system, consists of a proprietary radio-frequency or RF generator and proprietary disposable endovenous catheters and devices to close diseased veins through the application of temperature-controlled RF energy. As of December 31, 2007, we estimated that in excess of 300,000 patients had been treated using our Closure system since 1999.
We market our Closure system through a direct sales organization in the United States and France and subsidiaries in Germany and the United Kingdom. We also market and sell our products through distributors throughout the world.
Most of our U.S. customers are reimbursed by governmental and third-party payors, and that reimbursement is subject to periodic review and adjustment. Currently, our Closure procedure is covered by the policies of approximately 140 health insurers, representing over 220 million covered lives in the United States. We have a diverse customer base of hospitals, physicians and physician groups.
Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we re-evaluate our judgments and estimates, including those related to doubtful accounts, income taxes and loss contingencies. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that are believed to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies.
We believe the following critical accounting policies reflect our most significant estimates, judgments and assumptions used in the preparation of our consolidated financial statements:
• Revenue recognition;

• Valuation of inventory;

• Warranty;

• Allowance for doubtful accounts;

• Income taxes; and

• Share-based compensation expense.

For more information, see "Critical Accounting Policies and Estimates" included in our Annual Report on Form 10-K for the year ended December 31, 2007. As of June 30, 2008, we have not identified any significant changes to these critical accounting policies discussed in our "Critical Accounting Policies and Estimates", except as described below.
Royalty Revenue Recognition. The Company recognizes royalty revenues in accordance with SAB No. 104 , Revenue Recognition. SAB 104 requires there to exist persuasive evidence of an arrangement, transfer of title, fixed or determinable price and reasonably assured collectability. We use negotiated royalty licensing agreements to determine the existence of an arrangement and transfer of title. Royalty licensing agreements typically cover products shipped by the licensee after the date that the license agreement has been entered into and until the patent has expired or when the agreement expires, whichever is shorter. The Company's royalties are computed at a fixed price per unit shipped, are paid quarterly in arrears and recognized as revenue at the time the amount of the quarterly royalty payment becomes determinable and collection is reasonably assured.

Financial Operations Overview
Net Revenues. We derive our net revenues from net product revenues and royalty revenues. Net product revenues are derived from the sale of disposable endovenous catheters and devices, RF generators and accessory products. Our large installed base of RF generators facilitates a recurring revenue stream from the sale of disposable catheters. Royalty revenues are derived from licensing our patents which describe methods of vein ablation.
Cost of Revenues. Our cost of revenues represents the cost of materials, overhead, direct labor and delivery charges associated with the manufacture of disposable catheters, the purchase and delivery of RF generators, the purchase and delivery of accessory products, warranty, inventory reserves and share-based compensation.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of personnel expenses, sales force incentive compensation, travel, promotional materials, advertising, patient education materials, other expenses incurred to provide reimbursement services, clinical training and share-based compensation.
Research and Development Expenses. Research and development expenses consist primarily of personnel expenses, supplies, materials and other expenses associated with product development, expenses associated with preclinical and clinical studies and share-based compensation.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration, professional fees and share-based compensation.
Results of Operations
Net Revenues by Period
The following table sets forth our net revenues for the three and six months ended June 30, 2008 and 2007, and the percentage change in net revenues between periods:

                               Three months ended                                  Six months ended
                                    June 30,                                           June 30,
                              2008             2007           % Change           2008            2007           % Change

Net product revenues       $   21,516        $ 17,189                25 %      $ 40,392        $ 32,838                23 %
Royalty revenues               10,402               -                NA          10,402               -                NA

Net revenues               $   31,918        $ 17,189                86 %      $ 50,794        $ 32,838                55 %

Net revenues increased in the three months ended June 30, 2008 as compared to the same period in 2007 primarily due to:
• increased catheter sales in both units (38% increase in the second quarter of 2008 versus the comparable period in 2007) and dollars ($4.0 million increase in the second quarter of 2008 versus the comparable period in 2007) due to increased demand for the ClosureFAST catheter and ClosureRFS device;

• increased accessory product sales in both dollars and units directly related to products used in the performance of our Closure procedure; and

• recognition of $10.4 million of royalty revenues in connection with the settlement of certain patent infringement claims (Note 3).

Net revenues increased in the six months ended June 30, 2008 as compared to the same period in 2007 primarily due to:
• increased catheter unit sales in both units (44% increase in the six months ended June 30, 2008 versus the comparable period in 2007) and dollars ($8.1 million increase in the six months ended June 30, 2008 versus the comparable period in 2007) due to increased demand for the ClosureFAST catheter and ClosureRFS device; and

• increased accessory product sales in both dollars and units directly related to products used in the performance of our Closure procedure; and

• recognition of $10.4 million of royalty revenues in connection with the settlement of certain infringement claims (Note 3); partially offset by,

• decreased RF generator revenue in the six months ended June 30, 2008 versus the comparable period in 2007 due to net recognition of $2.0 million of RF generator revenue deferred in 2006 related to a promised software upgrade and recognized in the first six months of 2007.

We expect net product revenues for the three months ended September 2008 to be in line with the results reported for the three months ended June 30, 2008 due to seasonality effects and to increase in the fourth quarter ending December 31, 2008 as a result of continued market acceptance of our ClosureFAST catheter in both domestic and international markets. Beginning in the third quarter of 2008, royalty revenues will reflect royalties owed as reported by the licensees for shipments during the related quarter. We expect royalty revenues to be 5 to 6% of total net revenues for the remainder of 2008. Net Product Revenues by Product
The following table sets forth the percentage of net product revenues derived from the sale of disposable endovenous catheters and devices, RF generators and accessories for the three and six months ended June 30, 2008 and 2007:

                                      Three months ended          Six months ended
                                           June 30,                   June 30,
                                      2008           2007         2008         2007

           Catheters and devices         76 %           72 %         77 %        70 %
           RF generators                 10             14           10          17
           Accessories                   14             14           13          13

                                        100 %          100 %        100 %       100 %

We derive our net product revenues from the sale of disposable endovenous catheters and devices, RF generators and accessory products. Our large installed base of RF generators facilitates a recurring revenue stream from the sale of disposable catheters. The change in product mix as a percentage of net product revenue in the three and six months ended June 30, 2008 as compared to the same period in 2007 resulted from the recognition of $2.0 million of RF generator revenue in the first two quarters of 2007 which had been deferred in 2006. The Company anticipates catheters and devices and accessories will continue to account for a greater percentage of net revenues as our large installed base of RF generators facilitates a recurring revenue stream from the sale of disposable catheters and accessories.

Net Revenues by Geographic Region as a Percentage of Net Revenues The following table sets forth the percentage of net revenues from domestic and international sales for the three and six months ended June 30, 2008 and 2007:

                                   Three months ended          Six months ended
                                        June 30,                   June 30,
                                   2008           2007         2008         2007

             United States            92 %           93 %         90 %        94 %
             Europe and other          8              7           10           6

                                     100 %          100 %        100 %       100 %

We market our Closure system through a direct sales organization in the United States and France and subsidiaries in Germany and the United Kingdom. We also market and sell our products through distributors throughout the world. In 2007, we experienced an increase in net revenues as a percentage of total net revenues from sources outside the U.S., primarily due to the addition of a direct sales presence in the United Kingdom in 2007. We expect our net revenues derived from sales outside the United States to continue to increase in 2008 primarily related to increasing customer demand and international expansion. Gross Profit by Period
The following table sets forth our gross profit for the three and six months ended June 30, 2008 and 2007, and the percentage change between periods:

Three months ended Six months ended June 30, June 30, 2008 2007 % Change 2008 2007 % Change

Gross profit $ 24,469 $ 10,359 136 % $ 36,955 $ 20,914 77 %

Gross profit margin for the three months ended June 30, 2008 was approximately 76.6% compared with approximately 60.3% for the same period in 2007. Gross profit margin for the six months ended June 30, 2008 was approximately 72.8% compared with approximately 63.7% for the same period in 2007. The overall increase in gross profit margin for both periods was primarily due to:
• The recognition of $10.4 million of royalty revenues in the second quarter of 2008 with no associated cost of revenue (Note 3).

• Higher margin of ClosureFAST catheters in 2008 as compared to 2007. This is the result of improvements to the initial manufacturing inefficiencies in 2007 associated with launching a new product.

Assuming we are able to meet forecasted manufacturing efficiency targets associated with ClosureFAST catheter production and do not experience reductions in average sales price, we expect gross margins for 2008 to range from 70.5% to 70.7%.

Operating Expenses by Period

                                      Three months ended                                   Six months ended
                                           June 30,                                            June 30,
                                    2008              2007           % Change           2008              2007           % Change

Sales and marketing              $  7,261          $  6,470              12 %        $ 14,416          $ 12,975              11 %
Research and development            2,573             2,504               3 %           5,042             4,910               3 %
General and administrative          5,543             4,440              25 %           9,794             8,901              10 %

                                 $ 15,377          $ 13,414              15 %        $ 29,252          $ 26,786               9 %

Operating Expenses as a Percent of Net Revenues

                                        Three months ended         Six months ended
                                             June 30,                  June 30,
                                        2008          2007         2008         2007

        Sales and marketing               23 %          38 %         28 %          40 %
        Research and development           8 %          15 %         10 %          15 %
        General and administrative        17 %          26 %         19 %          27 %

Operating Expense Summary
Overall operating expenses increased $1,963,000 in the three months ended June 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $1,829,000 due to increased headcount and related expense (including share-based compensation) over the prior year;

• an increase of $411,000 due to Diomed due diligence legal expenses;

• an increase of $411,000 due to increases in general and international expenditures; and

• an increase of $266,000 in travel and professional fee expenditures; partially offset by

• a decrease of $154,000 in consulting fees;

• a decrease of $685,000 in certain clinical research and marketing expenses; and

• a decrease of $476,000 in patent litigation expense.

Overall operating expenses increased $2,466,000 in the six months ended June 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $2,732,000 due to increased headcount and related expense (including share-based compensation) over the prior year;

• an increase of $418,000 due to increases in general and international expenditures; and

• an increase of $446,000 in travel and professional fee expenditures; partially offset by

• a decrease of $262,000 in consulting fees;

• a decrease of $645,000 in certain clinical research and marketing expenses;

• a decrease of $178,000 in bad debt expense; and

• a decrease of $290,000 in patent litigation expense.

Overall operating expenses as a percentage of net revenues decreased as the Company continues to leverage its cost structure to support growth in net revenues.
Sales and Marketing Expenses
Sales and marketing expenses increased $791,000 in the three months ended June 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $780,000 due to increased payroll and related expense (including share-based compensation);

• an increase of $130,000 in travel expenses; and

• an increase of $122,000 in expenses associated with international operations and expansion; partially offset by

• a decrease of $337,000 in marketing programs, primarily advertising.

Sales and marketing expenses increased $1,441,000 in the six months ended June 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $1,239,000 due to increased payroll and related expense (including share-based compensation);

• an increase of $269,000 in travel expenses; and

• an increase of $112,000 in expenses associated with international operations and expansion, partially offset by

• a decrease of $340,000 in marketing programs, primarily advertising.

We expect sales and marketing related expenses to increase in absolute dollars in 2008 but to decrease as a percentage of net revenues as compared to 2007.
Research and Development Expenses
Research and development expenses were comparable in the three months ended June 30, 2008, as compared to the same period in 2007; however, the components of research and development expenses varied by period as follows:
• an increase of $706,000 due to increased headcount and related expense (including share-based compensation); partially offset by

• a decrease of $348,000 in clinical study expense; and

• a decrease of $154,000 in outside consulting fees.

Research and development expenses increased $132,000 in the six months ended June 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $910,000 due to increased headcount and related expense (including share-based compensation); partially offset by

• a decrease of $305,000 in clinical study expense; and

• a decrease of $262,000 in outside consulting fees.

We expect research and development expenses to increase in absolute dollars in 2008 but to decrease as a percentage of net revenues as compared to 2007. General and Administrative Expenses
General and administrative expenses increased $1,103,000 in the three months ended June 30, 2008, as compared to same period in 2007, primarily due to:
• an increase of $411,000 due to Diomed due diligence legal expenses;

• an increase of $343,000 due to increased payroll and related expense (including share-based compensation);

• an increase of $289,000 in general business expenses; and

• an increase of $136,000 due to increased professional fees and travel partially offset by;

• a decrease of $476,000 in patent litigation expenses.

General and administrative expenses increased $893,000 in the six months ended June 30, 2008, as compared to the same period in 2007, primarily due to:
• an increase of $583,000 due to increased payroll and related expense (including share-based compensation);

• an increase of $306,000 in general business expenses; and

• an increase of $177,000 in professional fees and travel; partially offset by,

• a decrease of $178,000 in bad debt expense; and

• a decrease of $290,000 in patent litigation and related Diomed due diligence legal expenses.

We expect general and administrative expenses to decrease in absolute dollars and as a percentage of net revenues in 2008 as compared to 2007. Interest Income and Other, Net
Interest income and other, net, decreased to $279,000 in the three months ended June 30, 2008 from $751,000 for the same period in 2007, primarily due to:
• a decrease of $146,000 in foreign currency translation gains related to the translation of foreign currency denominated cash and receivable balances held by the Company into U.S. dollars; and

• a decrease of $326,000 in interest income related to decreases in short-term interest rates.

Interest income and other, net, decreased to $1,217,000 in the six months ended June 30, 2008 from $1,624,000 for the same period in 2007, primarily due to:
• an increase of $227,000 in foreign currency translation gains related to the translation of foreign currency denominated cash and receivable balances held by the company into U.S. dollars; partially offset by

• a decrease of $634,000 in interest income related to an overall decrease in short-term interest rates.

We expect interest income and other, net to decrease in absolute dollars and as a percentage of net revenues in 2008 as compared to 2007. Provision for Income Taxes
Provision for income tax was $524,000 in the three months ended June 30, 2008 for anticipated annual minimum tax payments for Federal and certain state purposes in the United States, and foreign tax expense. Provision for income tax was $8,000 for three months ended June 30, 2007, primarily related to foreign taxes.
Provision for income tax was $493,000 in the six months ended June 30, 2008 for anticipated annual minimum tax payments for Federal and certain state purposes in the United States, and foreign tax expense. Provision for income tax was $18,000 for six months ended June 30, 2007, primarily related to foreign taxes.
We expect the tax provision rate will remain constant at 5.6% for the remainder of 2008.

Liquidity and Capital Resources

                                                  As of
                                        June 30,      December 31,
                                          2008            2007         $ Change
                                                     (in thousands)
           Cash and cash equivalents   $  44,079      $    39,269     $   4,810
           Short-term investments      $  30,613      $    24,067     $   6,546
           Working capital             $  82,308      $    71,001     $  11,307



                                                              Six Months Ended
                                                                  June 30,
                                                             2008          2007
                                                               (in thousands)
    Net cash provided by (used in) operating activities   $  11,447     $  (3,540 )
    Net cash (used in) provided by investing activities   $  (7,198 )   $   2,876
    Net cash provided by financing activities             $     566     $     820

We incurred net losses from inception through June 30, 2008 of $40.1 million. We currently invest our cash and cash equivalents in several large money market funds consisting of debt instruments of the U.S. government, its agencies and high-quality corporate issuers with original maturities of less than three months. Investments designated as short-term consist of cash invested in debt instruments of the U.S. government, its agencies and high-quality corporate issuers with original maturities greater than three months and remaining maturities less than one year and commercial paper. Since inception, we have financed our operations primarily through private sales of convertible preferred stock and common stock, and cash generated from operations.
Cash flows from operating activities
Net cash provided by operating activities increased by $15.0 million for the six months ended June 30, 2008, as compared to the same period in 2007. The increase was primarily due to:
• Net income of $8.4 million for the six months ended June 30, 2008, as compared to a loss of $4.3 million in the same period of 2007;

• Improved receivable collections over 2007; and

• Slowed inventory growth as compared to 2007.

Cash flows from investing activities
Net cash used in investing activities increased by $10.1 million for the six months ended June 30, 2008, as compared to the same period in 2007. The increase was primarily due to increased investment of the Company's available cash resources in short-term investments.
Cash flows from financing activities
Net cash provided by financing activities decreased by $254,000 for the six months ended June 30, 2008, as compared to the same period in 2007. The decrease was primarily due to a decrease of $133,000 in proceeds received upon the exercise of stock options for common stock and a decrease resulting from higher payments of employee withholding tax of $121,000 related to the vesting of restricted stock units ("RSU's").

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