees will retain their vested stock options before exercising them
(“expected term”) and the estimated volatility of its common stock price over
the expected term and the number of options that will ultimately not complete
their vesting requirements (“forfeitures”). Changes in the subjective
assumptions can materially affect the estimate of fair value of stock-based
compensation and consequently, the related amount recognized in the consolidated
statements of operations.





The
Company determines expected volatilities based on median results of  a peer
group analysis of companies similar in size and financial leverage. The Company
has elected to use the simplified method for estimating expected term as allowed
by Staff Accounting Bulletin (“SAB”) 107, and extended by SAB 110.
SAB 110 permits the use of the “simplified” method under certain conditions
including a company’s inability to rely on historical exercise data. The Company
will continue to use the simplified method until it has sufficient historical
exercise data to provide a reasonable basis upon which to estimate the expected
term of its options. The risk-free rate is indexed to the five-year Treasury
note interest at the date of grant and expected forfeiture rate is based on its
historical forfeiture information.





The
determination of the fair value of employee stock options and employee stock
purchase plan shares has been estimated using the following weighted-average
valuation assumptions:




Years
      Ended March 31,2009
                
                
                2008
                
                
                2007Employee
      Stock Option PlansExpected
      term (in years)
                
                
                6
                
                
                
                6
                
                
                
                6Volatility
                
                
                35
                %
                
                
                42
                %
                
                
                44
                %Risk-free
      interest rate
                
                
                3.2
                %
                
                
                4.0
                %
                
                
                4.7
                %Expected
      dividend yield
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %Weighted
      average fair value at date of grant
                
                $
                4.62
                
                
                $
                9.13
                
                
                $
                8.30Employee
      Stock Purchase PlanExpected
      term (in years)
                
                
                0.5
                
                
                
                0.5
                
                
                
                0.5Volatility
                
                
                45
                %
                
                
                43
                %
                
                
                45
                %Risk-free
      interest rate
                
                
                2.5
                %
                
                
                3.9
                %
                
                
                5.1
                %Expected
      dividend yield
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %





The fair
value of each purchase right granted under the Company’s Purchase Plan during
the year ended March 31, 2009, 2008, and 2007 was estimated at the date of
grant using the Black-Scholes option pricing model, and is not subject to
revaluation as a result of subsequent stock price fluctuations.





The
stock-based compensation expense related to SFAS 123R is as follows (in
thousands):




Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007Cost
      of goods sold
                  
                  $
                  560
                  
                  
                  $
                  457
                  
                  
                  $
                  193Research
      and development
                  
                  
                  592
                  
                  
                  
                  533
                  
                  
                  
                  203Sales
      and marketing
                  
                  
                  1,498
                  
                  
                  
                  1,312
                  
                  
                  
                  684General
      and administrative
                  
                  
                  2,995
                  
                  
                  
                  2,489
                  
                  
                  
                  1,124$
                  5,645
                  
                  
                  $
                  4,791
                  
                  
                  $
                  2,204







85


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Additionally,
approximately $8,000 in stock-based compensation expense related to SFAS 123R
has been released from inventory at March 31, 2009. In the prior years,
approximately $51,000 and $89,000 in stock-based compensation expense related to
SFAS 123R has been capitalized in inventory at March 31, 2008 and
2007, respectively.





As of
March 31, 2009, there was approximately $9.5 million of total stock-based
compensation expense, after estimated forfeitures, related to unvested employee
stock options and restricted stock units, which is expected to be recognized
over an estimated weighted average amortization period 2.3 years.





Stock-based
compensation expense recognized for the years ended March 31, 2008 and 2007
related to the amortization of deferred stock-based compensation was $163,000
and $213,000, respectively. The Company had fully recognized amortization of
deferred stock-based compensation in the fourth quarter ended March 31,
2008.





Stock-based
compensation expense recognized for the years ended March 31, 2008 and 2007
related to non-employee options was $4,000 and $157,000, respectively. All
non-employee options are fully-vested as of March 31, 2008.





Total
stock-based compensation expense included in results of operations is as follows
(in thousands):




Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007Cost
      of goods sold
                  
                  $
                  560
                  
                  
                  $
                  471
                  
                  
                  $
                  218Research
      and development
                  
                  
                  592
                  
                  
                  
                  533
                  
                  
                  
                  222Sales
      and marketing
                  
                  
                  1,498
                  
                  
                  
                  1,325
                  
                  
                  
                  802General
      and administrative
                  
                  
                  2,995
                  
                  
                  
                  2,629
                  
                  
                  
                  1,332$
                  5,645
                  
                  
                  $
                  4,958
                  
                  
                  $
                  2,574







General stock option
information




The
following table sets forth the summary of option activity for the year ended
March 31, 2009:




Average
                  
                  
                  RemainingExercise
                  
                  
                  Contractual
                  
                  
                  AggregateShares
                  
                  
                  Price
                  
                  
                  Term
                  
                  
                  Intrinsic
      Value(in
      thousands)
                  
                  
                  
                  
                  
                  (in
      years)
                  
                  
                  (in
      thousands)Options
      outstanding at March 31, 2008
                  
                  
                  3,656
                  
                  
                  $
                  13.02Options
      granted
                  
                  
                  702
                  
                  
                  $
                  11.53Options
      exercised
                  
                  
                  (83
                  )
                  
                  $
                  9.01Options
      forfeited
                  
                  
                  (192
                  )
                  
                  $
                  15.84Options
      expired
                  
                  
                  (65
                  )
                  
                  $
                  13.69Options
      outstanding at March 31, 2009
                  
                  
                  4,018
                  
                  
                  $
                  12.69
                  
                  
                  
                  7.3
                  
                  
                  $
                  1,139Options
      exercisable at March 31, 2009
                  
                  
                  2,450
                  
                  
                  $
                  11.22
                  
                  
                  
                  6.6
                  
                  
                  $
                  1,134





The total
aggregate intrinsic value of options exercised during the years ended
March 31, 2009, 2008 and 2007 was $322,000, $3.5 million and $8.5 million,
respectively. The closed market value per share of the Company’s common stock as
of March 31, 2009 was $5.97 as reported by The NASDAQ Stock
Market.







86


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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The
following table summarizes information related to options outstanding and
exercisable by exercise price at March 31, 2009 (in thousands, except per share
data):


Options
      Outstanding
                          
                          
                          Options
      ExercisableWeightedAverage
                          
                          
                          Weighted
                          
                          
                          
                          
                          
                          WeightedRemaining
                          
                          
                          Average
                          
                          
                          
                          
                          
                          AverageRange
      of
                          
                          
                          Number
                          
                          
                          Contractual
      Life
                          
                          
                          Exercise
                          
                          
                          Number
                          
                          
                          ExerciseExercise
      Prices
                          
                          
                          Outstanding
                          
                          
                          (years)
                          
                          
                          Price
                          
                          
                          Exercisable
                          
                          
                          Price$
                          0.68 - $ 1.01
                          
                          
                          
                          81
                          
                          
                          
                          2.9
                          
                          
                          $
                          0.81
                          
                          
                          
                          81
                          
                          
                          $
                          0.81$
                          1.15 - $ 1.15
                          
                          
                          
                          98
                          
                          
                          
                          4.8
                          
                          
                          $
                          1.15
                          
                          
                          
                          98
                          
                          
                          $
                          1.15$
                          4.93 - $ 7.40
                          
                          
                          
                          737
                          
                          
                          
                          5.8
                          
                          
                          $
                          5.67
                          
                          
                          
                          726
                          
                          
                          $
                          5.66$
                          8.62 - $12.63
                          
                          
                          
                          1,249
                          
                          
                          
                          7.8
                          
                          
                          $
                          10.61
                          
                          
                          
                          529
                          
                          
                          $
                          10.07$
                          12.83 - $17.68
                          
                          
                          
                          929
                          
                          
                          
                          7.7
                          
                          
                          $
                          15.19
                          
                          
                          
                          580
                          
                          
                          $
                          15.17$
                          17.74 - $20.24
                          
                          
                          
                          485
                          
                          
                          
                          8.2
                          
                          
                          $
                          19.12
                          
                          
                          
                          229
                          
                          
                          $
                          19.00$
                          20.37 - $24.75
                          
                          
                          
                          439
                          
                          
                          
                          8.1
                          
                          
                          $
                          22.81
                          
                          
                          
                          207
                          
                          
                          $
                          22.79$
                          0.68 - $24.75
                          
                          
                          
                          4,018
                          
                          
                          
                          7.3
                          
                          
                          $
                          12.69
                          
                          
                          
                          2,450
                          
                          
                          $
                          11.22





The
following table sets forth the summary of restricted stock units activity for
the year ended March 31, 2009:




Weighted-Weighted-
                  
                  
                  AverageAverage
                  
                  
                  RemainingExercise
                  
                  
                  Contractual
                  
                  
                  AggregateShares
                  
                  
                  Price
                  
                  
                  Term
                  
                  
                  Intrinsic
      Value(in
      thousands)
                  
                  
                  
                  
                  
                  (in
      years)
                  
                  
                  (in
      thousands)Non-vested
      restricted stock units at March 31, 2008
                  
                  
                  7
                  
                  
                  $
                  -Awarded
                  
                  
                  -
                  
                  
                  $
                  -Released
                  
                  
                  (3
                  )
                  
                  $
                  -Forfeited
                  
                  
                  -
                  
                  
                  $
                  -Non-vested
      restricted stock units at March 31, 2009
                  
                  
                  4
                  
                  
                  $
                  -
                  
                  
                  
                  0.3
                  
                  
                  $
                  20





401(k)
Savings Plan





The
Company has a 401(k) income deferral plan (the “401(k) Plan”). Eligible
participants may contribute up to 75% of their pretax salary up to the maximum
allowed under Internal Revenue Service regulations. According to the terms of
the 401(k) Plan, the Company may make discretionary matching contributions to
the 401(k) Plan each year, allocable to all plan participants. The Company made
no discretionary contributions during the years ended March 31, 2009, 2008
and 2007.





Note 13 —
Defined Benefit Plan





The
Company has a qualified defined benefit pension plan for all eligible Swiss
employees at its wholly-owned subsidiary in Switzerland, Micrus Endovascular SA.
Retirement benefits are provided based on employees’ years of service and
earnings, or in accordance with applicable employee benefit regulations. The
Company’s practice is to fund amounts sufficient to meet the requirements set
forth in the applicable employee benefit and tax regulations.









87


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The
following table sets forth summarized information on the defined benefit pension
plan (in thousands):




March
      31,2009
                  
                  
                  2008Change
      in benefit obligation:Benefit
      obligation at beginning of year
                  
                  $
                  599
                  
                  
                  $
                  334Service
      cost
                  
                  
                  85
                  
                  
                  
                  81Interest
      cost
                  
                  
                  17
                  
                  
                  
                  13Participant
      contribution
                  
                  
                  62
                  
                  
                  
                  64Actuarial
      gain
                  
                  
                  (14
                  )
                  
                  
                  54Benefit
      payments
                  
                  
                  (176
                  )
                  
                  
                  (48
                  )Transfers
      in and additional contributions
                  
                  
                  226
                  
                  
                  
                  24Plan
      amendments
                  
                  
                  109
                  
                  
                  
                  -Currency
      exchange rate changes
                  
                  
                  (81
                  )
                  
                  
                  77Benefit
      obligation at end of year
                  
                  
                  827
                  
                  
                  
                  599Change
      in plan assets:Fair
      value of plan assets at beginning of year
                  
                  
                  517
                  
                  
                  
                  294Actual
      return on plan assets
                  
                  
                  36
                  
                  
                  
                  23Employer
      contributions
                  
                  
                  84
                  
                  
                  
                  93Participant
      contributions
                  
                  
                  62
                  
                  
                  
                  64Benefit
      payments
                  
                  
                  (176
                  )
                  
                  
                  (48
                  )Transfers
      in and additional contributions
                  
                  
                  226
                  
                  
                  
                  24Currency
      exchange rate changes
                  
                  
                  (70
                  )
                  
                  
                  67Fair
      value of plan assets at end of year
                  
                  
                  679
                  
                  
                  
                  517Unfunded
      status at end of year
                  
                  $
                  148
                  
                  
                  $
                  82




The net
periodic pension cost for the Swiss pension plan for fiscal 2009 and 2008 was
based on long-term asset rates of return of 3.20% and 3.5%, respectively. In
developing these expected long-term rate of return assumptions, consideration
was given to expected returns based on the current investment policy and
historical return for the asset classes.




The
following table presents selected pension plan information (in
thousands):




March
      31,2009
                
                
                2008Projected
      benefit obligation
                
                $
                827
                
                
                $
                599Accumulated
      benefit obligation
                
                $
                756
                
                
                $
                544Fair
      value of plan assets
                
                $
                679
                
                
                $
                517







88


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





Years
      Ended March 31,2009
                
                
                2008Components
      of net periodic benefit cost:Service
      cost
                
                $
                85
                
                
                $
                81Interest
      cost
                
                
                17
                
                
                
                13Expected
      return on plan assets
                
                
                (14
                )
                
                
                (11
                )Net
      periodic benefit cost
                
                
                88
                
                
                
                83Other
      changes in plan assets and benefit obligations recognized in other
      comprehensive incomeActuarial
      gain
                
                
                (36
                )
                
                
                42Plan
      amendments
                
                
                109
                
                
                
                -Total
      recognized in other comprehensive income
                
                
                73
                
                
                
                42Total
      recognized in net periodic benefit cost and other comprehensive
      income
                
                $
                161
                
                
                $
                125




At March
31, 2009 and 2008, the assets of the plans are held in trust and allocated as
follows:




2009
                
                
                2008Equity
      securities
                
                
                5
                %
                
                
                16
                %Debt
      securities
                
                
                9
                %
                
                
                13
                %Cash
      and cash equivalents
                
                
                9
                %
                
                
                3
                %Fixed
      interests
                
                
                63
                %
                
                
                55
                %Investment
      in participations and associated companies
                
                
                1
                %
                
                
                1
                %Real
      estate
                
                
                11
                %
                
                
                11
                %Other
      investments
                
                
                2
                %
                
                
                1
                %





The
Company may make contributions in excess of the legally required minimum
contribution level. Any voluntary contributions by the Company are not expected
to exceed deductible limits in accordance with Switzerland tax
regulations.




The
benefits expected to be paid out are as follows (in thousands):




For
      Years Ending March 31,
                  
                  Pension
      PlanBenefit2010
                  
                  $
                  622011
                  
                  $
                  622012
                  
                  $
                  632013
                  
                  $
                  622014
                  
                  $
                  62Thereafter
                  
                  $
                  292









89


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MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






Note 14 —
Segments





Revenues
from unaffiliated customers by geographic area, based on the customer’s shipment
locations, were as follows (in thousands):





Years
      Ended March 31,2009
                  
                  
                  2008
                  
                  
                  2007United
      States
                  
                  $
                  39,007
                  
                  
                  $
                  33,753
                  
                  
                  $
                  28,868Japan
                  
                  
                  9,319
                  
                  
                  
                  6,250
                  
                  
                  
                  8,661United
      Kingdom
                  
                  
                  7,531
                  
                  
                  
                  9,100
                  
                  
                  
                  6,448Rest
      of the world
                  
                  
                  22,339
                  
                  
                  
                  20,110
                  
                  
                  
                  14,818$
                  78,196
                  
                  
                  $
                  69,213
                  
                  
                  $
                  58,795





The
Company’s long-lived assets, excluding goodwill and intangible assets, by
geographic area were as follows (in thousands):





March
      31,2009
                  
                  
                  2008United
      States
                  
                  $
                  6,691
                  
                  
                  $
                  4,907United
      Kingdom
                  
                  
                  69
                  
                  
                  
                  124Rest
      of the world
                  
                  
                  222
                  
                  
                  
                  254$
                  6,982
                  
                  
                  $
                  5,285





The
Company identifies its operating segments based on how management views and
evaluates the Company’s operations, which is primarily based on geographic
location. The Company has determined it operates in four business segments, the
Americas, Europe (excluding the United Kingdom), the United Kingdom and Asia
Pacific. The products and services sold by each segment are substantially the
same and the Company evaluates performance and allocates resources primarily
based on revenues and gross profit. In previous years, the Company’s Europe
(excluding the United Kingdom) and the United Kingdom segments were aggregated
as a single business segment. Previous year information in the tables that
follow has been restated to conform to the current year
classification.





Revenues
and gross profit for these segments were as follows (in thousands):





Years
      Ended March 31,2009
                      
                      
                      2008
                      
                      
                      2007Revenues:Americas
                      
                      $
                      44,067
                      
                      
                      $
                      37,565
                      
                      
                      $
                      31,618Europe
      (excluding the United Kingdom)
                      
                      
                      15,930
                      
                      
                      
                      15,095
                      
                      
                      
                      11,226United
      Kingdom
                      
                      
                      7,531
                      
                      
                      
                      9,100
                      
                      
                      
                      6,448Asia
      Pacific
                      
                      
                      10,668
                      
                      
                      
                      7,453
                      
                      
                      
                      9,503$
                      78,196
                      
                      
                      $
                      69,213
                      
                      
                      $
                      58,795Gross
      Profit:Americas
                      
                      $
                      32,952
                      
                      
                      $
                      29,621
                      
                      
                      $
                      25,426Europe
      (excluding the United Kingdom)
                      
                      
                      11,047
                      
                      
                      
                      10,552
                      
                      
                      
                      7,310United
      Kingdom
                      
                      
                      5,957
                      
                      
                      
                      7,012
                      
                      
                      
                      4,638Asia
      Pacific
                      
                      
                      7,393
                      
                      
                      
                      4,727
                      
                      
                      
                      6,060$
                      57,349
                      
                      
                      $
                      51,912
                      
                      
                      $
                      43,434





Total
assets by operating segments at March 31, 2009 and 2008 were as follows (in
thousands):





March
      31,2009
                  
                  
                  2008Americas
                  
                  $
                  43,537
                  
                  
                  $
                  52,043Europe
      (excluding the United Kingdom)
                  
                  
                  8,739
                  
                  
                  
                  7,265United
      Kingdom
                  
                  
                  9,230
                  
                  
                  
                  13,024$
                  61,506
                  
                  
                  $
                  72,332




90


Table of Contents




MICRUS
ENDOVASCULAR CORPORATION
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 15 —
Subsequent Events





On May
20, 2009, the Company amended the Credit Agreement with Wells Fargo Bank
extending the maturity date to August 1, 2010 and adjusting the minimum limits
for the financial covenants based on the Company’s financial forecast for fiscal
2010.





Note 16 —
Quarterly Financial Information (unaudited)





The
following table represents certain unaudited quarterly information for the eight
quarters ended March 31, 2009. In management’s opinion, this information
has been prepared on the same basis as the audited financial statements and
includes all the adjustments necessary to fairly state the unaudited quarterly
results of operations set forth herein.




First
                
                
                Second
                
                
                Third
                
                
                FourthQuarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter(in
      thousands, except per share amounts)2009:Revenues
                
                $
                18,324
                
                
                $
                20,792
                
                
                $
                18,322
                
                
                $
                20,758Gross
      profit
                
                $
                13,731
                
                
                $
                15,178
                
                
                $
                13,545
                
                
                $
                14,895Net
      income (loss) attributable to common stockholders
                
                $
                (6,602
                )
                
                $
                (2,736
                )
                
                $
                (2,292
                )
                
                $
                576Net
      income (loss) per share attributable to common stockholders basic and
      diluted
                
                $
                (0.42
                )
                
                $
                (0.17
                )
                
                $
                (0.15
                )
                
                $
                0.042008:Revenues
                
                $
                16,790
                
                
                $
                14,362
                
                
                $
                18,343
                
                
                $
                19,718Gross
      profit
                
                $
                13,055
                
                
                $
                11,211
                
                
                $
                13,294
                
                
                $
                14,352Net
      loss attributable to common stockholders
                
                $
                (1,393
                )
                
                $
                (3,012
                )
                
                $
                (5,704
                )
                
                $
                (6,151
                )Net
      loss per share attributable to common stockholders basic and
      diluted
                
                $
                (0.09
                )
                
                $
                (0.20
                )
                
                $
                (0.37
                )
                
                $
                (0.40
                )2007:Revenues
                
                $
                12,683
                
                
                $
                14,527
                
                
                $
                15,544
                
                
                $
                16,041Gross
      profit
                
                $
                9,421
                
                
                $
                10,633
                
                
                $
                11,352
                
                
                $
                12,028Net
      loss attributable to common stockholders
                
                $
                (2,959
                )
                
                $
                (151
                )
                
                $
                (1,002
                )
                
                $
                (1,371
                )Net
      loss per share attributable to common stockholders basic and
      diluted
                
                $
                (0.21
                )
                
                $
                (0.01
                )
                
                $
                (0.07
                )
                
                $
                (0.09
                )








91
 Table of Contents






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





None





Item 9A.Controls and
Procedures.





(a) Evaluation
of disclosure controls and procedures.





With the
participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), management has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by
this report. Based on such evaluation, our CEO and CFO have concluded that, as
of the end of such period, our disclosure controls and procedures are
effective.





(b) Management’s
report on internal control over financial reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f), to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with United States generally
accepted accounting principles. Under the supervision and with the participation
of our management, including our CEO and CFO, we conducted an evaluation of the
design and operational effectiveness of our internal control over financial
reporting as of March 31, 2009 based on the framework in Internal Control —
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).





Our
management, including the CEO and CFO, does not expect our disclosure controls
or our internal control over financial reporting will prevent or detect all
errors or all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. The design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.





Based on
our evaluation utilizing the criteria set forth in Internal Control — Integrated Framework issued by COSO,our management (including our CEO and CFO) concluded that our internal
control over financial reporting was effective as of March 31, 2009. Our
assessment of the effectiveness of internal control over financial reporting as
of March 31, 2009 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
included at “Item 8 – Financial Statements and Supplementary Data” in this
Annual Report on Form 10-K.





(c) Changes
in internal control over financial reporting.





There
have not been any changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934) during the fourth quarter of our fiscal year ended March 31,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





Item 9B.Other
Information.





None.











92


Table of
Contents





PART III





Item 10.Directors, Executive
Officers and Corporate Governance.





Information
required by this item is incorporated by reference to the Micrus Proxy Statement
for the 2009 Annual Meeting of Stockholders.





Item 11.Executive
Compensation.





Information
required by this item is incorporated by reference to the Micrus Proxy Statement
for the 2009 Annual Meeting of Stockholders.





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





Information
required by this item is incorporated by reference to the Micrus Proxy Statement
for the 2009 Annual Meeting of Stockholders





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





Information
required by this item is incorporated by reference to the Micrus Proxy Statement
for the 2009 Annual Meeting of Stockholders.





Item 14.Principal Accountant
Fees and Services.





Information
required by this item is incorporated by reference to the Micrus Proxy Statement
for the 2009 Annual Meeting of Stockholders.





PART IV





Item 15.Exhibits and Financial
Statement Schedules.





(a) The
following documents are filed as part of this Annual Report on
Form 10-K:





(1) Financial
Statements.  The following statements of Micrus Endovascular
Corporation and the report of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm, are included in Part II, Item 8.





(2) Financial Statement
Schedules.  The following schedule is required to be filed by
Item 15(b).





Schedule II —
Valuation and Qualifying Accounts for each of the three years in the period
ended March 31, 2009





All other
schedules have been omitted because they are either inapplicable or the required
information has been provided in the consolidated financial statements or the
notes thereto.





(b) Exhibits.  The list
of exhibits on the Index to Exhibits on pages 102 through 103 of this report is
incorporated herein by reference.









93


Table of
Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Micrus Endovascular Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.




MICRUS
      ENDOVASCULAR CORPORATIONBy:
                  /s/
      JOHN T. KILCOYNEJohn
      T. KilcoyneChairman
      and Chief Executive Officer


Date:
June 10, 2009





POWERS
OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints John T. Kilcoyne and Gordon T. Sangster, and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any amendments to this Report on Form 10-K and to file
the same, with exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes may do or cause
to be done by virtue hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Form 10-K
has been signed by the following persons in the capacities and on the dates
indicated:




Signatures
                    
                    Title
                    
                    Date/s/
      JOHN T. KILCOYNE
                    
                    Chairman
      and Chief Executive Officer
                    
                    June
      10, 2009John
      T. Kilcoyne
                    
                    (Principal
      Executive Officer)/s/
      GORDON T. SANGSTER
                    
                    Chief
      Financial Officer
                    
                    June
      10, 2009Gordon
      T. Sangster
                    
                    (Principal
      Financial and Accounting Officer)/s/
      MICHAEL EAGLE
                    
                    Director
                    
                    June
      10, 2009Michael
      Eagle/s/
      MICHAEL R. HENSON
                    
                    Director
                    
                    June
      10, 2009Michael
      R. Henson/s/
      FRED HOLUBOW
                    
                    Director
                    
                    June
      10, 2009Fred
      Holubow/s/
      L. NELSON HOPKINS
                    
                    Director
                    
                    June
      10, 2009L.
      Nelson Hopkins, M.D./s/  FRANCIS
      J. SHAMMO
                    
                    Director
                    
                    June
      10, 2009Francis
      J. Shammo/s/
      JEFFREY H. THIEL
                    
                    Director
                    
                    June
      10, 2009Jeffrey
      H. Thiel/s/
      GREGORY H. WOLF
                    
                    Director
                    
                    June
      10, 2009Gregory
      H. Wolf





94


Table of
Contents





Schedule II – Valuation and Qualifying Accounts











Balance
      At
                
                
                Additions/Beginning
                
                
                Charged
      to
                
                
                
                
                
                Balance
      atof
      Year
                
                
                Expenses
                
                
                Deduction
                
                
                End
      of YearAllowance
      for Doubtful Accounts
                
                (In
      thousands)Year
      Ended March 31, 2009
                
                $
                95
                
                
                $
                49
                
                
                $
                (25
                )
                
                $
                119Year
      Ended March 31, 2008
                
                $
                234
                
                
                $
                (145
                )
                
                $
                6
                
                
                $
                95Year
      Ended March 31, 2007
                
                $
                317
                
                
                $
                (84
                )
                
                $
                1
                
                
                $
                234Valuation
      Allowance - Deferred Tax AssetsYear
      Ended March 31, 2009
                
                $
                21,419
                
                
                $
                2,277
                
                
                $
                -
                
                
                $
                23,696Year
      Ended March 31, 2008
                
                $
                17,750
                
                
                $
                3,669
                
                
                $
                -
                
                
                $
                21,419Year
      Ended March 31, 2007
                
                $
                16,078
                
                
                $
                1,936
                
                
                $
                (264
                )
                
                $
                17,750











95


Table of
Contents





INDEX
TO EXHIBITS





Exhibit
                Number
              Description3.1
              Certificate
      of Incorporation (Filed as Exhibit 3.2 of Amendment No. 3 to the
      Company’s Registration Statement on Form S-1 filed on May 17,
      2005 (Registration No. 333-123154) (“Amendment No. 3”), and
      incorporated herein by reference)3.2
              Bylaws
      (Filed as Exhibit 3.4 of Amendment No. 3, and incorporated
      herein by reference)4.1
              Specimen
      Stock Certificate (Filed as Exhibit 4.1 of the Company’s Registration
      Statement on Form S-1 filed on March 4, 2005 (Registration
      No. 333-123154) (“Form S-1”), and incorporated herein by
      reference)4.2
              Warrant
      dated as of December 11, 2000 among the Registrant and Roberts Mitani
      Capital, LLC (Filed as Exhibit 4.2 of Form S-1, and incorporated
      herein by reference)4.3
              Amended
      and Restated Stockholders’ Rights Agreement dated as of February 21,
      2005 among the Registrant and the parties listed therein (Filed as
      Exhibit 4.3 of Form S-1, and incorporated herein by
      reference)4.4
              Form
      of Common Stock Warrant issued in connection with the Series E
      Preferred Stock and Warrant Purchase Agreement dated February 21,
      2005, among the Company and the purchasers of the Company’s Series E
      Preferred Stock (Filed as Exhibit 4.4 to the Company’s Quarterly
      Report on Form 10-Q filed on February 14, 2006, and incorporated
      herein by reference)10.1*
              1996
      Stock Option Plan (Filed as Exhibit 10.1 of Form S-1, and
      incorporated herein by reference)10.2*
              1998
      Stock Plan (Filed as Exhibit 10.2 of Form S-1, and incorporated
      herein by reference)10.3*
              2005
      Equity Incentive Plan (Filed as Exhibit 10.3 of Amendment No. 4
      to the Company’s Registration Statement on Form S-1 filed on
      May 23, 2005 (Registration No. 333-123154) (“Amendment
      No. 4”), and incorporated herein by reference)10.4*
              2005
      Equity Incentive Plan — Form of Incentive Stock Option Agreement for
      Executive Officers and Directors (Filed as Exhibit 10.2 to the
      Company’s Quarterly Report on Form 10-Q filed on August 15,
      2005, and incorporated herein by reference)10.5*
              2005
      Equity Incentive Plan — Form of Nonstatutory Stock Option Agreement
      for Executive Officers and Directors (Filed as Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q filed on August 15,
      2005, and incorporated herein by reference)10.6*
              2005
      Employee Stock Purchase Plan, as amended (Filed as Exhibit 10.4 of
      Amendment No. 6 to the Company’s Registration Statement on
      Form S-1 filed on June 13, 2005 (Registration
      No. 333-123154) (“Amendment No. 6”), and incorporated herein by
      reference)10.7*
              Letter
      Agreement dated November 15, 2004 with John R. Kilcoyne (Filed as
      Exhibit 10.7 of Form S-1, and incorporated herein by
      reference)10.8*
              Letter
      Agreement dated November 5, 2003 with Robert A. Stern (Filed as
      Exhibit 10.8 of Form S-1, and incorporated herein by
      reference)10.9*
              Letter
      Agreement dated June 12, 1998 with Tom M. Holdych (Filed as
      Exhibit 10.9 of Form S-1, and incorporated herein by
      reference)10.10*
              Letter
      Agreement dated May 23, 2003 with Edward F. Ruppel, Jr. (Filed as
      Exhibit 10.10 of Form S-1, and incorporated herein by
      reference)10.11*
              Letter
      Agreement dated October 25, 2004 with Eckhard H. Reitz (Filed as
      Exhibit 10.13 of Form S-1, and incorporated herein by
      reference)10.12*
              Letter
      Agreement dated February 16, 2005 with Robert C. Colloton (Filed as
      Exhibit 10.23 of Amendment No. 6, and incorporated herein by
      reference)10.13
              Office
      Lease dated June 6, 2005 between the Registrant and WW/LJ GATEWAYS
      LTD., a California limited partnership, for office space located at 821
      Fox Lane in San Jose, California (Filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on July 5, 2005, and
      incorporated herein by reference)10.14†
              Distribution
      Agreement, dated September 30, 2005, between Micrus Endovascular
      Corporation and Goodman Co., Ltd. (Filed as Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q filed on November 14,
      2005, and incorporated herein by reference)10.15
              Share
      Purchase Agreement, dated September 20, 2005, between Mark Ellis and
      James Mackenzie and Micrus Endovascular Corporation (Filed as
      Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on
      September 26, 2005, and incorporated herein by
    reference)10.16†
              License
      Agreement, effective July 1, 2005, between Micrus Endovascular
      Corporation and Micrus Endovascular SA (Filed as Exhibit 10.5 to the
      Company’s Quarterly Report on Form 10-Q filed on November 14,
      2005, and incorporated herein by reference)10.17†
              Contract
      Manufacturing Agreement, effective July 1, 2005, between Micrus
      Endovascular Corporation and Micrus Endovascular SA (Filed as
      Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q
      filed on November 14, 2005, and incorporated herein by
      reference)10.18†
              Agreement
      for Sharing Development Costs, effective July 1, 2005, between Micrus
      Endovascular Corporation and Micrus Endovascular SA (Filed as
      Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q
      filed on November 14, 2005, and incorporated herein by
      reference)10.19†
              Support
      Services Agreement, effective July 1, 2005, between Micrus
      Endovascular Corporation and Micrus Endovascular SA (Filed as
      Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q
      filed on November 14, 2005, and incorporated herein by
      reference)10.20†
              Technology
      Transfer Agreement, effective July 28, 2005, between Micrus
      Endovascular Corporation and Vascular FX (Filed as Exhibit 10.9 to
      the Company’s Quarterly Report on Form 10-Q filed on
      November 14, 2005, and incorporated herein by
    reference)








96









Exhibit
                    Number
                  Description10.21†
                  License,
      Development and Distribution Agreement, effective January 6, 2006,
      between Micrus Endovascular Corporation and Biotronik AG (Filed as
      Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed
      on June 16, 2006 and incorporated herein by
  reference)10.22
                  Form
      of Director and Executive Officer Indemnification Agreement (Filed as
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
      filed on February 14, 2007)10.23*
                  Amended
      and Restated Employee Cash Bonus Plan with respect to Executive Officers
      (Filed as Exhibit 10.26 to the Company’s Quarterly Report on
      Form 10-Q filed on August 8, 2007)10.24†
                  Amendment
      No. 1 to Distribution Agreement, dated September 20, 2007,
      between Micrus Endovascular Corporation and Goodman Co., Ltd. (Filed as
      Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q
      filed on November 9, 2007)10.25†
                  Distribution
      Agreement, dated July 31, 2007, between Micrus Endovascular
      Corporation and Beijing Tianxinfu Medical Appliance Co. Ltd. (Filed as
      Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q
      filed on November 9, 2007)10.26†
                  Stock
      Purchase Agreement, dated October 26, 2007, between Micrus
      Endovascular Corporation, ReVasc Technologies, Inc. and The Cleveland
      Clinic Foundation which includes as an exhibit thereto the Amended and
      Restated License Agreement, dated October 26, 2007, between ReVasc
      Technologies, Inc. and The Cleveland Clinic Foundation (Filed as
      Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q
      filed on February 11, 2008)10.27*
                  Letter
      Agreement dated November 12, 2007 with Gordon Sangster (Filed as
      Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q
      filed on February 11, 2008)10.28*
                  Form
      of Acceleration Agreement (Filed as Exhibit 99.1 to the Company’s
      Current Report on Form 8-K filed on January 29, 2008, and
      incorporated herein by reference)10.29*
                  New
      Product Bonus Incentive Program (Filed as Exhibit 10.29 to the Company’s
      Quarterly Report on Form 10-Q filed on June 12, 2008)10.30†
                  Settlement
      and License Agreement, dated September 22, 2008, between Micrus
      Endovascular Corporation, Boston Scientific Corp. and Target Therapeutics,
      Inc. (Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
      filed on November 10, 2008)10.31†
                  Settlement
      and Release Agreement, dated September 22, 2008, between Micrus
      Endovascular Corporation and the Regents of the University of California
      (Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
      filed on November 10, 2008)10.32
                  Credit
      Agreement, dated November 5, 2008, between Micrus Endovascular Corporation
      and Wells Fargo Bank, National Association (Filed as Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q filed on November 10,
      2008)10.33
                  First
      Amendment to Credit Agreement, dated February 3, 2009, between Micrus
      Endovascular Corporation and Wells Fargo Bank, National Association (Filed
      as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on
      February 9, 2009)10.34
                  Amendment
      to Offer Letter, dated December 15, 2008, between Micrus Endovascular
      Corporation and John R. Kilcoyne (Filed as Exhibit 10.1 to the Company’s
      Quarterly Report on Form 10-Q filed on February 2,
2009)10.35
                  Amendment
      to Offer Letter, dated December 15, 2008, between Micrus Endovascular
      Corporation and Robert A. Stern (Filed as Exhibit 10.2 to the Company’s
      Quarterly Report on Form 10-Q filed on February 2,
2009)10.36
                  Amendment
      to Offer Letter, dated December 15, 2008, between Micrus Endovascular
      Corporation and Carolyn M. Bruguera (Filed as Exhibit 10.3 to the
      Company’s Quarterly Report on Form 10-Q filed on February 2,
      2009)10.37
                  Amendment
      to Offer Letter, dated December 12, 2008, between Micrus Endovascular
      Corporation and Robert C. Colloton (Filed as Exhibit 10.4 to the Company’s
      Quarterly Report on Form 10-Q filed on February 2,
2009)10.38#*
                  Bonus Program
      with respect to Executive Officers10.39#*
                  Amended
      and Restated 2005 Equity Incentive Plan10.40#*
                  First
      Amendment to Technology Transfer Agreement dated January 28, 2009,
      between Micrus Endovascular Corporation and Vascular FX, LLC, a Delaware
      limited liability company21.1#
                  List
      of Subsidiaries23.1#
                  Consent
      of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
      Firm24.1#
                  Powers
      of Attorney (appears on the signature page of this
form)31.1#
                  Certification
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2#
                  Certification
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1#
                  Certifications
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002


__________





#
            Filed
      herewith.*
            Indicates
      a management contract or compensatory plan or arrangement, as required by
      Item 15(a)3.†
            Confidential
      treatment requested for certain portions of this Exhibit pursuant to
      Rule 24b-2 promulgated under the Securities Exchange Act, which
      portions are omitted and filed separately with the Securities and Exchange
      Commission.







97