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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 000-50988


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 Number)
|                                                                                           
|2200 Zanker Road, Suite F
     San Jose, California(Address of principal executive offices) |  | 95131(Zip Code)                            

Registrants telephone number, including area code:


(408) 473-1100


Securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934:


None


Securities registered pursuant to Section 12(g) of
the


Securities Exchange Act of 1934:


Common Stock, $0.001 par value per share





þ o


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










VNUS MEDICAL TECHNOLOGIES, INC.


TABLE OF CONTENTS


|                           |  |                                                                                                                      |   |      |    | 
|-------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | - | ---- | -- | 
|                           |  |                                                                                                                      |   | Page |   
|                           |  |                                                                                                                      |   |      |   
|PART I                    
|FORWARD LOOKING STATEMENTS |  |                                                                                                                      | 1 |     
|Item 1.                    |  | Business                                                                                                             |   |      | 1  | 
|Item 2.                    |  | Properties                                                                                                           |   |      | 19 | 
|Item 3.                    |  | Legal Proceedings                                                                                                    |   |      | 19 | 
|Item 4.                    |  | Submission of Matters to a Vote of Security
    Holders                                                              |   |      | 19 | 
|PART II                   
|Item 5.                    |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |   |      | 19 | 
|Item 6.                    |  | Selected Consolidated Financial Data                                                                                 |   |      | 21 | 
|Item 7.                    |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |   |      | 22 | 
|Item 7A.                   |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |   |      | 45 | 
|Item 8.                    |  | Consolidated Financial Statements and
    Supplementary Data                                                         |   |      | 46 | 
|Item 9.                    |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |   |      | 66 | 
|Item 9A.                   |  | Controls and Procedures                                                                                              |   |      | 66 | 
|Item 9B.                   |  | Other Information                                                                                                    |   |      | 66 | 
|PART III                  
|Item 10.                   |  | Directors and Executive Officers of the
    Registrant                                                               |   |      | 66 | 
|Item 11.                   |  | Executive Compensation                                                                                               |   |      | 67 | 
|Item 12.                   |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |   |      | 68 | 
|Item 13.                   |  | Certain Relationships and Related
    Transactions                                                                   |   |      | 68 | 
|Item 14.                   |  | Principal Accountant Fees and Services                                                                               |   |      | 68 | 
|PART IV                   
|Item 15.                   |  | Exhibits and Financial Statement
    Schedules                                                                       |   |      | 68 | 
|EXHIBIT 10.8              
|EXHIBIT 21                
|EXHIBIT 23.1              
|EXHIBIT 31.1              
|EXHIBIT 31.2              
|EXHIBIT 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. 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 II, Item 7
below. Our actual results could differ materially from those
discussed here. 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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| |                     
| | --------------------
| | Corporate Background





Venous Reflux Disease












| |   |                                                        
| | - | -------------------------------------------------------
| |  | leg pain and swelling;                                 
|
| |  | leg heaviness and fatigue;                             
|
| |  | painful varicose veins;                                
|
| |  | skin changes such as discoloration or inflammation; and
|
| |  | open skin ulcers.                                      





2



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Venous Reflux Market






| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 620,000 patients receive compression stockings or varicose
    vein procedures that do not address the primary underlying cause
    of venous reflux;
|
| |  | 100,000 patients undergo vein stripping surgery; and                                                                                                 
|
| |  | 80,000 patients receive minimally invasive treatment with
    endovenous ablation, including our Closure procedure.                                  



Current Treatment Alternatives




Conventional Vein Stripping and Ligation Surgery.






| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | is an invasive procedure requiring groin surgery;                                                                                     
|
| |  | routinely involves post-operative pain, discomfort and
    tenderness, which limits patients physical activities
    during recovery;

3



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| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | often results in significant bruising of the thigh and temporary
    discoloration of the skin;  
|
| |  | is typically performed using general anesthesia, exposing the
    patient to additional risk; and
|
| |  | may cause nerve injury.                                                                          



Endovenous Laser Ablation.








| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | significant pain, tenderness, bruising and skin discoloration
    during the post-operative period; and
|
| |  | veins to reopen from naturally occurring clot dissolving agents.                                       



The VNUS Closure Procedure






| |   |                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Map the Saphenous Vein. A typical procedure begins with
    noninvasive ultrasound imaging of the diseased vein to trace its
    location. This step allows the physician to determine the site
    where the Closure catheter will be inserted and to mark the
    desired position of the catheter tip to begin treatment.             
|
| |  | Insert the Closure Catheter. After the physician accesses
    the saphenous vein, the Closure catheter is inserted into the
    vein and advanced to the uppermost segment of the vein. The
    physician then typically injects a volume of dilute anesthetic
    fluid into the area surrounding the vein. The anesthetic numbs
    the

4



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | leg, helps squeeze blood out of the vein and provides a fluid
    layer outside the vein to protect surrounding tissue from heat
    once the catheter starts delivering RF energy. Saline is then
    slowly infused into the vein from the tip of the catheter to
    further create a near-bloodless field inside the vein, allowing
    the catheter to preferentially heat the vein wall, rather than
    the blood.                                                                                                                                                                                                                                                                                                         
|
| |  | Deliver RF Energy and Withdraw Catheter. Noninvasive
    ultrasound is used to confirm the catheter tip position and the
    physician then activates the RF generator, causing the
    electrodes at the tip of the catheter to heat the vein wall to a
    target temperature of typically 85 to 90 degrees
    Centigrade, or 185 to 195 degrees Fahrenheit. As the vein
    wall is heated, the vein shrinks and the catheter is gradually
    withdrawn. During catheter pullback, which typically occurs over
    9 to 18 minutes, the RF generator regularly adjusts the power
    level to maintain target temperature to effectively shrink
    collagen in the vein wall and close the vein over an extended
    length.
|
| |  | Confirm Closing of Vein. After treatment, ultrasound
    imaging is used to confirm closing of the vein. If a portion of
    the vein is not closed, the catheter can be reinserted and
    energy reapplied. After the procedure, the narrowed vein
    gradually becomes fibrous, sealing the interior of the vein
    walls and naturally redirecting blood flow to healthy veins.
    Experienced physicians often complete the procedure in 40 to 60
    minutes.                                                                                                                                                                                                                                                            







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Minimally Invasive Outpatient Procedure. Our Closure
    catheters are inserted into the vein via a needle puncture in
    the lower leg, eliminating the need for groin surgery and
    general anesthesia. The 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. The Closure procedure does not
    involve pulling the diseased vein from the thigh as with vein
    stripping surgery, or boiling blood to occlude a vein as with
    EVL. We believe this results in significantly less
    post-operative pain, faster healing and allows the early
    resumption of normal activities. Independent comparative studies
    have shown that patients receiving the Closure procedure return
    to work and normal activity significantly faster than those
    receiving vein stripping. In a comparative trial of the Closure
    procedure versus EVL, patients treated using the Closure system
    in one leg and EVL in the other leg exhibited less pain and
    bruising in the leg treated with the Closure system.
|
| |  | Excellent Clinical Outcomes. In a randomized comparative
    trial of the Closure procedure and vein stripping, the Closure
    procedure was found to be as effective as vein stripping at two
    years following treatment, with fewer side effects and faster
    recovery. A comparative trial versus EVL showed the Closure
    procedure exhibited greater efficacy and less post-operative
    bruising and pain.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Long-Lasting Results. Our multi-center registry data
    shows venous reflux was eliminated 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 vein stripping or EVL. Additionally, because the Closure
    procedure is catheter-based, it results in little or no scarring
    compared to vein stripping.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

5



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Clinical Results








| |   |                                                               
| | - | --------------------------------------------------------------
| |  | equivalent elimination of venous reflux at two-year follow-up;
|
| |  | faster recuperation and less post-operative pain; and         
|
| |  | fewer complications and adverse findings.                     





| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | long-term elimination of venous reflux; and                             
|
| |  | persistent relief of leg pain and other symptoms through five
    years.





| |   |                                                   
| | - | --------------------------------------------------
| |  | provided better efficacy; and                     
|
| |  | resulted in less post-operative pain and bruising.





| |                                                                     
| | --------------------------------------------------------------------
| | Randomized Trials of the Closure Procedure versus Vein
    Stripping



6



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| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patients treated with the Closure procedure returning 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 returning to normal activities within
    one day compared to only 47% of vein stripping patients; and                                              
|
| |  | Employed patients treated with the Closure procedure returning
    to work an average of 7.7 days faster than employed
    patients treated with vein stripping surgery.    



|         |  |                                     |  |               
|-------- |  | ----------------------------------- |  | --------------
|         |  | % of Limbs Free of Adverse Findings
|         |  |                                    
|         |  | Closure Procedure                   |  | Vein Stripping
|         |  |                                     |  |               
|72 Hours |  | 43%                                 |  | 17%           
|1 Week   |  | 35%                                 |  | 14%           
|3 Weeks  |  | 71%                                 |  | 39%           





7



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| |                                           
| | ------------------------------------------
| | Clinical Registry of the Closure Procedure



|                  |  |            |  |               
|----------------- |  | ---------- |  | --------------
|                  |  |            |  | Elimination of
|Time of Follow up |  | # of Limbs |  | Reflux        
|                  |  |            |  |               
|1 Year            |  | 473        |  | 88%           
|2 Years           |  | 263        |  | 88%           
|3 Years           |  | 133        |  | 88%           
|4 Years           |  | 119        |  | 87%           
|5 Years           |  | 117        |  | 84%           





| |                                                    
| | ---------------------------------------------------
| | Closure Procedure Versus Endovenous Laser Treatment



|                                         |  |                   |  |    
|---------------------------------------- |  | ----------------- |  | ---
|                                         |  | Closure Procedure |  | EVL
|                                         |  |                   |  |    
|Bruising at one week following treatment |  | 4%                |  | 40%
|Primary vein occlusion                   |  | 82%               |  | 56%





Products






| |                                
| | -------------------------------
| | Disposable Endovenous Catheters



8



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| |             
| | ------------
| | RF Generator





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the temperature of the vein wall at the point where energy is
    applied;                                                                                                        
|
| |  | the power used during treatment; and                                                                                                                                              
|
| |  | the impedance, or amount of resistance between electrodes, so
    that the physician can determine whether the electrodes are
    maintaining adequate contact with the vein wall.



| |                               
| | ------------------------------
| | Accessories and Other Products



Seasonality




Sales and Marketing






9



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We educate and train our sales representatives and the
    physicians interested in performing the Closure procedure. We
    also educate experienced physicians in the use of the Closure
    procedure for treatments such as large veins, venous ulcer
    patients and small saphenous veins through workshops and
    one-on-one training sessions.                                                                                                 
|
| |  | We assist physicians in educating their current and potential
    patients about the 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 patients on the many
    benefits of the Closure procedure.                                                                                        
|
| |  | We advise physicians in the reimbursement process via the
    support of our Reimbursement Services team, which works directly
    with physicians and their office personnel, hospital and
    surgicenter personnel, and patients to obtain authorization from
    payors for patients to receive the Closure procedure. We also
    work with providers to challenge any procedure authorization
    denials by payors by providing our clinical data.
|
| |  | We seek to add and promote products to leverage our position as
    the leader in vein treatments to position VNUS as the
    single-source supplier for a physicians vein treatment
    needs.                                                                                                                                                                                                                                                         





Reimbursement








10



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Research and Development


tm






Manufacturing






11



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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 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.




Premarket Approval Pathway.


Clinical Trials.


14



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Continuing Food and Drug Administration Regulation.




| |   |                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Quality System Regulations, which requires 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.                                                                                                                                                                                                                                                                                       







15



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| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | 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;      
|
| |  | 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.                                                                



Current Clearances.




| |               
| | --------------
| | European Union







| |                  
| | -----------------
| | Rest of the World



16



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Fraud and Abuse Laws




| |                      
| | ---------------------
| | Anti-Kickback Statute









| |          
| | ---------
| | Stark Law







17



---



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| |                  
| | -----------------
| | False Claims Laws





| |                                                    
| | ---------------------------------------------------
| | Fraud on a Health Benefit Plan and False Statements



Privacy and Security




Employees




Financial Information




18



---



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|        |           
|------- | ----------
|Item 2: | Properties








|        |                  
|------- | -----------------
|Item 3: | Legal Proceedings








|        |                                                    
|------- | ---------------------------------------------------
|Item 4: | Submission of Matters to a Vote of Security Holders





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approve an amendment to our certificate of incorporation
    effecting a two-for-three reverse split of our common stock;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | approve an amendment and restatement of our certificate of
    incorporation and bylaws, each to become effective immediately
    following the completion of our initial public offering; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | approve an amendment to our 2000 Equity Incentive Plan to
    (i) increase the number of authorized shares of common
    stock issuable under the plan to 2,378,666, and (ii) on
    December 31 of each year, beginning on December 31,
    2005, further increase the number of shares reserved for
    issuance under the plan by the lower of
    (x) 800,000 shares, (y) 4% of the number of
    shares of our common stock then outstanding or (z) such
    other number of shares of our common stock as is determined by
    the administrator of the plan, provided that the maximum number
    of shares of our common stock that may be issued upon the
    exercise of incentive stock options during the term of the plan
    may not exceed 6,378,666.




PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5: | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

Market Information




|                                     |  |      |       |  |     |   |       | 
|------------------------------------ |  | ---- | ----- |  | --- | - | ----- | 
|                                     |  | High |       |  | Low |  
|                                     |  |      |       |  |     |  
|October 20, 2004 - December 31, 2004 |  | $    | 21.30 |  |     | $ | 12.80 | 



Dividend Policy




Securities Authorized for Issuance Under Equity Compensation
Plans




19



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Purchases of Equity Securities




Changes in Securities and Use of Proceeds












20



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|        |                                     
|------- | ------------------------------------
|Item 6: | Selected Consolidated Financial Data



|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |   |        |       |        |   |        |       |       | 
|------------------------------------------- | --------------------------------------------------------------- | ------------------------------------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ----- | 
|                                            |                                                                 | Years Ended December 31,              |                         
|                                            |                                                                 |                                       |                         
|                                            |                                                                 | 2004                                  |                          |        | 2003   |        |   | 2002   |        |        | 2001 |        |       | 2000   |  
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            |                                                                 | (in thousands, except per share data) |                         
|                                            |                                                                 | (unaudited)                           |                         
|Consolidated Statements of Operations Data: |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |   |        |       |        |   |       
|                                            | Net revenues                                                    |                                       | $                        | 38,166 |        |        | $ | 21,838 |        |        | $    | 10,041 |       |        | $ | 5,564  |       |        | $ | 2,155  |      
|                                            | Cost of revenues(1)                                             |                                       |                          | 9,542  |        |        |   | 6,311  |        |        |      | 3,646  |       |        |   | 3,262  |       |        |   | 2,130  |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Gross profit                                                    |                                       |                          | 28,624 |        |        |   | 15,527 |        |        |      | 6,395  |       |        |   | 2,302  |       |        |   | 25     |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Operating expenses:                                             |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |   |        |       |        |   |        |      
|                                            |                                                                 | Sales and marketing(1)                |                          |        | 16,235 |        |   |        | 11,997 |        |      |        | 7,728 |        |   |        | 5,602 |        |   |        | 4,233 |      
|                                            |                                                                 | Research and development(1)           |                          |        | 5,034  |        |   |        | 3,676  |        |      |        | 2,156 |        |   |        | 2,534 |        |   |        | 2,387 |      
|                                            |                                                                 | General and administrative(1)         |                          |        | 4,706  |        |   |        | 2,609  |        |      |        | 2,749 |        |   |        | 2,427 |        |   |        | 2,726 |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            |                                                                 |                                       | Total operating expenses |        |        | 25,975 |   |        |        | 18,282 |      |        |       | 12,633 |   |        |       | 10,563 |   |        |       | 9,346 | 
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Income (loss) from operations                                   |                                       |                          | 2,649  |        |        |   | (2,755 | )      |        |      | (6,238 | )     |        |   | (8,261 | )     |        |   | (9,321 | )    
|                                            | Interest income (expense) and other, net                        |                                       |                          | 439    |        |        |   | 171    |        |        |      | 283    |       |        |   | (240   | )     |        |   | 298    |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Income (loss) before provision for income taxes                 |                                       |                          | 3,088  |        |        |   | (2,584 | )      |        |      | (5,955 | )     |        |   | (8,501 | )     |        |   | (9,023 | )    
|                                            | Provision for income taxes                                      |                                       |                          | 222    |        |        |   |       |        |        |      |       |       |        |   |       |       |        |   |       |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Net income (loss)                                               |                                       | $                        | 2,866  |        |        | $ | (2,584 | )      |        | $    | (5,955 | )     |        | $ | (8,501 | )     |        | $ | (9,023 | )    
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Basic net income (loss) per share(2)                            |                                       | $                        | 0.73   |        |        | $ | (1.97  | )      |        | $    | (4.73  | )     |        | $ | (7.09  | )     |        | $ | (8.04  | )    
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Diluted net income (loss) per share(2)                          |                                       | $                        | 0.23   |        |        | $ | (1.97  | )      |        | $    | (4.73  | )     |        | $ | (7.09  | )     |        | $ | (8.04  | )    
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Shares used in computing basic net income (loss) per share(2)   |                                       |                          | 3,946  |        |        |   | 1,309  |        |        |      | 1,260  |       |        |   | 1,199  |       |        |   | 1,123  |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  
|                                            | Shares used in computing diluted net income (loss) per share(2) |                                       |                          | 12,368 |        |        |   | 1,309  |        |        |      | 1,260  |       |        |   | 1,199  |       |        |   | 1,123  |      
|                                            |                                                                 |                                       |                          |        |        |        |   |        |        |        |      |        |       |        |  






|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Includes charges for stock-based compensation in the following
    amounts:

|                           |       |   |     |       |  |   |     |     |  |   |     |     |  |   |     |       |  |   |     |       | 
|-------------------------- | ----- | - | --- | ----- |  | - | --- | --- |  | - | --- | --- |  | - | --- | ----- |  | - | --- | ----- | 
|Cost of revenues           |       | $ | 90  |       |  | $ | 56  |     |  | $ | 51  |     |  | $ | 576 |       |  | $ | 164 |      
|Sales and marketing        |       |   | 525 |       |  |   | 257 |     |  |   | 342 |     |  |   | 491 |       |  |   | 290 |      
|Research and development   |       |   | 84  |       |  |   | 89  |     |  |   | 160 |     |  |   | 285 |       |  |   | 249 |      
|General and administrative |       |   | 352 |       |  |   | 146 |     |  |   | 278 |     |  |   | 120 |       |  |   | 302 |      
|                           |       |   |     |       |  |   |     |     |  |   |     |     |  |   |    
|                           | Total |   | $   | 1,051 |  |   | $   | 548 |  |   | $   | 831 |  |   | $   | 1,472 |  |   | $   | 1,005 | 
|                           |       |   |     |       |  |   |     |     |  |   |     |     |  |   |    

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|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | See Note 2 of the notes to our consolidated 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.

|                                 |                            |                    |   |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|-------------------------------- | -------------------------- | ------------------ | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                 |                            | As of December 31, |  
|                                 |                            |                    |  
|                                 |                            | 2004               |   |         | 2003 |  |   | 2002    |   |  | 2001 |         |   | 2000 |  
|                                 |                            |                    |   |         |      |  |   |         |   |  |      |         |   |      |  
|                                 |                            | (in thousands)     |  
|                                 |                            | (unaudited)        |  
|Consolidated Balance Sheet Data: |                            |                    |   |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |        
|                                 | Cash and cash equivalents  |                    | $ | 68,566  |      |  | $ | 11,711  |   |  | $    | 12,601  |   |      | $ | 17,376  |   |  | $ | 2,805   |  
|                                 | Working capital            |                    |   | 70,681  |      |  |   | 12,713  |   |  |      | 14,530  |   |      |   | 19,141  |   |  |   | 2,543   |  
|                                 | Total assets               |                    |   | 77,972  |      |  |   | 17,789  |   |  |      | 17,885  |   |      |   | 22,442  |   |  |   | 4,576   |  
|                                 | Total debt                 |                    |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   | 518     |  
|                                 | Accumulated deficit        |                    |   | (41,173 | )    |  |   | (44,039 | ) |  |      | (41,455 | ) |      |   | (35,500 | ) |  |   | (26,999 | )
|                                 | Total stockholders equity |                    | $ | 72,308  |      |  | $ | 14,241  |   |  | $    | 16,214  |   |      | $ | 21,299  |   |  | $ | 3,026   |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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, 2004,
and our financial condition at December 31, 2004. 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 below, 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










22



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##### Table of Contents







Financial Operations Overview


Net Revenues.


Cost of Revenues.


Sales and Marketing Expenses.


Research and Development Expenses.


General and Administrative Expenses.


Critical Accounting Policies and Estimates




Revenue Recognition. Revenue
Recognition.




23



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Valuation of Inventory.


Warranty Costs.


Allowance for Doubtful Accounts.




Income Taxes.


24



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Stock-Based Compensation Expense. Accounting for Stock Issued to
Employees, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, Accounting for Stock-Based Compensation Accounting for Stock-Based
Compensation  Transition and Disclosure.


Accounting for
Equity


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Investments that are Issued to Non-Employees for Acquiring,
or in Conjunction with Selling, Goods or Services.






Recent Accounting Pronouncements




Results of Operations




| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Changes to previously announced fiscal 2004 fourth quarter
    and fiscal year end results (in thousands, except per share
    data):



26



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|                                                |                            |                          |       |      |      |  |       |      |      |  |       |      |       | 
|----------------------------------------------- | -------------------------- | ------------------------ | ----- | ---- | ---- |  | ----- | ---- | ---- |  | ----- | ---- | ----- | 
|                                                |                            | Years Ended December 31, |      
|                                                |                            |                          |      
|                                                |                            | 2004                     |       |      | 2003 |  |       | 2002 |     
|                                                |                            |                          |       |      |      |  |       |      |     
|Net revenues                                    |                            |                          | 100.0 | %    |      |  | 100.0 | %    |      |  | 100.0 | %   
|Cost of revenues                                |                            |                          | 25.0  |      |      |  | 28.9  |      |      |  | 36.3  |     
|                                                |                            |                          |       |      |      |  |       |      |     
|Gross profit                                    |                            |                          | 75.0  |      |      |  | 71.1  |      |      |  | 63.7  |     
|Operating expenses:                             |                            |                          |       |      |      |  |       |      |      |  |       |     
|                                                | Sales and marketing        |                          |       | 42.6 |      |  |       | 54.9 |      |  |       | 77.0 |      
|                                                | Research and development   |                          |       | 13.2 |      |  |       | 16.8 |      |  |       | 21.4 |      
|                                                | General and administrative |                          |       | 12.3 |      |  |       | 12.0 |      |  |       | 27.4 |      
|                                                |                            |                          |       |      |      |  |       |      |     
|                                                |                            | Total operating expenses |       |      | 68.1 |  |       |      | 83.7 |  |       |      | 125.8 | 
|Income (loss) from operations                   |                            |                          | 6.9   |      |      |  | (12.6 | )    |      |  | (62.1 | )   
|Interest income (expense) and other, net        |                            |                          | 1.2   |      |      |  | 0.8   |      |      |  | 2.8   |     
|                                                |                            |                          |       |      |      |  |       |      |     
|Income (loss) before provision for income taxes |                            |                          | 8.1   |      |      |  | (11.8 | )    |      |  | (59.3 | )   
|Provision for income taxes                      |                            |                          | 0.6   |      |      |  |      |      |      |  |      |     
|                                                |                            |                          |       |      |      |  |       |      |     
|Net income (loss)                               |                            |                          | 7.5   | %    |      |  | (11.8 | )%   |      |  | (59.3 | )%  
|                                                |                            |                          |       |      |      |  |       |      |     



| |                                             
| | --------------------------------------------
| | Years Ended December 31, 2004, 2003 and 2002



|              |  |              |     |   |      |  |     |      |  |  |     |  
|------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|              |  | Year Ended   |    
|              |  | December 31, |    
|              |  |              |    
|              |  | 2004         |     |   | 2003 |  |     | 2002 | 
|              |  |              |     |   |      |  |     |      | 
|Catheters     |  |              | 77  | % |      |  | 72  | %    |  |  | 67  | %
|RF Generators |  |              | 18  | % |      |  | 24  | %    |  |  | 31  | %
|Accessories   |  |              | 5   | % |      |  | 4   | %    |  |  | 2   | %
|              |  |              |     |   |      |  |     |      | 
|              |  |              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|              |  |              |     |   |      |  |     |      | 



|                    |  |              |     |   |      |  |     |      |  |  |     |  
|------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                    |  | Year Ended   |    
|                    |  | December 31, |    
|                    |  |              |    
|                    |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                    |  |              |     |   |      |  |     |      | 
|United States       |  |              | 96  | % |      |  | 96  | %    |  |  | 94  | %
|Europe              |  |              | 3   | % |      |  | 3   | %    |  |  | 6   | %
|Other international |  |              | 1   | % |      |  | 1   | %    |  |  |    |  
|                    |  |              |     |   |      |  |     |      | 
|                    |  |              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                    |  |              |     |   |      |  |     |      | 

Net Revenues.


27



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Gross Profit.


Sales and Marketing Expenses.


Research and Development Expenses.


General and Administrative Expenses.


Interest Income (Expense) and Other, Net.


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Provision for Income Taxes.


Liquidity and Capital Resources


|                                                 |  |              |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | December 31, |       
|                                                 |  |              |       
|                                                 |  | 2004         |        |   | 2003 |   |        | 2002 | 
|                                                 |  |              |        |   |      |   |        |      | 
|Cash and cash equivalents                        |  | $            | 68,566 |   |      | $ | 11,711 |      |  | $ | 12,601 |  
|Working capital                                  |  |              | 70,681 |   |      |   | 12,713 |      |  |   | 14,530 |  
|Net cash provided (used) in operating activities |  |              | 3,229  |   |      |   | (680   | )    |  |   | (4,651 | )
|Net cash used in investing activities            |  |              | (525   | ) |      |   | (238   | )    |  |   | (163   | )
|Net cash provided by financing activities        |  |              | 54,151 |   |      |   | 28     |      |  |   | 39     |  





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Off-Balance Sheet Liabilities




Contractual Obligations and Capital Expenditure
Requirements




|                            |       |                        |       |           |        |   |     |       |  |     |       |       |           |         |   |   |  |   |   |   | 
|--------------------------- | ----- | ---------------------- | ----- | --------- | ------ | - | --- | ----- |  | --- | ----- | ----- | --------- | ------- | - | - |  | - | - | - | 
|                            |       | Payments Due by Period
|                            |       |                       
|                            |       |                        |       | Less than |        |   | 1-3 |       |  | 3-5 |       |       | More than
|Contractual Obligations     |       | Total                  |       |           | 1 Year |   |     | Years |  |     | Years |       |           | 5 Years
|                            |       |                        |       |           |        |   |     |       |  |     |       |       |           |        
|                            |       | (In thousands)        
|Operating lease obligations |       | $                      | 1,955 |           |        | $ | 771 |       |  | $   | 1,183 |       |           | $       | 1 |   |  | $ |  |  
|Purchase obligations        |       |                        | 752   |           |        |   | 752 |       |  |     |      |       |           |         |  |   |  |   |  |  
|                            |       |                        |       |           |        |   |     |       |  |     |       |       |           |         |  
|                            | Total |                        | $     | 2,707     |        |   | $   | 1,523 |  |     | $     | 1,183 |           |         | $ | 1 |  |   | $ |  | 
|                            |       |                        |       |           |        |   |     |       |  |     |       |       |           |         |  

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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.






| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lack of experience with our Closure procedure;                                                                                                                                                
|
| |  | perceived liability risks associated with the use of new
    technologies or procedures for venous reflux disease;                                                                            
|
| |  | the results of any adverse long-term clinical studies relating
    to the effectiveness of our Closure system;                                                                                
|
| |  | the cost of our RF generator;                                                                                                                                                                 
|
| |  | 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 the
    Closure system is reduced or discontinued.                                                                                           







We may experience significant fluctuations in our quarterly
results and we may not maintain our recent profitability.




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| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | delays or interruptions in manufacturing and shipping of our
    products;                                         
|
| |  | practices of insurance companies and Medicare with respect to
    reimbursement for our procedure and our products;
|
| |  | physician and patient acceptance of our products and procedures;                                                   
|
| |  | seasonal demand;                                                                                                   
|
| |  | pricing of our products;                                                                                           
|
| |  | timing of new product introductions;                                                                               
|
| |  | timing of orders received;                                                                                         
|
| |  | our ability to train physicians in performing the Closure
    procedure; and                                       
|
| |  | the effect of competing technological and market developments.                                                     





Competition from existing and new products and procedures may
decrease our market share and cause our revenues to decline.








| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | established distribution networks;                                                                           
|
| |  | established relationships with physicians;                                                                   
|
| |  | products and procedures that are less expensive and take less
    time to perform;                           
|
| |  | greater experience in launching, marketing, distributing and
    selling products;                           
|
| |  | established relationships with healthcare providers and
    payors; and                                      
|
| |  | greater financial and other resources for product development,
    sales and marketing and patent litigation.

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If we become subject to product liability claims, we may be
required to spend significant time and money in litigation or
otherwise pay significant damages that may exceed our insurance
coverage.






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.






33



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Inadequate levels of reimbursement for the 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.










34



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##### Table of Contents



Our manufacturing operations are dependent upon third-party
suppliers, making us vulnerable to supply problems and price
fluctuations, which could harm our business.






| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | suppliers may make errors in manufacturing components that could
    negatively affect the efficacy or safety of our products or
    cause delays in shipment 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;                                                                                                    
|
| |  | switching components may require product redesign and submission
    to the FDA of a pre-market supplement or possibly a separate
    pre-market approval, either of which could significantly delay
    production;                     
|
| |  | 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; and
|
| |  | 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.                                                       





We depend on our officers and if we are not able to retain
them or recruit additional qualified personnel, our business
will suffer.




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To successfully grow our business we will need to attract
additional qualified management, technical and sales
personnel.




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, require us to pay damages and discontinue selling our
products.






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.




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##### Table of Contents





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.




Any failure in our efforts to train physicians could reduce
the market acceptance of our Closure system and reduce our
revenues.




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.




If we are unable to manufacture an adequate supply of our
products, we could lose customers and revenues and our growth
could be limited.




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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.




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;                                                                                   
|
| |  | 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.                                                                                    





38



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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 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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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;
|
| |  | 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 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.        

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Modifications to our Closure system 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.




We sell the Closure system internationally and are subject to
various risks relating to such international activities which
could harm our international sales and profitability.






| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | 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 changing foreign
    regulatory requirements and laws;              
|
| |  | laws and business practices favoring local companies;                                                     
|
| |  | longer payment cycles;                                                                                    
|
| |  | difficulties in enforcing agreements and collecting receivables
    through certain 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; and                               
|
| |  | difficulties in enforcing intellectual property rights.                                                   

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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.                                                                   



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 rate of progress and cost of our research and development
    activities;                        

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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 number and timing of acquisitions and other strategic
    transactions.                                                                            



Concentration of ownership among our existing directors,
executive officers and principal stockholders may prevent new
investors from influencing significant corporate decisions.




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;                                                                                            

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| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.  



If there are substantial sales of our common stock, our stock
price could decline.






If we fail to maintain the adequacy of our internal controls,
our ability to provide accurate financial reports could be
impaired, and any failure to maintain our internal controls and
provide accurate financial reports would cause our market price
to decrease substantially.




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Item 7A:     Quantitative and
Qualitative Disclosures about Market Risk






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|        |                                                             
|------- | ------------------------------------------------------------
|Item 8: | Consolidated Financial Statements and Supplementary
    Data

VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                                               |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                               |  | Page |   
|                                                                                                                               |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                    |  |      | 47 | 
|Consolidated Balance Sheets at
    December 31, 2004 and 2003                                                                  |  |      | 48 | 
|Consolidated Statements of Operations for
    each of the years in the three year period ended
    December 31, 2004           |  |      | 49 | 
|Consolidated Statements of
    Stockholders Equity for each of the years in the three
    year period ended December 31, 2004 |  |      | 50 | 
|Consolidated Statements of Cash Flows for
    each of the years in the three year period ended
    December 31, 2004           |  |      | 51 | 
|Notes to Consolidated Financial
    Statements                                                                                 |  |      | 52 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS


|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |        |     |         |        |        | 
|-------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ------- | ------ | ------ | --- | ------- | ------ | ------ | 
|                                       |                                                                                                                                                                                                                                        | December 31,                               |             
|                                       |                                                                                                                                                                                                                                        |                                            |             
|                                       |                                                                                                                                                                                                                                        | 2004                                       |              |         | 2003   |       
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        | (in thousands, except                      |             
|                                       |                                                                                                                                                                                                                                        | share data)                                |             
|ASSETS                                
|Current assets:                        |                                                                                                                                                                                                                                        |                                            |              |         |        |        |     |        
|                                       | Cash and cash equivalents                                                                                                                                                                                                              |                                            | $            | 68,566  |        |        | $   | 11,711  |       
|                                       | Accounts receivable, net of allowance for doubtful accounts of
    $195 and $192, respectively                                                                                                                                         |                                            |              | 5,347   |        |        |     | 3,330   |       
|                                       | Inventory                                                                                                                                                                                                                              |                                            |              | 1,644   |        |        |     | 871     |       
|                                       | Prepaid expenses and other current assets                                                                                                                                                                                              |                                            |              | 677     |        |        |     | 242     |       
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        | Total current assets                       |              |         | 76,234 |        |     |         | 16,154 |       
|Property and equipment, net            |                                                                                                                                                                                                                                        |                                            | 1,096        |         |        |        | 991 |        
|Other assets                           |                                                                                                                                                                                                                                        |                                            | 642          |         |        |        | 644 |        
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        |                                            | Total assets |         | $      | 77,972 |     |         | $      | 17,789 | 
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current liabilities:                   |                                                                                                                                                                                                                                        |                                            |              |         |        |        |     |        
|                                       | Accounts payable                                                                                                                                                                                                                       |                                            | $            | 1,242   |        |        | $   | 884     |       
|                                       | Accrued liabilities                                                                                                                                                                                                                    |                                            |              | 4,311   |        |        |     | 2,557   |       
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        | Total current liabilities                  |              |         | 5,553  |        |     |         | 3,441  |       
|Other liabilities                      |                                                                                                                                                                                                                                        |                                            | 111          |         |        |        | 107 |        
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        | Total liabilities                          |              |         | 5,664  |        |     |         | 3,548  |       
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|Commitments and contingencies (Note 7) |                                                                                                                                                                                                                                        |                                            |              |         |        |        |     |        
|                                      
|Stockholders equity:                  |                                                                                                                                                                                                                                        |                                            |              |         |        |        |     |        
|                                       | Convertible preferred stock: $0.001 par value; 10,000,000
    authorized; none issued and outstanding at December 31,
    2004 and 50,000,000 shares authorized;
    25,186,747 shares issued and outstanding at
    December 31, 2003 |                                            |              |        |        |        |     | 25      |       
|                                       | Common stock: $0.001 par value; 56,666,666 authorized,
    14,371,439 issued and outstanding at December 31, 2004; and
    21,000,000 shares authorized, 1,329,369 shares issued
    and outstanding at December 31, 2003              |                                            |              | 14      |        |        |     | 1       |       
|                                       | Additional paid-in capital                                                                                                                                                                                                             |                                            |              | 114,698 |        |        |     | 58,686  |       
|                                       | Deferred stock compensation                                                                                                                                                                                                            |                                            |              | (1,231  | )      |        |     | (432    | )     
|                                       | Accumulated deficit                                                                                                                                                                                                                    |                                            |              | (41,173 | )      |        |     | (44,039 | )     
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        | Total stockholders equity                 |              |         | 72,308 |        |     |         | 14,241 |       
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       
|                                       |                                                                                                                                                                                                                                        | Total liabilities and stockholders equity |              | $       | 77,972 |        |     | $       | 17,789 |       
|                                       |                                                                                                                                                                                                                                        |                                            |              |         |        |       



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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                  |         |                                 |        |        |        |   |        |       |        |   |        |       |        | 
|--------------------------------------------------------------------------------- | ------- | ------------------------------- | ------ | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                                                                  |         | Year Ended December 31,         |       
|                                                                                  |         |                                 |       
|                                                                                  |         | 2004                            |        |        | 2003   |   |        | 2002  |       
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|                                                                                  |         | (in thousands, except share and |       
|                                                                                  |         | per share data)                 |       
|Net revenues                                                                      |         | $                               | 38,166 |        |        | $ | 21,838 |       |        | $ | 10,041 |      
|Cost of
    revenues(1)                                                           |         |                                 | 9,542  |        |        |   | 6,311  |       |        |   | 3,646  |      
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Gross profit                                                                      |         |                                 | 28,624 |        |        |   | 15,527 |       |        |   | 6,395  |      
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Operating expenses                                                                |         |                                 |        |        |        |   |        |       |        |   |        |      
|Sales and
    marketing(1)                                                        |         |                                 | 16,235 |        |        |   | 11,997 |       |        |   | 7,728  |      
|Research and
    development(1)                                                   |         |                                 | 5,034  |        |        |   | 3,676  |       |        |   | 2,156  |      
|General and
    administrative(1)                                                 |         |                                 | 4,706  |        |        |   | 2,609  |       |        |   | 2,749  |      
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|                                                                                  |         | Total operating expenses        |        |        | 25,975 |   |        |       | 18,282 |   |        |       | 12,633 | 
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Income (loss) from operations                                                     |         |                                 | 2,649  |        |        |   | (2,755 | )     |        |   | (6,238 | )    
|Interest income (expense) and other income, net                                   |         |                                 | 439    |        |        |   | 171    |       |        |   | 283    |      
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Income (loss) before provision for taxes                                          |         |                                 | 3,088  |        |        |   | (2,584 | )     |        |   | (5,955 | )    
|Provision for income taxes                                                        |         |                                 | 222    |        |        |   |       |       |        |   |       |      
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Net income (loss)                                                                 |         | $                               | 2,866  |        |        | $ | (2,584 | )     |        | $ | (5,955 | )    
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Net income (loss) per share (see Note 2)                                          |         |                                 |        |        |        |   |        |       |        |   |        |      
|                                                                                  | Basic   |                                 | $      | 0.73   |        |   | $      | (1.97 | )      |   | $      | (4.73 | )     
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|                                                                                  | Diluted |                                 | $      | 0.23   |        |   | $      | (1.97 | )      |   | $      | (4.73 | )     
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|Weighted average number of shares used in per share calculations
    (see Note 2) |         |                                 |        |        |        |   |        |       |        |   |        |      
|                                                                                  | Basic   |                                 |        | 3,946  |        |   |        | 1,309 |        |   |        | 1,260 |       
|                                                                                  |         |                                 |        |        |        |   |        |       |       
|                                                                                  | Diluted |                                 |        | 12,368 |        |   |        | 1,309 |        |   |        | 1,260 |       
|                                                                                  |         |                                 |        |        |        |   |        |       |       






|    |                                                
|--- | -----------------------------------------------
|(1) | Includes the following stock-based compensation

|                           |  |                         |       |  |      |   |     |      |  |   |     | 
|-------------------------- |  | ----------------------- | ----- |  | ---- | - | --- | ---- |  | - | --- | 
|                           |  | Year Ended December 31, |      
|                           |  |                         |      
|                           |  | 2004                    |       |  | 2003 |   |     | 2002 | 
|                           |  |                         |       |  |      |   |     |      | 
|Cost of revenues           |  | $                       | 90    |  |      | $ | 56  |      |  | $ | 51  | 
|Sales and marketing        |  |                         | 525   |  |      |   | 257 |      |  |   | 342 | 
|Research and development   |  |                         | 84    |  |      |   | 89  |      |  |   | 160 | 
|General and administrative |  |                         | 352   |  |      |   | 146 |      |  |   | 278 | 
|                           |  |                         |       |  |      |   |     |      | 
|                           |  | $                       | 1,051 |  |      | $ | 548 |      |  | $ | 831 | 
|                           |  |                         |       |  |      |   |     |      | 



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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                              |                                                                   |                                                 |            |             |              |   |    |            |   |  |            |           |   |             |    |       |               |   |         |         |   |   |        |        |   |   |         |   |  |   |        |        |  
|----------------------------- | ----------------------------------------------------------------- | ----------------------------------------------- | ---------- | ----------- | ------------ | - | -- | ---------- | - |  | ---------- | --------- | - | ----------- | -- | ----- | ------------- | - | ------- | ------- | - | - | ------ | ------ | - | - | ------- | - |  | - | ------ | ------ | -
|                              |                                                                   | Convertible                                     |            |             |              |   |    |            |   |  |            |           |  
|                              |                                                                   | Preferred Stock                                 |            |             | Common Stock |   |    | Additional |   |  | Deferred   |           |   |             |    | Total |              
|                              |                                                                   |                                                 |            |             |              |   |    | Paid-In    |   |  | Stock      |           |   | Accumulated |    |       | Shareholders |  
|                              |                                                                   | Shares                                          |            |             | Amount       |   |    | Shares     |   |  | Amount     |           |   | Capital     |    |       | Compensation  |   |         | Deficit |   |   | Equity |       
|                              |                                                                   |                                                 |            |             |              |   |    |            |   |  |            |           |   |             |    |       |               |   |         |         |   |   |        |       
|                              |                                                                   | (in thousands, except share and per share data) |           
|Balances at December 31, 2001 |                                                                   |                                                 | 25,186,747 |             |              |   | 25 |            |   |  | 1,265,225  |           |   |             | 1  |       |               |   | 58,065  |         |   |   | (1,292 | )      |   |   | (35,500 | ) |  |   | 21,299 |       
|                              | Exercise of stock options for cash at $0.44 -
    $1.50 per share |                                                 |            |            |              |   |    |           |   |  |            | 42,803    |   |             |    |      |               |   |         | 39      |   |   |        |       |   |   |         |  |  |   |        | 39     |  
|                              | Deferred stock compensation for stock option grants               |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | 140     |   |   |        | (140   | ) |   |         |  |  |   |        |       |  
|                              | Fair value of options issued for services                         |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | 23      |   |   |        |       |   |   |         |  |  |   |        | 23     |  
|                              | Amortization of deferred stock compensation                       |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         |        |   |   |        | 808    |   |   |         |  |  |   |        | 808    |  
|Net loss                      |                                                                   |                                                 |           |             |              |   |   |            |   |  |           |           |   |             |   |       |               |   |        |         |   |   |       |        |   |   | (5,955  | ) |  |   | (5,955 | )     
|                              |                                                                   |                                                 |            |             |              |   |    |            |   |  |            |           |   |             |    |       |               |   |         |         |   |   |        |       
|Balances at December 31, 2002 |                                                                   |                                                 | 25,186,747 |             |              |   | 25 |            |   |  | 1,308,028  |           |   |             | 1  |       |               |   | 58,267  |         |   |   | (624   | )      |   |   | (41,455 | ) |  |   | 16,214 |       
|                              | Exercise of stock options for cash at $0.44 -
    $1.50 per share |                                                 |            |            |              |   |    |           |   |  |            | 21,341    |   |             |    |      |               |   |         | 28      |   |   |        |       |   |   |         |  |  |   |        | 28     |  
|                              | Deferred stock compensation for stock option grants               |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | 401     |   |   |        | (366   | ) |   |         |  |  |   |        | 35     |  
|                              | Fair value of options issued for services                         |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | 22      |   |   |        |       |   |   |         |  |  |   |        | 22     |  
|                              | Cancellation of options                                           |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | (32     | ) |   |        | 32     |   |   |         |  |  |   |        |       |  
|                              | Amortization of deferred stock compensation                       |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         |        |   |   |        | 526    |   |   |         |  |  |   |        | 526    |  
|Net loss                      |                                                                   |                                                 |           |             |              |   |   |            |   |  |           |           |   |             |   |       |               |   |        |         |   |   |       |        |   |   | (2,584  | ) |  |   | (2,584 | )     
|                              |                                                                   |                                                 |            |             |              |   |    |            |   |  |            |           |   |             |    |       |               |   |         |         |   |   |        |       
|Balances at December 31, 2003 |                                                                   |                                                 | 25,186,747 |             |              |   | 25 |            |   |  | 1,329,369  |           |   |             | 1  |       |               |   | 58,686  |         |   |   | (432   | )      |   |   | (44,039 | ) |  |   | 14,241 |       
|                              | Exercise of warrants for Series C preferred stock                 |                                                 |            | 33,006      |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         |        |   |   |        |       |   |   |         |  |  |   |        |       |  
|                              | Net exercise of warrants for common stock                         |                                                 |            |            |              |   |    |           |   |  |            | 2,602     |   |             |    |      |               |   |         |        |   |   |        |       |   |   |         |  |  |   |        |       |  
|                              | Exercise of stock options for cash at $0.04 -
    $7.14 per share |                                                 |            |            |              |   |    |           |   |  |            | 82,871    |   |             |    |      |               |   |         | 149     |   |   |        |       |   |   |         |  |  |   |        | 149    |  
|                              | Deferred stock compensation for stock option grants               |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | 1,701   |   |   |        | (1,701 | ) |   |         |  |  |   |        |       |  
|                              | Fair value of options issued for services                         |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         | 181     |   |   |        |       |   |   |         |  |  |   |        | 181    |  
|                              | Cancellation 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  |   |   |        |       |   |   |         |  |  |   |        | 54,002 |  
|                              | Repurchase of restricted stock                                    |                                                 |            |            |              |   |    |           |   |  |            | (792      | ) |             |    |      |               |   |         | (1      | ) |   |        |       |   |   |         |  |  |   |        | (1     | )
|                              | Amortization of deferred stock compensation                       |                                                 |            |            |              |   |    |           |   |  |            |          |   |             |    |      |               |   |         |        |   |   |        | 870    |   |   |         |  |  |   |        | 870    |  
|Net income                    |                                                                   |                                                 |           |             |              |   |   |            |   |  |           |           |   |             |   |       |               |   |        |         |   |   |       |        |   |   | 2,866   |   |  |   | 2,866  |       
|                              |                                                                   |                                                 |            |             |              |   |    |            |   |  |            |           |   |             |    |       |               |   |         |         |   |   |        |       
|Balances at December 31, 2004 |                                                                   |                                                 |           |             |              | $ |   |            |   |  | 14,371,439 |           |   | $           | 14 |       |               | $ | 114,698 |         |   | $ | (1,231 | )      |   | $ | (41,173 | ) |  | $ | 72,308 |       
|                              |                                                                   |                                                 |            |             |              |   |    |            |   |  |            |           |   |             |    |       |               |   |         |         |   |   |        |       



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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |     |        |        |        |     |      |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | ----- | ------ | ------ | ------ | --- | ------ | ------ | ------ | --- | ---- | ------ | -
|                                                     |                                                                                                        | Year Ended December 31,                                                             |                                  
|                                                     |                                                                                                        |                                                                                     |                                  
|                                                     |                                                                                                        | 2004                                                                                |                                   |                                                     | 2003  |        |        | 2002   |    
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|                                                     |                                                                                                        | (in thousands)                                                                      |                                  
|Cash flows from operating activities:                |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |     |        |        |       
|                                                     | Net income (loss)                                                                                      |                                                                                     | $                                 | 2,866                                               |       |        | $      | (2,584 | )   |        | $      | (5,955 | )  
|                                                     | Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                                                     |                                   |                                                     |       |        |        |        |     |        |        |        |    
|                                                     |                                                                                                        | Depreciation and amortization                                                       |                                   |                                                     | 420   |        |        |        | 351 |        |        |        | 417 |     
|                                                     |                                                                                                        | Non-employee stock compensation and amortization of deferred
    stock compensation |                                   |                                                     | 1,051 |        |        |        | 583 |        |        |        | 831 |     
|                                                     |                                                                                                        | Allowance for doubtful accounts                                                     |                                   |                                                     | 3     |        |        |        | 28  |        |        |        | 144 |     
|                                                     |                                                                                                        | Provision for excess and obsolete inventory                                         |                                   |                                                     | (165  | )      |        |        | 48  |        |        |        | 24  |     
|                                                     |                                                                                                        | Changes in operating assets and liabilities:                                        |                                   |                                                     |       |        |        |        |     |        |        |        |     |     
|                                                     |                                                                                                        |                                                                                     | Accounts receivable               |                                                     |       | (2,021 | )      |        |     | (1,513 | )      |        |     | (459 | )     
|                                                     |                                                                                                        |                                                                                     | Inventory                         |                                                     |       | (608   | )      |        |     | 560    |        |        |     | (205 | )     
|                                                     |                                                                                                        |                                                                                     | Prepaid expenses and other assets |                                                     |       | (433   | )      |        |     | (29    | )      |        |     | 24   |       
|                                                     |                                                                                                        |                                                                                     | Accounts payable                  |                                                     |       | 358    |        |        |     | 472    |        |        |     | 160  |       
|                                                     |                                                                                                        |                                                                                     | Accrued and other liabilities     |                                                     |       | 1,758  |        |        |     | 1,404  |        |        |     | 368  |       
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|                                                     |                                                                                                        |                                                                                     |                                   | Net cash provided by (used in) operating activities |       |        | 3,229  |        |     |        | (680   | )      |     |      | (4,651 | )
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|Cash flows from investing activities:                |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |     |        |        |       
|                                                     | Purchase of property and equipment                                                                     |                                                                                     |                                   | (525                                                | )     |        |        | (238   | )   |        |        | (163   | )  
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|                                                     |                                                                                                        |                                                                                     |                                   | Net cash used in investing activities               |       |        | (525   | )      |     |        | (238   | )      |     |      | (163   | )
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|Cash flows from financing activities:                |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |     |        |        |       
|                                                     | Proceeds from sale of common stock                                                                     |                                                                                     |                                   | 55,800                                              |       |        |        |       |     |        |        |       |    
|                                                     | Stock issuance costs                                                                                   |                                                                                     |                                   | (1,798                                              | )     |        |        |       |     |        |        |       |    
|                                                     | Proceeds from exercise of stock options for common stock                                               |                                                                                     |                                   | 149                                                 |       |        |        | 28     |     |        |        | 39     |    
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|                                                     |                                                                                                        |                                                                                     |                                   | Net cash provided by financing activities           |       |        | 54,151 |        |     |        | 28     |        |     |      | 39     |  
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|Net increase (decrease) in cash and cash equivalents |                                                                                                        |                                                                                     | 56,855                            |                                                     |       |        | (890   | )      |     |        | (4,775 | )     
|Cash and cash equivalents at beginning of year       |                                                                                                        |                                                                                     | 11,711                            |                                                     |       |        | 12,601 |        |     |        | 17,376 |       
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|Cash and cash equivalents at end of year             |                                                                                                        | $                                                                                   | 68,566                            |                                                     |       | $      | 11,711 |        |     | $      | 12,601 |       
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    
|Supplemental disclosure of cash flow information:    |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |     |        |        |       
|                                                     | Deferred stock-based compensation                                                                      |                                                                                     |                                   | 1,669                                               |       |        |        | 334    |     |        |        | 140    |    
|                                                     |                                                                                                        |                                                                                     |                                   |                                                     |       |        |        |        |    



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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|         |            
|-------- | -----------
|Note 1  | The Company









|         |                                           
|-------- | ------------------------------------------
|Note 2  | Summary of Significant Accounting Policies

Net Income (Loss) Per Share.




|                                                                                                   |  |                         |       |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                   |  | Year Ended December 31, |      
|                                                                                                   |  |                         |      
|                                                                                                   |  | 2004                    |       |   | 2003 |   |        | 2002 | 
|                                                                                                   |  |                         |       |   |      |   |        |      | 
|Numerator:                                                                                         |  |                         |       |   |      |   |        |      |  |   |        |  
|Net income (loss) available to common stockholders, basic and
    diluted                          |  | $                       | 2,866 |   |      | $ | (2,584 | )    |  | $ | (5,955 | )
|                                                                                                   |  |                         |       |   |      |   |        |      | 
|Denominator:                                                                                       |  |                         |       |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding                                                         |  |                         | 3,947 |   |      |   | 1,318  |      |  |   | 1,278  |  
|Weighted average unvested common shares subject to repurchase
    agreements                       |  |                         | (1    | ) |      |   | (9     | )    |  |   | (18    | )
|                                                                                                   |  |                         |       |   |      |   |        |      | 
|Weighted average common shares outstanding used in computing
    basic net income (loss) per share |  |                         | 3,946 |   |      |   | 1,309  |      |  |   | 1,260  |  

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                    |                                                                                                       |                         |        |       |      |  |       |       |   |  |       |       |  
|----------------------------------- | ----------------------------------------------------------------------------------------------------- | ----------------------- | ------ | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | -
|                                    |                                                                                                       | Year Ended December 31, |       
|                                    |                                                                                                       |                         |       
|                                    |                                                                                                       | 2004                    |        |       | 2003 |  |       | 2002  |  
|                                    |                                                                                                       |                         |        |       |      |  |       |       |  
|Effect of dilutive securities:      |                                                                                                       |                         |        |       |      |  |       |       |   |  |       |      
|                                    | Stock options, warrants, weighted average unvested common shares
    subject to repurchase agreements |                         |        | 8,422 |      |  |       |      |   |  |       |      |  
|                                    |                                                                                                       |                         |        |       |      |  |       |       |  
|Total shares, diluted               |                                                                                                       |                         | 12,368 |       |      |  | 1,309 |       |   |  | 1,260 |      
|                                    |                                                                                                       |                         |        |       |      |  |       |       |  
|Net income (loss) per common share: |                                                                                                       |                         |        |       |      |  |       |       |   |  |       |      
|                                    | Basic                                                                                                 |                         | $      | 0.73  |      |  | $     | (1.97 | ) |  | $     | (4.73 | )
|                                    |                                                                                                       |                         |        |       |      |  |       |       |  
|                                    | Diluted                                                                                               |                         | $      | 0.23  |      |  | $     | (1.97 | ) |  | $     | (4.73 | )
|                                    |                                                                                                       |                         |        |       |      |  |       |       |  



|                                                                                                                     |  |                         |    |  |      |  |        |      |  |  |        | 
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -- |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                                                                                     |  | Year Ended December 31, |   
|                                                                                                                     |  |                         |   
|                                                                                                                     |  | 2004                    |    |  | 2003 |  |        | 2002 | 
|                                                                                                                     |  |                         |    |  |      |  |        |      | 
|Convertible preferred stock (assuming conversion, using
    appropriate conversion ratio, to common shares)          |  |                         |   |  |      |  | 8,957  |      |  |  | 8,957  | 
|Convertible preferred stock warrants (assuming conversion, using
    appropriate conversion ratio, to common shares) |  |                         |   |  |      |  | 13     |      |  |  | 13     | 
|Common stock warrants                                                                                                |  |                         |   |  |      |  | 147    |      |  |  | 147    | 
|Stock options                                                                                                        |  |                         | 38 |  |      |  | 1,389  |      |  |  | 975    | 
|Unvested common shares subject to repurchase agreements                                                              |  |                         |   |  |      |  | 4      |      |  |  | 14     | 
|                                                                                                                     |  |                         |    |  |      |  |        |      | 
|                                                                                                                     |  |                         | 38 |  |      |  | 10,510 |      |  |  | 10,106 | 
|                                                                                                                     |  |                         |    |  |      |  |        |      | 

Basis of Consolidation.


Use of Estimates.


Cash and Cash Equivalents.


Fair Value of Financial Instruments.


Inventory.


Property and Equipment.


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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                              |  |  |               | 
|----------------------------- |  |  | ------------- | 
|Furniture and fixtures        |  |  | 3 years       | 
|Computer and office equipment |  |  | 3 years       | 
|Laboratory equipment          |  |  | 5 years       | 
|Software                      |  |  | 3 to 5  years | 



Long-lived Assets.


Revenue Recognition.




Warranty.


Research and Development Costs.


Advertising Expenses.


Stock-based Compensation. Accounting for
Stock Issued to Employees Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No 25,


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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123,


|                                                                                                           |         |                         |       |        |      |   |        |       |   |   |        |       |  
|---------------------------------------------------------------------------------------------------------- | ------- | ----------------------- | ----- | ------ | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                           |         | Year Ended December 31, |      
|                                                                                                           |         |                         |      
|                                                                                                           |         | 2004                    |       |        | 2003 |   |        | 2002  |  
|                                                                                                           |         |                         |       |        |      |   |        |       |  
|Net income (loss) as reported                                                                              |         | $                       | 2,866 |        |      | $ | (2,584 | )     |   | $ | (5,955 | )    
|Add: Employee stock-based compensation expense included in
    reported net income, net of tax             |         |                         | 809   |        |      |   | 526    |       |   |   | 808    |      
|Deduct: Employee stock-based compensation expense determined
    under fair value based method, net of tax |         |                         | (925  | )      |      |   | (627   | )     |   |   | (898   | )    
|                                                                                                           |         |                         |       |        |      |   |        |       |  
|Pro forma net income (loss)                                                                                |         | $                       | 2,750 |        |      | $ | (2,685 | )     |   | $ | (6,045 | )    
|                                                                                                           |         |                         |       |        |      |   |        |       |  
|Weighted average number of shares used in per share calculation:                                           |         |                         |       |        |      |   |        |       |   |   |        |      
|                                                                                                           | Basic   |                         |       | 3,946  |      |   |        | 1,309 |   |   |        | 1,260 |  
|                                                                                                           | Diluted |                         |       | 12,368 |      |   |        | 1,309 |   |   |        | 1,260 |  
|Pro forma net income (loss) per share:                                                                     |         |                         |       |        |      |   |        |       |   |   |        |      
|                                                                                                           | Basic   |                         | $     | 0.70   |      |   | $      | (2.05 | ) |   | $      | (4.80 | )
|                                                                                                           | Diluted |                         | $     | 0.22   |      |   | $      | (2.05 | ) |   | $      | (4.80 | )





|                         |  |                          |            |   |      |  |            |      |  |  |            |  
|------------------------ |  | ------------------------ | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                         |  | Years Ended December 31, |           
|                         |  |                          |           
|                         |  | 2004                     |            |   | 2003 |  |            | 2002 | 
|                         |  |                          |            |   |      |  |            |      | 
|Risk-free interest rate  |  |                          | 2.64- 3.62 | % |      |  | 1.95- 3.04 | %    |  |  | 2.49- 4.39 | %
|Expected life (in years) |  |                          | 4          |   |      |  | 4          |      |  |  | 4          |  
|Dividend yield           |  |                          |           |   |      |  |           |      |  |  |           |  
|Volatility               |  |                          | 65         | % |      |  |           |      |  |  |           |  





Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans


Income Taxes.


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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Recent Accounting Pronouncements. Stock-Based
Compensation




|         |                             
|-------- | ----------------------------
|Note 3  | Concentration of Credit Risk











|         |                                             
|-------- | --------------------------------------------
|Note 4  | Operating Segment and Geographic Information

Disclosures
About Segments of an Enterprise and


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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Related Information,




|                    |  |              |     |   |      |  |     |      |  |  |     |  
|------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                    |  | Year Ended   |    
|                    |  | December 31, |    
|                    |  |              |    
|                    |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                    |  |              |     |   |      |  |     |      | 
|United States       |  |              | 96  | % |      |  | 96  | %    |  |  | 94  | %
|Europe              |  |              | 3   | % |      |  | 3   | %    |  |  | 6   | %
|Other international |  |              | 1   | % |      |  | 1   | %    |  |  |    |  
|                    |  |              |     |   |      |  |     |      | 
|                    |  |              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                    |  |              |     |   |      |  |     |      | 
|Catheters           |  |              | 77  | % |      |  | 72  | %    |  |  | 67  | %
|RF Generators       |  |              | 18  | % |      |  | 24  | %    |  |  | 31  | %
|Accessories         |  |              | 5   | % |      |  | 4   | %    |  |  | 2   | %
|                    |  |              |     |   |      |  |     |      | 
|                    |  |              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                    |  |              |     |   |      |  |     |      | 





|         |                         
|-------- | ------------------------
|Note 5  | Balance Sheet Components

|                                                |  |              |        |   |      |   |        |  
|----------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                |  | December 31, |       
|                                                |  |              |       
|                                                |  | 2004         |        |   | 2003 |  
|                                                |  |              |        |   |      |  
|Inventory                                       |  |              |        |   |      |   |        |  
|Finished goods                                  |  | $            | 626    |   |      | $ | 317    |  
|Raw materials and sub-assemblies                |  |              | 876    |   |      |   | 290    |  
|Radio-frequency generators                      |  |              | 142    |   |      |   | 264    |  
|                                                |  |              |        |   |      |  
|                                                |  | $            | 1,644  |   |      | $ | 871    |  
|                                                |  |              |        |   |      |  
|Property and equipment, net                     |  |              |        |   |      |   |        |  
|Furniture and fixtures                          |  | $            | 138    |   |      | $ | 91     |  
|Computers and office equipment                  |  |              | 493    |   |      |   | 366    |  
|Leasehold improvements                          |  |              | 924    |   |      |   | 827    |  
|Laboratory equipment                            |  |              | 735    |   |      |   | 498    |  
|Software                                        |  |              | 442    |   |      |   | 348    |  
|Equipment installation in progress              |  |              |       |   |      |   | 77     |  
|                                                |  |              |        |   |      |  
|                                                |  |              | 2,732  |   |      |   | 2,207  |  
|Less: Accumulated depreciation and amortization |  |              | (1,636 | ) |      |   | (1,216 | )
|                                                |  |              |        |   |      |  
|                                                |  | $            | 1,096  |   |      | $ | 991    |  
|                                                |  |              |        |   |      |  

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                              |  |              |       |  |      |   |       | 
|----------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                              |  | December 31, |      
|                              |  |              |      
|                              |  | 2004         |       |  | 2003 |  
|                              |  |              |       |  |      |  
|Accrued liabilities           |  |              |       |  |      |   |       | 
|Payroll and related expenses  |  | $            | 692   |  |      | $ | 410   | 
|Sales commissions and bonuses |  |              | 2,402 |  |      |   | 1,803 | 
|Other                         |  |              | 1,217 |  |      |   | 344   | 
|                              |  |              |       |  |      |  
|                              |  | $            | 4,311 |  |      | $ | 2,557 | 
|                              |  |              |       |  |      |  



|         |             
|-------- | ------------
|Note 6  | Income Taxes





|                                               |  |                          |        |    |      |  |        |      |  |  |        |   
|---------------------------------------------- |  | ------------------------ | ------ | -- | ---- |  | ------ | ---- |  |  | ------ | --
|                                               |  | Years Ended December 31, |       
|                                               |  |                          |       
|                                               |  | 2004                     |        |    | 2003 |  |        | 2002 | 
|                                               |  |                          |        |    |      |  |        |      | 
|U.S. federal statutory income tax rate         |  |                          | 35.00  | %  |      |  | (34.00 | )%   |  |  | (34.00 | )%
|State income taxes, net of federal tax benefit |  |                          | 6.40   | %  |      |  | (5.83  | )%   |  |  |       |   
|Deferred tax benefits utilized                 |  |                          | (59.03 | )% |      |  | (16.58 | )%   |  |  |       |   
|Accruals, allowances and reserves              |  |                          | 4.72   | %  |      |  | 54.38  | %    |  |  | 27.94  | % 
|Amortization of stock-based compensation       |  |                          | 11.14  | %  |      |  | 8.45   | %    |  |  | 5.18   | % 
|Other                                          |  |                          | 8.93   | %  |      |  | (6.42  | )%   |  |  | 0.88   | % 
|                                               |  |                          |        |    |      |  |        |      | 
|                                               |  |                          | 7.16   | %  |      |  | 0.00   | %    |  |  | 0.00   | % 
|                                               |  |                          |        |    |      |  |        |      | 



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | December 31, |        
|                                  |  |              |        
|                                  |  | 2004         |         |   | 2003 |  
|                                  |  |              |         |   |      |  
|Deferred tax assets               |  |              |         |   |      |   |         |  
|Net operating loss carryforwards  |  | $            | 12,470  |   |      | $ | 13,784  |  
|Tax credits                       |  |              | 1,661   |   |      |   | 1,445   |  
|Accruals, allowances and reserves |  |              | 564     |   |      |   | 460     |  
|Depreciation and amortization     |  |              | 494     |   |      |   | 619     |  
|Other                             |  |              | 134     |   |      |   | 123     |  
|                                  |  |              |         |   |      |  
|Total gross deferred tax assets   |  |              | 15,323  |   |      |   | 16,431  |  
|Valuation allowance               |  |              | (15,323 | ) |      |   | (16,431 | )
|                                  |  |              |         |   |      |  
|Net deferred tax assets           |  | $            |        |   |      | $ |        |  
|                                  |  |              |         |   |      |  



58



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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                              
|-------- | -----------------------------
|Note 7  | Commitments and Contingencies

Leases.




|                         |  |           |       | 
|------------------------ |  | --------- | ----- | 
|                         |  | Operating |      
|Year Ending December 31, |  | Leases    |      
|                         |  |           |      
|2005                     |  | $         | 771   | 
|2006                     |  |           | 795   | 
|2007                     |  |           | 388   | 
|2008                     |  |           | 1     | 
|                         |  |           |      
|                         |  | $         | 1,955 | 
|                         |  |           |      

Indemnifications.


Purchase Commitments.


Contingencies.




|         |         
|-------- | --------
|Note 8  | Warrants





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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|         |                            
|-------- | ---------------------------
|Note 9  | Convertible Preferred Stock





|             |  |                  |                     |             |           |   |        |            |  |        |             |  |             |        |            |        |                |   |        |  |  |   |        | 
|------------ |  | ---------------- | ------------------- | ----------- | --------- | - | ------ | ---------- |  | ------ | ----------- |  | ----------- | ------ | ---------- | ------ | -------------- | - | ------ |  |  | - | ------ | 
|             |  |                  |                     | Original    |           |   |        |            |  |        |             |  | Proceeds    |       
|             |  |                  |                     | Issue Price |           |   | Shares |            |  | Shares |             |  | Liquidation |        |            | Net of |               
|Series       |  | Date of Issuance |                     |             | Per Share |   |        | Authorized |  |        | Outstanding |  |             | Amount |            |        | Issuance Costs |  
|             |  |                  |                     |             |           |   |        |            |  |        |             |  |             |        |            |        |                |  
|Series A-1   |  |                  | January 1995        |             |           | $ | 0.10   |            |  |        | 2,537,500   |  |             |        | 2,537,500  |        |                | $ | 254    |  |  | $ | 243    | 
|Series A-2   |  |                  | October 1995        |             |           | $ | 0.30   |            |  |        | 2,030,000   |  |             |        | 2,030,000  |        |                |   | 609    |  |  |   | 609    | 
|Series A-3   |  |                  | March 1996          |             |           | $ | 0.90   |            |  |        | 1,015,000   |  |             |        | 1,015,000  |        |                |   | 914    |  |  |   | 913    | 
|Series B     |  |                  | August 1996         |             |           | $ | 1.20   |            |  |        | 1,691,667   |  |             |        | 1,691,667  |        |                |   | 2,030  |  |  |   | 2,029  | 
|Series C     |  |                  | May 1997/May 2001   |             |           | $ | 1.70   | (1)        |  |        | 6,616,888   |  |             |        | 4,936,032  |        |                |   | 8,391  |  |  |   | 7,936  | 
|Series D     |  |                  | February/April 1999 |             |           | $ | 2.00   |            |  |        | 8,750,000   |  |             |        | 8,074,250  |        |                |   | 16,149 |  |  |   | 16,122 | 
|Series E     |  |                  | August 2001         |             |           | $ | 5.12   |            |  |        | 5,152,000   |  |             |        | 4,902,298  |        |                |   | 25,100 |  |  |   | 24,979 | 
|Undesignated |  |                  |                     |             |           |   |        |            |  |        | 22,206,945  |  |             |        |           |        |                |   |       |  |  |   |       | 
|             |  |                  |                     |             |           |   |        |            |  |        |             |  |             |        |            |        |                |  
|             |  |                  |                     |             |           |   |        |            |  |        | 50,000,000  |  |             |        | 25,186,747 |        |                | $ | 53,447 |  |  | $ | 52,831 | 
|             |  |                  |                     |             |           |   |        |            |  |        |             |  |             |        |            |        |                |  






|    |                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company originally issued 4,694,835 shares of
    Series C preferred stock in May 1997 at a price of $1.70
    per share. In addition, 241,197 and 33,006 shares of
    Series C preferred stock were issued upon exercise of
    Series C warrants in May 2001 and June 2004, respectively.
    See Note 8, Warrants.



|          |             
|--------- | ------------
|Note 10  | Common Stock





|          |                   
|--------- | ------------------
|Note 11  | Stock Option Plans



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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|                              |  |            |           |                     |           |  |           |          |  |         |             |  |  |   |      | 
|----------------------------- |  | ---------- | --------- | ------------------- | --------- |  | --------- | -------- |  | ------- | ----------- |  |  | - | ---- | 
|                              |  |            |           | Options Outstanding |           |  |          
|                              |  | Options    |           |                     |           |  |           | Weighted | 
|                              |  | Available  |           |                     |           |  | Range of  |          |  | Average |            
|                              |  | for Future |           |                     | Number of |  |           | Exercise |  |         | Exercise    | 
|                              |  | Grant      |           |                     | Options   |  |           | Prices   |  |         | Price       | 
|                              |  |            |           |                     |           |  |           |          |  |         |             | 
|Balances at December 31, 2001 |  |            | 192,229   |                     |           |  | 809,743   |          |  | $       | 0.04-$7.14  |  |  |   | 2.40 | 
|Authorized                    |  |            | 398,000   |                     |           |  |          |          |  |         |            |  |  |   |     | 
|Granted                       |  |            | (272,766  | )                   |           |  | 272,766   |          |  |         | 1.50        |  |  |   | 1.50 | 
|Exercised                     |  |            |          |                     |           |  | (42,803   | )        |  |         | 0.04-1.50   |  |  |   | 0.91 | 
|Terminated/cancelled          |  |            | 57,105    |                     |           |  | (65,105   | )        |  |         | 0.61-7.14   |  |  |   | 3.47 | 
|                              |  |            |           |                     |           |  |           |          |  |         |             | 
|Balances at December 31, 2002 |  |            | 374,568   |                     |           |  | 974,601   |          |  | $       | 0.04-$7.14  |  |  |   | 2.15 | 
|Authorized                    |  |            | 98,000    |                     |           |  |          |          |  |         |            |  |  |   |     | 
|Granted                       |  |            | (489,915  | )                   |           |  | 489,915   |          |  |         | 1.50        |  |  |   | 1.50 | 
|Exercised                     |  |            |          |                     |           |  | (21,341   | )        |  |         | 0.43-1.50   |  |  |   | 1.32 | 
|Terminated/cancelled          |  |            | 50,010    |                     |           |  | (53,814   | )        |  |         | 0.43-7.14   |  |  |   | 2.66 | 
|                              |  |            |           |                     |           |  |           |          |  |         |             | 
|Balances at December 31, 2003 |  |            | 32,663    |                     |           |  | 1,389,361 |          |  | $       | 0.04-$7.14  |  |  |   | 1.92 | 
|Authorized                    |  |            | 1,231,333 |                     |           |  |          |          |  |         |            |  |  |   |     | 
|Granted                       |  |            | (477,944  | )                   |           |  | 477,944   |          |  |         | 3.00-16.70  |  |  |   | 5.41 | 
|Exercised                     |  |            |          |                     |           |  | (82,871   | )        |  |         | 0.04-7.14   |  |  |   | 1.79 | 
|Terminated/cancelled          |  |            | 101,632   |                     |           |  | (104,712  | )        |  |         | 0.71-10.50  |  |  |   | 2.87 | 
|                              |  |            |           |                     |           |  |           |          |  |         |             | 
|Balances at December 31, 2004 |  |            | 887,684   |                     |           |  | 1,679,722 |          |  | $       | 0.04-$16.70 |  |  | $ | 2.86 | 
|                              |  |            |           |                     |           |  |           |          |  |         |             | 

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |  |                     |           |           |                     |  |      |           |          |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | --------- | ------------------- |  | ---- | --------- | -------- |  | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |           |           | Options Exercisable | 
|                |  |                     |           |           |                     | 
|                |  |                     |           | Weighted  |                     |  |     
|                |  |                     |           | Average   |                     |  |      |           | Weighted | 
|                |  |                     |           | Remaining |                     |  |      |           | Average  | 
|                |  | Number of           |           |           | Contractual         |  |      | Number of |          |  | Exercise  | 
|Exercise Prices |  | Options             |           |           | Life (in Years)     |  |      | Options   |          |  | Price     | 
|                |  |                     |           |           |                     |  |      |           |          |  |           | 
|$ 0.04          |  |                     | 1         |           |                     |  | 0.54 |           |          |  | 1         |  |  | $ | 0.04  | 
|0.11            |  |                     | 21,700    |           |                     |  | 1.10 |           |          |  | 21,700    |  |  |   | 0.11  | 
|0.32            |  |                     | 2,016     |           |                     |  | 1.36 |           |          |  | 2,016     |  |  |   | 0.32  | 
|0.43            |  |                     | 11,560    |           |                     |  | 1.92 |           |          |  | 11,559    |  |  |   | 0.43  | 
|0.61            |  |                     | 45,145    |           |                     |  | 2.82 |           |          |  | 45,140    |  |  |   | 0.61  | 
|0.71            |  |                     | 200,687   |           |                     |  | 4.64 |           |          |  | 200,353   |  |  |   | 0.71  | 
|1.50            |  |                     | 825,889   |           |                     |  | 7.63 |           |          |  | 525,381   |  |  |   | 1.50  | 
|3.00            |  |                     | 295,511   |           |                     |  | 9.18 |           |          |  | 63,551    |  |  |   | 3.00  | 
|6.00            |  |                     | 29,226    |           |                     |  | 9.48 |           |          |  | 1,694     |  |  |   | 6.00  | 
|7.14            |  |                     | 131,552   |           |                     |  | 5.90 |           |          |  | 130,073   |  |  |   | 7.14  | 
|9.00            |  |                     | 18,896    |           |                     |  | 9.54 |           |          |  | 1,761     |  |  |   | 9.00  | 
|10.50           |  |                     | 52,873    |           |                     |  | 9.69 |           |          |  | 465       |  |  |   | 10.50 | 
|12.60           |  |                     | 2,666     |           |                     |  | 9.80 |           |          |  |          |  |  |   | 12.60 | 
|13.19           |  |                     | 4,000     |           |                     |  | 9.95 |           |          |  |          |  |  |   | 13.19 | 
|13.75           |  |                     | 5,000     |           |                     |  | 9.92 |           |          |  |          |  |  |   | 13.75 | 
|14.20           |  |                     | 3,600     |           |                     |  | 9.96 |           |          |  |          |  |  |   | 14.20 | 
|14.91           |  |                     | 4,400     |           |                     |  | 9.94 |           |          |  |          |  |  |   | 14.91 | 
|15.00           |  |                     | 20,000    |           |                     |  | 9.82 |           |          |  |          |  |  |   | 15.00 | 
|16.70           |  |                     | 5,000     |           |                     |  | 9.91 |           |          |  |          |  |  |   | 16.70 | 
|                |  |                     |           |           |                     |  |      |           |          |  |           | 
|                |  |                     | 1,679,722 |           |                     |  | 7.33 |           |          |  | 1,003,694 |  |  | $ | 2.11  | 
|                |  |                     |           |           |                     |  |      |           |          |  |           | 



Employee Deferred Stock Based Compensation.




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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |  |           |         |          |          |   |          |            |  |           |       |  |  |   |      | 
|-------------------------------- |  | --------- | ------- | -------- | -------- | - | -------- | ---------- |  | --------- | ----- |  |  | - | ---- | 
|                                 |  |           |         |          |          |   |          | Weighted   | 
|                                 |  |           |         |          |          |   |          | Average    | 
|                                 |  |           |         | Weighted |          |   | Weighted |            |  | Intrinsic |      
|                                 |  | Number of |         |          | Average  |   |          | Average    |  |           | Value | 
|                                 |  | Options   |         |          | Exercise |   |          | Fair Value |  |           | Per   | 
|Grants Made During Quarter Ended |  | Granted   |         |          | Price    |   |          | Per Share  |  |           | Share | 
|                                 |  |           |         |          |          |   |          |            |  |           |       | 
|March 31, 2003                   |  |           | 224,950 |          |          | $ | 1.50     |            |  | $         | 2.12  |  |  | $ | 0.62 | 
|June 30, 2003                    |  |           | 67,296  |          |          | $ | 1.50     |            |  | $         | 2.06  |  |  | $ | 0.56 | 
|September 30, 2003               |  |           | 77,142  |          |          | $ | 1.50     |            |  | $         | 2.49  |  |  | $ | 0.99 | 
|December 31, 2003                |  |           | 88,471  |          |          | $ | 2.01     |            |  | $         | 4.05  |  |  | $ | 2.04 | 
|March 31, 2004                   |  |           | 168,620 |          |          | $ | 3.00     |            |  | $         | 6.51  |  |  | $ | 3.51 | 
|June 30, 2004                    |  |           | 144,883 |          |          | $ | 3.77     |            |  | $         | 10.56 |  |  | $ | 6.79 | 
|September 30, 2004               |  |           | 49,391  |          |          | $ | 9.93     |            |  | $         | 13.31 |  |  | $ | 3.38 | 
|December 31, 2004                |  |           | 24,130  |          |          | $ | 10.73    |            |  | $         | 15.21 |  |  | $ | 4.48 | 



Stock Compensation Expense Related to Consultant
Services.


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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|          |                       
|--------- | ----------------------
|Note 12  | Employee Benefit Plans





|          |                                               
|--------- | ----------------------------------------------
|Note 13  | Selected Quarterly Financial Data (unaudited):



|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |   |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | -------------- | ------ | - | --------- | - | ------ | -------- |  | - | -------- | - |  | -------- | ----- | - | --------- | - | ----- | -------- |  | - | -------- | - |  | - | ------ | - |  | - | ------ | -
|                                                |  | Dec. 04       |        |   | Sept. 04 |   |        | June 04 |  |   | Mar. 04 |   |  | Dec. 03 |       |   | Sept. 03 |   |       | June 03 |  |   | Mar. 03 |  
|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |  
|                                                |  | (in thousands) |       
|                                                |  | (unaudited)    |       
|Net revenues                                    |  | $              | 11,186 |   |           | $ | 10,116 |          |  | $ | 9,230    |   |  | $        | 7,634 |   |           | $ | 7,485 |          |  | $ | 5,978    |   |  | $ | 4,615  |   |  | $ | 3,760  |  
|Cost of revenues(1)                             |  |                | 2,845  |   |           |   | 2,562  |          |  |   | 2,285    |   |  |          | 1,850 |   |           |   | 1,945 |          |  |   | 1,756    |   |  |   | 1,460  |   |  |   | 1,150  |  
|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |  
|Gross profit                                    |  |                | 8,341  |   |           |   | 7,554  |          |  |   | 6,945    |   |  |          | 5,784 |   |           |   | 5,540 |          |  |   | 4,222    |   |  |   | 3,155  |   |  |   | 2,610  |  
|Total operating expenses(1)                     |  |                | 7,651  |   |           |   | 6,494  |          |  |   | 6,443    |   |  |          | 5,387 |   |           |   | 5,574 |          |  |   | 4,792    |   |  |   | 4,272  |   |  |   | 3,644  |  
|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |  
|Income (loss) from operations                   |  |                | 690    |   |           |   | 1,060  |          |  |   | 502      |   |  |          | 397   |   |           |   | (34   | )        |  |   | (570     | ) |  |   | (1,117 | ) |  |   | (1,034 | )
|Interest income (expense) and other, net        |  |                | 340    |   |           |   | 46     |          |  |   | 21       |   |  |          | 32    |   |           |   | 38    |          |  |   | 26       |   |  |   | 50     |   |  |   | 57     |  
|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |  
|Income (loss) before provision for income taxes |  |                | 1,030  |   |           |   | 1,106  |          |  |   | 523      |   |  |          | 429   |   |           |   | 4     |          |  |   | (544     | ) |  |   | (1,067 | ) |  |   | (977   | )
|Provision for income taxes                      |  |                | (16    | ) |           |   | (111   | )        |  |   | (52      | ) |  |          | (43   | ) |           |   |      |          |  |   |         |   |  |   |       |   |  |   |       |  
|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |  
|Net income (loss)                               |  | $              | 1,014  |   |           | $ | 995    |          |  | $ | 471      |   |  | $        | 386   |   |           | $ | 4     |          |  | $ | (544     | ) |  | $ | (1,067 | ) |  | $ | (977   | )
|                                                |  |                |        |   |           |   |        |          |  |   |          |   |  |          |       |   |           |   |       |          |  |   |          |  






|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Includes charges for stock-based compensation in the following
    amounts:

|                   |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|------------------ |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- | 
|Cost of revenues   |  | $ | 26  |  |  | $ | 26  |  |  | $ | 24  |  |  | $ | 14  |  |  | $ | 10  |  |  | $ | 14  |  |  | $ | 15  |  |  | $ | 17  | 
|Operating expenses |  |   | 284 |  |  |   | 270 |  |  |   | 273 |  |  |   | 134 |  |  |   | 93  |  |  |   | 121 |  |  |   | 135 |  |  |   | 143 | 
|                   |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|Total              |  | $ | 310 |  |  | $ | 296 |  |  | $ | 297 |  |  | $ | 148 |  |  | $ | 103 |  |  | $ | 135 |  |  | $ | 150 |  |  | $ | 160 | 
|                   |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     | 

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VNUS MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |    |  |  |        |    |  |  |        |   
|----------------------------------------------- |  | -------- | ------ | - | --------- |  | ------ | -------- |  |  | -------- | - |  | -------- | ------ | - | --------- |  | ------ | -------- |  |  | -------- | -- |  |  | ------ | -- |  |  | ------ | --
|                                                |  | Dec. 04 |        |   | Sept. 04 |  |        | June 04 |  |  | Mar. 04 |   |  | Dec. 03 |        |   | Sept. 03 |  |        | June 03 |  |  | Mar. 03 |   
|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |   
|Net revenues                                    |  |          | 100.0% |   |           |  | 100.0% |          |  |  | 100.0%   |   |  |          | 100.0% |   |           |  | 100.0% |          |  |  | 100.0%   |    |  |  | 100.0% |    |  |  | 100.0% |   
|Cost of revenues                                |  |          | 25.4   |   |           |  | 25.3   |          |  |  | 24.8     |   |  |          | 24.2   |   |           |  | 26.0   |          |  |  | 29.4     |    |  |  | 31.6   |    |  |  | 30.6   |   
|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |   
|Gross profit                                    |  |          | 74.6   |   |           |  | 74.7   |          |  |  | 75.2     |   |  |          | 75.8   |   |           |  | 74.0   |          |  |  | 70.6     |    |  |  | 68.4   |    |  |  | 69.4   |   
|Total operating expenses                        |  |          | 68.4   |   |           |  | 64.2   |          |  |  | 69.8     |   |  |          | 70.6   |   |           |  | 74.5   |          |  |  | 80.1     |    |  |  | 92.6   |    |  |  | 96.9   |   
|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |   
|Income (loss) from operations                   |  |          | 6.2    |   |           |  | 10.5   |          |  |  | 5.4      |   |  |          | 5.2    |   |           |  | (0.5   | )        |  |  | (9.5     | )  |  |  | (24.2  | )  |  |  | (27.5  | ) 
|Interest income (expense) and other, net        |  |          | 3.0    |   |           |  | 0.4    |          |  |  | 0.2      |   |  |          | 0.4    |   |           |  | 0.5    |          |  |  | 0.4      |    |  |  | 1.1    |    |  |  | 1.5    |   
|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |   
|Income (loss) before provision for income taxes |  |          | 9.2    |   |           |  | 10.9   |          |  |  | 5.6      |   |  |          | 5.6    |   |           |  | 0.0    |          |  |  | (9.1     | )  |  |  | (23.1  | )  |  |  | (26.0  | ) 
|Provision for income taxes                      |  |          | (0.1   | ) |           |  | (1.1   | )        |  |  | (0.6     | ) |  |          | (0.6   | ) |           |  |       |          |  |  |         |    |  |  |       |    |  |  |       |   
|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |   
|Net income (loss)                               |  |          | 9.1%   |   |           |  | 9.8%   |          |  |  | 5.0%     |   |  |          | 5.0%   |   |           |  | 0.0%   |          |  |  | (9.1     | )% |  |  | (23.1  | )% |  |  | (26.0  | )%
|                                                |  |          |        |   |           |  |        |          |  |  |          |   |  |          |        |   |           |  |        |          |  |  |          |   

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9: | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures










Item 9B.Other
Information







PART III





Item 10:Directors and
Executive Officers of the Registrant




Executive Officers and Directors




|                    |  |     |    |  |          |                                                                           
|------------------- |  | --- | -- |  | -------- | --------------------------------------------------------------------------
|Name                |  | Age |    |  | Position
|                    |  |     |    |  |         
|Brian E. Farley     |  |     | 47 |  |          | President and Chief Executive Officer, Director                           
|Timothy A. Marcotte |  |     | 48 |  |          | Chief Financial Officer and Vice President, Finance and
    Administration
|William A. Perry    |  |     | 40 |  |          | Vice President, Worldwide Marketing and International Sales               
|Scott H. Cramer     |  |     | 43 |  |          | Senior Vice President, U.S. Sales                                         
|Robert G. McRae     |  |     | 36 |  |          | Senior Vice President, Manufacturing and Research &
    Development       

Brian E. Farley


66



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##### Table of Contents





Timothy A. Marcotte


William A. Perry


Scott H. Cramer


Robert G. McRae







|         |                       
|-------- | ----------------------
|Item 11: | Executive Compensation



67



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##### Table of Contents








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12: | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13: | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14: | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15: | Exhibits and Financial Statement Schedules

Consolidated Financial Statements and
Supplementary Data:




|                                                                                                                           |                                   |        |    |  | 
|-------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------ | -- |  | 
|                                                                                                                           |                                   | Page   |   
|                                                                                                                           |                                   | Number |   
|                                                                                                                           |                                   |        |   
|Report of Independent Registered Public Accounting Firm                                                                    |                                   |        | 47 | 
|Consolidated Balance Sheets at December 31, 2004 and
    December 31, 2003                                                 |                                   |        | 48 | 
|Consolidated Statements of Operations for Each of the Years in
    the Three Year Period Ended December 31, 2004           |                                   |        | 49 | 
|Consolidated Statements of Stockholders Equity for Each of
    the Years in the Three Year Period Ended December 31, 2004 |                                   |        | 50 | 
|Consolidated Statements of Cash Flows for Each of the Years in
    the Three Year Period Ended December 31, 2004           |                                   |        | 51 | 
|Notes to Consolidated Financial Statements                                                                                 |                                   |        | 52 | 
|                                                                                                                           | 2. Financial Statement Schedules: |        |    |  | 
|Schedule II  Valuation and Qualifying Accounts                                                                            |                                   |        | 72 | 
|                                                                                                                           | 3. Exhibit Index                  |        |    |  | 

68



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##### Table of Contents



INDEX OF EXHIBITS


|        |    |      |             |                                                                                                                                                                                                                                                                              
|------- | -- | ---- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 3  | .1   |             | Form of Amended and Restated Certificate of Incorporation, to be
    in effect upon the completion of the offering (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   |             | Form of Amended and Restated Bylaws, to be in effect upon the
    completion of the offering (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.)                      
|        | 3  | .3   |             | Amended and Restated Certificate of Incorporation, currently in
    effect (incorporated by reference to Exhibit 3.3 to the
    Companys Registration Statement on Form S-1/ A
    No. 333-117640, filed on August 18, 2004.)                                               
|        | 3  | .4   |             | Amended and Restated Bylaws, currently in effect (incorporated
    by reference to Exhibit 3.4 to the Companys
    Registration Statement on Form S-1/ A No. 333-117640,
    filed on August 18, 2004.)                                                                     
|        | 3  | .5   |             | Amendment to Amended and Restated Certificate of Incorporation
    currently in effect (incorporated by reference to
    Exhibit 3.5 to the Companys Registration Statement on
    Form S-1/ A No. 333-117640, filed on October 15,
    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.)                                                                                          
|        | 4  | .2   |             | Fifth Restated Stockholder Rights Agreement, dated
    August 15, 2001 (incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-1 No. 333-117640, filed on July 23, 2004.)                                                        
|        | 4  | .3   |             | Warrant to purchase common stock between VNUS Medical
    Technologies, Inc. and The Bay City Capital Fund I, L.P.
    (incorporated by reference to Exhibit 4.3 to the
    Companys Registration Statement on
    Form No. 333-117640, filed on July 23, 2004.)            
|        | 4  | .4   |             | Warrant to purchase common stock between VNUS Medical
    Technologies, Inc. and SPI Commerce Park, LP. (incorporated by
    reference to Exhibit 4.4 to the Companys Registration
    Statement on Form S-1 No. 333-117640, filed on
    July 23, 2004.)                   
|        | 10 | .2#  |             | 2000 Equity Incentive Plan (incorporated by reference to
    Exhibit 10.2 to the Companys Registration Statement
    on Form S-1 No. 333-117640, filed on July 23,
    2004.)                                                                                               
|        | 10 | .3#  |             | First Amendment to 2000 Equity Incentive Plan (incorporated by
    reference to Exhibit 10.3 to the Companys
    Registration Statement on Form S-1 No. 333-117640,
    filed on July 23, 2004.)                                                                            
|        | 10 | .4#  |             | 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 | .5#  |             | First Amendment to 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 | .6#  |             | Second Amendment to 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 | .7#  |             | VNUS Severance Plan for Management and Key Employees
    (incorporated by reference to Exhibit 10.7 to the
    Companys Registration Statement on Form S-1
    No. 333-117640, filed on July 23, 2004.)                                                                     
|        | 10 | .8#* |             | Form of Stock Option Agreement Under the 2000 Equity Incentive
    Plan, as amended.                                                                                                                                                                                         
|        | 10 | .9#  |             | Summary of the 2004 Bonus Payments and 2005 Salary for the Chief
    Executive Officer (incorporated by reference to the
    Companys Report on Form 8-K dated March 25,
    2005.)                                                                                         
|        | 10 | .10# |             | Summary of the 2004 Bonus Payments and 2005 Salaries for
    Executive Officers (incorporated by reference to the
    Companys Report on Form 8-K dated March 16,
    2005.)                                                                                                
|        | 10 | .11# |             | Form of Indemnification 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.)                                                    

69



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##### Table of Contents



|        |    |     |             |                                                                                                                                                                                                                                                                                                   
|------- | -- | --- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|        | 10 | .12 |             | RF Generator Development Agreement between VNUS Medical
    Technologies, Inc. and Byers Peak, Inc. dated February 20,
    2004 (incorporated by reference to Exhibit 10.9 to the
    Companys Registration Statement on Form S-1/ A
    No. 333-117640, filed on August 18, 2004.)              
|        | 10 | .13 |             | 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 | .14 |             | Lease by and between SPI Commerce Park, LP and VNUS Medical
    Technologies, Inc., dated January 24, 2001 (incorporated by
    reference to Exhibit 10.11 to the Companys
    Registration Statement on Form S-1 No. 333-117640,
    filed on July 23, 2004.)                                   
|        | 10 | .15 |             | First Amendment to Lease Agreement by and between SPI Commerce
    Park, LP and VNUS Medical Technologies, Inc., dated
    August 1, 2003 (incorporated by reference to
    Exhibit 10.12 to the Companys Registration Statement
    on Form S-1 No. 333-117640, filed on July 23,
    2004.)    
|        | 10 | .16 |             | Second Amendment to Lease Agreement by and between SPI Commerce
    Park, LP and VNUS Medical Technologies, Inc., dated
    February 13, 2004 (incorporated by reference to
    Exhibit 10.13 to the Companys Registration Statement
    on Form S-1 No. 333-117640, filed on July 23,
    2004.)
|        | 10 | .17 |             | Second Amendment to 2000 Equity Incentive Plan (incorporated by
    reference to Exhibit 10.14 to the Companys
    Registration Statement on Form S-1/ A No. 333-117640,
    filed on July 23, 2004.)                                                                                            
|        | 21 | *   |             | List of Subsidiaries of VNUS Medical Technology, 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.





70



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##### Table of Contents



SIGNATURES






| |                                    
| | -----------------------------------
| | VNUS Medical Technologies,
    Inc.



| |    |                    
| | -- | -------------------
| | By | /s/ Brian E. Farley

| |                                   
| | ----------------------------------
| |                                   
| | Brian E. Farley                   
| | President, Chief Executive Officer
| | and Director                      





|   |  |                                                      |  |                                                                              |  |                     
|-- |  | ---------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | --------------------
|  
|By |  | /s/ Brian E. FarleyBrian
    E. Farley               |  | President, Chief Executive Officer and Director                              |  | Date: March 31, 2005
|  
|By |  | /s/ Timothy A. MarcotteTimothy
    A. Marcotte       |  | Vice President and Chief Financial Officer
    (Principal Financial Officer) |  | Date: March 31, 2005
|  
|By |  | /s/ H. DuBose
    MontgomeryH.
    DuBose Montgomery |  | Chairman of the Board                                                        |  | Date: March 31, 2005
|  
|By |  | /s/ James FitzsimmonsJames
    Fitzsimmons           |  | Director                                                                     |  | Date: March 31, 2005
|  
|By |  | /s/ Kathy LaPorteKathy
    LaPorte                   |  | Director                                                                     |  | Date: March 31, 2005
|  
|By |  | /s/ Edward UnkartEdward
    Unkart                   |  | Director                                                                     |  | Date: March 31, 2005

71



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##### Table of Contents



FINANCIAL STATEMENT SCHEDULE




|                                                        |  |                |        |  |           |   |       |            |            |   |        |   |  |   |        | 
|------------------------------------------------------- |  | -------------- | ------ |  | --------- | - | ----- | ---------- | ---------- | - | ------ | - |  | - | ------ | 
|                                                        |  | Balance at     |        |  |           |   |       |            | Balance at |  
|                                                        |  | Beginning      |        |  |           |   |       |            | End of     |  
|Description                                             |  | of Period      |        |  | Additions |   |       | Write-offs |            |   | Period |  
|                                                        |  |                |        |  |           |   |       |            |            |   |        |  
|                                                        |  | (in thousands) |       
|Allowance for Doubtful Accounts Year Ended:             |  |                |        |  |           |   |       |            |            |   |        |   |  |   |        | 
|December 31, 2002                                       |  | $              | 41     |  |           | $ | 189   |            |            | $ | (66    | ) |  | $ | 164    | 
|December 31, 2003                                       |  | $              | 164    |  |           | $ | 43    |            |            | $ | (15    | ) |  | $ | 192    | 
|December 31, 2004                                       |  | $              | 192    |  |           | $ | 105   |            |            | $ | (102   | ) |  | $ | 195    | 
|                                                       
|Allowance for Excess and Obsolete Inventory Year Ended: |  |                |        |  |           |   |       |            |            |   |        |   |  |   |        | 
|December 31, 2002                                       |  | $              | 124    |  |           | $ | 128   |            |            | $ | (104   | ) |  | $ | 148    | 
|December 31, 2003                                       |  | $              | 148    |  |           | $ | 77    |            |            | $ | (29    | ) |  | $ | 196    | 
|December 31, 2004                                       |  | $              | 196    |  |           | $ | 68    |            |            | $ | (233   | ) |  | $ | 31     | 
|                                                       
|Allowance for Deferred Tax Assets Year Ended:           |  |                |        |  |           |   |       |            |            |   |        |   |  |   |        | 
|December 31, 2002                                       |  | $              | 13,427 |  |           | $ | 1,639 |            |            | $ |       |   |  | $ | 15,066 | 
|December 31, 2003                                       |  | $              | 15,066 |  |           | $ | 1,365 |            |            | $ |       |   |  | $ | 16,431 | 
|December 31, 2004                                       |  | $              | 16,431 |  |           | $ |      |            |            | $ | (1,108 | ) |  | $ | 15,323 | 

72



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##### Table of Contents



INDEX OF EXHIBITS


|        |    |      |             |                                                                                                                                                                                                                                                                                     
|------- | -- | ---- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 3  | .1   |             | Form of Amended and Restated Certificate of Incorporation, to be
    in effect upon the completion of the offering (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   |             | Form of Amended and Restated Bylaws, to be in effect upon the
    completion of the offering (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.)                             
|        | 3  | .3   |             | Amended and Restated Certificate of Incorporation, currently in
    effect (incorporated by reference to Exhibit 3.3 to the
    Companys Registration Statement on Form S-1/ A
    No. 333-117640, filed on August 18, 2004.)                                                      
|        | 3  | .4   |             | Amended and Restated Bylaws, currently in effect (incorporated
    by reference to Exhibit 3.4 to the Companys
    Registration Statement on Form S-1/ A No. 333-117640,
    filed on August 18, 2004.)                                                                            
|        | 3  | .5   |             | Amendment to Amended and Restated Certificate of Incorporation
    currently in effect (incorporated by reference to
    Exhibit 3.5 to the Companys Registration Statement on
    Form S-1/ A No. 333-117640, filed on October 15,
    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.)                                                                                                 
|        | 4  | .2   |             | Fifth Restated Stockholder Rights Agreement, dated
    August 15, 2001 (incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-1 No. 333-117640, filed on July 23, 2004.)                                                               
|        | 4  | .3   |             | Warrant to purchase common stock between VNUS Medical
    Technologies, Inc. and The Bay City Capital Fund I, L.P.
    (incorporated by reference to Exhibit 4.3 to the
    Companys Registration Statement on
    Form No. 333-117640, filed on July 23, 2004.)                   
|        | 4  | .4   |             | Warrant to purchase common stock between VNUS Medical
    Technologies, Inc. and SPI Commerce Park, LP. (incorporated by
    reference to Exhibit 4.4 to the Companys Registration
    Statement on Form S-1 No. 333-117640, filed on
    July 23, 2004.)                          
|        | 10 | .2#  |             | 2000 Equity Incentive Plan (incorporated by reference to
    Exhibit 10.2 to the Companys Registration Statement
    on Form S-1 No. 333-117640, filed on July 23,
    2004.)                                                                                                      
|        | 10 | .3#  |             | First Amendment to 2000 Equity Incentive Plan (incorporated by
    reference to Exhibit 10.3 to the Companys
    Registration Statement on Form S-1 No. 333-117640,
    filed on July 23, 2004.)                                                                                   
|        | 10 | .4#  |             | 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 | .5#  |             | First Amendment to 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 | .6#  |             | Second Amendment to 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 | .7#  |             | VNUS Severance Plan for Management and Key Employees
    (incorporated by reference to Exhibit 10.7 to the
    Companys Registration Statement on Form S-1
    No. 333-117640, filed on July 23, 2004.)                                                                            
|        | 10 | .8#* |             | Form of Stock Option Agreement Under the 2000 Equity Incentive
    Plan, as amended.                                                                                                                                                                                                
|        | 10 | .9#  |             | Summary of the 2004 Bonus Payments and 2005 Salary for the Chief
    Executive Officer (incorporated by reference to the
    Companys Report on Form 8-K dated March 25,
    2005.)                                                                                                
|        | 10 | .10# |             | Summary of the 2004 Bonus Payments and 2005 Salaries for
    Executive Officers (incorporated by reference to the
    Companys Report on Form 8-K dated March 16,
    2005.)                                                                                                       
|        | 10 | .11# |             | Form of Indemnification 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 | .12  |             | RF Generator Development Agreement between VNUS Medical
    Technologies, Inc. and Byers Peak, Inc. dated February 20,
    2004 (incorporated by reference to Exhibit 10.9 to the
    Companys Registration Statement on Form S-1/ A
    No. 333-117640, filed on August 18, 2004.)



---



##### Table of Contents



|        |    |     |             |                                                                                                                                                                                                                                                                                                   
|------- | -- | --- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|        | 10 | .13 |             | 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 | .14 |             | Lease by and between SPI Commerce Park, LP and VNUS Medical
    Technologies, Inc., dated January 24, 2001 (incorporated by
    reference to Exhibit 10.11 to the Companys
    Registration Statement on Form S-1 No. 333-117640,
    filed on July 23, 2004.)                                   
|        | 10 | .15 |             | First Amendment to Lease Agreement by and between SPI Commerce
    Park, LP and VNUS Medical Technologies, Inc., dated
    August 1, 2003 (incorporated by reference to
    Exhibit 10.12 to the Companys Registration Statement
    on Form S-1 No. 333-117640, filed on July 23,
    2004.)    
|        | 10 | .16 |             | Second Amendment to Lease Agreement by and between SPI Commerce
    Park, LP and VNUS Medical Technologies, Inc., dated
    February 13, 2004 (incorporated by reference to
    Exhibit 10.13 to the Companys Registration Statement
    on Form S-1 No. 333-117640, filed on July 23,
    2004.)
|        | 10 | .17 |             | Second Amendment to 2000 Equity Incentive Plan (incorporated by
    reference to Exhibit 10.14 to the Companys
    Registration Statement on Form S-1/ A No. 333-117640,
    filed on July 23, 2004.)                                                                                            
|        | 21 | *   |             | List of Subsidiaries of VNUS Medical Technology, 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.