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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
 ANNUAL REPORT
 PURSUANT TO SECTIONS 13 OR
    15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to           .   Commission file number:
    000-50988
      VNUS Medical Technologies,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

94-3216535(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)5799 Fontanoso Way,
    San Jose, California

95138(Address of principal executive
    offices)

(Zip Code)   Registrants telephone number, including area code:
 (408) 360-7200
  Securities registered pursuant to Section 12(b) of the
    Act:
 Common Stock, $0.001 par value per share
 Name of Each Exchange on which Registered:
 The NASDAQ Stock Market LLC
  Securities registered pursuant to Section 12(g) of the
    Act:
 None
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



VNUS
    MEDICAL TECHNOLOGIES, INC.
  TABLE OF
    CONTENTS
  
  PagePART IFORWARD LOOKING
    STATEMENTS


1Item 1.


Business


1Item 1A.


Risk
    Factors


18Item 1B.


Unresolved Staff
    Comments


32Item 2.


Properties


32Item 3.


Legal
    Proceedings


33Item 4.


Submission of
    Matters to a Vote of Security Holders


33PART IIItem 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


33Item 6.


Selected
    Consolidated Financial Data


36Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


37Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


48Item 8.


Consolidated
    Financial Statements and Supplementary Data


49Item 9.


Changes in and
    Disagreements with Accountants on Accounting and
    Financial Disclosure


76Item 9A.


Controls and
    Procedures


76Item 9B.


Other
    Information


77PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


77Item 11.


Executive
    Compensation


77Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and
    Related Stockholder Matters


77Item 13.


Certain
    Relationships and Related Transactions


77Item 14.


Principal
    Accountant Fees and Services


78PART IVItem 15.


Exhibits and
    Financial Statement Schedules


78EXHIBIT 10.10EXHIBIT 21EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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PART I FORWARD-LOOKING
    STATEMENTS  Certain statements contained in or incorporated by reference
    into this report are forward-looking statements within the
    meaning of Section 21 of the Securities Exchange Act of
    1934, as amended. Forward-looking statements include statements
    that are predictive in nature and depend upon or refer to future
    events or conditions, which include words such as
    believes, plans,
    anticipates, estimates,
    expects, may, will,
    should, could, potential, or
    similar expressions. In addition, any statements concerning
    future financial performance, reimbursement rates, ongoing
    business strategies or prospects, and possible future actions
    are also forward-looking statements. Forward-looking statements
    are based on current expectations and projections about future
    events and are subject to risks, uncertainties, and assumptions
    about our company, economic and market factors and the industry
    in which we do business, among other things. We discuss such
    risks, uncertainties and other factors throughout this report
    and specifically under the caption Risk Factors in
    Part I, Item 1A below. Our actual results, performance
    or achievements or industry results could differ materially from
    any future results, performance, achievements or industry
    results expressed or implied by such forward-looking statements.
    These statements are not guaranties of future performance and we
    undertake no obligation to publicly update any forward-looking
    statements, whether as a result of new information, future
    events or otherwise, except as required by law.
  Item 1:
    Business  Overview
  ® ®
       1




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follow-up www.vnus.com/navigation/clinicallibrary.htm
  tm tm
    Corporate
    Background
  (408) 360-7200. Form 10-K, Form 10-Q, Form 8-K
  ® ® ® tm tm tm tm tm tm ®
  Venous
    Reflux Disease
        
    leg pain and swelling;
    leg heaviness and fatigue;
    painful varicose veins; 2




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
    skin changes such as discoloration or inflammation; and
    open skin ulcers.    Venous
    Reflux Market
    
    600,000 patients receive compression stockings or varicose
    vein procedures that do not address the primary underlying cause
    of venous reflux;
    50,000 patients undergo vein stripping surgery; and
    150,000 patients receive minimally invasive treatment with
    endovenous ablation, including our Closure procedure.      Current
    Treatment Alternatives
    Conventional Vein Stripping and Ligation
    Surgery.
    Endovenous Laser Ablation, or EVL.
 3




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follow-up
  ease-of-use
  The VNUS
    Closure Procedure
        
    Minimally Invasive Outpatient Procedure.  Our
    Closure procedure can be performed using local anesthesia in a
    physicians office, as well as in an outpatient hospital
    setting or surgicenter.
    Less Post-Operative Pain.  Independent
    comparative studies have shown that patients receiving our
    Closure procedure return to work and normal activity
    significantly faster than those receiving vein stripping. In a
    comparative trial of our Closure procedure versus EVL, patients
    treated using our Closure system in one leg and EVL in the other
    leg exhibited less pain and bruising in the leg treated with our
    Closure system.
    Excellent Clinical Outcomes.  In a randomized
    comparative trial of our Closure procedure and vein stripping
    conducted in 2000, our Closure procedure was found to be as
    effective as vein stripping at two years following treatment,
    with fewer side effects and faster recovery. Another comparative
    trial of our Closure procedure versus EVL showed our Closure
    procedure exhibited greater efficacy and less post-operative
    bruising and pain. Our multi-center clinical trial of our new
    ClosureFAST catheter showed 100% vein occlusion at six month
    follow-up in
    over 60 limbs examined using ultrasound imaging. By comparison,
    earlier studies of the previous generations of the Closure
    catheter produced a vein occlusion rate of 92% at six-month
    follow-up in
    our multi-center clinical registry. 4




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
    Long-Lasting Results.  Our published
    multi-center registry data shows our Closure procedure
    eliminated venous reflux in 87% of 119 limbs evaluated at four
    years and 84% of 117 limbs evaluated at five years.
    Safe and Controlled Procedure.  Our Closure
    system includes a number of safety features designed to ensure
    precise delivery of RF energy. Our system continuously monitors
    the temperature of the vein wall and adjusts energy delivery
    throughout the procedure to provide a high level of
    effectiveness and a low incidence of adverse events during
    recovery.
    Cosmetically Appealing.  We believe that our
    Closure system results in less bruising, pain and skin
    discoloration than both vein stripping and EVL. Additionally,
    because our Closure procedure is catheter-based, it results in
    little or no scarring compared to vein stripping.      Clinical
    Results
    Randomized
    Trials of our Closure Procedure Versus Vein
    Stripping
  80-patient
    
    Patients treated with our Closure procedure returned to normal
    activities in an average of 1.2 days, compared to
    3.9 days for patients treated with vein stripping;
    81% of Closure patients returned to normal activities within one
    day compared to only 47% of vein stripping patients; and
    Employed patients treated with our Closure procedure returned to
    work an average of 7.7 days faster than employed patients
    treated with vein stripping surgery. 5




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% of Limbs Free of Adverse FindingsClosure Procedure

Vein Stripping72 Hours


43%



17%3 Weeks


71%



39%       Closure
    Procedure Versus Endovenous Laser Treatment
    Closure Procedure

EVLBruising at one week following
    treatment


4%



40%Primary vein occlusion


82%



56%   follow-up
   6




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Clinical
    Registry of the Closure Procedure
    Elimination ofTime of Follow Up

# of Limbs

Reflux1 Year


473



88
%2 Years


263



88
%3 Years


133



88
%4 Years


119



87
%5 Years


117



84
%     Single-Center
    Studies of Our Closure Procedure
      Products
  tm
 7




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Disposable
    Endovenous Catheters
  ClosureFAST
    Catheter
        ClosurePlus
    Catheter
      ClosureRFS tm and
    ClosurePLEX tm
    RFGPlus
    Generator
  tm
 8




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Accessories
    and Other Products
    The
    U-Clip Anastomotic Device
  U-Clip
  Seasonality
    Sales and
    Marketing
    market-by-market
    
    We educate and train physicians interested in performing our
    Closure procedure in the great saphenous vein. We also educate
    experienced physicians in the use of our Closure procedure for
    treatments in perforator veins, tributary veins, large veins,
    venous ulcer patients and small saphenous veins through
    workshops and
    one-on-one
    training sessions. 9




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
    We assist physicians in educating their current and potential
    patients about our Closure procedure. We create and make
    available an expansive array of support tools for physician use
    such as patient videos, brochures and patient testimonials
    designed to help physicians educate both patients and referring
    physicians on the many benefits of our Closure procedure.
    We assist physicians by communicating with insurance companies
    to expand coverage policies and by providing our clinical data
    to counter any procedure authorization denials by payors.
    We seek to add and promote products to leverage our position as
    the leader in vein treatments and as the single-source supplier
    for a physicians vein treatment needs.  direct-to-consumer
    Reimbursement
         10




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Research
    and Development
  ease-of-use
      Business
    Development
  U-Clip ® easy-to-use.
    Manufacturing
       11




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9001/EN46001
  90-day
      Patents
    and Proprietary Technology
       12




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Competition
              
    improved patient outcomes;
    approval of reimbursement by healthcare payors;
    the publication of peer-reviewed clinical studies;
    product quality;
    cost effectiveness;
    acceptance by leading physicians;
    ease-of-use
    and speed of procedure for physicians;
    sales and marketing capability;
    timing and acceptance of product innovation; and
    patent protection. 13




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Government
    Regulation
  United
    States
      510(k) Clearance Pathway. pre-1976
    Pre-market Approval Pathway.
  Clinical Trials.
 14




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Continuing Food and Drug Administration
    Regulation.
  
    Quality System Regulations, which require manufacturers to
    follow design, testing, control, documentation and other quality
    assurance procedures during the manufacturing process;
    labeling regulations, which govern product labels and labeling,
    prohibit the promotion of products for unapproved or
    off-label uses and impose other restrictions on
    labeling and promotional activities;
    medical device reporting, or MDR, regulations, which require
    that manufacturers report to the Food and Drug Administration if
    their device may have caused or contributed to a death or
    serious injury or malfunctioned in a way that would likely cause
    or contribute to a death or serious injury if it were to
    recur; and
    notices of correction or removal, and recall regulations.        
    warning Letters or untitled letters;
    fines, injunctions, and civil penalties;
    recall or seizure of our products;
    customer notification, or orders for repair, replacement or
    refund;
    operating restrictions, partial suspension or total shutdown of
    production; 15




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
    refusing our request for 510(k) clearance or pre-market approval
    of new products;
    withdrawing 510(k) clearance or pre-market approvals that are
    already granted; and
    criminal prosecution.    Current Clearances.
  European
    Union
  (93/42/EEC),
    Rest
    of the World
    Fraud and
    Abuse Laws
  Anti-Kickback
    Statute
   16




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Stark
    Law
        False
    Claims Laws
   17




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Fraud
    on a Health Benefit Plan and False Statements
    Privacy
    and Security
    Employees
    Financial
    Information
   Item 1A:  Risk
    Factors  We
    expect to derive substantially all of our future revenues from
    sales of our Closure system. If our Closure system fails to
    achieve substantial market acceptance, we may not generate
    sufficient revenues to continue our operations.
    
    the results of any adverse clinical studies relating to the
    safety or effectiveness of our Closure system;
    the cost of our Closure system products; 18




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
    the discovery of design or manufacturing defects in our Closure
    system, including in the systems software component;
    perceived liability risks associated with the use of new
    technologies or procedures for venous reflux disease;
    the failure of our Closure system, including the new ClosureFast
    catheter to meet physicians expectations;
    the availability of alternative treatments or procedures that
    may be, or may be perceived as, more effective, safer, faster,
    easier to use or less costly than our Closure system; and
    if reimbursement from U.S. healthcare payors for our
    Closure system is reduced, inadequate or discontinued.  If
    physicians do not adopt and utilize our Closure system, we will
    not achieve greater, or maintain our current, revenues or be
    profitable.
    follow-up
    Competition
    from existing and new products and procedures may decrease our
    market share and cause our revenues to decline.
      
    products and procedures that are less expensive and take less
    time to perform;
    perceived benefits in product performance and clinical outcomes;
    established distribution networks;
    greater experience in launching, marketing, distributing and
    selling products;
    established relationships with physicians, healthcare providers
    and payors; and
    greater financial and other resources for product development,
    sales and marketing and patent litigation. 19




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We may
    experience significant fluctuations in our quarterly and annual
    results.
    
    physician and patient acceptance of our products and procedures;
    design or manufacturing defects in our Closure system;
    the effect of competition from existing and new products and
    procedures;
    fluctuations in the demand for our products, including seasonal
    demand, the timing of orders received and the timing of new
    product introductions;
    our ability to recognize revenue from the sales of our products;
    our ability to protect our intellectual property rights and
    defend against third party challenges;
    our ability to hire and train key personnel, including
    management, sales and technical personnel;
    practices of insurance companies and Medicare with respect to
    reimbursement for our procedure and our products;
    delays or interruptions in manufacturing and shipping of our
    products, which may result from our dependence on third-party
    suppliers;
    the results of future clinical trial data, including long-term
    randomized trial data;
    litigation, including product liability claims, patent
    litigation and securities litigation;
    failure to comply with current government regulations and
    announcements of changes in government regulations affecting us
    or our competitors;
    failure to obtain or maintain regulatory approvals and
    clearances to market our products;
    our ability to train physicians in performing our Closure
    procedure; and
    fluctuations in the international markets where we sell our
    products.     20




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Our
    intellectual property rights may not provide meaningful
    commercial protection for our products, which could enable third
    parties to use our technology or methods, or very similar
    technology or methods, and could reduce our ability to
    compete.
      Our
    manufacturing operations are dependent upon third-party
    suppliers, some of whom are sole-source, making us vulnerable to
    supply problems and price fluctuations, which could harm our
    business.
    
    our suppliers may make errors in manufacturing components that
    could negatively affect the efficacy or safety of our products
    or cause delays in shipment or recalls of our products;
    we may not be able to obtain adequate supply in a timely manner
    or on commercially reasonable terms;
    we may have difficulty locating and qualifying alternative
    suppliers for our disposable catheter components or RF
    generators;
    our suppliers may encounter financial hardships unrelated to our
    demand for components, which could inhibit their ability to
    fulfill our orders and meet our requirements;
    switching components may require product redesign and submission
    to the Food and Drug Administration which could significantly
    delay production; and 21




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
    our suppliers manufacture products for a range of customers, and
    fluctuations in demand for the products those suppliers
    manufacture for others may affect their ability to deliver
    components for us in a timely manner.      If we
    continue to fail to achieve and maintain effective disclosure
    controls and procedures and internal control over financial
    reporting on a consolidated basis, our ability to provide
    accurate financial reports could be impaired and our stock price
    and investor confidence in our company could be materially and
    adversely affected.
         22




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If we
    are unable to manufacture an adequate supply of our products, we
    could lose customers and revenues and our growth could be
    limited.
    Inadequate
    levels of reimbursement for our Closure procedure from
    governmental or other third-party payors could affect the
    adoption or use of our Closure system and may cause our revenues
    to decline.
        non-U.S. sales.
 23




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To
    successfully grow our business, we will need to attract
    additional qualified personnel and retain key
    personnel.
    We
    lack published long-term randomized trial data comparing the
    efficacy of our Closure procedure with vein stripping and EVL.
    If future data proves to be inconsistent with our clinical
    results, our revenues may decline.
  follow-up
  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.
    If we
    become subject to product liability claims and our product
    liability insurance coverage is inadequate or inapplicable, we
    may be required to engage in costly litigation or pay
    significant damages and our business may be
    harmed.
   24




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The
    medical device industry is characterized by patent litigation
    and we could become subject to litigation that could be costly,
    result in the diversion of managements attention and
    require us to pay damages and discontinue selling our
    products.
      If we
    fail to comply with the extensive government regulations
    relating to our business, we may be subject to fines,
    injunctions and penalties.
    
    design, development and manufacturing;
    testing; 25




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
    clinical trials in humans;
    electronic product safety;
    labeling;
    storage;
    marketing;
    pre-market clearance or approval;
    record keeping procedures;
    advertising and promotion;
    post-market surveillance and reporting of deaths, serious
    injuries or malfunctions; and
    export.         26




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We
    depend on our officers and if we are not able to retain them or
    recruit additional qualified personnel, our business will
    suffer.
    Any
    failure in our efforts to train physicians could reduce the
    market acceptance of our products and reduce our
    revenues.
    We
    spend considerable time and money complying with federal, state
    and foreign regulations and, if we are unable to fully comply
    with such regulations, we could face substantial
    penalties.
    
    the Federal Food, Drug, and Cosmetic Act, which regulates the
    design, testing, manufacture, labeling, marketing, distribution
    and sale of prescription drugs and medical devices;
    state food and drug laws;
    the Sarbanes-Oxley Act of 2002;
    the federal Anti-Kickback Law, which prohibits persons from
    knowingly and willfully soliciting, offering, receiving or
    providing remuneration, directly or indirectly, in cash or in
    kind, to induce either the referral of an individual, or
    furnishing or arranging for a good or service, for which payment
    may be made under federal healthcare programs such as the
    Medicare and Medicaid Programs;
    Medicare laws and regulations that prescribe the requirements
    for coverage and payment, including the amount of such payment,
    and laws prohibiting false claims for reimbursement under
    Medicare and Medicaid;
    the federal physician self-referral prohibition, commonly known
    as the Stark Law, which, in the absence of a statutory or
    regulatory exception, prohibits the referral of Medicare
    patients by a physician to an entity for the provision of
    designated healthcare services, if the physician or a member of
    the physicians immediate family has a direct or indirect
    financial relationship, including an ownership interest in, or a
    compensation arrangement with, the entity and also prohibits
    that entity from submitting a bill to a federal payor for
    services rendered pursuant to a prohibited referral; 27




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
    state laws that prohibit the practice of medicine by
    non-physicians and fee-splitting arrangements between physicians
    and non-physicians, as well as state law equivalents to the
    Anti-Kickback Law and the Stark Law, which may not be limited to
    government reimbursed items; and
    the Federal Trade Commission Act and similar laws regulating
    advertising and consumer protection.    Product
    sales or introductions may be delayed or canceled as a result of
    the Food and Drug Administrations regulatory process,
    which could cause our sales or profitability to
    decline.
      
    delay or eliminate commercialization of products we develop;
    require us to perform costly procedures;
    diminish any competitive advantages that we may attain; and
    reduce our ability to collect revenues or royalties.    Modifications
    to our products may require new marketing clearances or
    approvals or require us to cease marketing or recall the
    modified products until such clearance or approvals are
    obtained.
   28




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We
    sell our products internationally and are subject to various
    risks relating to such international activities which could harm
    our international sales and profitability.
  non-U.S. currency,
  
    export restrictions and controls relating to technology;
    the availability and level of reimbursement within prevailing
    foreign healthcare payment systems;
    pricing pressure that we may experience internationally;
    required compliance with existing and new foreign regulatory
    requirements and laws;
    laws and business practices favoring local companies;
    longer payment cycles;
    difficulties in enforcing agreements and collecting receivables
    through foreign legal systems;
    political and economic instability;
    potentially adverse tax consequences, tariffs and other trade
    barriers;
    international terrorism and
    anti-American
    sentiment;
    difficulties and costs of staffing and managing foreign
    operations;
    changes in currency exchange rates; and
    difficulties in enforcing intellectual property rights.    We may
    be subject to fines, penalties or injunctions if we are
    determined to be promoting the use of our products for
    unapproved or off-label uses.
   29




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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.
    Our
    stock price may be volatile which may cause the value of our
    stock to decline or subject us to a securities class action
    litigation.
    
    the depth and liquidity of the market for our common stock;
    volume and timing of orders for our products;
    developments generally affecting medical device companies;
    the announcement of new products or product enhancements by us
    or our competitors;
    changes in earnings estimates or recommendations by securities
    analysts;
    investor perceptions of us and our business, including changes
    in market valuations of medical device companies;
    actions by institutional or other large stockholders;
    our results of operations and financial performance; and
    general economic, industry and market conditions.    If
    there are substantial sales of our common stock, our stock price
    could decline.
     30




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Our
    business may be harmed by a natural disaster, terrorist attacks
    or other unanticipated problems.
    Our
    future capital needs are uncertain; we may need to raise
    additional funds in the future and such funds may not be
    available on acceptable terms, if at all.
    
    the revenues generated by sales of our products;
    the costs associated with expanding our manufacturing,
    marketing, sales and distribution efforts;
    the number and timing of acquisitions and other strategic
    transactions;
    the rate of progress and cost of our research and development
    activities;
    the costs of obtaining and maintaining Food and Drug
    Administration and other regulatory clearance of our products
    and products in development;
    the effects of competing technological and market developments;
    and
    the cost of litigation and other legal actions.    Concentration
    of ownership among our existing directors, executive officers
    and principal stockholders may prevent new investors from
    influencing significant corporate decisions.
   31




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Anti-takeover
    provisions in our organizational documents and Delaware law may
    discourage or prevent a change of control, even if an
    acquisition would be beneficial to our stockholders, which could
    cause our stock price to decline and prevent attempts by our
    stockholders to replace or remove our current
    management.
    
    our board of directors is authorized, without prior stockholder
    approval, to create and issue preferred stock, commonly referred
    to as blank check preferred stock, with rights
    senior to those of common stock;
    advance notice requirements for stockholders to nominate
    individuals to serve on our board of directors or for
    stockholders to submit proposals that can be acted upon at
    stockholder meetings;
    our board of directors is classified so that not all members of
    our board of directors are elected at one time, which may make
    it more difficult for a person who acquires control of a
    majority of our outstanding voting stock to replace our
    directors;
    stockholder action by written consent is prohibited;
    special meetings of our stockholders are permitted to be called
    only by a majority of our board of directors, the chairman of
    our board of directors or our president;
    stockholders are not permitted to cumulate their votes for the
    election of directors;
    newly created directorships resulting from an increase in the
    authorized number of directors or vacancies on our board of
    directors are to be filled only by majority vote of the
    remaining directors, even though less than a quorum is then in
    office;
    our board of directors is expressly authorized to modify, alter
    or repeal our bylaws; and
    stockholders are permitted to amend our bylaws only upon
    receiving at least 75% of the votes entitled to be cast by
    holders of all outstanding shares then entitled to vote
    generally in the election of directors, voting together as a
    single class.   Item 1B:  Unresolved
    Staff Comments   Item 2:  Properties   32




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Item 3:  Legal
    Proceedings  VNUS Medical
    Technologies, Inc. v. Diomed Holdings, Inc.,
    et al No. C05-02972 MMC
 Item 4:  Submission
    of Matters to a Vote of Security Holders   PART II  Item 5:
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
  intra-day
  High


LowYear Ended December 31, 2005First Quarter


14.90



10.08Second Quarter


13.54



9.20Third Quarter


13.35



9.42Fourth Quarter


11.45



8.00Year Ended December 31, 2006First Quarter


9.09



7.33Second Quarter


8.38



6.98Third Quarter


8.20



5.97Fourth Quarter


8.96



6.46    33




---



##### Table of Contents



Dividend
    Policy
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Issuer
    Purchases of Equity Securities
    Changes
    in Securities and Use of Proceeds
  Form S-1 No. 333-117640)
 34




---



##### Table of Contents



Stock
    Price Performance Graph
   Comparison
    of 26 Month Cumulative Total Return*
    Among VNUS Medical Technologies, Inc.,
    the NASDAQ Composite Index
    and the NASDAQ Medical Equipment Index
  
  Cumulative Total Return10/20/04


12/04


12/05


12/06VNUS Medical Technologies, Inc.



100.00




89.89




55.72




59.04NASDAQ Composite



100.00




115.10




118.48




134.72NASDAQ Medical Equipment



100.00




107.70




116.65




124.49     *
    
    $100 invested on 10/20/04 in stock or on 9/30/04 in
    index-including reinvestment of dividends. Fiscal year ending
    December 31. 35




---



##### Table of Contents



Item 6:  Selected
    Consolidated Financial Data    Years Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share data)Consolidated Statements of
    Operations Data:Net revenues

$
51,681


$
49,170


$
38,166


$
21,838


$
10,041Cost of revenues(1)


17,284



12,311



9,542



6,311



3,646Gross profit


34,397



36,859



28,624



15,527



6,395Operating expenses:Sales and marketing(1)


22,343



20,173



16,235



11,997



7,728Research and development(1)


7,422



3,815



4,540



3,513



2,099General and administrative(1)


15,402



9,025



5,200



2,772



2,806Total operating expenses


45,167



33,013



25,975



18,282



12,633(Loss) income from operations


(10,770
)


3,846



2,649



(2,755
)


(6,238
)Interest income and other expense,
    net


3,471



1,779



439



171



283(Loss) income before income taxes


(7,299
)


5,625



3,088



(2,584
)


(5,955
)Income tax provision


33



275



222







Net (loss) income before
    cumulative effect of change in accounting principle


(7,332
)


5,350



2,866



(2,584
)


(5,955
)Cumulative effect of change in
    accounting principle


73















Net (loss) income after cumulative
    effect of change in accounting principle

$
(7,259
)

$
5,350


$
2,866


$
(2,584
)

$
(5,955
)Basic net (loss) income per
    share(2)

$
(0.48
)

$
0.37


$
0.73


$
(1.97
)

$
(4.73
)Diluted net (loss) income per share

$
(0.48
)

$
0.35


$
0.23


$
(1.97
)

$
(4.73
)Shares used in computing basic net
    (loss) income per share(2)


15,047



14,652



3,946



1,309



1,260Shares used in computing diluted
    net (loss) income per share(2)


15,047



15,466



12,368



1,309



1,260  36




---



##### Table of Contents



(1)
    
    Includes charges for amortization of deferred stock-based
    compensation in the following amounts:  At December 31,2006


2005


2004


2003


2002(In thousands)Cost of revenues

$
182


$
65


$
90


$
56


$
51Sales and marketing


886



264



525



257



342Research and development


276



68



84



89



160General and administrative


1,089



279



352



146



278
   (2)
    
    See Note 2 of the notes to our financial statements for a
    description of the method used to compute basic and diluted net
    income (loss) per share and shares used in computing basic and
    diluted net income (loss) per share.  Years Ended December 31,2006


2005


2004


2003


2002(In thousands)Consolidated Balance Sheet
    Data:Cash and cash equivalents

$
38,917


$
46,797


$
68,566


$
11,711


$
12,601Short-term investments


28,996



25,718











Working capital


70,859



77,362



70,681



12,713



14,530Total assets


85,519



85,339



77,972



17,789



17,885Total accumulated deficit


(43,082
)


(35,823
)


(41,173
)


(44,039
)


(41,455
)Total stockholders equity


74,748



79,522



72,308



14,241



16,214  Item 7:  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  This financial review presents our operating results for each
    of the three years in the period ended December 31, 2006,
    and our financial condition at December 31, 2006. You
    should read the following discussion of our financial condition
    and results of our operations in conjunction with the
    information presented in our consolidated financial statements
    and the related notes to our consolidated financial statements.
    Except for the historical information contained herein, this
    discussion contains forward-looking statements that involve
    risks and uncertainties, such as statements of our plans,
    objectives, expectations and intentions. Factors that could
    cause or contribute to these differences include those discussed
    in Risk Factors Part 1, Item 1A, as well
    as those discussed elsewhere. Our actual results could differ
    materially from those discussed here. The cautionary statements
    made herein should be read as applying to all related
    forward-looking statements wherever they appear herein.
  Business
    Overview
    start-up
 37




---



##### Table of Contents



Financial
    Operations Overview
  Net Revenues.
  Cost of Revenues.
  Sales and Marketing Expenses.
  Research and Development Expenses.
  General and Administrative Expenses.
 38




---



##### Table of Contents



Internal
    Control Matters
  Form 10-K
  If we
    continue to fail to achieve and maintain effective disclosure
    controls and procedures and internal control over financial
    reporting on a consolidated basis, our ability to provide
    accurate financial reports could be impaired and our stock price
    and investor confidence in our company could be materially and
    adversely affected.
  Change to
    Previously Reported Results
    Critical
    Accounting Policies and Estimates
    Revenue Recognition.
  Revenue Recognition No. 00-21, Revenue Arrangements with Multiple Deliverables No. 03-05, Applicability of AICPA Statement of Position
    97-2 to
    Non-Software Deliverables in an Arrangement Containing
    More-Than-Incidental
    Software
  SOP No. 97-2, Software Revenue Recognition SOP No. 98-9, Software Revenue Recognition with Respect to Certain
    Agreements
 39




---



##### Table of Contents



Valuation of Inventory.
  Warranty Costs.
  Allowance for Doubtful Accounts.
   40




---



##### Table of Contents



Income Taxes.
  non-U.S. operations.
    Share-Based Compensation Expense.
     41




---



##### Table of Contents



No. 96-18,
  Recent
    Accounting Pronouncements
  No. 06-03, 06-03). 06-03 06-03 06-03 06-03
     42




---



##### Table of Contents



Results
    of Operations
    Years Ended December 31,2006


2005


2004Net revenues


100.0
%


100.0
%


100.0
%Cost of revenues


33.4



25.0



25.0Gross profit


66.6



75.0



75.0Operating expenses:Sales and marketing


43.2



41.0



42.6Research and development


14.4



7.8



11.9General and administrative


29.8



18.3



13.6Total operating expenses


87.4



67.1



68.1Income (loss) from operations


(20.8
)


7.9



6.9Interest income and other, net


6.7



3.6



1.2Income (loss) before provision for
    income taxes


(14.1
)


11.5



8.1Provision for income taxes


0.0



0.6



0.6Net (loss) income before
    cumulative effect of change in accounting principle


(14.1
)


10.9



7.5Cumulative effect of change in
    accounting principle


0.1







Net (loss) income


(14.0
)%


10.9
%


7.5
%     Years Ended December 31,2006

2005

2004Catheters and devices


81
%


76
%


77
%RF Generators


8
%


18
%


18
%Accessories


11
%


6
%


5
%100
%


100
%


100
%  43




---



##### Table of Contents



Years Ended December 31,2006

2005

2004United States


96
%


96
%


96
%Europe


3
%


3
%


3
%Other International


1
%


1
%


1
%100
%


100
%


100
%   Net Revenues. tm tm tm tm
  Gross Profit.
  Sales and Marketing Expenses.
 44




---



##### Table of Contents



Research and Development Expenses.
  General and Administrative Expenses.
  Interest Income and Other, Net.
  Provision for Income Taxes.
 45




---



##### Table of Contents



Liquidity
    and Capital Resources
  December 31,2006


2005


2004Cash and cash equivalents

$
38,917


$
46,797


$
68,566Short-term investments


28,996



25,718



Working capital


70,859



77,362



70,681Net cash provided by (used in)
    operating activities


(165
)


3,750



3,229Net cash used in investing
    activities


(7,912
)


(26,669
)


(525
)Net cash provided by financing
    activities


197



1,150



54,151      46




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
   47




---



##### Table of Contents



Contractual
    Obligations and Capital Expenditure Requirements
    Payments Due by PeriodContractual Obligations and




Less Than


1-3


3-5


More ThanCapital Expenditure Requirements

Total


1 Year


Years


Years


5 Years(In thousands)Operating lease obligations

$
7,982


$
857


$
2,053


$
2,364


$
2,708Inventory purchase commitments


2,370



2,370











Other purchase commitments


1,816



1,816











Total

$
12,168


$
5,043


$
2,053


$
2,364


$
2,708    Item 7A:  Quantitative
    and Qualitative Disclosures about Market Risk     48




---



##### Table of Contents



Item 8:  Consolidated
    Financial Statements and Supplementary Data  VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of
    Independent Registered Public Accounting Firm


50Consolidated
    Balance Sheets at December 31, 2006 and 2005


52Consolidated
    Statements of Operations for each of the years in the three year
    period ended December 31, 2006


53Consolidated
    Statements of Stockholders Equity for each of the years in
    the three year period ended December 31, 2006


54Consolidated
    Statements of Cash Flows for each of the years in the three year
    period ended December 31, 2006


55Notes to
    Consolidated Financial Statements


56Schedule II,
    Valuation and Qualifying Accounts and Reserves


81  49




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       Consolidated
    financial statements and financial statement schedule
      Internal
    control over financial reporting
  Internal Control 
    Integrated Framework
     50




---



##### Table of Contents



Internal Control  Integrated Framework Internal Control 
    Integrated Framework
  
 
  51




---



##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(In thousands,except share data)ASSETSCurrent assets:Cash and cash equivalents

$
38,917


$
46,797Short-term investments


28,996



25,718Accounts receivable, net of
    allowance for doubtful accounts of $284 and $308, respectively


8,183



6,448Inventories


2,798



2,964Prepaid expenses and other current
    assets


1,192



1,216Total current assets


80,086



83,143Property and equipment, net


4,651



1,363Other assets


782



833Total assets

$
85,519


$
85,339LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,340


$
1,233Accrued compensation and benefits


2,708



2,693Other accrued liabilities


2,665



1,633Deferred revenue


2,514



222Total current liabilities


9,227



5,781Other long-term liabilities


1,544



36Total liabilities


10,771



5,817Commitments and contingencies
    (Note 12)Stockholders equity:Convertible preferred stock:
    $0.001 par value; 10,000,000 authorized; none issued and
    outstanding at December 31, 2006 and December 31,
    2005, respectively






Common stock: $0.001 par
    value; 56,666,666 authorized, 15,130,598 and 14,899,989 issued
    and outstanding at December 31, 2006 and 2005, respectively


15



15Additional paid-in capital


117,964



117,924Deferred stock-based compensation


(144
)


(2,544
)Accumulated other comprehensive
    loss


(5
)


(50
)Accumulated deficit


(43,082
)


(35,823
)Total stockholders equity


74,748



79,522Total liabilities and
    stockholders equity

$
85,519


$
85,339    52




---



##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended December 31,2006


2005


2004(In thousands,except share and per share data)Net revenues

$
51,681


$
49,170


$
38,166Cost of revenues


17,284



12,311



9,542Gross profit


34,397



36,859



28,624Operating expensesSales and marketing


22,343



20,173



16,235Research and development


7,422



3,815



4,540General and administrative


15,402



9,025



5,200Total operating expenses


45,167



33,013



25,975Income (loss) from operations


(10,770
)


3,846



2,649Interest income


3,148



1,852



351Other income (expense), net


323



(73
)


88(Loss) income before provision for
    taxes


(7,299
)


5,625



3,088Provision for income taxes


33



275



222Net (loss) income before
    cumulative effect of change in accounting principle


(7,332
)


5,350



2,866Cumulative effect of accounting
    change


73







Net (loss) income after cumulative
    effect of change in accounting principle

$
(7,259
)

$
5,350


$
2,866Net (loss) income per share (see
    Note 2)Basic(Loss) income per share before
    cumulative change in accounting principle

$
(0.49
)

$
0.37


$
0.73Cumulative effect of change in
    accounting principle, net of tax


0.01







Basic net (loss) income per share

$
(0.48
)

$
0.37


$
0.73Diluted(Loss) income per share before
    cumulative change in accounting principle

$
(0.49
)

$
0.35


$
0.23Cumulative effect of change in
    accounting principle, net of tax


0.01







Diluted net (loss) income per share

$
(0.48
)

$
0.35


$
0.23Weighted average number of shares
    used in per share calculations (see Note 2)Basic


15,047



14,652



3,946Diluted


15,047



15,466



12,368    53




---



##### Table of Contents



VNUS MEDICAL TECHNOLOGIES, INC. AND
    SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
  AccumulatedConvertible








Additional


Deferred


Other





TotalPreferred Stock


Common Stock


Paid-In


Stock-Based


Comprehensive


Accumulated


ShareholdersShares


Amount


Shares


Amount


Capital


Compensation


Loss


Deficit


Equity(In thousands, except share and per share data)Balances at December 31, 2003


25,186,747


$
25



1,329,369


$
1


$
58,686


$
(432
)





$
(44,039
)

$
14,241Exercise of warrants for
    Series C preferred stock


33,006































Net exercise of warrants for common
    stock










2,602























Exercise of stock options










82,871







149















149Deferred stock compensation for
    stock option grants


















1,701



(1,701
)










Fair value of options issued for
    services


















181















181Cancellation of options


















(32
)


32











Conversion of preferred stock to
    common stock


(25,219,753
)


(25
)


8,957,389



9



16















Issuance of common stock in initial
    public offering










4,000,000



4



53,998















54,002Repurchase of restricted stock
    common stock










(792
)






(1
)














(1
)Amortization of deferred
    stock-based compensation






















870











870Net income






























2,866



2,866Balances at December 31, 2004










14,371,439



14



114,698



(1,231
)






(41,173
)


72,308Unrealized loss on short-term
    investments


























(50
)






(50
)Exercise of stock options










528,550



1



1,149















1,150Deferred stock compensation for
    stock option grants


















10



(10
)










Deferred stock compensation for
    restricted stock units (RSUs)


















2,264



(2,264
)










Fair value of options issued for
    services


















62















62Cancellation of options


















(284
)


284











Cancellation of RSUs


















(63
)


63











Amortization of deferred
    stock-based compensation






















614











614Tax benefit on exercise of employee
    stock options


















88















88Net income






























5,350



5,350Balances at December 31, 2005










14,899,989



15



117,924



(2,544
)


(50
)


(35,823
)


79,522Unrealized gain on short-term
    investments


























45







45Exercise of stock options










164,883







197















197Exercise of stock warrants










21,928























Common stock issued for restricted
    stock units










43,798







(127
)














(127
)Reversal of deferred stock
    compensation


















(2,005
)


2,005











Fair value of options issued for
    services


















10















10Cancellation of options


















(43
)


43











Stock compensation for stock options


















1,400



244











1,644Stock compensation for RSUs


















608



181











789Cumulative effect of change in
    accounting principle






















(73
)










(73
)Net loss






























(7,259
)


(7,259
)Balances at December 31, 2006





$




15,130,598


$
15


$
117,964


$
(144
)

$
(5
)

$
(43,082
)

$
74,748    54




---



##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net (loss) income

$
(7,259
)

$
5,350


$
2,866Adjustments to reconcile net (loss)
    income to net cash (used in) provided by
    operating activities:Depreciation and amortization


1,103



634



420Provision for excess and obsolete
    inventory


298



174



68Impairment of long-lived assets


181







Stock based compensation and
    amortization of deferred stock-based compensation


2,443



676



1,051Cumulative effect of change in
    accounting principle


(73
)






Tax benefit on the exercise of
    employee stock options






88



Allowance for doubtful accounts


44



216



105Changes in operating assets and
    liabilities:Accounts receivable


(1,779
)


(1,317
)


(2,123
)Inventories


(132
)


(1,445
)


(841
)Prepaid expenses and other assets


24



(588
)


(435
)Other long-term assets


51



(191
)


2Accounts payable


107



(9
)


358Accrued compensation and benefits


15



(389
)


870Other accrued liabilities


905



549



739Deferred revenue


2,292



77



145Other long-term liabilities


1,615



(75
)


4Net cash provided by (used in)
    operating activities


(165
)


3,750



3,229Cash flows from investing
    activities:Purchase of short-term investments


(56,261
)


(34,468
)


Sale/maturities of short-term
    investments


53,028



8,700



Purchase of property and equipment


(4,679
)


(901
)


(525
)Net cash used in investing
    activities


(7,912
)


(26,669
)


(525
)Cash flows from financing
    activities:Proceeds from the sale of common
    stock










55,800Stock issuance costs










(1,798
)Proceeds from the exercise of stock
    options for common stock


197



1,150



149Net cash provided by financing
    activities


197



1,150



54,151Net (decrease) increase in cash and
    cash equivalents


(7,880
)


(21,769
)


56,855Cash and cash equivalents at the
    beginning of the year


46,797



68,566



11,711Cash and cash equivalents at the
    end of the period

$
38,917


$
46,797


$
68,566Supplemental disclosure of cash
    flow information:Non-cash financing activities:Deferred stock-based compensation

$
2,433


$
1,927


$
1,669RSU share releases surrendered for
    taxes

$
127


$



$
    55




---



##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Note 1 
    The Company
  ® ® tm
    Note 2 
    Summary of Significant Accounting Policies
  Principles of consolidation and basis of
    presentation.
  Use of Estimates.
  Net Income (Loss) Per Share. in-the-money
 56




---



##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2006


2005


2004Numerator:Net (loss) income available to
    common stockholders, basic and diluted

$
(7,259
)

$
5,350


$
2,866Denominator:Weighted average common shares
    outstanding


15,047



14,652



3,947Weighted average unvested common
    shares subject to repurchase










(1
)Weighted average common shares
    outstanding used in computing basic net (loss) income per share


15,047



14,652



3,946Effect of dilutive securities:Stock options, restricted stock
    units, warrants, weighted average convertible preferred stock,
    weighted average unvested common shares subject to repurchase
    agreements, deferred stock-based compensation






814



8,422Total shares, diluted


15,047



15,466



12,368Net (loss) income per common share:Basic

$
(0.48
)

$
0.37


$
0.73Diluted

$
(0.48
)

$
0.35


$
0.23     Year Ended December 31,2006


2005


2004Stock options


1,634



214



38Restricted stock units


398







Total


2,032



214



38   Cash and Cash Equivalents.
  Short-Term Investments. available-for-sale other-than-temporary
  Fair Value of Financial Instruments.
 57




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Inventories. first-in,
  Property and Equipment.
    Furniture and fixtures

3 yearsComputer and office equipment

3 yearsLaboratory equipment

5 yearsPurchased software

3 to 5 years     Long-Lived Assets.
  Revenue Recognition.
  Revenue Recognition No. 00-21, Revenue Arrangements with Multiple Deliverables No. 03-05, Applicability of AICPA Statement of Position
    97-2 to
    Non-Software Deliverables in an Arrangement Containing
    More-Than-Incidental
    Software.
  SOP No. 97-2, Software Revenue Recognition SOP No. 98-9, Software Revenue Recognition with Respect to Certain
    Agreements
   58




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Warranty.
  Research and Development Costs.
  Advertising Expenses.
  Cumulative Effect of a Change in Accounting
    Principle. Accounting for Stock-Based
    Compensation,
    Comprehensive Income (Loss).
  Income Taxes.
  Recent Accounting Pronouncements. No. 06-03, 06-03). 06-03 06-03
 59




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  06-03 06-03
          Note 3 
    Corporate Headquarters Relocation
     60




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Exit Charge





Balance atRecorded in





December 31,2006


Payments


2006Accrued lease payments, net of
    rent deferral

$
650


$
(298
)

$
352Accrued realtor commission


18



(18
)


Write-off of impaired leasehold
    improvements and other fixed assets


179



(179
)


Total facility exit charge

$
847


$
(495
)

$
352     Note 4 
    Concentration of Credit Risk
         61




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 5 
    Inventories
  December 31,


December 31,2006


2005(in thousands)Raw materials and
    sub-assemblies

$
1,212


$
893Finished goods


1,344



1,570Radio-frequency generators


242



501$
2,798


$
2,964   first-in,
  Note 6 
    Property and Equipment, Net
  December 31,


December 31,2006


2005(in thousands)Furniture and fixtures

$
367


$
158Computers and office equipment


1,274



637Leasehold improvements


2,884



1,107Laboratory equipment


1,181



962Purchased software


906



674Construction in progress


296



956,908



3,633Less: Accumulated depreciation and
    amortization


(2,257
)


(2,270
)$
4,651


$
1,363   Note 7 
    Operating Segment and Geographic Information
  Disclosures About Segments of an
    Enterprise and Related Information
 62




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended December 31,2006


2005


2004United States


96
%


96
%


96
%Europe


3
%


3
%


3
%Other International


1
%


1
%


1
%100
%


100
%


100
%   Year Ended December 31,2006


2005


2004Catheters and devices


81
%


76
%


77
%RF Generators


8
%


18
%


18
%Accessories


11
%


6
%


5
%100
%


100
%


100
%     Note 8 
    Short-Term Investments
    December 31, 2006Gross


Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueCommercial paper

$
18,500


$
9


$



$
18,509Corporate debt securities


8,494







(4
)


8,490Asset backed securities


1,997











1,997$
28,991


$
9


$
(4
)

$
28,996     December 31, 2005Gross


Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueCertificates of deposit and money
    market funds

$
688


$



$
(3
)

$
685Commercial paper


987



1







988Corporate debt securities


19,629







(38
)


19,591Asset backed securities


4,464







(10
)


4,454$
25,768


$
1


$
(51
)

$
25,718   available-for-sale available-for-sale
 63




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       December 31,2006One year or less

$
28,996One to five years


$
28,996   Note 9 
    Balance Sheet Components
    December 31,2006


2005Prepaid expenses and other
    current assetsPrepaid expenses

$
1,049


$
902Interest receivable


143



314$
1,192


$
1,216Other accrued
    liabilitiesAccrued expenses

$
1,590


$
1,127Accrued taxes


473



424Accrued warranty


204



34Accrued restructuring


352



Other accrued liabilities


46



48$
2,665


$
1,633Other long-term
    liabilitiesDeferred rent

$
1,544


$
36   Note 10 
    Other Income, Net
  Years Ended December 31,2006


2005


2004Foreign exchange gain (loss)

$
209


$
(152
)

$
46Other


114



79



42$
323


$
(73
)

$
88   Note 11 
    Income Taxes
   64




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Years Ended December 31,2006


2005


2004U.S. federal statutory tax
    rate


(35.00
)%


35.00
%


35.00
%State income taxes, net of federal
    benefit


(5.09
)%


5.58
%


6.40
%Meals/entertainment and other
    permanent adjustments


0.88
%


1.57
%


Change in valuation allowance


33.30
%


(47.35
)%


(54.31
)%Amortization of book stock-based
    compensation


6.37
%


4.77
%


11.14
%AMT tax credit not benefited






2.69
%


Other






2.64
%


8.93
%0.46
%


4.90
%


7.16
%     December 31,2006


2005Net operating loss carryovers

$
12,313


$
11,166Tax credits


2,569



1,857Accruals, allowances and reserves


415



515Capitalization & cost
    recovery


996



711Stock based compensation


279



132Other


(4
)


4Net deferred tax assets


16,568



14,385Valuation allowance


(16,568
)


(14,385
)Net deferred tax assets

$



$
       Note 12 
    Commitments and Contingencies
  Product Warranty Commitment.
 65




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Balance at


Additions


Warranty


Balance atBeginning of


to Warranty


Reserve


End ofPeriod


Liability


Utilized


PeriodYear ended December 31, 2006

$
34


$
283


$
(113
)

$
204Year ended December 31, 2005


43



35



(44
)


34   Legal Proceedings. VNUS Medical Technologies, Inc. v. Diomed Holdings,
    Inc., et al No. C05-02972 MMC
    Leases.
 66




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ending December 31,

Operating Leases2007

$
8572008


9382009


1,1152010


1,1662011


1,1982012 and thereafter


2,708$
7,982     Indemnifications.
  Purchase Commitments.
  Note 13 
    Stock Based Compensation
  Share-Based
    Payment. Accounting for Stock
    Issued to Employees, Accounting for Stock-Based
    Compensation.
  No. 96-18, Accounting for Equity Investments that are Issued to
    Non-Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
 67




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Prior
    to the adoption of SFAS No. 123(R)
  Accounting for Stock-Based Compensation Accounting for
    Stock-Based Compensation  Transition and
    Disclosures.
    Year Ended2005


2004Net income, as reported

$
5,350


$
2,866Deduct: Stock-based compensation
    expense determined under fair value based method, net of tax


(1,938
)


(925
)Pro forma net income

$
3,412


$
1,941Weighted average number of shares
    used in per share calculationBasic


14,652



3,946Diluted


15,218



12,368Pro forma net income per shareBasic

$
0.23


$
0.49Diluted

$
0.22


$
0.16       Impact
    of the adoption of SFAS No. 123(R)
    Transition
    Election Related to Accounting for Tax Effects of Share-Based
    Payment Awards.
 68




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Year EndedDecember 31,2006Costs of revenues

$
182Sales and marketing


886Research and development


276General and administrative


1,089Total stock-based compensation

$
2,433     Valuation
    Assumptions
      Year Ended2006

2005

2004Risk free interest rates

4.55  5.00%

3.71  4.45%

2.64  3.62%Expected Life (in years)

5.25  6.25

3.70

4.00Dividend Yield





Volatility

63.8  96.2%

51.59%

65.00%      69




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           Equity
    Incentive Program
       70




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      and/or
 71




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Options Outstanding


Restricted Stock Units OutstandingShares





Weighted





WeightedAvailable





Average


Number of


Averagefor Future


Number of


Exercise


Restricted Stock


ExerciseGrant


Options


Price


Units


PriceBalances at December 31, 2003


32,663



1,389,361


$
1.92






$
Authorized


1,231,333















Granted


(477,944
)


477,944



5.41







Options Exercised






(82,871
)


1.79







Terminated/cancelled


101,632



(104,712
)


2.87







Balances at December 31, 2004


887,684



1,679,722


$
2.86






$
Authorized


595,999















Expired


(273
)














Granted


(1,021,218
)


771,939



11.38



249,279



Options Exercised






(528,550
)


2.18







Terminated/cancelled


210,486



(203,466
)


5.36



(7,020
)


Balances at December 31, 2005


672,678



1,719,645


$
6.60



242,259


$
Authorized


605,223















Expired


(3,118
)














Granted


(539,843
)


228,666



7.52



311,177



Options Exercised






(164,883
)


1.19







Restricted Stock Unit Releases














(43,798
)


RSU releases surrendered for taxes


18,098











(18,098
)


Terminated/cancelled


242,758



(149,336
)


10.19



(93,422
)


Balances at December 31, 2006


995,796



1,634,092


$
6.94



398,118


$
   in-the-money in-the-money in-the-money
 72




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Options OutstandingWeighted

Options ExercisableAverage



WeightedRemaining



AverageNumber of

Contractual

Number of

ExerciseExercise Prices

Options

Life (in Years)

Options

Price$    0.43 
    0.71


100,852



1.95



99,284


$
0.661.50 
    1.50


323,570



5.69



307,810



1.503.00 
    3.00


207,241



7.18



140,571



3.006.00 
    9.61


327,383



8.00



125,509



7.299.65 
    10.74


153,750



8.24



93,931



10.4410.76  10.86


180,000



8.21



78,750



10.8210.89  12.40


134,545



8.59



47,232



11.3012.44  13.10


151,359



9.29



70,191



13.4613.12  15.00


53,100



8.33



38,071



14.4316.70  16.70


2,292



7.91



2,292



16.701,634,092



7.21



1,003,641


$
5.67       Restricted
    Stock Units
           73




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 14 
    Employee Benefit Plans
    Note 15 
    Selected Quarterly Financial Data (unaudited)
    Dec. 06


Sept. 06


June 06


Mar. 06


Dec. 05


Sept. 05


June 05


Mar. 05(In thousands)(Unaudited)Net revenues

$
13,322


$
11,919


$
13,089


$
13,351


$
13,535


$
12,129


$
12,314


$
11,192Cost of revenues(1)


4,760



4,345



4,262



3,917



3,521



2,915



3,145



2,730Gross profit


8,562



7,574



8,827



9,434



10,014



9,214



9,169



8,462Total operating expenses(1)


11,525



11,011



11,898



10,733



9,879



7,898



8,067



7,169Income (loss) from operations


(2,963
)


(3,437
)


(3,071
)


(1,299
)


135



1,316



1,102



1,293Interest income and other, net


973



926



857



715



575



458



385



361Income (loss) before provision for
    income taxes


(1,990
)


(2,511
)


(2,214
)


(584
)


710



1,774



1,487



1,654Provision for (benefit from) income
    taxes


20



13











(66
)


121



104



116Net (loss) income before cumulative
    effect of change in accounting principle


(2,010
)


(2,524
)


(2,214
)


(584
)


776



1,653



1,383



1,538Cumulative effect of accounting
    change














(73
)














Net (loss) income after cumulative
    effect of change in accounting principle

$
(2,010
)

$
(2,524
)

$
(2,214
)

$
(511
)

$
776


$
1,653


$
1,383


$
1,538Earnings (loss) per share:Basic:

$
(0.13
)

$
(0.17
)

$
(0.15
)

$
(0.03
)

$
0.05


$
0.11


$
0.09


$
0.11Diluted:

$
(0.13
)

$
(0.17
)

$
(0.15
)

$
(0.03
)

$
0.05


$
0.11


$
0.09


$
0.10Shares used in computing basic net
    income (loss) per share:


15,112



15,064



15,039



14,966



14,849



14,786



14,561



14,403Shares used in computing diluted
    net income (loss) per share:


15,112



15,064



15,039



14,966



15,445



15,611



15,601



15,655(1) Includes charges for
    stock-based compensation in the following amounts:Cost of revenues

$
45


$
56


$
41


$
40


$
14


$
16


$
17


$
18Operating expenses


457



602



553



639



190



130



111



180 74




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##### Table of Contents



VNUS
    MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Dec. 06


Sept. 06


June 06


Mar. 06


Dec. 05


Sept. 05


June 05


Mar. 05Net revenues


100.0
%


100.0
%


100.0
%


100.0
%


100.0
%


100.0
%


100.0
%


100.0
%Cost of revenues


35.7



36.5



32.6



29.3



26.0



24.0



25.5



24.4Gross profit


64.3



63.5



67.4



70.7



74.0



76.0



74.5



75.6Total operating expenses


86.5



92.4



90.8



80.4



73.0



65.1



65.5



64.0Income from operations


(22.2
)


(28.9
)


(23.4
)


(9.7
)


1.0



10.9



9.0



11.6Interest income and other, net


7.3



7.8



6.5



5.4



4.2



3.8



3.1



3.1Income before provision for income
    taxes


(14.9
)


(21.1
)


(16.9
)


(4.3
)


5.2



14.7



12.1



14.7Provision for (benefit from) income
    taxes


0.2



0.1



0.0



0.0



(0.5
)


1.0



0.9



1.0Net (loss) income before cumulative
    effect of change in accounting principle


(15.1
)


(21.2
)


(16.9
)


(4.3
)


5.7



13.7



11.2



13.7Cumulative effect of accounting
    change


0.0



0.0



0.0



(0.5
)


0.0



0.0



0.0



0.0Net income


(15.1
)%


(21.2
)%


(16.9
)%


(3.8
)%


5.7
%


13.7
%


11.2
%


13.7
%   Note 16 
    Subsequent Event
   75




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##### Table of Contents



Item 9:
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e),
  MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Rule 13a-15(f)
    Internal
    Control  Integrated Framework
     76




---



##### Table of Contents



Form 10-K.
  MANAGEMENTS
    PLANS FOR REMEDIATION
    CHANGES
    IN INTERNAL CONTROL OVER FINANCIAL REPORTING
    Item 9B.
    Other
    Information   PART III  Item 10:
    Directors
    and Executive Officers of the Registrant    Item 11:
    Executive
    Compensation    Item 12:
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13:
    Certain
    Relationships and Related Transactions   77




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##### Table of Contents



Item 14:
    Principal
    Accountant Fees and Services   PART IV Item 15:  Exhibits
    and Financial Statement Schedules  Consolidated Financial Statements and
    Supplementary Data:
    PageNumberReport of Independent Registered
    Public Accounting Firm


50Audit of Managements
    Assessment of Internal Controls Over Financial ReportingConsolidated Balance Sheets at
    December 31, 2006 and December 31, 2005


52Consolidated Statements of
    Operations for Each of the Years in the Three Year Period Ended
    December 31, 2006


53Consolidated Statements of
    Stockholders Equity for Each of the Years in the Three
    Year Period Ended December 31, 2006


54Consolidated Statements of Cash
    Flows for Each of the Years in the Three Year Period Ended
    December 31, 2006


55Notes to Consolidated Financial
    Statements


562. Financial Statement
    Schedules:Schedule II 
    Valuation and Qualifying Accounts


813. Exhibit Index
   INDEX OF
    EXHIBITS
  ExhibitNumber

Description3
.1

Amended and Restated Certificate
    of Incorporation (incorporated by reference to Exhibit 3.1
    to the Companys Registration Statement on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).3
.2

Amended and Restated Bylaws
    (incorporated by reference to Exhibit 3.2 to the
    Companys Registration Statement on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).4
.1

Specimen Stock Certificate
    (incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement on
    Form No. S-1/A
    333-117640,
    filed on October 15, 2004).10
.1#

Amended and Restated 2000 Equity
    Incentive Plan (incorporated by reference to Exhibit 10.1
    to the Companys Report on
    Form 8-K
    dated March 21, 2007).10
.2#

Form of Restricted Stock Unit
    Award Grant Notice and Restricted Stock Unit Award Agreement
    Under the VNUS Medical Technologies, Inc. Amended and Restated
    2000 Equity Incentive Plan (incorporated by reference to
    Exhibit 10.1 to the Companys Report on
    Form 8-K
    dated September 8, 2005).10
.3#

VNUS Medical Technologies, Inc.
    1995 Stock Plan (incorporated by reference to Exhibit 10.4
    to the Companys Registration Statement on
    Form S-1
    No. 333-117640,
    filed on July 23, 2004).10
.4#

First Amendment to the VNUS
    Medical Technologies, Inc. 1995 Stock Plan (incorporated by
    reference to Exhibit 10.5 to the Companys
    Registration Statement on
    Form S-1
    No. 333-117640,
    filed on July 23, 2004).10
.5#

Second Amendment to the VNUS
    Medical Technologies, Inc. 1995 Stock Plan (incorporated by
    reference to Exhibit 10.6 to the Companys
    Registration Statement on
    Form S-1
    No. 333-117640,
    filed on July 23, 2004). 78




---



##### Table of Contents



ExhibitNumber

Description10
.6#

Amended and Restated VNUS
    Severance Plan for Management and Key Employees (incorporated by
    reference to Exhibit 10.1 to the Companys Report on
    Form 8-K
    dated November 8, 2005).10
.7#

Form of Indemnity Agreement for
    Directors and Officers (incorporated by reference to
    Exhibit 10.8 to the Companys Registration Statement
    on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).10
.8

Service and Supply Agreement by
    and between VNUS Medical Technologies, Inc. and Byers Peak,
    Inc., dated February 20, 2004 (incorporated by reference to
    Exhibit 10.10 to the Companys Registration Statement
    on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).10
.9

Lease Agreement by and between
    Legacy Partners I SJ Fontanoso, LLC and VNUS Medical
    Technologies, Inc., dated November 15, 2005. (incorporated
    by reference to Exhibit 10.19 to the Companys Annual
    Report on
    Form 10-K,
    dated March 14, 2006).10
.10*

Form of Stock Option Award Grant
    Notice and Option Award Agreement under the VNUS Medical
    Technologies, Inc. Amended and Restated 2000 Equity Incentive
    Plan.21
*

List of Subsidiaries of VNUS
    Medical Technologies, Inc.23
.1*

Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm.31
.1*

Certification of Chief Executive
    Officer Required Under
    Rule 13a-14(a)
    of the Securities Exchange Act of 1934, as amended.31
.2*

Certification of Principal
    Financial Officer Required Under
    Rule 13a-14(a)
    of the Securities Exchange Act of 1934, as amended.32
*

Certification of Chief Executive
    Officer and Principal Financial Officer Required Under
    Rule 13a-14(b)
    of the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. Section 1350.     *
    
    Filed herewith.#
    
    Management compensation or arrangement.+
    
    Confidential treatment requested for certain portions of this
    document.  Exhibits.
  Regulation S-K
 79




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##### Table of Contents



SIGNATURES
      By
    /s/  BRIAN
    E. FARLEY   President, Chief Executive Officer
 and Director
      By

/s/  BRIAN
    E. FARLEYBrian
    E. Farley

President, Chief Executive Officer
    and Director
    (Principal Executive Officer)

Date: March 30, 2007By

/s/  TIMOTHY
    A. MARCOTTETimothy
    A. Marcotte

Vice President and
    Chief Financial Officer
    (Principal Financial Officer)

Date: March 30, 2007By

/s/  W.
    JAMES
    FITZSIMMONSW.
    James Fitzsimmons

Director

Date: March 30, 2007By

/s/  KATHLEEN
    D. LAPORTEKathleen
    D. Laporte

Director

Date: March 30, 2007By

/s/  EDWARD
    W. UNKARTEdward
    W. Unkart

Director

Date: March 30, 2007By

/s/  LORI
    M. ROBSON,
    PH.D.Lori
    M. Robson, Ph.D.

Director

Date: March 30, 2007By

/s/  MICHAEL
    J. COYLEMichael
    J. Coyle

Director

Date: March 30, 2007By

/s/  GREGORY
    T.
    SCHIFFMANGregory
    T. Schiffman

Director

Date: March 30, 2007  80




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##### Table of Contents



FINANCIAL
    STATEMENT SCHEDULE
  SCHEDULE II VALUATION AND QUALIFYING
    ACCOUNTS AND RESERVES
  Balance at








Balance atBeginning








End ofof Period


Additions


Write-offs


Period(In thousands)Allowance for Doubtful Accounts
    Year Ended:December 31, 2004

$
192


$
105


$
(102
)

$
195December 31, 2005


195



216



(103
)


308December 31, 2006


308



44



(68
)


284Allowance for Excess and
    Obsolete Inventory Year Ended:December 31, 2004

$
196


$
68


$
(233
)

$
31December 31, 2005


31



174



(50
)


155December 31, 2006


155



298



(63
)


390Allowance for Deferred Tax
    Assets Year Ended:December 31, 2004

$
16,431






$
(1,108
)

$
15,323December 31, 2005


15,323







(938
)


14,385December 31, 2006


14,385



2,183







16,568  81




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##### Table of Contents



INDEX OF
    EXHIBITS
  ExhibitNumber

Description3
.1

Amended and Restated Certificate
    of Incorporation (incorporated by reference to Exhibit 3.1
    to the Companys Registration Statement on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).3
.2

Amended and Restated Bylaws
    (incorporated by reference to Exhibit 3.2 to the
    Companys Registration Statement on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).4
.1

Specimen Stock Certificate
    (incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement on
    Form No. S-1/A
    333-117640,
    filed on October 15, 2004).10
.1#

Amended and Restated 2000 Equity
    Incentive Plan (incorporated by reference to Exhibit 10.1
    to the Companys Report on
    Form 8-K
    dated March 21, 2007).10
.2#

Form of Restricted Stock Unit
    Award Grant Notice and Restricted Stock Unit Award Agreement
    Under the VNUS Medical Technologies, Inc. Amended and Restated
    2000 Equity Incentive Plan (incorporated by reference to
    Exhibit 10.1 to the Companys Report on
    Form 8-K
    dated September 8, 2005).10
.3#

VNUS Medical Technologies, Inc.
    1995 Stock Plan (incorporated by reference to Exhibit 10.4
    to the Companys Registration Statement on
    Form S-1
    No. 333-117640,
    filed on July 23, 2004).10
.4#

First Amendment to the VNUS
    Medical Technologies, Inc. 1995 Stock Plan (incorporated by
    reference to Exhibit 10.5 to the Companys
    Registration Statement on
    Form S-1
    No. 333-117640,
    filed on July 23, 2004).10
.5#

Second Amendment to the VNUS
    Medical Technologies, Inc. 1995 Stock Plan (incorporated by
    reference to Exhibit 10.6 to the Companys
    Registration Statement on
    Form S-1
    No. 333-117640,
    filed on July 23, 2004).10
.6#

Amended and Restated VNUS
    Severance Plan for Management and Key Employees (incorporated by
    reference to Exhibit 10.1 to the Companys Report on
    Form 8-K
    dated November 8, 2005).10
.7#

Form of Indemnity Agreement for
    Directors and Officers (incorporated by reference to
    Exhibit 10.8 to the Companys Registration Statement
    on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).10
.8

Service and Supply Agreement by
    and between VNUS Medical Technologies, Inc. and Byers Peak,
    Inc., dated February 20, 2004 (incorporated by reference to
    Exhibit 10.10 to the Companys Registration Statement
    on
    Form S-1/A
    No. 333-117640,
    filed on September 28, 2004).10
.9

Lease Agreement by and between
    Legacy Partners I SJ Fontanoso, LLC and VNUS Medical
    Technologies, Inc., dated November 15, 2005. (incorporated
    by reference to Exhibit 10.19 to the Companys Annual
    Report on
    Form 10-K,
    dated March 14, 2006).10
.10*

Form of Stock Option Award Grant
    Notice and Option Award Agreement under the VNUS Medical
    Technologies, Inc. Amended and Restated 2000 Equity Incentive
    Plan.21
*

List of Subsidiaries of VNUS
    Medical Technologies, Inc.23
.1*

Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm.31
.1*

Certification of Chief Executive
    Officer Required Under
    Rule 13a-14(a)
    of the Securities Exchange Act of 1934, as amended.31
.2*

Certification of Principal
    Financial Officer Required Under
    Rule 13a-14(a)
    of the Securities Exchange Act of 1934, as amended.32
*

Certification of Chief Executive
    Officer and Principal Financial Officer Required Under
    Rule 13a-14(b)
    of the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. Section 1350.     *
    
    Filed herewith.#
    
    Management compensation or arrangement.+
    
    Confidential treatment requested for certain portions of this
    document.