UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2007

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

For the transition period from                      to                     

Micrus Endovascular Corporation

(Exact name of registrant as specified in its charter)

Delaware		23-2853441
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

821 Fox Lane
San Jose, California		95131
(Address of principal executive offices)		(Zip Code)

(408) 433-1400
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

     As of February 1, 2008, there were 15,549,623 shares of common stock, par value $0.01, of the registrant outstanding.

 

 

MICRUS ENDOVASCULAR CORPORATION

INDEX TO FORM 10-Q

		Page
		Number
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets as of December 31, 2007 and March 31, 2007			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2007 and 2006			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2007 and 2006			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4. Controls and Procedures			32
Part II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			49
Item 4. Submission of Matters to a Vote of Security Holders			49
Item 5. Other Information			49
Item 6. Exhibits			49
Signatures			50
EXHIBIT 10.29
EXHIBIT 10.30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)

		December 31,				March 31,
		2007				2007
ASSETS
Current Assets:
Cash and cash equivalents		$	25,343			$	34,536
Accounts receivable, net of allowance for doubtful accounts of $234 at December 31, 2007 and March 31, 2007			10,984				8,168
Inventories			11,418				9,049
Prepaid expenses and other current assets			1,322				1,340
Deferred tax assets			45				102
Assets held for sale (Note 4)			1,146				—
Total current assets			50,258				53,195
Property and equipment, net			5,243				4,648
Goodwill			5,552				5,552
Intangible assets, net			7,589				9,405
Other assets			291				297
Total assets		$	68,933			$	73,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	1,738			$	1,660
Accrued payroll and other related expenses			6,216				6,145
Accrued liabilities			4,893				6,288
Total current liabilities			12,847				14,093
Deferred tax liabilities			402				570
Other non-current liabilities			3,578				2,140
Total liabilities			16,827				16,803
Commitments and contingencies (Note 6)
Stockholders’ Equity:
Common stock, $0.01 par value;
Authorized: 50,000,000 shares
Issued and outstanding: 15,545,137 shares at December 31, 2007 and 15,249,057 shares at March 31, 2007			155				152
Additional paid-in capital			117,811				111,920
Deferred stock-based compensation			(25	)			(164	)
Accumulated other comprehensive loss			(624	)			(512	)
Accumulated deficit			(65,211	)			(55,102	)
Total stockholders’ equity			52,106				56,294
Total liabilities and stockholders’ equity		$	68,933			$	73,097

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

MICRUS ENDOVASCULAR CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Revenues		$	18,343			$	15,544			$	49,495			$	42,754
Cost of goods sold			5,049				4,192				11,935				11,348
Gross profit			13,294				11,352				37,560				31,406
Operating expenses:
Research and development			5,553				1,769				10,135				6,025
Sales and marketing			7,530				5,992				21,441				17,199
General and administrative			6,076				5,273				17,722				14,166
Total operating expenses			19,159				13,034				49,298				37,390
Loss from operations			(5,865	)			(1,682	)			(11,738	)			(5,984	)
Interest and investment income			304				426				1,015				1,211
Interest expense			—				(5	)			(2	)			(5	)
Other income, net			67				221				427				554
Loss before income taxes			(5,494	)			(1,040	)			(10,298	)			(4,224	)
Provision for (benefit of) income taxes			210				(38	)			(189	)			(112	)
Net loss		$	(5,704	)		$	(1,002	)		$	(10,109	)		$	(4,112	)
Net loss per share:
Basic and diluted		$	(0.37	)		$	(0.07	)		$	(0.66	)		$	(0.28	)
Weighted-average number of shares used in per share calculations:
Basic and diluted			15,516				14,766				15,399				14,466

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

Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

		Nine Months Ended
		December 31,
		2007				2006
Cash flows from operating activities:
Net loss		$	(10,109	)		$	(4,112	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,383				1,364
Provision for doubtful accounts			(7	)			(12	)
Loss on disposal of property and equipment			23				—
Provision for excess and obsolete inventories			655				191
Realized gain on investments			—				(4	)
Stock-based compensation			3,501				1,629
Deferred tax benefit			(194	)			—
Changes in operating assets and liabilities:
Accounts receivable			(2,439	)			(298	)
Inventories			(3,421	)			(2,232	)
Prepaid expenses and other current assets			63				(391	)
Other assets			16				27
Accounts payable			40				(399	)
Accrued payroll and other related expenses			(14	)			1,179
Accrued liabilities			861				2,530
Other non-current liabilities			1,437				(139	)
Net cash used in operating activities			(7,205	)			(667	)
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities			—				1,000
Acquisition of property and equipment			(1,657	)			(967	)
Proceeds from sale of property and equipment			107				—
Purchase of VasCon, LLC, net of cash acquired			—				(2,736	)
Earn-out payment in connection with acquisition of Neurologic UK Ltd.			(2,232	)			(1,414	)
Payment to Biotronik AG for developed technology			—				(835	)
Net cash used in investing activities			(3,782	)			(4,952	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs			—				2,043
Proceeds from exercise of stock options			1,956				1,367
Proceeds from employee stock purchase plan			513				379
Net cash provided by financing activities			2,469				3,789
Effect of foreign exchange rate changes on cash and cash equivalents			(675	)			(694	)
Net decrease in cash and cash equivalents			(9,193	)			(2,524	)
Cash and cash equivalents at beginning of period			34,536				36,104
Cash and cash equivalents at end of period		$	25,343			$	33,580
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for purchase of VasCon, LLC		$	—			$	2,972

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

MICRUS ENDOVASCULAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Formation and Business of the Company

     Micrus Endovascular Corporation (the “Company”) was incorporated under the laws of the state of Delaware in June 1996. The Company develops, manufactures and markets both implantable and disposable medical devices used in the treatment of cerebral vascular diseases. The Company’s products are used by interventional neuroradiologists and neurosurgeons for the treatment of hemorrhagic and ischemic stroke.

  Interim unaudited financial information

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the preceding fiscal year included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007 which was filed with the SEC on June 7, 2007.

     The results of operations for the interim periods ended December 31, 2007 may not necessarily be indicative of the results that may be expected for the fiscal year ended March 31, 2008, or any future period.

  Revisions to fiscal year 2007 quarterly cash flows presentations

     The consolidated cash flow statement for the nine months ended December 31, 2006 has been revised from that previously reported in the Company’s Form 10-Q for the period ended December 31, 2006 to correct the classification of the payment of an earn-out amount of approximately $1.4 million made in April 2006 in connection with the acquisition of Neurologic UK Ltd. (“Neurologic”) that had been accrued as of March 31, 2006, and correctly excluded, as it was a non-cash item, from the fiscal 2006 full year statement of cash flows included in the fiscal 2006 and 2007 annual reports on Form 10-K. The Company had previously incorrectly presented in its quarterly reports on Form 10-Q for the first, second and third quarters of fiscal 2007 the payment as an operating cash outflow (decrease in accrued liabilities) which resulted in an overstatement of the reported amount of cash used in operating activities with a corresponding understatement of the cash used in investing activities. This item has been adjusted in this Form 10-Q and in the previously filed Form 10-Q for the first and second quarters of fiscal 2008. The impact on the Company’s cash flow data is as follows:

		As Previously
		Reported				As Revised
Nine months ended December 31, 2006
Cash flows from operating activities:
Accrued liabilities		$	1,127			$	2,530
Net cash used in operating activities		$	(2,070	)		$	(667	)
Cash flows from investing activities:
Purchase of Neurologic UK Ltd., net of cash acquired		$	(11	)		$	(1,414	)
Net cash used in investing activities		$	(3,549	)		$	(4,952	)

Note 2 — Summary of Significant Accounting Policies

  Principles of consolidation

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

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

  Use of estimates

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

  Cost of goods sold

     The Company’s cost of goods sold includes the cost of products sold to customers including materials, direct labor, depreciation, overhead costs associated with manufacturing, impairments of inventory and warranty expenses. Additionally, beginning with the quarter ended December 31, 2006, cost of goods sold includes amortization of capitalized license technology in connection with the Biotronik AG (“Biotronik”) agreement and acquired intangible assets in connection with the acquisition of VasCon, LLC (“VasCon”).

  Comprehensive loss

     Comprehensive loss generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. Accumulated other comprehensive loss as of December 31, 2007 and March 31, 2007 was comprised entirely of foreign currency translation adjustments. Total comprehensive loss for the three and nine months ended December 31, 2007 was $5.7 million and $10.2 million, respectively. This included other comprehensive loss of zero and $112,000 respectively, related to foreign currency translation adjustments. Total comprehensive loss for the three and nine months ended December 31, 2006 was $1.1 million and $4.4 million, respectively. This included other comprehensive loss of $100,000 and $315,000, respectively, related to the Company’s unrealized gains and losses on its available-for-sale securities and foreign currency translation adjustments.

  Net loss per share

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

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

		as of December 31,
		2007				2006
Shares issuable upon exercise of common stock options			3,492				3,204
Shares issuable upon settlement of restricted stock units			7				10
Shares issuable under employee stock purchase plan			18				20
			3,517				3,234

  Stock-based compensation

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

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

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

  Income taxes

     Effective April 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainties in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. See Note 5 for further information regarding the adoption of FIN 48.

  Recent accounting pronouncements

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. Certain provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 but does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 but does not expect the adoption of SFAS 159 to have a material impact on its consolidated financial position, results of operations or cash flows.

     In June 2007, the FASB issued Emerging Issue Task Force (EITF) No. 07-03 (EITF 07-03), “Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.” EITF 07-03 provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. If, subsequently, based on management’s assessment, it is no longer expected that the goods will be delivered or services will be rendered, then EITF 07-3 requires that the capitalized advance payment be charged to expense. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF 07-03 but does not expect the adoption of EITF 07-03 to have a material impact on its consolidated financial position, results of operations or cash flows.

     In December 2007, the FASB issued SFAS 141R (revised 2007), “Business Combinations,” which replaces SFAS 141. SFAS 141R requires the acquiring entity in a business combination to recognize at full fair value all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose information needed to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations completed on or after the date of adoption.

Note 3 — Balance Sheet Components

  Inventories

     Inventories consisted of the following (in thousands):

		December 31,				March 31,
		2007				2007
Raw materials		$	1,801			$	1,862
Work-in-progress			1,778				1,413
Finished goods			4,050				3,005
Consigned inventory			3,564				2,622
Inventory held by distributors			225				147
		$	11,418			$	9,049

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

     Inventory held by distributors at December 31, 2007 consists of $157,000 in inventory that was held by the Company’s Latin American distributors and $68,000 in inventory that was held by the Company’s Chinese distributor. Inventory held by distributors at March 31, 2007 was all held by the Company’s Latin American distributors.

  Property and equipment, net

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

		December 31,				March 31,
		2007				2007
Computer equipment and software		$	1,754			$	1,210
Furniture, fixtures and equipment			5,197				4,701
Leasehold improvements			985				936
Construction in progress			340				148
Total cost			8,276				6,995
Less accumulated depreciation and amortization			(3,033	)			(2,347	)
		$	5,243			$	4,648

Goodwill

     On September 20, 2005, the Company entered into a Share Purchase Agreement acquiring all of the outstanding capital stock of Neurologic, a privately held distributor of the Company’s products in the United Kingdom. The transaction included an initial cash payment in addition to future multi-year revenue based earn-out payments. The Company has recorded goodwill of $5.6 million associated with the purchase of Neurologic. At March 31, 2007, the Company accrued for additional consideration of approximately $2.2 million for the second year earn-out payment, which was added to goodwill. The Company paid the second year earn-out in April 2007.

Intangible assets, net

     Intangible assets, net, consisted of the following (in thousands):

		Useful				Gross Carrying Amount																Accumulated Amortization																Net
		Life				March 31,								Assets Held				December 31,				March 31,								Assets Held				December 31,				December 31,				March 31,
		(Years)				2007				Additions				For Sale				2007				2007				(Additions)				For Sale				2007				2007				2007
Existing process technology			7			$	4,590			$	—			$	—			$	4,590			$	(219	)		$	(492	)		$	—			$	(711	)		$	3,879			$	4,371
Distribution agreements			5				2,300				—				—				2,300				(704	)			(345	)			—				(1,049	)			1,251				1,596
Capitalized license fee			7				1,565				—				—				1,565				(112	)			(168	)			—				(280	)			1,285				1,453
Patents - microcoil			10				1,100				—				—				1,100				(770	)			(82	)			—				(852	)			248				330
Non-compete agreements			6				700				—				—				700				(177	)			(88	)			—				(265	)			435				523
Customer relationships			5				900				—				—				900				(274	)			(135	)			—				(409	)			491				626
Patents - catheter			7				300				—				(300	)			—				(14	)			(25	)			39				—				—				286
Existing product technology			2				260				—				(260	)			—				(40	)			(70	)			110				—				—				220
						$	11,715			$	—			$	(560	)		$	11,155			$	(2,310	)		$	(1,405	)		$	149			$	(3,566	)		$	7,589			$	9,405

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Cost of goods sold		$	234			$	124			$	755			$	124
Operating expenses			217				217				650				664
		$	451			$	341			$	1,405			$	788

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

For Years Ended March 31,		Amortization
2008 (remaining 3 months)		$	436
2009			1,746
2010			1,746
2011			1,298
2012			935
Thereafter			1,428
		$	7,589

Accruals

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

		December 31,				March 31,
		2007				2007
Bonuses		$	2,200			$	2,646
Vacation			1,654				1,333
Commissions			1,291				725
Salaries			527				702
Payroll taxes			521				739
401(k) payable			23				—
		$	6,216			$	6,145

     Accrued liabilities consisted of the following (in thousands):

		December 31,				March 31,
		2007				2007
Professional fees		$	1,771			$	1,069
VAT payable			569				438
Minimum milestone payment to The Cleveland Clinic Foundation			500				—
Earn-out payment in connection with Neurologic acquisition			—				2,232
Other			2,053				2,549
		$	4,893			$	6,288

Other non-current liabilities

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

		December 31,				March 31,
		2007				2007
Contingent purchase price		$	1,596			$	1,596
Minimum milestone payments to The Cleveland Clinic Foundation			1,500				—
Deferred revenue from Japan distribution agreement			309				375
Other non-current liabilities			173				169
		$	3,578			$	2,140

Note 4 — Assets Held for Sale

     On November 2, 2007, the Company signed a non-binding term sheet to sell its non-neurological cardiac and peripheral catheter assets and technology for $3.0 million to Merit Medical Systems, Inc. (“Merit”). The decision to sell the non-neurological cardiac and peripheral catheter assets and technology was a result of management’s desire to focus resources on the Company’s neurological products.

     In accordance with the provision of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reclassified certain assets into assets held for sale and recorded them at the lower of their carrying value or fair value less costs to sell. The majority of these assets were originally acquired by the Company in connection with the acquisition of VasCon in November 2006. The following table details the components of the assets held for sale as of December 31, 2007:

		Amount
Inventories		$	717
Property and equipment, net			18
Intangible assets, net			411
		$	1,146

     The sale was completed on January 31, 2008.

Note 5 — Income Taxes

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

     The Company has incurred net operating losses for both federal and state purposes since inception and, as a result, the Company has paid no federal or state income tax. For the three and nine months ended December 31, 2007, the Company recorded an income tax expense of approximately $210,000 and an income tax benefit of $189,000, respectively. The income tax expense for the three months ended December 31, 2007 includes income tax expense of $273,000 for its Swiss subsidiary operating profits and a non-current tax benefit of approximately $63,000 for the tax effect of the amortization related to the intangible assets acquired in the Neurologic transaction which is not deductible and the tax benefit of operating losses for its United Kingdom subsidiary. The income tax benefit for the nine months ended December 31, 2007 includes an income tax benefit of $10,000 related to net operating losses for its Swiss subsidiary and a non-current tax benefit of $179,000 for the tax effect of the amortization related to the intangible assets acquired in the Neurologic transaction which is not deductible and the tax benefit of operating losses for its United Kingdom subsidiary.

     As of March 31, 2007, the Company had federal, state and foreign net operating loss carryforwards (“NOLs”) that are available to reduce future taxable income of approximately $35.5 million, $25.9 million and $0.9 million, respectively. The federal NOLs will expire at various dates beginning in 2012, state NOLs will expire beginning in 2008 and the foreign NOLs will expire beginning in 2013. The Company also has federal and state tax research and development credit carryforwards of approximately $1.1 million and $1.0 million, respectively. The federal tax credit carryforwards will expire beginning in 2012. The state tax credit carryforwards can be carried forward indefinitely. Due to the uncertainty of its ability to generate sufficient taxable income to realize the carryforwards prior to their expiration, the Company has recorded a valuation allowance at December 31, 2007 to offset its federal and state deferred tax assets.

Note 6 — Commitments and Contingencies

Indemnification

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

Litigation

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

FCPA investigation

     In August 2004, the Company identified certain payments made to physicians located in France, Germany, Spain and Turkey that are likely to have violated the Foreign Corrupt Practices Act (“FCPA”) and the laws of such countries as well as possibly the laws of Switzerland, where the Company’s Swiss subsidiary is located. The Company’s audit committee immediately directed internal legal counsel to conduct an internal investigation into these payments. In September 2004, the Company voluntarily disclosed to the United States Department of Justice (“DOJ”) the factual information obtained in the Company’s internal investigation of potential violations of the FCPA. In February 2005, the DOJ and the Company entered into an agreement pursuant to which the DOJ agreed not to prosecute the Company for conduct disclosed to the DOJ, provided that the Company accepted responsibility for the actions of its employees and officers, paid a monetary penalty of $450,000, continues to cooperate with the DOJ in its investigation, including the waiver of legal privileges, establishes policies and procedures to assure compliance with the FCPA and other relevant bribery laws, retains and pays for an independent monitor, which shall report to the DOJ for a period of three years to assure compliance with the agreement with the DOJ and the Company’s implementation and adherence to FCPA compliance policies and procedures, and cooperates fully with the DOJ, the independent monitor and the SEC. The Company must remain in compliance with these conditions for a period of two years following February 28, 2005 or face the filing of a criminal complaint by the DOJ. The independent monitor is assessing the Company’s compliance with the terms of the agreement, and the Company currently expects that the monitor will file his final report with the DOJ before the end of February 2008. The monetary penalty was accrued in fiscal 2005 and was paid in April 2005. The ongoing cost of compliance with the DOJ agreement will be recorded as an expense as incurred.

     The payments made to physicians in France, Germany, Spain and Turkey also may likely have violated the applicable laws in those foreign jurisdictions and may possibly have violated laws in Switzerland, where the Company’s Swiss subsidiary is located. The Company is not able to determine at this time what penalties or other sanctions, if any, authorities in France, Germany, Spain, or Turkey may impose as a result of such violations. Such amounts could be material to the financial position, results of operations or cash flows of the Company. The Company has been notified by the Swiss Federal Prosecutor that it does not intend to bring any action or impose any penalties on the Company relating to its activities in Switzerland.

Patent litigation

     In September 2004, Boston Scientific Corporation and Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation, (collectively “Boston Scientific”), filed a patent infringement suit in the United States District Court for the Northern District of California, alleging that the Company’s embolic coil products infringe two patents held by Boston Scientific and that this infringement is willful. Sales of the Company’s embolic coil products currently represent virtually all of the Company’s revenues. Boston Scientific is a large, publicly-traded corporation with significantly greater financial resources than the Company.

     In November 2004, the Company answered Boston Scientific’s complaint and counterclaimed, alleging that Boston Scientific’s embolic coil products, and their use, infringe three of the Company’s patents. In addition, the Company alleged that Boston Scientific has violated United States antitrust laws, and has violated certain California state laws by committing unfair business practices, disparaging its products, and interfering with its prospective economic advantage. In January 2005, Boston Scientific filed a motion to dismiss the Company claims for disparagement, interference with prospective economic advantage and unfair business practices. That motion has been fully briefed but no oral argument has been heard or scheduled and the Court has not ruled on the motion.

     In November 2006, the Company withdrew one of its three asserted patents from the litigation to pursue a reissue application filed with the United States Trademark and Patent Office (“USPTO”). Each party seeks an injunction preventing the making, using, selling, offering to sell, importing into the U.S. or exporting from the U.S., of the other’s embolic coil products in the United States, damages for past infringement, which may be trebled, and payment of its legal fees and costs. In addition, each party seeks a declaration that the patents of the other are invalid and not infringed and has alleged that certain of the asserted patents of the other are unenforceable due to inequitable conduct.

     Boston Scientific has also been a party in two other lawsuits against Cordis and ev3/Micro Therapeutics, Inc. (“ev3”) in which the Boston Scientific patents, which are the basis of Boston Scientific’s suit against the Company, are also at issue. An outcome of either of these lawsuits adverse to Cordis or ev3., and related to the same patent claims Boston Scientific asserts against the Company, could have an adverse impact on certain of the Company defenses in its litigation with Boston Scientific.

     In November, 2007, press reports reported that Boston Scientific and ev3 had reached settlement terms and would dismiss their lawsuits against each other with prejudice. The Company does not know if a final settlement agreement has been reached between Boston Scientific and ev3. On January 25, 2008, in the Cordis case, the district court granted Boston Scientific’s motion for summary judgment against Cordis that claims 10 and 35 of the ‘385 patent, and claims 1, 3, 7, 9, and 10 of the ‘498 patent, are not invalid for having been on-sale or in public use before the statutory bar period. Boston Scientific is asserting these same claims against the Company in its lawsuit with Boston Scientific and, like Cordis, the Company is alleging that these claims are invalid for having been on-sale or in public use before the statutory bar period.

     In October 2004, Cordis requested ex parte reexamination of certain claims in Boston Scientific’s ‘385 and ‘498 patents. In February 2006, the USPTO issued a Notice of Intent to Issue Ex Parte Reexamination Certificate for one of the two patents, apparently confirming all of the claims of that patent. In February 2006, the USPTO also issued an Office Action in which it apparently confirmed the patentability of certain of the claims in the second patent, but rejected the remainder.

     A hearing on claim construction was held on June 1, 2007. The Court has not issued a claim construction order or calendared any other dates.

Securities litigation

     On October 3, 2007, a purported securities class action complaint (the “Complaint”) was filed in the United States District Court for the Southern District of Florida against the Company and certain of its directors and officers (the “Defendants”). The Complaint alleges that the Company and the individual defendants made materially false and/or misleading statements or omissions in violation of the federal securities laws during the period of February 12, 2007 through September 16, 2007 (the “Class Period”). The Complaint seeks to recover damages on behalf of anyone who purchased or otherwise acquired the Company’s stock during the Class Period. On January 22, 2008, the Court appointed lead class plaintiff, and on February 6, 2008, plaintiffs filed their Consolidated Complaint. The Company intends to take all appropriate action in response to this lawsuit.

     The Company is unable at this time to determine the outcome of any such litigation. As such, no provision for any liability that may result upon resolution of these matters has been made in the accompanying financial statements. If the litigation is protracted or results in an unfavorable outcome to the Company, the impact to the financial position, results of operations or cash flows of the Company could be material.

Note 7 — Stock-based Compensation

Stock options

     The Company’s stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. The Company considers the stock option program critical to its operations and productivity. As of December 31, 2007, the Company has three stock option plans: the 1996 Stock Option Plan (the “1996 Plan”), the 1998 Stock Plan (the “1998 Plan”), and the 2005 Equity Incentive Plan (the “2005 Plan”). Currently, the Company grants options from the 2005 Plan, which permits the Company to grant options to all employees, including executive officers, and outside consultants, and directors. Effective June 16, 2005, no new options may be granted under the 1996 Plan or the 1998 Plan. As of December 31, 2007, there were no outstanding options under the 1996 Plan and 1,095,643 outstanding options under the 1998 Plan. As of December 31, 2007, there were 3,654,426 remaining shares reserved for issuance under the 2005 Plan, of which 1,251,005 were available for grant, 2,396,755 shares were subject to outstanding options and 6,666 shares were subject to outstanding restricted stock units. Stock options issued under the Company’s stock option plans generally vest based on 4 years of continuous service and have 10-year contractual terms.

2005 Employee stock purchase plan

     The 2005 Employee Stock Purchase Plan (the “Purchase Plan”) became effective upon the Company’s initial public offering. The Purchase Plan provides employees with an opportunity to purchase the Company’s common stock through accumulated payroll deductions. As of December 31, 2007, there were 503,679 shares reserved for issuance under the Purchase Plan.

Stock-based compensation

     On April 1, 2006, the Company adopted the provisions of SFAS 123R. The Company’s financial statements for the three and nine months ended December 31, 2007 and 2006 reflect the impact of SFAS 123R. The Company currently uses the Black-Scholes option pricing model to determine the fair value of employee stock options and employee stock purchase plan shares. The determination of the fair value of employee stock options and employee stock purchase plan shares has been estimated using the following weighted-average valuation assumptions:

			Three Months Ended								Nine Months Ended
			December 31,								December 31,
			2007				2006				2007				2006
Employee Stock Option Plans
Expected term (in years)				6				6				6				6
Volatility				41	%			45	%			41	%			45	%
Risk-free interest rate				4.0	%			4.6	%			4.4	%			4.7	%
Expected dividend yield				0	%			0	%			0	%			0	%
Weighted average fair value at date of grant			$	8.25			$	8.54			$	9.60			$	7.69
Employee Stock Purchase Plan
Expected term (in years)				0.5				0.5				0.5				0.5
Volatility				44	%			49	%			44	%			42	%
Risk-free interest rate				3.8	%			5.1	%			4.2	%			5.1	%
Expected dividend yield				0	%			0	%			0	%			0	%

     The fair value of each purchase right granted under the Company’s Purchase Plan during the three and nine months ended December 31, 2007 and 2006 was estimated at the date of grant using the Black-Scholes option pricing model, and is not subject to revaluation as a result of subsequent stock price fluctuations.

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Cost of goods sold		$	103			$	58			$	310			$	126
Research and development			151				55				379				117
Sales and marketing			379				178				932				467
General and administrative			651				366				1,737				628
Total		$	1,284			$	657			$	3,358			$	1,338

     Additionally, approximately $181,000 and $61,000 in stock-based compensation expense related to SFAS 123R has been capitalized in inventory as of December 31, 2007 and 2006, respectively.

     As of December 31, 2007, there was approximately $13.3 million of total stock-based compensation expense, after estimated forfeitures, related to unvested employee stock options and restricted stock units, which is expected to be recognized over an estimated weighted average amortization period of 2.6 years.

     Stock-based compensation expense recognized for the three months ended December 31, 2007 and 2006 related to the amortization of deferred stock-based compensation was $40,000 and $56,000, respectively. For the nine months ended December 31, 2007 and 2006, the amortization of deferred stock-based compensation expense was $139,000 and $168,000, respectively. The Company anticipates recording the remaining amortization of deferred stock-based compensation of $25,000 in the quarter ending March 31, 2008. This deferred stock-based compensation expense will be reduced in the period of forfeiture for any accrued but unvested compensation arising from early termination of an option holder’s services.

     In previous years, certain stock options were issued to non-employees, generally in exchange for consulting services related to patient studies or marketing analysis. The stock options are recorded at their fair value on the date of vesting and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated at each reporting date using the Black-Scholes option pricing model using the following assumptions:

		Three Months
		Ended				Nine Months Ended
		December 31,				December 31,
		2006				2007				2006
Expected term (in years)			5				5				5
Volatility			43	%			40	%			43	%
Risk-free interest rate			4.7	%			4.6	%			4.7	%
Expected dividend yield			0	%			0	%			0	%

     Stock-based compensation expense recognized for the three months ended December 31, 2007 and 2006 related to non-employee options was ($2,000) and $14,000, respectively. For the nine months ended December 31, 2007 and 2006, the stock-based compensation expense recognized related to non-employee options was $4,000 and $123,000, respectively. There were no unvested non-employee options for the three months ended December 31, 2007.

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Cost of goods sold		$	105			$	64			$	324			$	145
Research and development			151				55				379				135
Sales and marketing			382				190				943				578
General and administrative			684				418				1,855				771
Total		$	1,322			$	727			$	3,501			$	1,629

General stock option information

     The following table sets forth the summary of stock options activity for the nine months ended December 31, 2007:

						Weighted-				Remaining
						Average				Contractual				Aggregate
		Shares				Exercise				Term				Intrinsic Value
		(in thousands)				Price				(in years)				(in thousands)
Beginning outstanding at March 31, 2007			3,182			$	10.71
Granted			741			$	20.38
Exercised			(248	)		$	7.89
Forfeited			(182	)		$	15.77
Expired			(1	)		$	12.20
Ending outstanding at December 31, 2007			3,492			$	12.70				8.1			$	25,915
Options exercisable at December 31, 2007			1,510			$	8.51				7.2			$	16,883

     The total aggregate intrinsic value of options exercised during the three months ended December 31, 2007 and 2006 was $567,000 and $4.0 million, respectively. For the nine months ended December 31, 2007 and 2006, the total aggregate intrinsic value of options exercised was $3.3 million and $4.7 million, respectively. The market value of a share of the Company’s common stock as of December 31, 2007 was $19.68 per share as reported by The NASDAQ Stock Market.

     The options outstanding and currently exercisable by exercise price at December 31, 2007 are as follows (in thousands, except per share data):

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
						Remaining				Average								Average
Range of		Number				Contractual Life				Exercise				Number				Exercise
Exercise Prices		Outstanding				(years)				Price				Exercisable				Price
$0.68   - $1.01			106				4.1			$	0.81				106			$	0.81
$1.15   - $1.15			99				6.1			$	1.15				97			$	1.15
$5.63   - $8.44			739				7.0			$	5.68				560			$	5.65
$8.62   - $12.66			821				8.1			$	10.09				375			$	9.96
$12.72 - $18.37			942				8.7			$	15.73				314			$	14.73
$18.40 - $22.23			510				9.2			$	20.19				54			$	19.11
$22.35 - $24.75			275				9.3			$	23.86				4			$	22.35
$0.68   - $24.75			3,492				8.1			$	12.70				1,510			$	8.51

     The following table sets forth the summary of restricted stock units activity for the nine months ended December 31, 2007:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
						Purchase				Term				Intrinsic Value
		Shares				Price				(in years)				(in thousands)
Non-vested restricted stock units at March 31, 2007			10			$	—
Awarded			—			$	—
Released			(3	)		$	—
Forfeited			—			$	—
Non-vested restricted stock units at December 31, 2007			7			$	—				1.0			$	131

Note 8 – Technology Acquisition

ReVasc Technologies, Inc.

     On October 26, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”) with The Cleveland Clinic Foundation (“The Cleveland Clinic”) and ReVasc Technologies, Inc. (“ReVasc”), a wholly-owned subsidiary of The Cleveland Clinic, pursuant to which it acquired all of the outstanding stock of ReVasc from The Cleveland Clinic for an aggregate up-front purchase price of $1.0 million. Pursuant to the Agreement, the Company also agreed to pay The Cleveland Clinic up to an additional $5.0 million in payments upon the achievement of certain milestones set forth in the Agreement, with minimum milestone payments of at least $2.0 million due to The Cleveland Clinic upon the third anniversary of the closing of the purchase.

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

     The Company acquired only pre-regulatory approved technology and did not assume any other assets or liabilities in connection with the acquisition of ReVasc. Accordingly, the Agreement has been accounted for as a purchase of in-process research and development and $3.0 million, representing the up-front purchase price of $1.0 million plus future minimum milestone payments of $2.0 million, was recorded as research and development expense during the quarter ended December 31, 2007.

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

Note 9 — Segment and Geographic Information

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
United States		$	7,942			$	7,824			$	24,389			$	20,743
Japan			2,989				2,420				4,128				7,479
United Kingdom			2,333				1,508				6,853				4,464
Rest of the world			5,079				3,792				14,125				10,068
Total revenues		$	18,343			$	15,544			$	49,495			$	42,754

     The Company’s long lived assets by geographic area were as follows (in thousands):

		December 31,				March 31,
		2007				2007
United States		$	4,947			$	4,342
United Kingdom			115				120
Rest of the world			181				186
		$	5,243			$	4,648

     The Company identifies its operating segments based on how management views and evaluates the Company’s operations, which is primarily based on geographic location. For all periods presented, the Company operated in the following three business segments: the Americas, Europe and Asia Pacific. The products sold by each segment are substantially the same and the Company evaluates performance and allocates resources primarily based on revenues and gross profit. Revenues and gross profit for these segments were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Revenues:
Americas		$	9,077			$	8,457			$	27,015			$	22,554
Europe			6,074				4,423				17,464				12,115
Asia Pacific			3,192				2,664				5,016				8,085
Total		$	18,343			$	15,544			$	49,495			$	42,754
Gross Profit:
Americas		$	6,730			$	6,596			$	21,794			$	18,211
Europe			4,482				3,089				12,597				8,085
Asia Pacific			2,082				1,667				3,169				5,110
Total		$	13,294			$	11,352			$	37,560			$	31,406

     The Company’s total assets by operating segment were as follows (in thousands):

		December 31,				March 31,
		2007				2007
Americas		$	50,427			$	56,507
Europe			18,506				16,590
		$	68,933			$	73,097

Note 10 — Subsequent Events

     On January 16, 2008, the Company entered into a license, development and commercialization agreement with Genesis Medical Interventional, Inc. (“Genesis”). Under the terms of the agreement, the Company will license the rights to Genesis’s F.A.S.T. Funnel Catheter and clot retrieval system for the treatment of ischemic stroke. The transaction includes an initial upfront payment of $750,000, a future development milestone payment of $150,000 payable upon the earlier to occur of the date of first commercial sale or September 30, 2008 and royalty on potential future product sales.

     On January 31, 2008, the Company entered into an Asset Purchase and Supply Agreement (the “Purchase Agreement”) with Merit pursuant to which the Company sold its non-neurological cardiac and peripheral catheter assets and technology (the “Merit Transaction”). The majority of the assets sold were originally acquired by the Company in November 2006 in connection with its purchase of VasCon, LLC (“VasCon”). Under the terms of the Purchase Agreement, the Company also agreed to manufacture and supply certain guide catheters to Merit for a period of up to one year following the closing. Pursuant to the Purchase Agreement, the Company received an up-front payment of $1.5 million and will receive an additional $1.5 million upon the earlier to occur of the date that Merit can independently manufacture, validate and commercially produce certain guide catheters or the one year anniversary of the closing. In connection with the Merit Transaction, the Company also entered into a License Agreement granting Merit the right to use certain non-patented intellectual property in the cardiology and peripheral radiology fields and a Non-Competition Agreement, whereby the Company agreed not to engage in certain competitive business activities in the fields of cardiology and peripheral radiology for a period of five years.

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

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

Overview

     We develop, manufacture and market both implantable and disposable medical devices used in the treatment of cerebral vascular diseases. Our products are used by interventional neuroradiologists and neurosurgeons for the treatment of hemorrhagic and ischemic stroke. Both hemorrhagic and ischemic stroke are significant causes of death worldwide. Our product lines consist of endovascular systems that enable a physician to gain access to the brain in a minimally invasive manner through the vessels of the arterial system. We believe our products provide a safe and reliable alternative to more invasive neurosurgical procedures for treating aneurysms. Our proprietary three-dimensional, embolic coils are unique in that they automatically and rapidly deploy within an aneurysm, forming a scaffold that conforms to a wide diversity of aneurysm shapes and sizes. We also supply accessories for use with our microcoils and other products for the treatment of neurovascular disease including microcatheters, guidewires and stents. We plan on growing our business by continuing to penetrate our existing hemorrhagic and ischemic stroke markets, bringing new products and technologies to interventional neuroradiologists and neurosurgeons, and by entering new geographic territories such as Asia where we commenced selling our products in Japan through our distribution partner, Goodman, CO., LTD (“Goodman”) in March 2006. Additionally, on July 31, 2007, we entered into an exclusive distribution agreement with Beijing Tianxinfu Medical appliances Co., LTD (“TXF Medical”) to market our products in the Chinese market. We will begin distributing our products through TXF Medical in the Chinese market upon receiving regulatory approvals.

     Our revenues are derived primarily from sales of our microcoils. We also sell stents, access products and accessories for use with our microcoils, which accounted for approximately 5% of our revenues for both the third quarter and the first nine months of fiscal 2008. Geographically, our revenues are generally from sales to customers in the Americas, Europe and Asia. Our products are shipped from our facilities in the United States, Switzerland, United Kingdom, and a logistics facility in the Netherlands, to either hospitals or distributors. We invoice our customers upon shipment. In select hospitals, our products are held on consignment, and remain on site, free of charge until used.

     We anticipate that our cost of goods sold will generally increase in absolute dollars during those quarters in which our sales increase or we incur additional manufacturing costs in anticipation of the commercial introduction of new products. Furthermore, our gross margin percentage may decrease in those quarters in which we initiate sales of new products or product lines, or enter new geographic territories.

     Our product development efforts are primarily focused on expanding our current line of microcoils and broadening our product offerings in the hemorrhagic and ischemic stroke markets. In August 2004, we introduced our Cerecyte^® microcoil product line and we have launched eight new products in the last 24 months, including microcoils, stents, microcatheters and guidewires. During the first quarter of fiscal 2008, we introduced two new products — the Cashmere™ microcoil system and the ENZO™ deflectable microcatheter. The Cashmere™ is a stretch-resistant microcoil designed to provide stable framing or filling of aneurysms that may require a softer microcoil, such as those with irregular shapes or ruptured aneurysms. The ENZO™ deflectable microcatheter is designed to offer improved maneuverability through the brain’s tortuous vasculature and to enable in vivo repositioning of the microcatheter in the aneurysm, allowing physicians to more efficiently fill aneurysms, which may lead to improved outcomes. We intend to continue this product line expansion with the goal of continuing to increase our per-procedure revenue.

     We also intend to continue to expand our direct sales force in the United States and Europe as necessary and enter the Asian markets through distributors. In March 2006, we launched our sales and marketing efforts in Japan through our distributor, Goodman. We recorded product sales to Goodman of $2.2 million and $8.7 million in fiscal 2006 and 2007, respectively, and $4.1 million in the first nine months of fiscal 2008. Sales to Goodman have been lower than anticipated in the first nine months of fiscal 2008 as compared to the first nine months of fiscal 2007 due to regulatory approvals delay in Japan. In December 2007, we received regulatory approval to sell our stretch-resistant microcoils in Japan. We continue to work with regulatory officials in Japan to gain approval for our Cerecyte^® microcoils. The delay in these product approvals has had an adverse impact on the revenues previously anticipated from sales in Japan for fiscal 2008. Goodman is required to purchase a minimum of $5.5 million of Micrus products during fiscal 2008 and they have purchased regulatory approved products in the amount of $4.1 million which we have recognized as revenue during the first nine months of fiscal 2008. We are also preparing to enter the Chinese market and have selected TXF Medical to be our distributor in China. We will begin selling our products in China upon receiving regulatory approvals. However, the timing of these approvals are uncertain due to a pending review by the Chinese State Food and Drug Administration (SFDA) of drug and medical device approvals granted during the term of the former SFDA minister. We believe this review process along with more stringent approval procedures will delay review and approval of applications for new products. Therefore, we do not expect to recognize revenues from sales in China this fiscal year.

     We currently anticipate that the broadening of our product line, the worldwide expansion of our direct sales force and our entry into the Asian market will be primarily funded with our currently available cash and cash expected to be generated from product sales.

     We introduced our first proprietary, three-dimensional microcoil in May 2000. Our revenues have grown from $1.8 million in fiscal 2001 to $58.8 million in fiscal 2007. Our revenues were $49.5 million in the first nine months of fiscal 2008.

     Since inception, we have been unprofitable. We have incurred net losses of $6.7 million in fiscal 2005, $8.3 million in fiscal 2006, $5.5 million in fiscal 2007 and $10.1 million in the first nine months of fiscal 2008. As of December 31, 2007, we had cash and cash equivalents of $25.3 million. We believe that our current cash position and the cash expected to be generated from product sales will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. There is no assurance that we will be profitable in the foreseeable future as we expand our manufacturing and sales activities and expand geographically. As of December 31, 2007, we had an accumulated deficit of $65.2 million.

Recent Developments

     On July 31, 2007, we entered into a five-year, exclusive distribution agreement with TXF Medical. Under the terms of the distribution agreement, TXF Medical will promote and market our full line of products, as such products are approved, in China and is required to purchase a minimum of $53.5 million of such products over the five year term of the agreement commencing upon regulatory approvals in order to maintain its exclusive distributor status in China, ranging from $2.5 million during fiscal 2008 to $16.5 million during fiscal 2012. We will begin distributing our products through TXF Medical in the Chinese market upon receiving regulatory approvals.

     On October 26, 2007, we entered into a Stock Purchase Agreement (the “Agreement”) with The Cleveland Clinic Foundation (“The Cleveland Clinic”) and ReVasc Technologies Inc. (“ReVasc”), a wholly-owned subsidiary of The Cleveland Clinic, pursuant to which we acquired all of the outstanding stock of ReVasc from The Cleveland Clinic for an aggregate up-front purchase price of $1.0 million. Pursuant to the Agreement, we also agreed to pay The Cleveland Clinic up to an additional $5.0 million in payments upon the achievement of certain milestones set forth in the Agreement, with minimum milestone payments of at least $2.0 million due to The Cleveland Clinic upon the third anniversary of the closing of the purchase.

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

     We acquired only pre-regulatory approved technology and did not assume any other assets or liabilities in connection with the acquisition of ReVasc. Accordingly, the Agreement has been accounted for as a purchase of in-process research and development and $3.0 million, representing the up-front purchase price of $1.0 million plus future minimum milestone payments of $2.0 million, was recorded as research and development expense during the third quarter of fiscal 2008.

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

     On January 16, 2008, we entered into a license, development and commercialization agreement with Genesis Medical Interventional, Inc. (“Genesis”). Under the terms of the agreement, we will license the rights to Genesis’s F.A.S.T. Funnel Catheter and clot retrieval system for the treatment of ischemic stroke. The transaction includes an initial upfront payment of $750,000, a future development milestone payment of $150,000 payable upon the earlier occurrence of the date of first commercial sale or September 30, 2008 and royalty on potential future product sales.

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

     On January 31, 2008, we entered into an Asset Purchase and Supply Agreement (the “Purchase Agreement”) with Merit Medical Systems, Inc. (“Merit”) pursuant to which we sold our non-neurological cardiac and peripheral catheter assets and technology (the “Merit Transaction”). The majority of the assets sold were originally acquired by us in November 2006 in connection with our purchase of VasCon, LLC (“VasCon”). Under the terms of the Purchase Agreement, we also agreed to manufacture and supply certain guide catheters to Merit for period of up to one year following the closing. Pursuant to the Purchase Agreement, we received an up-front payment of $1.5 million and will receive an additional $1.5 million upon the earlier to occur of the date that Merit can independently manufacture, validate and commercially produce certain guide catheters or the one year anniversary of the closing. In connection with the Merit Transaction, we also entered into a License Agreement granting Merit the right to use certain non-patented intellectual property in the cardiology and peripheral radiology fields and a Non-Competition Agreement, whereby we agreed not to engage in certain competitive business activities in the fields of cardiology and peripheral radiology for a period of five years.

Results of Operations

     The following table sets forth the results of our operations, expressed as percentages of revenues, for the three and nine months ended December 31, 2007 and 2006:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Consolidated Statement of Operations Data:
Revenues			100	%			100	%			100	%			100	%
Cost of goods sold			28	%			27	%			24	%			27	%
Gross profit			72	%			73	%			76	%			73	%
Operating expenses:
Research and development			30	%			11	%			21	%			14	%
Sales and marketing			41	%			39	%			43	%			40	%
General and administrative			33	%			34	%			36	%			33	%
Total operating expenses			104	%			84	%			100	%			87	%
Loss from operations			(32	%)			(11	%)			(24	%)			(14	%)
Interest and investment income			2	%			3	%			2	%			3	%
Interest expense			0	%			0	%			0	%			0	%
Other income, net			0	%			2	%			1	%			1	%
Loss before income taxes			(30	%)			(6	%)			(21	%)			(10	%)
Provision for (benefit of) income taxes			1	%			0	%			(0	%)			0	%
Net loss			(31	%)			(6	%)			(21	%)			(10	%)

Three Months Ended December 31, 2007 and 2006

Revenues

		Three Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Americas		$	9,077			$	8,457			$	620				7	%
Europe			6,074				4,423				1,651				37	%
Asia Pacific			3,192				2,664				528				20	%
Total Revenues		$	18,343			$	15,544			$	2,799				18	%

     Our revenues are derived primarily from sales of our microcoils used in the treatment of cerebral vascular diseases. We also sell stents, access products and accessories for use with our microcoils, which accounted for 5% of our revenues for the third quarter of fiscal 2008. The increase in total revenues in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 was due to an increase in the number of microcoil products sold in the third quarter of fiscal 2008 as compared to the same period in fiscal 2007. In December 2007, we received regulatory approval to sell our stretch-resistant microcoils in Japan. We continue to work with regulatory officials in Japan to gain approval for our Cerecyte^® microcoils. We sold $3.0 million of our regulatory approved products in Japan in the third quarter of fiscal 2008. Our distributor, Goodman, is required to purchase a minimum of $5.5 million of Micrus products during fiscal 2008 and they have purchased regulatory approved products in the amount of $4.1 million which we have recognized as revenue during the first nine months of fiscal 2008.

     We introduced two new products, the Cashmere™ microcoil system and the ENZO™ deflectable microcatheter in fiscal 2008. Products introduced in the past 24 months comprised 24% of our revenues in the third quarter of fiscal 2008.

     Revenues from our non-embolic and accessories products were $0.9 million in the third quarter of fiscal 2008 compared with revenues of $399,000 in the third quarter of fiscal 2007. We expect our embolic and non-embolic sales to increase in the future as a result of market growth, continued market penetration of products released during the past two years and the introduction of new products.

     We are also preparing to enter the Chinese market through our distribution partner, TXF Medical. We will begin selling our products in China upon receiving regulatory approvals. However, the timing of product approvals in China will be delayed due to a pending review by the SFDA of drug and medical device approvals granted during the term of the former SFDA minister. We currently believe this review process along with more stringent approval procedures will delay review and approval of applications for new products. Therefore, we do not expect to recognize revenues from sales in China this fiscal year.

Gross Profit

		Three Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Cost of goods sold		$	5,049			$	4,192			$	857				20	%
Gross profit			13,294				11,352				1,942				17	%

     Cost of goods sold consists primarily of materials, direct labor, depreciation, overhead costs associated with manufacturing, impairments of inventory, warranty expenses, amortization of intangible assets that were acquired by us as part of the acquisition of VasCon, amortization of capitalized license technology associated with our stent product and royalties related to certain access device products. The increase in cost of goods sold during the third quarter of fiscal 2008 as compared to the third quarter of fiscal 2007 was primarily due to an increase of $364,000 resulting from an increase in sales of our products as well as an increase of $176,000 in provision for excess and expired inventories resulting from slower consignment inventory turns, an increase of $110,000 in amortization of intangible assets and an increase of $58,000 in royalties. Cost of goods sold in the third quarter of fiscal 2008 and 2007 includes $177,000 and $68,000, respectively, related to the amortization of intangibles acquired from the acquisition of VasCon on November 30, 2006.

     Gross margin was 72% in the third quarter of fiscal 2008 and 73% in the third quarter of fiscal 2007. The decrease was primarily due to an increase in provision for excess and expired inventories resulting from slower consignment inventory turns, an increase in amortization of intangible assets resulting from the acquisition of VasCon and higher distributor sales of lower margin products primarily in Japan and certain European markets. We expect our gross margin to fluctuate in future periods based on the mix of our product sales.

Operating Expenses

Research and Development

		Three Months Ended
		December 31								Change
(Dollars in thousands)		2007				2006				$				%
Research and development		$	5,553			$	1,769			$	3,784				214	%

     Research and development expenses consist primarily of costs associated with the design, development, and testing of new products. Such costs are expensed as they are incurred and include salaries and related personnel costs, fees paid to outside consultants, and other direct and indirect costs related to research and product development. Research and development expenses increased in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 primarily due to a charge of $3.0 million for in-process research and development in connection with the acquisition of ReVasc to obtain the rights to pre-regulatory approved revascularization technology. In addition, there was an increase of $364,000 related to increased headcount, an increase of $166,000 in product testing and related consulting expense, as well as an increase of $96,000 in stock-based compensation expense. In the third quarter of fiscal 2008 and 2007, approximately 9% and 3%, respectively, of our research and development costs were attributable to our subsidiary, Micrus Design Technology Inc. (“MDT”), formed on November 30, 2006 in connection with the acquisition of VasCon.

     We expect our base research and development expense to increase in absolute dollars in future periods as we hire additional development personnel, continue work on product developments, and expand our existing product line.

Sales and Marketing

		Three Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Sales and marketing		$	7,530			$	5,992			$	1,538				26	%

     Sales and marketing expenses consist primarily of compensation costs of our direct sales force and marketing personnel, as well as overhead costs related to these activities. Also included are costs associated with promotional literature and videos, trade show participation, and education and training of physicians. Sales and marketing expenses increased in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 primarily due to an increase of $1.0 million in travel and personnel costs due to an increase in sales and marketing personnel in the United States, Europe and Asia, an increase of $436,000 in sales incentives resulting from higher level of sales and changes in the sales compensation structure, an increase of $222,000 in product marketing costs, as well as an increase of $192,000 in stock-based compensation expense. These increases were partially offset by an aggregate decrease of $403,000 in tradeshow, market research, consulting and graphic design costs. We anticipate that sales and marketing expenses will increase in absolute dollars in future periods as we continue to increase the size of our direct sales force and clinical support group, increase spending on additional sales and marketing programs and expand into additional geographic territories.

General and Administrative

		Three Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
General and administrative		$	6,076			$	5,273			$	803				15	%

     General and administrative expenses consist primarily of compensation and related costs for finance, human resources, facilities, information technology, insurance, and professional services. Professional services are principally comprised of outside legal, audit, Sarbanes Oxley compliance and information technology consulting. General and administrative expenses increased in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 primarily due to an increase of $0.6 million related to higher finance and administrative personnel costs due to increased headcount, as well as an increase of $266,000 in stock-based compensation expense. In the third quarter of fiscal 2008 and 2007, approximately 7% and 2%, respectively, of our general and administrative costs were attributable to our subsidiary, MDT, formed on November 30, 2006 in connection with the acquisition of VasCon. As we incur additional expenses associated with being a public company and to the extent our business expands, we expect that general and administrative expenses will increase in absolute dollars in future periods.

Other Income, Net

		Three Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Interest and investment income		$	304			$	426			$	(122	)			(29	%)
Interest expense			—				(5	)			5				—
Other income, net			67				221				(154	)			(70	%)
Total other income, net		$	371			$	642			$	(271	)			(42	%)

     Other income, net consists primarily of investment income and foreign currency gains and losses. Total other income, net decreased in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 primarily due to higher foreign exchange losses related to a loan made to Micrus SA and a decrease in interest and investment income resulting from lower average cash and investment balances earning interest, partially offset by an increase in foreign exchange gains resulting from differences in exchange rates between the time of the recording of the transaction and settlement of foreign currency denominated receivables and payables.

Income Taxes

     Effective April 1, 2007, we adopted FIN 48, which requires that we recognize the financial statement effects of a tax position when it becomes more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result of the implementation of FIN 48, we recognized a $192,000 increase in our unrecognized tax benefits. None was accounted for as an increase in the April 1, 2007 balance of accumulated deficit since the benefit relates to attribute carryovers for which the related deferred tax asset was subject to a full valuation allowance. At the adoption date of April 1, 2007 and at December 31, 2007, we had no accrued interest or penalties related to tax contingencies. Since the unrecognized tax benefit relates to attribute carryover for which the related deferred tax asset was subject to a full valuation allowance, the recognition of the unrecognized tax benefits will not affect our effective tax rate. We have elected to include interest and penalties as a component of tax expense. We do not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at March 31, 2007 will significantly increase or decrease within the next 12 months. Because of net operating loss and credit carryforwards, substantially all of our tax years, dating to inception in 1996, remain open to federal tax examination. Most state and foreign jurisdictions have 3 to 10 open tax years at any point in time.

     We have incurred net operating losses for both federal and state purposes since inception and, as a result, we have paid no federal or state income tax. In the third quarter of fiscal 2008, we recorded an income tax expense of approximately $210,000. The income tax expense includes income tax expense of $273,000 for our Swiss subsidiary’s operating profits and a non-current tax benefit of approximately $63,000 for the tax effect of the amortization related to the intangible assets acquired in the Neurologic transaction which is not deductible and the tax benefit of operating losses for our United Kingdom subsidiary.

     As of March 31, 2007, we had federal, state and foreign NOLs that are available to reduce future taxable income of approximately $35.5 million, $25.9 million and $0.9 million, respectively. The federal NOLs will expire at various dates beginning in 2012, state NOLs will expire beginning in 2008 and the foreign NOLs will expire beginning in 2013. We also have federal and state tax research and development credit carryforwards of approximately $1.1 million and $1.0 million, respectively. The federal tax credit carryforwards will expire beginning in 2012. The state tax credit carryforwards can be carried forward indefinitely. Due to the uncertainty of our ability to generate sufficient taxable income to realize the carryforwards prior to their expiration, we have recorded a valuation allowance at December 31, 2007 to offset our federal and state deferred tax assets.

Nine Months Ended December 31, 2007 and 2006

Revenues

		Nine Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Americas		$	27,015			$	22,554			$	4,461				20	%
Europe			17,464				12,115				5,349				44	%
Asia Pacific			5,016				8,085				(3,069	)			(38	%)
Total Revenues		$	49,495			$	42,754			$	6,741				16	%

     The increase in total revenues in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007 was due to an increase in the number of microcoil products sold, an increase in revenues from our Latin American distributors due to higher collections and to a lesser extent an increase in average selling price of our microcoil products sold. Total revenues in the first nine months of fiscal 2008 increased primarily due to the introduction of new products including microcoils and microcatheter products. This increase was partially offset by a decrease in revenues from Asia Pacific. Revenues from Asia Pacific were $5.0 million in the first nine months of fiscal 2008, and included sales of $4.1 million to our distributor in Japan, compared with revenues of $8.1 million for the same period in the prior year, which included sales of $7.5 million to our distributor in Japan. The decline in revenues from Japan was primarily a result of product approvals delay in Japan. In December 2007, we received regulatory approval to sell our stretch-resistant microcoils in Japan. We continue to work with regulatory officials in Japan to gain approval for our Cerecyte^® microcoils. The delay in these product approvals has had an adverse impact on the revenues previously anticipated from sales in Japan for fiscal 2008. Our distributor in Japan is required to purchase a minimum of $5.5 million of Micrus products during fiscal 2008 and they have purchased regulatory approved products in the amount of $4.1 million which we have recognized as revenue during the first nine months of fiscal 2008.

     We introduced two new products, the Cashmere™ microcoil system and the ENZO™ deflectable microcatheter in fiscal 2008. Products introduced in the past 24 months comprised 18% of our revenues in the first nine months of fiscal 2008.

     Revenues from our non-embolic and accessories products were $2.5 million in the first nine months of fiscal 2008 compared with revenues of $0.8 million in the first nine months of fiscal 2007.

     We are also preparing to enter the Chinese market through our distribution partner, TXF Medical. We will begin selling our products in China upon receiving regulatory approvals. However, the timing of product approvals in China will be delayed due to a pending review by the SFDA of drug and medical device approvals granted during the term of the former SFDA minister. We believe this review process along with more stringent approval procedures will delay review and approval of applications for new products. Therefore, we do not expect to recognize revenues from sales in China this fiscal year.

Gross Profit

		Nine Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Cost of goods sold		$	11,935			$	11,348			$	587				5	%
Gross profit			37,560				31,406				6,154				20	%

     The increase in cost of goods sold during the first nine months of fiscal 2008 as compared to the first nine months of fiscal 2007 was primarily due to an increase of $458,000 in provision for excess and expired inventories resulting from slower consignment inventory turns, an increase of $0.6 million in amortization of intangible assets and an increase of $125,000 in royalties, partially offset by manufacturing efficiencies that have lowered per unit costs. The cost of goods sold in the first nine months of fiscal 2008 and 2007 includes $0.6 million and $68,000, respectively, related to the amortization of intangibles acquired from the acquisition of VasCon on November 30, 2006 and $168,000 and $56,000, respectively, related to the amortization of capitalized license fees which we started to amortize in the third quarter of fiscal 2007 when we began selling the Pharos™ stent product.

     Gross margin was 76% in the first nine months of fiscal 2008 and 73% in the first nine months of fiscal 2007. The increase was primarily due to an increase in revenue from sales of higher margin products as well as increased manufacturing efficiencies that have lowered per unit costs, and fewer distributor sales of lower margin products primarily as a result of lower product sales to Japan in the first nine months of fiscal 2008.

Operating Expenses

Research and Development

		Nine Months Ended
		December 31,								Change
(Dollars in thousands)		2007				2006				$				%
Research and development		$	10,135			$	6,025			$	4,110				68	%