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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, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-52045
 VOLCANO CORPORATION
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    33-0928885(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)2870 Kilgore Road
    
    95670Rancho Cordova, California
    
    (Zip Code)(Address of Principal ExecutiveOffices)
 Registrants telephone number, including area code:
1-800-228-4728
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.001 per share par value
    
    The NASDAQ Global Market
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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VOLCANO CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    23Item 1B. Unresolved Staff Comments
    
    
    46Item 2. Properties
    
    
    46Item 3. Legal Proceedings
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46PART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    47Item 6. Selected Financial Data
    
    
    50Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    52Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    67Item 8. Financial Statements and Supplementary Data
    
    
    68Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    98Item 9A. Controls and Procedures
    
    
    98Item 9B. Other Information
    
    
    98PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    99Item 11. Executive Compensation
    
    
    99Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    99Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    99Item 14. Principal Accounting Fees and Services
    
    
    99PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    100SIGNATURES
    
    
    103EXHIBIT INDEX
    
    
    104EXHIBIT 10.3aEXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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This annual report on Form 10-K contains forward-looking statements These statements include, but are not
limited to, those concerning the following; our intentions, beliefs and expectations regarding our
future ; the timing and success
of our clinical trials and regulatory submissions; our belief that our cash and cash equivalents
will be sufficient to satisfy our anticipated cash requirements; our operating results; our
expectations regarding our revenues and customers; our distributors and statements regarding market
penetration and expansion efforts. Forward-looking statements are subject to risks and
uncertainties that could cause actual results and events to differ materially. For a detailed
discussion of these risks and uncertainties, see the   section of this Form 10-K . we undertake no obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of this Form 10-K .
 We currently have registered trademarks for Volcano®, Eagle Eye®, Visions®, Revolution®,
ComboWire®, SmartMap®, ComboMap®, SmartWire®, FloWire®, WaveWire®, among others, and are in the
process of registering certain other of our trademarks with the U.S. Patent and Trademark Office
including, but not limited to, vFusion Powered by Volcano TM , vfusion TM ,
AIM TM , Virtual Histology TM and VH TM . All other brand names or
trademarks appearing in this Annual Report are the property of their respective holders.
 
 PART I
 
 Item 1. Business
 Overview
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Vascular Disease Market and Current Treatments
       4




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Our Strategy
  
    
    Accelerating the trend towards less invasive procedures.
Four major trends are driving the demand for less invasive
cardiovascular procedures: improved non-invasive diagnostic
and therapeutic techniques; cost-containment pressures from
payors; increasing incidence of vascular and structural
heart disease; and patient demand for less invasive
procedures which require shorter hospital stays and allow
more rapid recovery. This shift to less invasive procedures
requires diagnostic modalities that can provide more
comprehensive clinical information than angiography. Our
IVUS products offer continuous, real-time three-dimensional
imaging, plaque visualization, color-coded identification
of plaque composition, and automatic drawing of lumen and
vessel borders allowing for automatic vessel sizing. Our
IVUS and angiography co-registration product is being
designed to allow physicians to traverse the length of the
vessel on the angiogram while simultaneously looking at the
parallel cross-sectional IVUS image. Our FM products offer
physicians a simple pressure and flow based method to
determine whether stenting or additional percutaneous
intervention is required. We believe our combination of
IVUS enhancements and functional assessment is instrumental
in facilitating less invasive procedures.
    
    Improving the diagnosis of cardiovascular disease.We
believe our VH IVUS products will significantly improve the
diagnosis of cardiovascular disease by addressing the
limitations of diagnostic angiography. Interim data from
our PROSPECT trial, in conjunction with Abbott Vascular,
indicated that our VH IVUS technology is able to identify
lesions requiring stenting that were not detected by
diagnostic angiography and, in 35% of patients, lesions
with characteristics of vulnerable plaque. Our ongoing VH
Registry is exploring the correlation of plaque
characteristics with patient demographics, clinical
presentation and cardiac risk factors, which in conjunction
with the PROSPECT data we believe will allow clinicians to
identify patients and lesions at risk for future adverse
coronary vascular system events.
    
    Improving the outcomes of percutaneous interventional
procedures.A key determinant of positive
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therapeutic
results in percutaneous interventions is having sufficient
information about the plaque or lesions. Inadequate or
imprecise sizing and anatomical information can result in
incorrect stent selection, incomplete stent apposition to
the arterial wall, asymmetric expansion of the stent,
incorrect geographical deployment relative to the lesion,
and dissection of the arterial wall. Clinical data has
shown that use of IVUS and FM in conjunction with
angiography during percutaneous interventional procedures
can result in better outcomes. Numerous studies have shown
the acute and long-term benefits of IVUS guidance in stent
deployment. For example, studies have demonstrated that
physicians change their percutaneous interventional
strategies in 20% to 40% of cases and that 50% of stent
deployment issues detected by IVUS are not visible by
angiography. Additionally, we believe the information that
our IVUS products provide will become increasingly
important with the focus on the thrombosis safety risks of
drug-eluting stents and on increasing awareness of the
importance of correct stent deployment to improve safety.
We believe our products, enabled with novel technological
enhancements, provide clinically significant information
that improves the outcomes of current and increasingly
complex percutaneous interventional procedures.
    
    Enabling new procedures to treat CAD, PAD and structural
heart disease.Current treatment of a number of vascular
and structural heart diseases, including coronary,
peripheral and carotid artery disease and atrial
fibrillation, a heart rhythm disorder involving a rapid
heart rate in which the upper chambers, or atria, are
stimulated to contract in a disorganized and abnormal
manner, is limited by conventional catheter-based
techniques and angiography. Today, many patients with these
diseases are prescribed drug therapy or referred to
invasive surgical procedures because of the difficulty in
diagnosing and treating percutaneously. In addition,
physicians today cannot diagnose and therefore treat
vulnerable plaque. Because our technologies address many of
these current limitations, we believe our products provide
the potential to enable these diseases to be diagnosed and
optimally treated percutaneously.
    
    Improving ease of use of IVUS technologies to drive market
adoption.Developing the expertise required to perform
percutaneous interventional procedures typically requires
advanced training beyond that required to become a
specialist physician. Additionally, in order to use
conventional IVUS products, physicians require
comprehensive training to operate the system, interpret the
images and manually draw lumen and vessel borders within
the IVUS grayscale images, which has hindered market
adoption. We believe our products, especially our recent
IVUS product enhancements such as automatic real-time
drawing of lumen and vessel borders, automatic vessel
sizing, color-coded identification of plaque composition
and IVUS and angiographic image co-registration currently
developed on our IVUS IVG consoles, allow doctors to use
IVUS with less training while still providing substantially
more and better information. Our products also help
physicians to conduct increasingly complex percutaneous
procedures.
    
    Decreasing the number of interventional devices used per
procedure and optimizing their usage.Our IVUS and FM
products have the potential to reduce the number of devices
deployed thereby lowering treatment costs. IVUS provides
the interventionalist the information to optimize stent
sizing and placement. This can help eliminate the need for
additional stents or the use of accessory products like
balloons to correct for inaccurate stent deployment and
apposition issues. In addition, FM products offer the
opportunity to physiologically assess lesion severity and
determine whether expensive drug-eluting stents are needed,
and we believe can be used to appropriately rationalize use
of drug-eluting stents only in flow-limiting lesions.
  
    
    Increase market share in existing IVUS and FM markets.We
believe that our differentiated, patent-protected
technologies represent important advancements in the
ongoing trend towards percutaneous interventional
therapeutic procedures in the cath lab and provide
substantial, clinically significant improvements and cost
efficiencies over existing technologies. To our knowledge,
no other company offers the broad product suite we offer,
and we continue to introduce product enhancements to meet
physicians needs for improved visualization,
characterization, and ease of use. We believe these
enhancements make our products easier to use than competing
products while providing substantially more and better
information to improve procedural outcomes, thereby driving
greater usage of our IVUS and FM products within the
existing percutaneous interventional market.
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
    
    Increase IVUS and FM adoption rates.Given the relatively
low current U.S. adoption rate of IVUS, a significant
opportunity for growth lies in expanding usage of IVUS by
interventionalists. We are working on three strategies to
increase penetration. First, we have addressed limitations
of conventional IVUS such as difficulty in use, lack of
automation and grayscale imaging by developing technologies
and introducing features such as automatic real-time
drawing of lumen and vessel borders, color-coded
identification of plaque composition, and automatic vessel
sizing. Furthermore, pursuant to a software development and
license agreement with Paieon we have developed IVUS and
angiographic image co-registration functionality for our
IVUS consoles. Second, we recently developed PC-based IVUS
and FM consoles that can be integrated easily into cath
labs, thereby making it easier for physicians to adopt and
use our products. Integrated cath lab versions of our
consoles and advanced functionality options are part of our
vfusion cath lab integration initiative. The significantly
expanded capabilities of our vfusion offering will allow
for networking of patient information, control of IVUS and
FM information at both the operating table and in the cath
lab control room, as well as the capability for images to
be displayed on standard cath lab monitors, Third, we have
pursued collaborations such as our agreement with General
Electric Medical Systems Scs, or GE, in which our
integrated IVUS products are required to be included on all
of GEs initial quotes for cardiovascular and
interventional radiology systems.
    
    Leverage our installed base to drive single-procedure
disposable device revenues.We have a worldwide installed
base of over 1,800 IVUS consoles and over 700 FM consoles.
We intend to grow and leverage this installed base to drive
recurring sales of our single-procedure disposable
catheters and guide wires. With the recent launch of the s5
family of IVUS consoles, we expect to continue to grow our
worldwide installed base of consoles and increase our
recurring revenue stream from sales of our single-procedure
disposable products to our installed base.
    
    Develop clinical applications for and utilization of our
technology in new markets.We plan to leverage our current
technology to expand into new markets and increase clinical
applications through clinical studies, conducted by us or
with companies such as Abbott Vascular, Glaxo SmithKline,
or GSK and Goodman in Japan. We have several programs
underway to expand the use of our technology in
percutaneous interventional procedures and drug studies.
These include (1) establishing the use of our IVUS products
in combination with diagnostic angiography, (2) developing
the capability to determine optimal treatment options for
those patients who have stents placed and are on
anti-platelet drug therapy, (3) developing technology
supported by clinical data to diagnose and guide treatment
of vulnerable plaque and carotid artery disease, (4)
developing a family of intracardiac echo products based on
our existing technologies to improve treatments of
structural heart disease, (5) combining the imaging
capability of IVUS onto existing therapeutic devices
provided by others such as balloons, stents, guide wires or
re-entry devices used in surgeries to reopen completely
blocked arteries, or CTO re-entry devices, and (6) using
our current technologies in on-going or planned drug
studies conducted by pharmaceutical and biotechnology
companies.
    
    Enhance product capabilities and introduce new products
through collaborations or acquisitions.We have a
successful track record of acquiring and licensing
technologies and collaborating with third parties to create
synergistic product offerings. For instance, we licensed
from The Cleveland Clinic Foundation the VH IVUS technology
that now forms the core of our ability to determine the
composition of plaque, and we have entered into a software
development and license agreement with Paieon to develop
the technology to synchronize IVUS and angiographic images.
We acquired from Philips the intellectual property rights
allowing us to develop our Revolution rotational catheter.
Additionally, we have entered into relationships with
companies that incorporate our technology into their
products, such as Medtronics Pioneer re-entry device.
Given our manufacturing, research and development, and
global distribution capabilities, we believe there will be
additional opportunities to leverage these capabilities
through technology or company acquisitions as well as
collaborations.
    
    Improve manufacturing efficiencies and reduce costs to
improve margins.We believe that by moving to PC-based
consoles and improving our manufacturing processes through
increased automation and design improvements, we will be
able to continue to reduce the cost to manufacture our
consoles and single-procedure disposable products.
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
    
    Continue to expand and protect our intellectual property
position.As of December 31, 2006, we had a broad portfolio
of 184 owned or licensed U.S. and international patents and
103 applications for owned or licensed patents. We intend
to continue to expand our intellectual property position to
protect the design and use of our products, principally in
the areas of IVUS and FM for the diagnosis and guidance of
treatment of vascular and structural heart disease.
 Our Products
  Our IVUS Products
  Consoles
   s5:
 s5i:
 s5i GE Innova IVUS:
 s5 and s5i with FFR:
 8




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Catheters
  Advanced Functionality
 in vivo
 VH IVUS.
  IVUS and angiography co-registration.
  9




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Expected U.S. andEuropean Launch
    
    Expected JapaneseProduct
    
    Date
    
    Launch DateConsoless5 grayscale
    
    Launched
    
    Launcheds5 with VH IVUS
    
    Launched
    
    Launcheds5i with VH IVUS
    
    Launched
    
    
    2H 2007s5i GE Innova IVUS with VH IVUS
    
    Launcheds5 and s5i with FFR
    
    
    1H 2007
    
    
    
    1H 2008CathetersRevolution on IVG consoles
    
    Launched
    
    
    2H 2007Revolution on s5 family of consoles
    
    
    1H 2007
    
    
    
    2H 2007Revolution supporting VH IVUS on s5
    
    
    2H 2007
    
    
    
    2H 2007Advanced Functionality OptionsIVG
    
    
    1H 2007
    
    
    
    2H 2007
 Our FM Products
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Product Expansion
 Our Vulnerable Plaque Products and Technology
   
    
    unstable plaque;
    
    necrotic core and dense calcium tissue;
    
    location of the necrotic core within the plaque;
    
    plaque composition by percentages and quantities through in vivotissue
characterization of the artery by 0.5 mm slices;
    
    locations with evidence of previous plaque rupture;
    
    positive remodeling of the vessel;
    
    high and low strain lumen caps;
    
    location of the plaque in the most dangerous proximal third of the artery; and
    
    hemodynamic significance.
  Intra-Cardiac Echocardiography
  11




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Combination IVUS and Therapeutic Devices
  Clinical Program
   Study
    
    Indication
    
    Study Design
    
    Status
    
    Collaborator(s)PROSPECT
(US/Europe)
    
    Natural history
study of plaque to
investigate
non-flow
obstructing lesions
with an increased
risk for future
coronary events
    
    700 patient,
multi-center study
of ACS patients
with single or
double CAD; non-
randomized
    
    Enrollment
completed, follow
up ongoing
    
    Abbott VascularVolcano VH Registry
(Worldwide)
    
    Study of
correlation of
coronary plaque
characteristics
with patient
demographics,
clinical
presentation and
cardiac risk
factors
    
    3,000 patient,
non-randomized
prospective, multi-
center, global,
registry imaging
study
    
    Enrollment
completed, analysis
of data in progress
    
    SPECIAL (Japan)
    
    Natural history
study of vulnerable
plaque to
investigate
non-flow
obstructing lesions
with an increased
risk for future
coronary events
    
    2,000 patient,
randomized
multi-center study
of ACS patients
with single or
double CAD
    
    Enrollment ongoing
    
    Goodman; FukudaIBIS-2 (Europe)
    
    Estimate the effect
on the novel GSK
Lp-PLA(2) inhibitor
on circulatory
biomarkers and
coronary plaque
biomechanical
properties as well
as endothelial
dysfunction,
coronary plaque
volume and
composition with
IVUS grayscale
palpography and VH
IVUS
    
    300 patient,
international,
randomized,
placebo-controlled,
parallel-group, one
year treatment
study
    
    Enrollment
completed, follow
up ongoing
    
    GlaxoSmithKline
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Study
    
    Indication
    
    Study Design
    
    Status
    
    Collaborator(s)CAPITAL (US)
    
    Evaluate the
prevalence and
correlation of the
data provided by
IVUS grayscale and
VH IVUS, such as
plaque components,
quantities,
configurations and
location, to
patient
demographics,
clinical
presentation and
risk factors for
carotid artery
disease
    
    30 patient,
single-center study
    
    Enrollment
completed, analysis
of data in progress
    
    Arizona Heart
InstituteCHECK (Worldwide)
    
    Study of
correlation of
carotid artery
plaque
characteristics
with patient
demographics,
clinical
presentation and
risk factors
    
    300 patient, non
randomized,
prospective,
multi-center,
global, registry
imaging study
    
    Enrollment starting
in the first half
of 2007
    
    
 Providing Regional Observations to Study Predictors of Events in the Coronary Tree (PROSPECT)
  2
 Volcano VH Registry
 in vivo
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Study of Prospective Events in Coronary Intermediate Atherosclerotic Lesions (SPECIAL)
  Integrated Biomarker and Imaging Study (IBIS-2)
  Carotid Artery Plaque Virtual Histology Evaluation (CAPITAL)
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Carotid Histology Evaluation and Correlations to Patient Work-up (CHECK)
 in vivo
 Drug Studies Using IVUS
  Sales, Marketing and Distribution
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
    
    Consoles.We sell our consoles through our own direct sales
force, through distributors and through our supply and
distribution agreement with GE.
    
    Disposables.We leverage our installed base of consoles to
drive recurring sales of our proprietary disposables. We
provide training and clinical support to users of our
products to increase their familiarity with product
features and benefits, and thereby increase usage.
   United States
  International
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Japan
    Interventional Cardiology
  Functional Measurement
  Endovascular/ Peripheral Applications
  Western Europe
  Other International
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Supply and Distribution Agreement with GE
  Competition
  
    
    innovate and maintain scientifically advanced technology;
    
    apply our technology across products and markets;
    
    develop proprietary products;
    
    successfully conduct clinical studies that expand our markets;
    
    obtain and maintain patent protection for our products;
    
    obtain and maintain regulatory approvals;
    
    cost-effectively manufacture and successfully market our products; and
    
    attract and retain skilled personnel.
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Intellectual Property
    Patents and Trademarks
 ® ® ® ® ® ® ® ® ® ® TM TM TM TM TM TM TM
 Third-party Licenses
  The Cleveland Clinic License
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Asset Transfer Agreement with Philips
  License with Medtronic
  License with Paieon
  Research and Development
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Manufacturing
    Government Regulation
   
    
    product design, development and manufacture;
 21




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
    
    product safety, testing, labeling and storage;
    
    pre-marketing clearance or approval;
    
    record keeping procedures;
    
    product marketing, sales and distribution; and
    
    post-marketing surveillance, complaint handling, medical
device reporting, reporting of deaths or serious injuries
and repair or recall of products.
  
    
    warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
    
    repair, replacement, refunds, recall or seizure of our products;
    
    operating restrictions, partial suspension or total shutdown of production;
    
    refusing our requests for 510(k) clearance or PMA approval of new products, new intended
uses or modifications to existing products;
    
    withdrawing 510(k) clearance or PMA approvals that have already been granted; and
    
    criminal prosecution.
 Employees
  Seasonality
  Corporate Information
  Available Information
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Item 1A. Risk Factors
 Risks Related to Our Business and Industry
   
    
    physicians accepting the benefits of the use of IVUS in conjunction with angiography;
    
    physician experience with IVUS products;
    
    the availability of, and physicians willingness to participate in, training
required to gain proficiency in the use of IVUS products;
    
    the additional procedure time required for use of IVUS;
    
    perceived risks generally associated with the use of new products and procedures;
    
    the availability of alternative treatments or procedures that are perceived to be or
are more effective, safer, easier to use or less costly than IVUS technology;
    
    availability of adequate reimbursement; and
    
    marketing efforts and publicity regarding IVUS technology.
  
    
    the lack of perceived benefits of information on plaque
composition available to the physician through use of our
IVUS products, including the ability to identify calcified
and other forms of plaque;
    
    the actual and perceived ease of use of our IVUS products;
    
    the quality of the images rendered by our IVUS products;
    
    the cost, performance, benefits and reliability of our IVUS
products relative to the products and services offered by
our competitors;
    
    the lack of perceived benefit of integration of our IVUS
products into the cath lab, including the ability to
synchronize, or co-register, IVUS images with angiographic
images; and
    
    the extent and timing of technological advances.
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We have a limited operating history, have incurred significant operating losses since inception and
cannot assure you that we will achieve profitability.
  If the clinical studies that we sponsor or co-sponsor are unsuccessful, we may not be able to
develop or increase penetration in identified markets and our business prospects may suffer.
  
    
    the U.S. Food and Drug Administration, or the FDA, institutional review boards or other regulatory
authorities do not approve a clinical study protocol or place a clinical study on hold;
    
    patients do not enroll in a clinical study or are not followed-up at the expected rate;
    
    patients experience adverse side effects, including adverse side effects to our or a co-sponsors drug
candidate or device;
    
    patients die during a clinical study for a variety of reasons that may or may not be related to our
products, including the advanced stage of their disease and medical problems;
    
    third-party clinical investigators do not perform the clinical studies on the anticipated schedule or
consistent with the clinical study protocol and good clinical practices, or other third-party
organizations do not perform data collection and analysis in a timely or accurate manner;
    
    our co-sponsors do not perform their obligations in relation to the clinical study or terminate the study;
    
    regulatory inspections of manufacturing facilities, which may, among other things, require us or a
co-sponsor to undertake corrective action or suspend the clinical studies;
    
    changes in governmental regulations or administrative actions;
    
    the interim results of the clinical study are inconclusive or negative; and the study design, although
approved and completed, is inadequate to demonstrate safety and efficacy.
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If we are unable to identify the plaque that is most likely to rupture and cause a coronary event
we may not be able to develop a market for our vulnerable plaque products or expand the market for
existing products.
  If sponsorship of the PROSPECT study is delayed or stopped, our ongoing and future business may be
negatively affected because of the potential inability to obtain useful clinical data or increased
costs and delays in completing the study.
  Competition from companies that have longer operating histories and greater resources than us may
harm our IVUS business.
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
    
    innovate and maintain scientifically advanced technology;
    
    apply our technology across products and markets;
    
    develop proprietary products;
    
    successfully conduct or sponsor clinical studies that expand our markets;
    
    obtain and maintain patent protection for our products;
    
    obtain and maintain regulatory clearance or approvals;
    
    cost-effectively manufacture and successfully market our products; and
    
    attract and retain skilled personnel.
  
    
    more established distribution networks;
    
    entrenched relationships with physicians;
    
    products and procedures that are less expensive;
    
    greater experience in launching, marketing, distributing and selling products;
    
    greater experience in obtaining and maintaining the FDA and other regulatory clearances and approvals;
    
    established relationships with healthcare providers and payors; and
    
    greater financial and other resources for product development, sales and marketing, acquisitions of
products and companies, and intellectual property protection.
  Failure to innovate will adversely impact our competitive position and may adversely impact our
product revenues.
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We manufacture our IVUS catheters, maintain our own customized equipment and are implementing a new
manufacturing process, making us vulnerable to production and supply problems that could negatively
impact our revenues.
    We are dependent on our collaborations, and events involving these collaborations or any future
collaborations could delay or prevent us from developing or commercializing products.
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If we experience difficulties with our IVUS and three-dimensional image development efforts with
MediGuide, the commercialization of this product enhancement would be adversely affected.
  If we experience difficulties with our IVUS and angiographic image co-registration development
efforts, the commercialization of this IVUS product enhancement would be adversely affected.
   Delays in planned product introductions may adversely affect our business and negatively impact
future revenues.
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
    
    we do not achieve our objectives under our collaboration agreements;
    
    we or our collaborators are unable to obtain patent protection for the products or proprietary
technologies we develop in our collaborations;
    
    we are unable to manage multiple simultaneous product discovery and development collaborations;
    
    our collaborators become competitors of ours or enter into agreements with our competitors;
    
    we or our collaborators encounter regulatory hurdles that prevent commercialization of our products; and
    
    we develop products and processes or enter into additional collaborations that conflict with the
business objectives of our other collaborators.
   To market and sell our products, we depend on third-party distributors, and they may not be
successful.
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The risks inherent in our international operations may adversely impact our revenues, results of
operations and financial condition.
  
    
    our ability to obtain, and the costs associated with obtaining, U.S. export licenses and other required
export or import licenses or approvals;
    
    operating under government-run healthcare systems and changes in third-party reimbursement policies;
    
    changes in duties and tariffs, taxes, trade restrictions, license obligations and other non-tariff
barriers to trade;
    
    burdens of complying with a wide variety of foreign laws and regulations related to healthcare products;
    
    costs of localizing product and service offerings for foreign markets;
    
    business practices favoring local companies;
    
    longer payment cycles and difficulties collecting receivables through foreign legal systems;
    
    difficulties in enforcing or defending agreements and intellectual property rights; and
    
    changes in foreign political or economic conditions.
  Our manufacturing operations are dependent upon sole source suppliers, which makes us vulnerable to
supply problems, price fluctuations and manufacturing delays.
  30




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##### Table of Contents




    
    inability to obtain adequate supply in a timely manner or on commercially reasonable terms;
    
    interruption of supply resulting from modifications to, or discontinuation of, a suppliers operations;
    
    delays in product shipments resulting from uncorrected defects, reliability issues or a suppliers
variation in a component;
    
    uncorrected quality and reliability defects that impact performance, efficacy and safety of products
from replacement suppliers;
    
    price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;
    
    difficulty identifying and qualifying alternative suppliers for components in a timely manner;
    
    production delays related to the evaluation and testing of products from alternative suppliers and
corresponding regulatory qualifications; and
    
    delays in delivery by our suppliers due to changes in demand from us or their other customers.
  If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to
effectively manage and expand our business will be harmed.
  31




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If we fail to properly manage our anticipated growth, our business could suffer.
  Fluctuations in foreign currency exchange rates could result in declines in our reported revenues
and earnings.
  If we choose to acquire new businesses, products or technologies, we may experience difficulty in
the identification or integration of any such acquisition, and our business may suffer.
  Our FM products have one competitor who, if more successful at commercializing its product, may
cause us to lose market share which would adversely impact our business.
  If we become profitable, we cannot assure you that our net operating losses will be available to
reduce our tax liability.
  32




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##### Table of Contents



We may require significant additional capital to pursue our growth strategy, and our failure to
raise capital when needed could prevent us from executing our growth strategy.
  
    
    market acceptance of our products;
    
    the revenues generated by our products
    
    the need to adapt to changing technologies and technical requirements, and the costs related thereto;
    
    the costs associated with expanding our manufacturing, marketing, sales and distribution efforts; and
    
    the existence and timing of opportunities for expansion, including acquisitions and strategic transactions.
  Our debt agreements contain terms that place restrictions on the operation of our business, and our
failure to comply with these terms could put us in default, which would harm our business and
operations.
  
    
    incur additional debt and liens;
    
    pay dividends; and
    
    sell or dispose of any of our assets outside the normal course of business.
  
    
    increase our borrowing costs;
    
    further restrict our ability to obtain additional borrowings;
 33




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##### Table of Contents




    
    accelerate payment on all amounts outstanding; and
    
    enforce their interests against collateral pledged.
   The expense and potential unavailability of insurance coverage for our company, customers or
products may have an adverse effect on our financial position and results of operations.
   
    
    substantial costs of related litigation or regulatory action;
    
    substantial monetary penalties or awards;
    
    decreased demand for our products;
    
    reduced revenue or market penetration;
    
    injury to our reputation;
    
    withdrawal of clinical study participants;
    
    an inability to establish new strategic relationships;
    
    increased product liability insurance rates; and
    
    prevention of securing continuing coverage.
  Risks Related to Government Regulation
  34




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Certificat de Conformité
 Certificat de Conformité
   Modifications to our products may require new regulatory clearances or approvals or may require us
to recall or cease marketing our products until clearances are obtained.
  35




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##### Table of Contents



If we fail to adequately manage our regulatory responsibilities following the Japanese regulatory
approvals, our ability to sell our IVUS products in Japan would be impaired.
   Changes in the Japanese regulatory requirements for medical devices could impact our ability to
market our products in Japan and subject us to fines, penalties or other sanctions.
    36




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##### Table of Contents



If we or our suppliers fail to comply with the FDAs Quality System Regulation or ISO Quality
Management Systems, manufacturing of our products could be negatively impacted and sales of our
products could suffer.
      37




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##### Table of Contents



Our products may in the future be subject to product recalls that could harm our reputation,
business and financial results.
  If our products, or malfunction of our products, cause or contribute to death or serious injury, we
will be subject to medical device reporting regulations, which can result in voluntary corrective
actions or agency enforcement actions.
   38




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##### Table of Contents



Failure to obtain regulatory approval in additional foreign jurisdictions will prevent us from
expanding the commercialization of our products abroad.
  We depend on one distributor to hold the shonins related to our FM products imported into Japan and
for ongoing regulatory compliance, and difficulties involving this relationship will impair our
ability to sell our FM products in Japan.
  We may be subject to Federal, state and foreign healthcare fraud and abuse laws and regulations and
other regulatory reforms, and a finding of failure to comply with such laws, regulations and
reforms could have a material adverse effect on our business.
   39




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##### Table of Contents



If our customers are unable to obtain coverage of or sufficient reimbursement for procedures
performed with our products, it is unlikely that our products will be widely used.
     40




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##### Table of Contents



Compliance with environmental laws and regulations could be expensive, and failure to comply with
these laws and regulations could subject us to significant liability.
  The use, misuse or off-label use of our products may result in injuries that lead to product
liability suits, which could be costly to our business.
  Risks Related to Our Intellectual Property and Potential Litigation
 Our ability to protect our intellectual property and proprietary technology through patents and
other means is uncertain.
  41




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The medical device industry is characterized by patent litigation, and we could become subject to
litigation that could be costly, result in the diversion of our managements time and efforts,
require us to pay damages or prevent us from selling our products.
     42




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##### Table of Contents



Our rights to a worldwide license of certain IVUS patents owned or licensed by Boston Scientific
may be challenged.
  Our VH IVUS business depends on a license from The Cleveland Clinic Foundation, the loss of which
would severely impact our business.
  Risks Related to Our Common Stock
 We expect that the price of our common stock will fluctuate substantially.
  
    
    changes in earnings estimates, investors perceptions, recommendations by securities analysts or our
failure to achieve analysts earning estimates;
    
    quarterly variations in our or our competitors results of operations;
    
    changes in governmental regulations or in the status of our regulatory clearance or approvals;
 43




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##### Table of Contents




    
    changes in availability of third-party reimbursement in the United States or other countries;
    
    the announcement of new products or product enhancements by us or our competitors;
    
    announcements related to patents issued to us or our competitors and to litigation;
    
    sales of large blocks of our common stock, including sales by our executive officers and directors; and
    
    general market conditions and other factors unrelated to our operating performance or the operating
performance of our competitors.
  Future equity issuances or a sale of a substantial number of shares of our common stock may cause
the price of our common stock to decline.
  Our directors, officers and principal stockholders have significant voting power and may take
actions that may not be in the best interests of our other stockholders.
  Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and
Delaware law could discourage a takeover.
  
    
    a classified board of directors;
    
    advance notice requirements to stockholders for matters to be brought at stockholder meetings;
    
    a supermajority stockholder vote requirement for amending certain provisions of our amended
and restated certificate of incorporation and bylaws; and
    
    the right to issue preferred stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquirer.
  44




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##### Table of Contents




    
    the rights will become exercisable only upon the occurrence
of certain events specified in the plan, including the
acquisition of 20% of our outstanding common stock by a
person or group, with limited exceptions;
    
    each right will entitle the holder, other than an acquiring
person, to acquire shares of our common stock at a discount
to the then prevailing market price;
    
    our board of directors may redeem outstanding rights at any
time prior to a person becoming an acquiring person at a
minimal price per right; and
    
    prior to a person becoming an acquiring person, the terms
of the rights may be amended by our board of directors
without the approval of the holders of the rights.
 Our costs have increased significantly as a result of operating as a public company, and our
management is required to devote substantial time to comply with public company regulations.
   We have not paid dividends in the past and do not expect to pay dividends in the future.
  45




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  46




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PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  Price RangeLow
    
    HighFiscal 2006:Third Quarter
    
    
    7.95
    
    
    
    14.75Fourth Quarter
    
    
    10.52
    
    
    
    19.90Fiscal Year (publicly traded June 15, 2006 through December 31, 2006)
    
    
    7.90
    
    
    
    19.90
     47




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Performance Graph
 The following Performance Graph and related information shall not be deemed soliciting material
or filed with the Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that we specifically incorporate it by reference into
such filing.
  Comparison of Cumulative Total Return Among
Volcano Corporation, NASDAQ Stock Market Index and NASDAQ Medical Devices IndexVolcano Indexed Stock Performance
 
 Equity Compensation Plan Information
  Recent Sales of Unregistered Securities
  
    
    We sold an aggregate of 83,817 shares of our common stock to employees, directors and
consultants for cash consideration in the aggregate amount of $26,000 upon the exercise of
stock options granted under our 2000 Long Term Incentive Plan; and
 48




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##### Table of Contents




    
    We granted stock options to employees, directors and consultants under our 2005 Equity
Compensation Plan covering an aggregate of 236,745 shares of our common stock, at a
weighted average exercise price of $10.56 per share. Of these, options covering an
aggregate of 11,487 were canceled without being exercised.
   Recent Purchase of our Registered Equity Securities
  Dividends
  49




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Item 6. Selected Financial Data
    Years Ended December 312006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Consolidated Statement of Operations Data:Revenues
    
    $
    103,048
    
    
    $
    91,900
    
    
    $
    61,098
    
    
    $
    23,463
    
    
    $
    Cost of revenues
    
    
    41,715
    
    
    
    47,843
    
    
    
    29,860
    
    
    
    14,524
    
    
    
    Gross profit
    
    
    61,333
    
    
    
    44,057
    
    
    
    31,238
    
    
    
    8,939
    
    
    
    Operating expenses:Selling, general and administrative
    
    
    47,614
    
    
    
    35,365
    
    
    
    30,374
    
    
    
    13,880
    
    
    
    2,341Research and development
    
    
    16,923
    
    
    
    15,119
    
    
    
    9,800
    
    
    
    8,064
    
    
    
    4,112Amortization of intangibles
    
    
    3,117
    
    
    
    3,052
    
    
    
    2,929
    
    
    
    1,571
    
    
    
    64Total operating expenses
    
    
    67,654
    
    
    
    53,536
    
    
    
    43,103
    
    
    
    23,515
    
    
    
    6,517Operating loss
    
    
    (6,321
    )
    
    
    (9,479
    )
    
    
    (11,865
    )
    
    
    (14,576
    )
    
    
    (6,517
    )Interest expense
    
    
    (4,013
    )
    
    
    (5,311
    )
    
    
    (4,784
    )
    
    
    (565
    )
    
    
    (46
    )Interest and other income (expense), net
    
    
    2,029
    
    
    
    (401
    )
    
    
    495
    
    
    
    50
    
    
    
    227Loss before provision for income taxes
    
    
    (8,305
    )
    
    
    (15,191
    )
    
    
    (16,154
    )
    
    
    (15,091
    )
    
    
    (6,336
    )Provision for income taxes
    
    
    298
    
    
    
    70
    
    
    
    37
    
    
    
    10
    
    
    
    1Net loss
    
    $
    (8,603
    )
    
    $
    (15,261
    )
    
    $
    (16,191
    )
    
    $
    (15,101
    )
    
    $
    (6,337
    )Net loss per sharebasic and diluted
    
    $
    (0.41
    )
    
    $
    (2.28
    )
    
    $
    (2.57
    )
    
    $
    (4.56
    )
    
    $
    (2.05
    )Weighted-average shares outstandingbasic and
diluted
    
    
    21,113
    
    
    
    6,693
    
    
    
    6,291
    
    
    
    3,312
    
    
    
    3,087As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Balance Sheet Data:Cash and cash equivalents
    
    $
    77,738
    
    
    $
    15,219
    
    
    $
    11,438
    
    
    $
    20,398
    
    
    $
    2,366Short-term available-for-sale investments
    
    
    17,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,733Working capital
    
    
    108,908
    
    
    
    16,993
    
    
    
    12,042
    
    
    
    21,883
    
    
    
    16,688Intangible assets, net(1)
    
    
    11,946
    
    
    
    14,645
    
    
    
    17,279
    
    
    
    19,739
    
    
    
    374Total assets
    
    
    154,725
    
    
    
    68,468
    
    
    
    59,141
    
    
    
    69,185
    
    
    
    18,279Short and long-term debt, including current
maturities(2)
    
    
    1,720
    
    
    
    30,350
    
    
    
    34,534
    
    
    
    31,286
    
    
    
    194Convertible preferred stock(3)
    
    
    
    
    
    
    63,060
    
    
    
    47,696
    
    
    
    47,222
    
    
    
    26,304Total stockholders equity (deficit)
    
    
    129,182
    
    
    
    (49,468
    )
    
    
    (36,976
    )
    
    
    (21,526
    )
    
    
    (8,853
    )
 
 These historical results are not necessarily indicative of results expected for any future period.(1)
    
    Includes the effects of the Jomed Acquisition and the acquisition of other
IVUS patents and technology in July 2003 for $20.7 million. 50




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##### Table of Contents



(2)
    
    Includes the effects of borrowings under a revolving credit facility commencing
in July 2003, the issuance of a note payable in July 2003 of $3.0 million related to the
purchase of certain IVUS patents and technology, the issuance of a $5.0 million term loan
in September 2003 for working capital and general corporate purposes, the issuance of
$20.0 million of senior subordinated notes in December 2003 for working capital and
general corporate purposes, the issuance of a $1.5 million term loan in September 2004 for
working capital and general corporate purposes and the issuance of a $500,000 term loan in
March 2005 for working capital and general corporate purposes.(3)
    
    Includes the issuance of Series A preferred stock in 2001 in the amount of $2.3
million, the issuance of Series B preferred stock in 2002 in the amount of $24.0 million,
the issuance of Series B preferred stock and preferred stock warrants in July 2003 in the
amount of $20.1 million and $321,000, respectively (primarily to finance the Jomed
Acquisition), the issuance of Series B preferred stock in November 2003 in the amount of
$500,000, the issuance of Series B preferred stock in March 2004 in the amount of
$250,000, the issuance of Series B preferred stock warrants in 2004 related to debt
agreements in the amount of $224,000, the issuance of Series C preferred stock in
February 2005 in the amount of $15.4 million and the conversion of all outstanding shares
of preferred stock into 18,123,040 shares of the Companys common stock in June 2006. 51




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with Selected Consolidated
Financial Data and our consolidated financial statements and notes thereto included elsewhere in
this annual report.
 Overview
        52




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53




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Financial Operations Overview
  Revenues.
    Cost of Revenues.
 Selling, General and Administrative.
 Research and Development.
 54




---



##### Table of Contents



Amortization of Intangibles.
 Interest Expense.
 Interest and Other Income (Expense), Net.
 Provision for Income Taxes.
  Results of Operations
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues
    
    $
    103,048
    
    
    
    100.0
    %
    
    $
    91,900
    
    
    
    100.0
    %
    
    $
    61,098
    
    
    
    100.0
    %Cost of revenues
    
    
    41,715
    
    
    
    40.5
    
    
    
    47,843
    
    
    
    52.1
    
    
    
    29,860
    
    
    
    48.9Gross profit
    
    
    61,333
    
    
    
    59.5
    
    
    
    44,057
    
    
    
    47.9
    
    
    
    31,238
    
    
    
    51.1Operating expenses:Selling, general and administrative
    
    
    47,614
    
    
    
    46.2
    
    
    
    35,365
    
    
    
    38.5
    
    
    
    30,374
    
    
    
    49.7Research and development
    
    
    16,923
    
    
    
    16.4
    
    
    
    15,119
    
    
    
    16.4
    
    
    
    9,800
    
    
    
    16.0Amortization of intangibles
    
    
    3,117
    
    
    
    3.0
    
    
    
    3,052
    
    
    
    3.3
    
    
    
    2,929
    
    
    
    4.8Total operating expenses
    
    
    67,654
    
    
    
    65.6
    
    
    
    53,536
    
    
    
    58.2
    
    
    
    43,103
    
    
    
    70.5Operating loss
    
    
    (6,321
    )
    
    
    (6.1
    )
    
    
    (9,479
    )
    
    
    (10.3
    )
    
    
    (11,865
    )
    
    
    (19.4
    )Interest expense
    
    
    (4,013
    )
    
    
    (3.9
    )
    
    
    (5,311
    )
    
    
    (5.8
    )
    
    
    (4,784
    )
    
    
    (7.8
    )Interest and other income (expense),
net
    
    
    2,029
    
    
    
    2.0
    
    
    
    (401
    )
    
    
    (0.4
    )
    
    
    495
    
    
    
    0.8Loss before provision for income taxes
    
    
    (8,305
    )
    
    
    (8.0
    )
    
    
    (15,191
    )
    
    
    (16.5
    )
    
    
    (16,154
    )
    
    
    (26.4
    )Provision for income taxes
    
    
    298
    
    
    
    0.3
    
    
    
    70
    
    
    
    0.1
    
    
    
    37
    
    
    
    0.1Net loss
    
    $
    (8,603
    )
    
    
    (8.3
    )%
    
    $
    (15,261
    )
    
    
    (16.6
    )%
    
    $
    (16,191
    )
    
    
    (26.5
    )%
 55




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##### Table of Contents



Years Ended December 31,Percentage
    
    
    
    
    
    
    PercentageChange
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    2006 to 2005
    
    
    2004
    
    
    2005 to 2004Revenues(1):United States
    
    $
    51,013
    
    
    $
    40,933
    
    
    
    24.6
    %
    
    $
    38,020
    
    
    
    7.7
    %Japan
    
    
    30,082
    
    
    
    33,207
    
    
    
    (9.4
    )
    
    
    9,353
    
    
    
    255.0Europe, the Middle East and Africa
    
    
    17,765
    
    
    
    15,294
    
    
    
    16.2
    
    
    
    11,426
    
    
    
    33.9Rest of world
    
    
    4,188
    
    
    
    2,466
    
    
    
    69.8
    
    
    
    2,299
    
    
    
    7.3$
    103,048
    
    
    $
    91,900
    
    
    
    12.1
    
    
    $
    61,098
    
    
    
    50.4
 
 (1)
  Years Ended December 31,Percentage
    
    
    
    
    
    
    PercentageChange
    
    
    
    
    
    
    Change2006
    
    
    2005
    
    
    2006 to 2005
    
    
    2004
    
    
    2005 to 2004IVUS:Consoles
    
    $
    22,128
    
    
    $
    23,617
    
    
    
    (6.3
    )%
    
    $
    9,438
    
    
    
    150.2
    %Single-procedure disposables
    
    
    66,268
    
    
    
    54,069
    
    
    
    22.6
    
    
    
    38,031
    
    
    
    42.2FM:Consoles
    
    
    1,954
    
    
    
    1,394
    
    
    
    40.1
    
    
    
    994
    
    
    
    40.2Single-procedure disposables
    
    
    10,072
    
    
    
    10,635
    
    
    
    (5.3
    )
    
    
    10,828
    
    
    
    (1.8
    )Other
    
    
    2,626
    
    
    
    2,185
    
    
    
    20.2
    
    
    
    1,807
    
    
    
    20.9$
    103,048
    
    
    $
    91,900
    
    
    
    12.1
    
    
    $
    61,098
    
    
    
    50.4
 Comparison of Years Ended December 31, 2006 and 2005
 Revenues.
 Cost of Revenues.
 56




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Selling, General and Administrative.
 Research and Development.
 Amortization of Intangibles.
 Interest Expense.
 Interest and Other Income (Expense), Net.
 Comparison of Years Ended December 31, 2005 and 2004
 Revenues.
 Cost of Revenues.
  57




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Selling, General and Administrative.
 Research and Development.
 Amortization of Intangibles.
 Interest Expense.
 Interest and Other Income (Expense), Net.
 Liquidity and Capital Resources
 Sources of Liquidity
     58




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Cash Flows
 Cash Flows from Operating Activities.
   Cash Flows from Investing Activities.
 59




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##### Table of Contents



Cash Flows from Financing Activities.
 Future Liquidity Needs
    Off-Balance Sheet Arrangements and Other Contractual Obligations
  60




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##### Table of Contents



Payment Due By PeriodLess
    
    
    
    
    
    
    
    
    
    
    MoreThan
    
    
    1-3
    
    
    3-5
    
    
    thanContractual Obligations and Commercial Commitments
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsDebt
    
    $
    1,662
    
    
    $
    1,598
    
    
    $
    64
    
    
    $
    
    
    
    $
    Interest on debt(1)
    
    
    13
    
    
    
    7
    
    
    
    5
    
    
    
    1
    
    
    
    Capital lease obligations
(including interest)
    
    
    121
    
    
    
    63
    
    
    
    40
    
    
    
    18
    
    
    
    Operating lease obligations(2)
    
    
    4,933
    
    
    
    1,731
    
    
    
    3,197
    
    
    
    5
    
    
    
    Minimum payments under
license agreements(3)
    
    
    1,595
    
    
    
    25
    
    
    
    1,370
    
    
    
    50
    
    
    
    150Non-cancelable purchase
commitments(4)
    
    
    5,672
    
    
    
    5,672
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,996
    
    
    $
    9,096
    
    
    $
    4,676
    
    
    $
    74
    
    
    $
    150
 
 (1)
    
    Future interest payments on our debt are based on the assumption that the debt
is outstanding until maturity and all interest expense has been calculated for all future
periods using the rate implicit in the respective debt agreements.(2)
    
    We lease office space and have entered into other lease commitments in the
United States as well as locations in Europe and Asia. Operating lease obligations include
future minimum lease payments under all our non-cancelable operating leases as of December 31,
2006.(3)
    
    Our license agreements include provisions that require us to make milestone
or royalty payments to the licensor based on the amount of future sales of covered products.
Certain of these agreements require that the royalties we pay in a given year total at least a
minimum amount as set forth in the agreements. The royalty obligations we may incur in excess
of these minimum amounts are not included in the table above because we cannot, at this time,
determine the timing or amount of these obligations.(4)
    
    Consists of non-cancelable commitments primarily for the purchase of
production materials. Critical Accounting Policies
   Revenue Recognition.
 Revenue Arrangements
 61




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##### Table of Contents



with Multiple Deliverables
 Inventory Valuation.
 Valuation of Long-lived Assets.
   Stock-based Compensation. Share-Based Payment
  Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation
 62




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##### Table of Contents



Accounting for Stock-Based CompensationTransition and Disclosurean amendment of
FASB Statement No. 123, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods and Services
  Practice Aid
Valuation of Privately-Held-Company Equity Securities Issues as Compensation
     63




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##### Table of Contents



Fair Value ofNumber of Options
    
    Option Exercise
    
    Common Stock on
    
    Intrinsic Value PerGranted
    
    Price
    
    Grant Date(1)
    
    ShareGrant Date2004 GrantsJanuary 2004
    
    
    127,273
    
    
    $
    0.33
    
    
    $
    0.83
    
    
    $
    0.50March 2004
    
    
    113,636
    
    
    
    0.33
    
    
    
    0.83
    
    
    
    0.50June 2004
    
    
    56,818
    
    
    
    0.33
    
    
    
    1.49
    
    
    
    1.16July 2004
    
    
    478,314
    
    
    
    0.33
    
    
    
    2.75
    
    
    
    2.42October 2004
    
    
    72,727
    
    
    
    0.33
    
    
    
    4.02
    
    
    
    3.69November 2004
    
    
    40,909
    
    
    
    0.33
    
    
    
    4.02
    
    
    
    3.69December 2004
    
    
    227,273
    
    
    
    0.33
    
    
    
    4.02
    
    
    
    3.69December 2004
    
    
    101,818
    
    
    
    0.83
    
    
    
    4.02
    
    
    
    3.19Total
    
    
    1,218,7682005 GrantsJanuary 2005
    
    
    153,456
    
    
    $
    0.83
    
    
    $
    5.06
    
    
    $
    4.23January 2005
    
    
    117,568
    
    
    
    1.65
    
    
    
    5.06
    
    
    
    3.41April 2005
    
    
    195,455
    
    
    
    5.78
    
    
    
    5.78
    
    
    
    June 2005
    
    
    90,455
    
    
    
    5.78
    
    
    
    5.78
    
    
    
    July 2005
    
    
    908,636
    
    
    
    6.49
    
    
    
    6.49
    
    
    
    October 2005
    
    
    270,273
    
    
    
    8.36
    
    
    
    8.36
    
    
    
    Total
    
    
    1,735,8432006 GrantsFebruary 2006
    
    
    145,406
    
    
    $
    10.56
    
    
    $
    10.56
    
    
    $
    May 2006
    
    
    91,339
    
    
    
    10.56
    
    
    
    10.56
    
    
    
    July 2006
    
    
    66,500
    
    
    
    8.50
    
    
    
    8.50
    
    
    
    November 2006
    
    
    61,000
    
    
    
    18.10
    
    
    
    18.10
    
    
    
    Total
    
    
    364,245
 
 (1)
    
    The estimated fair values for the period January 1, 2004 through March 31, 2005 have
been determined based upon retrospective valuations prepared by management and the estimated
fair values shown for the period April 1, 2005 through the date of our initial public offering
are based upon contemporaneous valuations prepared by management.  64




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##### Table of Contents



Year Ended December 31,2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.6% - 5.0
    %
    
    
    3.9
    %
    
    
    3.5
    %Expected life (years)
    
    
    4.75
    
    
    
    5
    
    
    
    5Estimated volatility
    
    
    55% - 61
    %
    
    
    75
    %
    
    
    75
    %Expected dividends
    
    None
    
    None
    
    None
      Income Taxes. Accounting for Income
Taxes
 65




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Fair Value
Measurements
 The Fair
Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 66




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##### Table of Contents



Inflation
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
     67




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 VOLCANO CORPORATION
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    69Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    70Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
    
    
    71Consolidated Statements of Convertible Preferred Stock and Stockholders Equity (Deficit)
for the Years Ended December 31, 2006, 2005 and 2004
    
    
    72Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
    
    
    73Notes to Consolidated Financial Statements
    
    
    74
 68




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Share-Based Payment
  
 69




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##### Table of Contents



VOLCANO CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    77,738
    
    
    $
    15,219Short-term available-for-sale investments
    
    
    17,787
    
    
    
    Accounts receivable, net
    
    
    21,575
    
    
    
    16,001Inventories
    
    
    13,423
    
    
    
    10,155Prepaid expenses and other current assets
    
    
    2,208
    
    
    
    1,416Total current assets
    
    
    132,731
    
    
    
    42,791Restricted cash
    
    
    352
    
    
    
    309Property and equipment, net
    
    
    9,333
    
    
    
    9,885Intangible assets, net
    
    
    11,946
    
    
    
    14,645Other non-current assets
    
    
    363
    
    
    
    838$
    154,725
    
    
    $
    68,468Liabilities, Convertible Preferred Stock and Stockholders Equity (Deficit)Current liabilities:Accounts payable
    
    $
    8,209
    
    
    $
    11,119Accrued compensation
    
    
    5,993
    
    
    
    4,437Accrued expenses and other current liabilities
    
    
    5,292
    
    
    
    4,955Deferred revenues
    
    
    2,675
    
    
    
    2,173Current maturities of long-term debt
    
    
    1,654
    
    
    
    3,114Total current liabilities
    
    
    23,823
    
    
    
    25,798Long-term debt
    
    
    66
    
    
    
    27,236Deferred license fee from a related party
    
    
    1,375
    
    
    
    1,625Other
    
    
    279
    
    
    
    217Total liabilities
    
    
    25,543
    
    
    
    54,876Commitments and contingencies (Note 8)Convertible preferred stock, 19,915 shares
issued and outstanding at December 31, 2005
    
    
    
    
    
    
    63,060Stockholders equity (deficit):Preferred stock, par value $0.001; 10,000 and 20,109 shares authorized at December 31,
2006 and 2005, respectively, and no shares issued and outstandingCommon stock, par value of $0.001; 250,000
and 34,500 shares authorized at December 31,
2006 and 2005, respectively; 37,720 and 3,883
shares issued and outstanding at December 31,
2006 and 2005, respectively
    
    
    38
    
    
    
    4Additional paid-in capital
    
    
    193,468
    
    
    
    8,443Deferred stock compensation
    
    
    
    
    
    
    (2,888
    )Accumulated other comprehensive income (loss)
    
    
    (302
    )
    
    
    392Accumulated deficit
    
    
    (64,022
    )
    
    
    (55,419
    )Total stockholders equity (deficit)
    
    
    129,182
    
    
    
    (49,468
    )$
    154,725
    
    
    $
    68,468
 
 See notes to consolidated financial statements. 70




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##### Table of Contents



VOLCANO CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues
    
    $
    103,048
    
    
    $
    91,900
    
    
    $
    61,098Cost of revenues
    
    
    41,715
    
    
    
    47,843
    
    
    
    29,860Gross profit
    
    
    61,333
    
    
    
    44,057
    
    
    
    31,238Operating expenses:Selling, general and administrative
    
    
    47,614
    
    
    
    35,365
    
    
    
    30,374Research and development
    
    
    16,923
    
    
    
    15,119
    
    
    
    9,800Amortization of intangibles
    
    
    3,117
    
    
    
    3,052
    
    
    
    2,929Total operating expenses
    
    
    67,654
    
    
    
    53,536
    
    
    
    43,103Operating loss
    
    
    (6,321
    )
    
    
    (9,479
    )
    
    
    (11,865
    )Interest expense
    
    
    (4,013
    )
    
    
    (5,311
    )
    
    
    (4,784
    )Interest and other income (expense), net
    
    
    2,029
    
    
    
    (401
    )
    
    
    495Loss before provision for income taxes
    
    
    (8,305
    )
    
    
    (15,191
    )
    
    
    (16,154
    )Provision for income taxes
    
    
    298
    
    
    
    70
    
    
    
    37Net loss
    
    $
    (8,603
    )
    
    $
    (15,261
    )
    
    $
    (16,191
    )Net loss per sharebasic and diluted
    
    $
    (0.41
    )
    
    $
    (2.28
    )
    
    $
    (2.57
    )Weighted-average shares outstandingbasic and diluted
    
    
    21,113
    
    
    
    6,693
    
    
    
    6,291
 
 See notes to consolidated financial statements. 71




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##### Table of Contents



VOLCANO CORPORATION
 
 CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
(in thousands)
 Designated Series A
    
    
    Designated Series B
    
    
    Designated Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    TotalConvertible
    
    
    Convertible
    
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Deferred
    
    
    
    
    
    
    Other
    
    
    StockholdersPreferred Stock
    
    
    Preferred Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    Income (loss)
    
    
    (Deficit)Balance at December 31, 2003
    
    
    2,304
    
    
    $
    2,304
    
    
    
    14,865
    
    
    $
    44,918
    
    
    
    
    
    
    $
    
    
    
    
    3,184
    
    
    $
    3
    
    
    $
    2,845
    
    
    $
    (530
    )
    
    $
    (23,967
    )
    
    $
    123
    
    
    $
    (21,526
    )Issuance of common stock under stock option plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433
    
    
    
    1
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,893
    
    
    
    (2,893
    )
    
    
    
    
    
    
    
    
    
    
    Reversal of unamortized deferred stock compensation
relating to the forfeiture of unvested employee stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation net of
adjustment for forfeitures of unvested options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    303Non-employee stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501Issuance of convertible preferred stock, net of
offering costs
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Issuance of warrants to purchase convertible preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,191
    )
    
    
    
    
    
    
    (16,191
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    (121
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,312
    )Balance at December 31, 2004
    
    
    2,304
    
    
    
    2,304
    
    
    
    14,949
    
    
    
    45,392
    
    
    
    
    
    
    
    
    
    
    
    3,617
    
    
    
    4
    
    
    
    6,182
    
    
    
    (3,006
    )
    
    
    (40,158
    )
    
    
    2
    
    
    
    (36,976
    )Issuance of common stock under stock option plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,239
    
    
    
    (1,239
    )
    
    
    
    
    
    
    
    
    
    
    Reversal of unamortized deferred stock compensation
relating to the forfeiture of unvested employee stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (255
    )
    
    
    255
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation net of
adjustment for forfeitures of unvested options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,102
    
    
    
    
    
    
    
    
    
    
    
    1,102Non-employee stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Issuance of convertible preferred stock, net of
offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,662
    
    
    
    15,364
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )Sale of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    601Issuance of common stock in exchange for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Comprehensive income (loss)Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,261
    )
    
    
    
    
    
    
    (15,261
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    390Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,871
    )Balance at December 31, 2005
    
    
    2,304
    
    
    
    2,304
    
    
    
    14,949
    
    
    
    45,392
    
    
    
    2,662
    
    
    
    15,364
    
    
    
    3,883
    
    
    
    4
    
    
    
    8,443
    
    
    
    (2,888
    )
    
    
    (55,419
    )
    
    
    392
    
    
    
    (49,468
    )Reversal of deferred stock compensation upon adoption
of SFAS No. 123(R)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,888
    )
    
    
    2,888
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock under stock option plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194Employee stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,913Non-employee stock-based compensation cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    434Common stock issued in connection with public offerings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,115
    
    
    
    12
    
    
    
    121,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,346Conversion of convertible preferred stock into common
stock upon initial public offering
    
    
    (2,304
    )
    
    
    (2,304
    )
    
    
    (14,949
    )
    
    
    (45,392
    )
    
    
    (2,662
    )
    
    
    (15,364
    )
    
    
    18,123
    
    
    
    19
    
    
    
    63,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,060Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,133
    
    
    
    3
    
    
    
    (3
    )Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,603
    )
    
    
    
    
    
    
    (8,603
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (693
    )
    
    
    (693
    )Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,297
    )Balance at December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    37,720
    
    
    $
    38
    
    
    $
    193,468
    
    
    $
    
    
    
    $
    (64,022
    )
    
    $
    (302
    )
    
    $
    129,182
 
 See notes to consolidated financial statements. 72




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##### Table of Contents



VOLCANO CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Operating activitiesNet loss
    
    $
    (8,603
    )
    
    $
    (15,261
    )
    
    $
    (16,191
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    8,480
    
    
    
    7,100
    
    
    
    5,988Amortization and write-off of debt discount and deferred
financing fees
    
    
    1,781
    
    
    
    808
    
    
    
    744Impairment of long-lived assets
    
    
    
    
    
    
    360
    
    
    
    Interest capitalized as debt principal
    
    
    1,973
    
    
    
    3,774
    
    
    
    3,259Non-cash stock compensation expense
    
    
    3,195
    
    
    
    1,948
    
    
    
    804Loss (gain) on foreign exchange
    
    
    (1,052
    )
    
    
    859
    
    
    
    (342
    )Loss on disposal of long-lived assets
    
    
    
    
    
    
    34
    
    
    
    48Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (5,078
    )
    
    
    (4,110
    )
    
    
    (2,830
    )Inventories
    
    
    (2,992
    )
    
    
    (2,684
    )
    
    
    1,204Prepaid expenses and other assets
    
    
    (399
    )
    
    
    (697
    )
    
    
    22Accounts payable
    
    
    (2,682
    )
    
    
    6,281
    
    
    
    360Accrued compensation
    
    
    1,505
    
    
    
    1,223
    
    
    
    1,006Accrued expenses and other liabilities
    
    
    283
    
    
    
    2,441
    
    
    
    (471
    )Deferred revenues
    
    
    465
    
    
    
    804
    
    
    
    912Deferred license fee from a related party
    
    
    (250
    )
    
    
    (250
    )
    
    
    (250
    )Net cash provided by (used in) operating activities
    
    
    (3,374
    )
    
    
    2,630
    
    
    
    (5,737
    )Investing activitiesPurchase of short-term available-for-sale securities
    
    
    (17,853
    )
    
    
    
    
    
    
    Capital expenditures
    
    
    (4,990
    )
    
    
    (5,585
    )
    
    
    (2,449
    )Cash paid for acquisitions
    
    
    
    
    
    
    
    
    
    
    (81
    )Cash paid for other intangibles
    
    
    (373
    )
    
    
    (434
    )
    
    
    (429
    )Proceeds from sale of long-lived assets
    
    
    50
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (23,166
    )
    
    
    (6,019
    )
    
    
    (2,959
    )Financing activitiesProceeds from underwritten public stock offerings, net
    
    
    121,346
    
    
    
    
    
    
    
    Proceeds from issuance of long-term debt
    
    
    
    
    
    
    500
    
    
    
    1,500Repayment of long-term debt
    
    
    (32,384
    )
    
    
    (2,963
    )
    
    
    (2,467
    )Payment of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (35
    )Proceeds from issuance of short-term debt
    
    
    750
    
    
    
    
    
    
    
    1,000Repayment of short-term debt
    
    
    (750
    )
    
    
    (5,897
    )
    
    
    (674
    )Proceeds from issuance of convertible preferred stock, net of
issuance costs
    
    
    
    
    
    
    15,106
    
    
    
    245Proceeds from sale of common stock
    
    
    
    
    
    
    601
    
    
    
    Proceeds from exercise of common stock options
    
    
    178
    
    
    
    63
    
    
    
    118Increase in restricted cash
    
    
    (34
    )
    
    
    (82
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    89,106
    
    
    
    7,328
    
    
    
    (313
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (47
    )
    
    
    (158
    )
    
    
    49Net increase (decrease) in cash and cash equivalents
    
    
    62,519
    
    
    
    3,781
    
    
    
    (8,960
    )Cash and cash equivalents, beginning of year
    
    
    15,219
    
    
    
    11,438
    
    
    
    20,398Cash and cash equivalents, end of year
    
    $
    77,738
    
    
    $
    15,219
    
    
    $
    11,438Supplemental disclosuresCash paid for interest
    
    $
    259
    
    
    $
    827
    
    
    $
    891Cash paid for income taxes
    
    
    71
    
    
    
    39
    
    
    
    28Non-cash investing and financing activitiesPreferred stock converted into common stock upon initial public
offering
    
    
    63,060
    
    
    
    
    
    
    
    
 
 See notes to consolidated financial statements. 73




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##### Table of Contents



VOLCANO CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Basis of Presentation and Nature of Operations
   Reverse Stock Split
  Use of Estimates
  Foreign Currency Translation
    74




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##### Table of Contents



Cash and Cash Equivalents
  Short-term Investments
  Restricted Cash
  Concentration of Credit Risk
     75




---



##### Table of Contents



Inventories
  Property and Equipment
    Intangible Assets
  Impairment or Disposal of Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Product Warranty Costs
  76




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##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    359
    
    
    $
    203
    
    
    $
    268Warranties issued during the year
    
    
    1,028
    
    
    
    611
    
    
    
    291Settlements during the year
    
    
    (681
    )
    
    
    (455
    )
    
    
    (356
    )Balance at end of year
    
    $
    706
    
    
    $
    359
    
    
    $
    203
 Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities ,
 Stock-Based Compensation
 Share-Based Payment, Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  77




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004Net loss as reported
    
    $
    (15,261
    )
    
    $
    (16,191
    )Add: Total stock-based employee
compensation determined under APB
25 and included in reported net
loss
    
    
    1,102
    
    
    
    303Deduct: Total stock-based employee
compensation determined under fair
value based method
    
    
    (1,800
    )
    
    
    (402
    )Pro forma net loss
    
    $
    (15,959
    )
    
    $
    (16,290
    )Basic and diluted net loss per share:As reported
    
    $
    (2.28
    )
    
    $
    (2.57
    )Pro forma
    
    $
    (2.38
    )
    
    $
    (2.59
    )
   Years Ended December 31,2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.6%  5.0
    %
    
    
    3.9
    %
    
    
    3.5
    %Expected life (years)
    
    
    4.75
    
    
    
    5
    
    
    
    5Estimated volatility factor
    
    
    55%   61
    %
    
    
    75
    %
    
    
    75
    %Expected dividends
    
    None
    
    None
    
    None
 Risk-Free Interest Rate
 Expected Life
 Estimated Volatility Factor
 Expected Dividends
 Estimated Forfeitures
 78




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##### Table of Contents



Option and Warrant Grants to Non-employees
 Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods and Services
 Comprehensive Loss
  Revenue Recognition
 Revenue Recognition Revenue Recognition
  Revenue Arrangements with Multiple Deliverables
  Revenue Recognition
When Right of Return Exists
 79




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##### Table of Contents



Shipping and Handling Costs
  Research and Development
  Clinical Studies
  Income Taxes
  Net Loss Per Share
 Earnings per Share
 80




---



##### Table of Contents



Years Ended December 31,2006
    
    2005
    
    2004Net loss
    
    $
    (8,603
    )
    
    $
    (15,261
    )
    
    $
    (16,191
    )Denominator for historical basic and diluted and
pro forma basic and diluted net loss per share:Weighted-average shares outstanding
    
    
    19,675
    
    
    
    3,608
    
    
    
    3,215Shares issuable upon exercise of certain warrants
    
    
    1,438
    
    
    
    3,085
    
    
    
    3,076Shares used for historical basic and diluted net
loss per share
    
    
    21,113
    
    
    
    6,693
    
    
    
    6,291Basic and diluted net loss per share
    
    $
    (0.41
    )
    
    $
    (2.28
    )
    
    $
    (2.57
    )
  December 31,2006
    
    2005
    
    2004Convertible preferred stock
    
    
    
    
    
    
    18,123
    
    
    
    15,700Stock options outstanding
    
    
    4,672
    
    
    
    4,941
    
    
    
    3,719Warrants to purchase convertible preferred stock
    
    
    
    
    
    
    177
    
    
    
    177Warrants to purchase common stock
    
    
    171
    
    
    
    49
    
    
    
    49Unvested common stock subject to repurchase
    
    
    24
    
    
    
    80
    
    
    
    185
 Operating Segments
  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Fair Value
Measurements
 81




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##### Table of Contents



The Fair
Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115
 2. Acquisitions
  Acquisition of IVUS Technology
   
 Jomed Acquisition
   Acquisition of Jomed Imaging, Ltd. Technology
  82




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##### Table of Contents



3. Financial Statement Details
 Accounts Receivable, Net
  December 31,2006
    
    
    2005Trade accounts receivable
    
    $
    21,776
    
    
    $
    16,159Less: allowance for doubtful accounts
    
    
    201
    
    
    
    158Total
    
    $
    21,575
    
    
    $
    16,001
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    158
    
    
    $
    118
    
    
    $
    66Additions charged to selling, general
and administrative expense, net of
recoveries
    
    
    70
    
    
    
    70
    
    
    
    50Write-offs
    
    
    (40
    )
    
    
    (21
    )
    
    
    (3
    )Foreign currency translation adjustments
    
    
    13
    
    
    
    (9
    )
    
    
    5Balance at end of year
    
    $
    201
    
    
    $
    158
    
    
    $
    118
 Inventories
  December 31,2006
    
    
    2005Finished goods
    
    $
    5,302
    
    
    $
    3,980Work-in-process
    
    
    2,529
    
    
    
    2,261Raw materials
    
    
    5,592
    
    
    
    3,914Total
    
    $
    13,423
    
    
    $
    10,155
 Property and Equipment
  December 31,2006
    
    
    2005Equipment
    
    $
    9,269
    
    
    $
    8,125Medical diagnostic equipment
    
    
    9,210
    
    
    
    7,094Leasehold improvements
    
    
    1,613
    
    
    
    1,499Purchased software
    
    
    973
    
    
    
    467Construction-in-progress
    
    
    701
    
    
    
    721,765
    
    
    
    17,192Accumulated depreciation and amortization
    
    
    (12,432
    )
    
    
    (7,307
    )Total
    
    $
    9,333
    
    
    $
    9,885
   83




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##### Table of Contents



Interest and Other Income (Expense), Net
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Interest income
    
    $
    958
    
    
    $
    458
    
    
    $
    153Gain (loss) on foreign exchange
    
    
    1,052
    
    
    
    (859
    )
    
    
    342Other expense
    
    
    19
    
    
    
    
    
    
    
    $
    2,029
    
    
    $
    (401
    )
    
    $
    495
 4. Debt and Credit Facilities
  December 31,2006
    
    
    2005Revolving credit facility,
bearing interest on borrowed
amounts at the banks prime rate
plus 0.50% (8.25% at December 31,
2006), maturing in May 2007(a)
    
    $
    
    
    
    $
    Note payable, non-interest bearing,
payable in four annual payments of
725,000, maturing in 2007(b)
    
    
    905
    
    
    
    1,578Term loan A, bearing interest at
12.5% per annum, payable monthly,
maturing in September 2006(c)
    
    
    
    
    
    
    1,620Term loan B, bearing interest at
13.0% per annum, payable monthly,
maturing in October 2007(c)
    
    
    528
    
    
    
    980Term loan C, bearing interest at
13.7% per annum, payable monthly,
maturing in February 2008(c)
    
    
    229
    
    
    
    373Senior subordinated notes, bearing
interest at 15% per annum, interest
payments due quarterly, maturing in
December 2008. Paid in full in
2006(d)
    
    
    
    
    
    
    27,216Capital lease obligations(e)
    
    
    108
    
    
    
    911,770
    
    
    
    31,858Less: Current portion
    
    
    (1,654
    )
    
    
    (3,114
    )Unamortized debt discount
    
    
    (50
    )
    
    
    (1,508
    )Long-term debt
    
    $
    66
    
    
    $
    27,236
 Short-Term Debt
  84




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##### Table of Contents



Long-Term Debt
     
      85




---



##### Table of Contents



Key Covenants
  Debt Maturities
  2007
    
    $
    1,5982008
    
    
    642009
    
    
    2010
    
    
    2011
    
    
    Total
    
    $
    1,662
 5. Financial Instruments
 Cash, Cash Equivalents and Short Term Investments.
 Gross
    
    GrossUnrealized
    
    UnrealizedGross
    
    Losses
    
    LossesUnrealized
    
    Less Than
    
    12 Months or
    
    Estimated FairCost
    
    Gains
    
    12 Months
    
    Longer
    
    ValueNon interest
bearing cash (U.S. and
International)
    
    $
    4,796
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,796Money market funds (U.S.)
    
    
    50,561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,561Corporate Bonds
    
    
    7,920
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    7,917Asset backed obligations
    
    
    3,943
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,943Commercial Paper
    
    
    28,306
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    28,308Total
    
    $
    95,526
    
    
    $
    2
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    95,525
  86




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##### Table of Contents



6. Intangible Assets
     December 31, 2006Accumulated
    
    
    
    
    
    
    Weighted-Cost
    
    
    Amortization
    
    
    Net
    
    
    Average LifeDeveloped technology
    
    $
    12,469
    
    
    $
    6,714
    
    
    $
    5,755
    
    
    
    6.5Licenses
    
    
    7,034
    
    
    
    2,721
    
    
    
    4,313
    
    
    
    8.6Customer relationships
    
    
    1,674
    
    
    
    901
    
    
    
    773
    
    
    
    6.5Patents and trademarks
    
    
    1,369
    
    
    
    264
    
    
    
    1,105
    
    
    
    9.1$
    22,546
    
    
    $
    10,600
    
    
    $
    11,946
    
    
    
    7.2
 December 31, 2005AccumulatedCost
    
    
    Amortization
    
    
    NetDeveloped technology
    
    $
    12,469
    
    
    $
    4,796
    
    
    $
    7,673Licenses
    
    
    7,034
    
    
    
    1,905
    
    
    
    5,129Customer relationships
    
    
    1,674
    
    
    
    644
    
    
    
    1,030Patents and trademarks
    
    
    951
    
    
    
    138
    
    
    
    813$
    22,128
    
    
    $
    7,483
    
    
    $
    14,645
   2007
    
    $
    3,0692008
    
    
    3,0102009
    
    
    3,0102010
    
    
    8342011
    
    
    835
 7. Impairment of Long-Lived Assets
  87




---



##### Table of Contents



8. Commitments and Contingencies
 Litigation
  Collaboration Agreements
   Licenses
     
  88




---



##### Table of Contents



Leases
   Year Ending December 31,
    
    Capital
    
    
    Operating2007
    
    $
    63
    
    
    $
    1,7312008
    
    
    24
    
    
    
    1,7932009
    
    
    16
    
    
    
    1,4042010
    
    
    15
    
    
    
    52011
    
    
    3
    
    
    
    Thereafter
    
    
    
    
    
    
    Net minimum lease payments
    
    
    121
    
    
    $
    4,933Less:Amounts representing interest
    
    
    13Current
    
    
    56Long-term
    
    $
    52
  Purchase Commitments
  Indemnification
  89




---



##### Table of Contents



9. Convertible Preferred Stock
  SharesAggregateIssued and
    
    
    LiquidationAuthorized
    
    
    Outstanding
    
    
    PreferenceSeries A
    
    
    2,304
    
    
    
    2,304
    
    
    $
    2,304Series B
    
    
    15,143
    
    
    
    14,949
    
    
    
    44,846Series C
    
    
    2,662
    
    
    
    2,662
    
    
    
    15,36420,109
    
    
    
    19,915
    
    
    $
    62,514
        10. Stockholders Equity (Deficit)
  Stockholders Rights Plan
  90




---



##### Table of Contents



Public
Offerings of our Common Stock
   Warrants
  Stock-Based Compensation
    91




---



##### Table of Contents



Years Ended December 31,2006
    
    2005
    
    2004Cost of revenues
    
    $
    348
    
    
    $
    258
    
    
    $
    14Selling, general and administrative
    
    
    2,238
    
    
    
    1,267
    
    
    
    677Research and development
    
    
    609
    
    
    
    423
    
    
    
    113
 (1)
    
    Includes $434,000, $736,000 and $501,000 of stock-based compensation expense related to
non-employees in the years ended December 31, 2006, 2005 and 2004, respectively.
    92




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##### Table of Contents



Weighted-AverageExerciseShares
    
    
    PriceOutstanding, December 31, 2003
    
    
    3,283,067
    
    
    $
    0.28Granted below estimated fair value (weighted-average fair value of $2.52)
    
    
    1,218,768
    
    
    
    0.37Exercised
    
    
    (432,345
    )
    
    
    0.28Canceled and expired
    
    
    (350,589
    )
    
    
    0.33Outstanding, December 31, 2004
    
    
    3,718,901
    
    
    
    0.30Granted below estimated fair value (weighted-average fair value of $4.36)
    
    
    271,024
    
    
    
    1.19Granted at estimated fair value (weighted-average fair value of $4.29)
    
    
    1,464,819
    
    
    
    6.70Exercised
    
    
    (180,998
    )
    
    
    0.35Canceled and expired
    
    
    (332,908
    )
    
    
    1.95Outstanding, December 31, 2005
    
    
    4,940,838
    
    
    
    2.13Granted at estimated fair value
    
    
    364,245
    
    
    
    11.45Exercised
    
    
    (466,023
    )
    
    
    0.38Canceled and expired
    
    
    (166,652
    )
    
    
    3.69Outstanding, December 31, 2006
    
    
    4,672,408
    
    
    
    2.98
  Options Outstanding and Exercisable
    
    
    Vested OptionsWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual Life
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange
    
    Outstanding
    
    
    (in years)
    
    
    Price
    
    
    Outstanding
    
    
    Price$0.11 - $0.33
    
    
    2,713,836
    
    
    
    6.6
    
    
    $
    0.29
    
    
    
    2,167,833
    
    
    $
    0.27$0.83 - $1.65
    
    
    308,439
    
    
    
    8.0
    
    
    
    1.04
    
    
    
    153,584
    
    
    
    1.03$5.78 - $6.49
    
    
    1,033,795
    
    
    
    8.5
    
    
    
    6.36
    
    
    
    386,642
    
    
    
    6.33$8.36 - $10.56
    
    
    555,338
    
    
    
    6.1
    
    
    
    9.27
    
    
    
    97,851
    
    
    
    8.66$18.10
    
    
    61,000
    
    
    
    6.9
    
    
    
    18.10
    
    
    
    156
    
    
    
    18.10$0.11 to $18.10
    
    
    4,672,408
    
    
    
    7.1
    
    
    
    2.98
    
    
    
    2,806,066
    
    
    
    1.44
  Weighted-AverageGrant Date FairShares
    
    
    ValueNon-vested shares at December 31, 2005
    
    
    2,865,914
    
    
    $
    3.08Grants of options
    
    
    364,245
    
    
    
    6.01Vested
    
    
    (1,172,474
    )
    
    
    2.59Forfeitures or expirations
    
    
    (166,652
    )
    
    
    3.15Non-vested shares at December 31, 2006
    
    
    1,891,033
    
    
    
    3.94
 93




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##### Table of Contents



Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual Life
    
    
    intrinsic valueShares
    
    
    Price
    
    
    (in years)
    
    
    (in thousands)Outstanding at December 31, 2005
    
    
    4,940,838
    
    
    $
    2.13Grants of options
    
    
    364,245
    
    
    
    11.45Exercises
    
    
    (466,023
    )
    
    
    0.38Forfeitures or expirations
    
    
    (166,652
    )
    
    
    3.69Outstanding and exercisable at December 31, 2006
    
    
    4,672,408
    
    
    
    2.98
    
    
    
    7.1
    
    
    $
    62,768Vested and expected to vest as of December 31, 2006
    
    
    4,479,624
    
    
    
    2.81
    
    
    
    7.1
    
    
    $
    60,911
   11. Income Taxes
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    35
    
    
    
    50
    
    
    
    36Foreign
    
    
    263
    
    
    
    20
    
    
    
    1$
    298
    
    
    $
    70
    
    
    $
    37
   Years Ended December 31,2006
    
    
    2005
    
    
    2004U.S. federal statutory income tax benefit
    
    $
    (2,907
    )
    
    $
    (5,317
    )
    
    $
    (5,654
    )State income tax benefit, net of federal income tax expense
    
    
    (524
    )
    
    
    (393
    )
    
    
    (531
    )Valuation allowance
    
    
    3,308
    
    
    
    6,163
    
    
    
    6,364Foreign tax rate differential
    
    
    445
    
    
    
    (142
    )
    
    
    (129
    )Credits
    
    
    (414
    )
    
    
    (401
    )
    
    
    (325
    )Other
    
    
    390
    
    
    
    160
    
    
    
    312$
    298
    
    
    $
    70
    
    
    $
    37
 94




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##### Table of Contents



December 31,2006
    
    
    2005Deferred tax assets:Net operating loss carryovers
    
    $
    18,335
    
    
    $
    16,519Tax credit carryovers
    
    
    3,236
    
    
    
    1,656Depreciation and amortization
    
    
    1,937
    
    
    
    909Accruals
    
    
    1,285
    
    
    
    1,685Deferred revenue
    
    
    623
    
    
    
    731Other, net
    
    
    1,340
    
    
    
    850Total deferred tax assets
    
    
    26,756
    
    
    
    22,350Less valuation allowance
    
    
    (26,756
    )
    
    
    (22,350
    )$
    
    
    
    $
    
    12. Segment and Geographic Information
   Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:United States
    
    $
    51,013
    
    
    $
    40,933
    
    
    $
    38,020Japan
    
    
    30,082
    
    
    
    33,207
    
    
    
    9,353Europe, the Middle East and Africa
    
    
    17,765
    
    
    
    15,294
    
    
    
    11,426Rest of world
    
    
    4,188
    
    
    
    2,466
    
    
    
    2,299$
    103,048
    
    
    $
    91,900
    
    
    $
    61,098
 13. Employee Benefits
 Defined Contribution Plans
  95




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##### Table of Contents



14. Quarterly Information (Unaudited)
  Quarter EndedYear ended2006
    
    March 31
    
    June 30
    
    September 30
    
    December 31
    
    December 31Revenue
    
    $
    19,872
    
    
    $
    25,863
    
    
    $
    27,782
    
    
    $
    29,531
    
    
    $
    103,048Gross profit
    
    
    11,652
    
    
    
    14,395
    
    
    
    17,222
    
    
    
    18,064
    
    
    
    61,333Operating income (loss)
    
    
    (5,320
    )
    
    
    (2,312
    )
    
    
    707
    
    
    
    604
    
    
    
    (6,321
    )Net income (loss)
    
    
    (6,374
    )
    
    
    (4,163
    )
    
    
    501
    
    
    
    1,433
    
    
    
    (8,603
    )Net income (loss) per share:Basic
    
    $
    (0.93
    )
    
    $
    (0.41
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.41
    )Diluted
    
    $
    (0.93
    )
    
    $
    (0.41
    )
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    (0.41
    )Includes the following
stock-based compensation
expense:Cost of revenues
    
    $
    68
    
    
    $
    68
    
    
    $
    103
    
    
    $
    109
    
    
    $
    348Selling, general and
administrative
    
    
    506
    
    
    
    601
    
    
    
    573
    
    
    
    558
    
    
    
    2,238Research and development
    
    
    115
    
    
    
    127
    
    
    
    133
    
    
    
    234
    
    
    
    609
 Quarter EndedYear ended2005
    
    March 31
    
    June 30
    
    September 30
    
    December 31(1)
    
    December 31Revenue
    
    $
    16,467
    
    
    $
    23,783
    
    
    $
    26,948
    
    
    $
    24,702
    
    
    $
    91,900Gross profit
    
    
    9,308
    
    
    
    11,603
    
    
    
    13,451
    
    
    
    9,695
    
    
    
    44,057Operating loss
    
    
    (2,394
    )
    
    
    (1,025
    )
    
    
    (528
    )
    
    
    (5,532
    )
    
    
    (9,479
    )Net loss
    
    
    (3,841
    )
    
    
    (2,672
    )
    
    
    (1,831
    )
    
    
    (6,917
    )
    
    
    (15,261
    )Net loss per share:Basic
    
    $
    (0.58
    )
    
    $
    (0.40
    )
    
    $
    (0.27
    )
    
    $
    (1.01
    )
    
    $
    (2.28
    )Diluted
    
    $
    (0.58
    )
    
    $
    (0.40
    )
    
    $
    (0.27
    )
    
    $
    (1.01
    )
    
    $
    (2.28
    )Includes the following
stock-based compensation
expense:Cost of revenues
    
    $
    63
    
    
    $
    65
    
    
    $
    65
    
    
    $
    65
    
    
    $
    258Selling, general and
administrative
    
    
    587
    
    
    
    207
    
    
    
    219
    
    
    
    254
    
    
    
    1,267Research and development
    
    
    99
    
    
    
    74
    
    
    
    75
    
    
    
    175
    
    
    
    423
 
 (1)
    
    During the fourth quarter of 2005, we recorded adjustments to (1) write-down
inventory for items deemed to be excess or obsolete by $963,000, (2) record an impairment charge of
$360,000 to reduce certain medical diagnostic equipment to its estimated net realizable value, and
(3) record expected losses of $2,045,000 related to non-cancelable inventory purchase commitments.
These adjustments resulted in charges to cost of revenues totaling $3,368,000 in the accompanying
statement of operations. 96




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15. Related Parties
 Medtronic, Inc. and Its Affiliates
    97




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Exemption from Managements Report on Internal Control Over Financial Reporting for 2006
  
 Item 9B. Other Information
  98




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
  www.volcanocorp.com
 
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accounting Fees and Services.
  99




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
  (1)
    
    The financial statements required by Item 15(a) are filed in Item 8 of this Annual Report
on Form 10-K.(2)
    
    Schedules required by Item 15(a) are omitted because they are not required, are not applicable or the
information is included in the consolidated financial statements or notes thereto.
 100




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##### Table of Contents



ExhibitNumber
    
    Description2.1
    
    Asset Purchase Agreement dated July 10, 2003 by and
among Jomed, Inc., Jomed N.V., Jomed GmBH, Jomed Benelux
S.A. and Volcano Therapeutics, Inc. (filed as Exhibit
2.1 to the Registrants Registration Statement on Form
S-1, as amended (File No. 333-132678) (the Form S-1),
as originally filed on March 24, 2006, and incorporated
herein by reference).2.2
    
    Asset Transfer Agreement, by and between Pacific Rim
Medical Ventures Corp and Koninklijke Philips
Electronics N.V., dated July 3, 2003 (filed as Exhibit
2.2 to the Form S-1, as originally filed on March 24,
2006, and incorporated herein by reference).3.1
    
    Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1 to the Registrants
Form 10-Q, as originally filed on August 9, 2006, and
incorporated herein by reference).3.2
    
    Bylaws of the Registrant (filed as Exhibit 3.3 to the
Registrants Form 10-Q, as originally filed on August 9,
2006, and incorporated herein by reference).3.3
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation of the Registrant (filed as
Exhibit 3.5 to the Form S-1, as originally filed on May
24, 2006, and incorporated herein by reference).4.1
    
    Specimen Common Stock certificate
of the Registrant (filed as Exhibit 4.1 to the Form S-1, as originally filed on May 24, 2006, and incorporated herein by reference).4.2
    
    Amended and Restated Investors Rights Agreement, dated
February 18, 2005, by and among the Registrant and
certain stockholders (filed as Exhibit 4.2 to the Form
S-1, as originally filed on March 24, 2006, and
incorporated herein by reference).4.3
    
    Warrant to Purchase Series B Preferred Stock, issued by
the Registrant to Venture Lending & Leasing IV, LLC,
dated September 30, 2004 (filed as Exhibit 4.4 to the
Form S-1, as originally filed on March 24, 2006, and
incorporated herein by reference).4.4
    
    Warrant to purchase shares of common stock issued by the
Registrant to Silicon Valley Bank, dated July 18, 2003
(filed as Exhibit 4.8 to the Form S-1, as originally
filed on March 24, 2006, and incorporated herein by
reference).4.5
    
    Warrant to purchase shares of Series B Preferred Stock
issued by the Registrant to Silicon Valley Bank, dated
July 18, 2004 (filed as Exhibit 4.9 to the Form S-1, as
originally filed on March 24, 2006, and incorporated
herein by reference).4.6
    
    Rights Agreement, by and between the Registrant and
American Stock Transfer & Trust Company, dated June 20,
2006 (filed as Exhibit 4.1 to the Registrants Form
10-Q, as originally filed on August 9, 2006, and
incorporated herein by reference).4.7
    
    Form of Certificate of Designation
of Series A Junior Participating Preferred Stock (filed as Exhibit
3.2 to the Registrants Form 10-Q,
as originally filed on August 9, 2006, and incorporated herein by reference).10.1
    
    Form of Indemnification Agreement for directors, chief
executive officer and chief financial officer (filed as
Exhibit 10.1 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.2*
    
    2000 Long Term Incentive Plan and forms of Stock Option
Agreements thereunder (filed as Exhibit 10.2 to the Form
S-1, as originally filed on March 24, 2006, and as
amended on May 6, 2006, and incorporated herein by
reference).10.3*
    
    2005 Equity Compensation Plan and forms of Stock Option
Agreements and Stock Grant Agreement thereunder (2005
Equity Compensation Plan filed as Exhibit 10.3 to the
Form S-1, as originally filed on March 24, 2006, and as
amended on May 6, 2006, and incorporated herein by
reference).10.3a*
    
    2005 Equity Compensation Plan Form of Grantee Restriction Agreement.10.4
    
    License Agreement by and between the Registrant and The
Cleveland Clinic Foundation, dated April 30, 2002 (filed
as Exhibit 10.15 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.5*
    
    Employment Agreement by and between the Registrant and
R. Scott Huennekens, dated February 17, 2006 (filed as
Exhibit 10.16 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.6*
    
    Employment Agreement by and between the Registrant and
John T. Dahldorf, dated February 17, 2006 (filed as
Exhibit 10.17 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.7
    
    Standard Multi-Tenant Office LeaseGross, as amended, by
and between Ethan Conrad and the Registrant, dated June
13, 2005 (filed as Exhibit 10.18 to the Form S-1, as
originally filed on March 24, 2006, and incorporated
herein by reference).
 101




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##### Table of Contents



ExhibitNumber
    
    Description10.8
    
    Net Lease Agreement, as amended, by and between the
Registrant and Great Scene Ventures Ltd, dated January
10, 1996 (filed as Exhibit 10.19 to the Form S-1, as
originally filed on March 24, 2006, and incorporated
herein by reference).10.9
    
    Standard Industrial/ Commercial Multi-Tenant Lease, as
amended, by and between 1325 J Street L.P. and Jomed
Incorporated, dated January 16, 2001 (filed as Exhibit
10.20 to the Form S-1, as originally filed on March 24,
2006, and as amended on May 6, 2006, and incorporated
herein by reference).10.10
    
    Supply Agreement by and between the Registrant and AVE
Galway Limited, dated July 21, 2003 (filed as Exhibit
10.21 to the Form S-1, as originally filed on March 24,
2006, and incorporated herein by reference).10.11
    
    License Agreement by and between the Registrant and AVE
Galway Limited, dated July 21, 2003 (filed as Exhibit
10.22 to the Form S-1, as originally filed on March 24,
2006, and incorporated herein by reference).10.12
    
    International Distributor Agreement by and between
Cardiometrics, Inc., Goodman Company, Ltd. and Kaneko
Enterprises, Inc., entered September 17, 1994 (filed as
Exhibit 10.26 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.13
    
    Distribution Agreement, as amended, by and between
Goodman Company, Ltd. and the Registrant, dated
September 27, 2004 (filed as Exhibit 10.27 to the Form
S-1, as originally filed on March 24, 2006, and
incorporated herein by reference).10.14
    
    Supply and Distribution Agreement between General
Electric Medical Systems Scs and the Registrant, dated
March 16, 2006 (filed as Exhibit 10.28 to the Form S-1,
as originally filed on March 24, 2006, and incorporated
herein by reference).10.15
    
    Amended and Restated Japanese Distribution Agreement by
and among the Registrant, Volcano Japan Co., Ltd. and
Fukuda Denshi Co., Ltd., dated March 17, 2006 (filed as
Exhibit 10.29 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.16*
    
    Managing Director Agreement by and between Volcano
Europe NV and Mr. Michel Lussier, dated March 20, 2006
(filed as Exhibit 10.30 to the Form S-1, as originally
filed on March 24, 2006, and incorporated herein by
reference).10.17
    
    Termination of Option to Distribute Agreement by and
between Medtronic Vascular, Inc. and the Registrant,
dated January 27, 2006 (filed as Exhibit 10.31 to the
Form S-1, as originally filed on May 24, 2006, and
incorporated herein by reference).10.18
    
    Software Development and License Agreement by and
between Paieon, Inc. and the Registrant dated May 10,
2006 (filed as Exhibit 10.32 to the Form S-1, as
originally filed on May 24, 2006, and incorporated
herein by reference).10.19*
    
    Director Compensation Policy (filed as Exhibit 10.33 to
the Form S-1, as originally filed on June 12, 2006, and
incorporated herein by reference).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (See page 103).31.1
    
    Certification of the President &  Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2
    
    Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1
    
    Certification of the President & Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan or arrangement
    
    Portions of the exhibit have been omitted pursuant to a
request for confidential treatment. The confidential
portions have been filed with the SEC. 102




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##### Table of Contents



SIGNATURES
  Volcano CorporationBy:
    /s/ R. Scott HuennekensR. Scott HuennekensPresident and Chief Executive Officer POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ R. Scott Huennekens
    
    President and Chief
Executive Officer,
    
    March 22, 2007R. Scott Huennekens
    
    Director (principal
executive officer)/s/ John. T. Dahldorf
    
    Chief financial
Officer (principal
financial
    
    March 22, 2007John T. Dahldorf
    
    officer
and principal
accounting officer)/s/ Olav B. Bergheim
    
    Director
    
    March 22, 2007Olav B. Bergheim/s/ Robert J. Adelman, M.D.
    
    Director
    
    March 22, 2007Robert J. Adelman, M.D./s/ James C. Blair, Ph.D.
    
    Director
    
    March 22, 2007James C. Blair, Ph.D./s/ S. Ward Casscells, M.D.
    
    Director
    
    March 22, 2007S. Ward Casscells, M.D./s/ Carlos A. Ferrer
    
    Director
    
    March 22, 2007Carlos A. Ferrer/s/ Lesley H. Howe
    
    Director
    
    March 22, 2007Lesley H. Howe/s/ Ronald A. Matricaria
    
    Director
    
    March 22, 2007Ronald A. Matricaria
 103




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##### Table of Contents



ExhibitNumber
    
    Description2.1
    
    Asset Purchase Agreement dated July 10, 2003 by and
among Jomed, Inc., Jomed N.V., Jomed GmBH, Jomed Benelux
S.A. and Volcano Therapeutics, Inc. (filed as Exhibit
2.1 to the Registrants Registration Statement on Form
S-1, as amended (File No. 333-132678) (the Form S-1),
as originally filed on March 24, 2006, and incorporated
herein by reference).2.2
    
    Asset Transfer Agreement, by and between Pacific Rim
Medical Ventures Corp and Koninklijke Philips
Electronics N.V., dated July 3, 2003 (filed as Exhibit
2.2 to the Form S-1, as originally filed on March 24,
2006, and incorporated herein by reference).3.1
    
    Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1 to the Registrants
Form 10-Q, as originally filed on August 9, 2006, and
incorporated herein by reference).3.2
    
    Bylaws of the Registrant (filed as Exhibit 3.3 to the
Registrants Form 10-Q, as originally filed on August 9,
2006, and incorporated herein by reference).3.3
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation of the Registrant (filed as
Exhibit 3.5 to the Form S-1, as originally filed on May
24, 2006, and incorporated herein by reference).4.1
    
    Specimen Common Stock certificate
of the Registrant (filed as Exhibit 4.1 to the Form S-1, as
originally filed on May 24, 2006, and incorporated herein by reference).4.2
    
    Amended and Restated Investors Rights Agreement, dated
February 18, 2005, by and among the Registrant and
certain stockholders (filed as Exhibit 4.2 to the Form
S-1, as originally filed on March 24, 2006, and
incorporated herein by reference).4.3
    
    Warrant to Purchase Series B Preferred Stock, issued by
the Registrant to Venture Lending & Leasing IV, LLC,
dated September 30, 2004 (filed as Exhibit 4.4 to the
Form S-1, as originally filed on March 24, 2006, and
incorporated herein by reference).4.4
    
    Warrant to purchase shares of common stock issued by the
Registrant to Silicon Valley Bank, dated July 18, 2003
(filed as Exhibit 4.8 to the Form S-1, as originally
filed on March 24, 2006, and incorporated herein by
reference).4.5
    
    Warrant to purchase shares of Series B Preferred Stock
issued by the Registrant to Silicon Valley Bank, dated
July 18, 2004 (filed as Exhibit 4.9 to the Form S-1, as
originally filed on March 24, 2006, and incorporated
herein by reference).4.6
    
    Rights Agreement, by and between the Registrant and
American Stock Transfer & Trust Company, dated June 20,
2006 (filed as Exhibit 4.1 to the Registrants Form
10-Q, as originally filed on August 9, 2006, and
incorporated herein by reference).4.7
    
    Form of Certificate of Designation of Series A Junior Participating Preferred Stock
(filed as Exhibit 3.2 to the Registrants Form 10-Q,
as originally filed on August 9, 2006, and incorporated herein by reference).10.1
    
    Form of Indemnification Agreement for directors, chief
executive officer and chief financial officer (filed as
Exhibit 10.1 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.2*
    
    2000 Long Term Incentive Plan and forms of Stock Option
Agreements thereunder (filed as Exhibit 10.2 to the Form
S-1, as originally filed on March 24, 2006, and as
amended on May 6, 2006, and incorporated herein by
reference).10.3*
    
    2005 Equity Compensation Plan and forms of Stock Option
Agreements and Stock Grant Agreement thereunder (2005
Equity Compensation Plan filed as Exhibit 10.3 to the
Form S-1, as originally filed on March 24, 2006, and as
amended on May 6, 2006, and incorporated herein by
reference).10.3a*
    
    2005 Equity Compensation Plan Form of Grantee Restriction Agreement.10.4
    
    License Agreement by and between the Registrant and The
Cleveland Clinic Foundation, dated April 30, 2002 (filed
as Exhibit 10.15 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.5*
    
    Employment Agreement by and between the Registrant and
R. Scott Huennekens, dated February 17, 2006 (filed as
Exhibit 10.16 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.6*
    
    Employment Agreement by and between the Registrant and
John T. Dahldorf, dated February 17, 2006 (filed as
Exhibit 10.17 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.7
    
    Standard Multi-Tenant Office LeaseGross, as amended, by
and between Ethan Conrad and the Registrant, dated June
13, 2005 (filed as Exhibit 10.18 to the Form S-1, as
originally filed on March 24, 2006, and incorporated
herein by reference).


104




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##### Table of Contents





ExhibitNumber
    
    Description10.8
    
    Net Lease Agreement, as amended, by and between the
Registrant and Great Scene Ventures Ltd, dated January
10, 1996 (filed as Exhibit 10.19 to the Form S-1, as
originally filed on March 24, 2006, and incorporated
herein by reference).10.9
    
    Standard Industrial/ Commercial Multi-Tenant Lease, as
amended, by and between 1325 J Street L.P. and Jomed
Incorporated, dated January 16, 2001 (filed as Exhibit
10.20 to the Form S-1, as originally filed on March 24,
2006, and as amended on May 6, 2006, and incorporated
herein by reference).10.10
    
    Supply Agreement by and between the Registrant and AVE
Galway Limited, dated July 21, 2003 (filed as Exhibit
10.21 to the Form S-1, as originally filed on March 24,
2006, and incorporated herein by reference).10.11
    
    License Agreement by and between the Registrant and AVE
Galway Limited, dated July 21, 2003 (filed as Exhibit
10.22 to the Form S-1, as originally filed on March 24,
2006, and incorporated herein by reference).10.12
    
    International Distributor Agreement by and between
Cardiometrics, Inc., Goodman Company, Ltd. and Kaneko
Enterprises, Inc., entered September 17, 1994 (filed as
Exhibit 10.26 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.13
    
    Distribution Agreement, as amended, by and between
Goodman Company, Ltd. and the Registrant, dated
September 27, 2004 (filed as Exhibit 10.27 to the Form
S-1, as originally filed on March 24, 2006, and
incorporated herein by reference).10.14
    
    Supply and Distribution Agreement between General
Electric Medical Systems Scs and the Registrant, dated
March 16, 2006 (filed as Exhibit 10.28 to the Form S-1,
as originally filed on March 24, 2006, and incorporated
herein by reference).10.15
    
    Amended and Restated Japanese Distribution Agreement by
and among the Registrant, Volcano Japan Co., Ltd. and
Fukuda Denshi Co., Ltd., dated March 17, 2006 (filed as
Exhibit 10.29 to the Form S-1, as originally filed on
March 24, 2006, and incorporated herein by reference).10.16*
    
    Managing Director Agreement by and between Volcano
Europe NV and Mr. Michel Lussier, dated March 20, 2006
(filed as Exhibit 10.30 to the Form S-1, as originally
filed on March 24, 2006, and incorporated herein by
reference).10.17
    
    Termination of Option to Distribute Agreement by and
between Medtronic Vascular, Inc. and the Registrant,
dated January 27, 2006 (filed as Exhibit 10.31 to the
Form S-1, as originally filed on May 24, 2006, and
incorporated herein by reference).10.18
    
    Software Development and License Agreement by and
between Paieon, Inc. and the Registrant dated May 10,
2006 (filed as Exhibit 10.32 to the Form S-1, as
originally filed on May 24, 2006, and incorporated
herein by reference).10.19*
    
    Director Compensation Policy (filed as Exhibit 10.33 to
the Form S-1, as originally filed on June 12, 2006, and
incorporated herein by reference).21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (See page 103).31.1
    
    Certification of the President &  Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2
    
    Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1
    
    Certification of the President & Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





|  |  |                                                                                                                                                    
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|* |  | Management contract or compensatory plan or arrangement                                                                                            
| 
| |  | Portions of the exhibit have been omitted pursuant to a
request for confidential treatment. The confidential
portions have been filed with the SEC.

105