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 SEC. 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 implantable and disposable medical devices used in the treatment of cerebral vascular diseases. Our products are used by interventional neuroradiologists, interventional neurologists and neurosurgeons to treat both cerebral aneurysms responsible for hemorrhagic stroke and intracranial atherosclerosis, which may lead to ischemic stroke. Hemorrhagic and ischemic stroke are both significant causes of death and disability 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 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, interventional neurologists 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. We have also entered into an exclusive distribution agreement to market our products in China 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 6% and 5% of our revenues in the second quarter and the first six months of fiscal 2009, respectively. 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, the 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 fluctuate 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 for 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 second quarter of fiscal 2009, we launched the Neuropath® guide catheter, which combines robust proximal support with a highly flexible and visible tip facilitating atraumatic vascular access. This design is intended to allow neurointerventionalists better vessel access and greater vessel selection in treating patients with complex anatomies. The Neuropath guide catheter is used as a conduit for delivery of the microcatheter or other devices to the aneurysm. We intend to continue this product line expansion with the goal of continuing to increase our per-procedure revenue.

In June 2008, we obtained CE Mark authorization for our PHAROS™ Vitesse™ intracranial stent for commercial distribution in the European Union and all other countries recognizing the CE Mark. The PHAROS Vitesse is our second generation balloon-expandable stent for intracranial ischemic stenosis and wide-neck aneurysm treatment. We have received U.S. Food and Drug Administration conditional approval of our PHAROS Vitesse Intracranial Stent Study for Ischemic Therapy ("VISSIT"). The VISSIT study is a randomized prospective clinical trial designed to compare the clinical outcomes between patients treated for intracranial ischemic stenosis with our stent and patients treated with another medical therapy. We are in the process of initiating study sites in the United States, Europe and China.

We also intend to continue to expand our direct sales force in North America and Europe as necessary and increase our presence in the Asian markets through distributors. In March 2006, we launched our sales and marketing efforts in Japan through our distribution partner, Goodman. In December 2007, we received regulatory approval to sell our stretch-resistant microcoils in Japan, and in July 2008, we received regulatory approval to sell our Cerecyte microcoils in Japan. We recorded product sales to Goodman of $4.8 million and $1.1 million in the first six months of fiscal 2009 and 2008, respectively. 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. As a result, we did not recognize revenues from sales in China in the first six months of fiscal 2009. 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 $69.2 million in fiscal 2008. Our revenues were $39.1 million in the first six months of fiscal 2009.

Since inception, we have been unprofitable. We have incurred net losses of $8.3 million in fiscal 2006, $5.5 million in fiscal 2007, $16.3 million in fiscal 2008 and $9.3 million in the first six months of fiscal 2009. As of September 30, 2008, we had cash and cash equivalents of $12.7 million. We believe that our current cash position and the cash expected to be generated from product sales, together with the funds available under our credit facility (subject to compliance with the conditions and covenants of the credit agreement) (see Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources and Part II, Item 5-Other Information in this Form 10-Q), 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 research and development, manufacturing, and sales activities and expand geographically. As of September 30, 2008, we had an accumulated deficit of $80.7 million.

Results of Operations

The following table sets forth the results of our operations, expressed as
percentages of revenues, for the three and six months ended September 30, 2008
and 2007:

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

Consolidated Statements of Operations Data:
Revenues                                             100 %              100 %           100 %            100 %
Cost of goods sold                                    27 %               22 %            26 %             22 %
Gross profit                                          73 %               78 %            74 %             78 %
Operating expenses:
   Research and development                           14 %               18 %            15 %             15 %
   Sales and marketing                                38 %               50 %            41 %             44 %
   General and administrative                         31 %               39 %            41 %             38 %
     Total operating expenses                         83 %              107 %            97 %             97 %
Loss from operations                                 (10 %)             (29 %)          (23 %)           (19 %)
   Interest income                                     0 %                2 %             0 %              2 %
   Interest expense                                    0 %                0 %             0 %              0 %
   Other income (expense), net                        (3 %)               2 %            (1 %)             2 %
Loss before income taxes                             (13 %)             (25 %)          (24 %)           (15 %)
   Provision (benefit) for income taxes                1 %                4 %            (0 %)             1 %
Net loss                                             (12 %)             (21 %)          (24 %)           (14 %)

Three Months Ended September 30, 2008 and 2007

Revenues

                                          Three months ended
                                             September 30,               Change
                                           2008          2007          $           %
                                              (Dollars in thousands)
Americas                                $   11,407     $  8,464     $ 2,943        35 %
Europe (excluding the United Kingdom)        3,795        3,257         538        17 %
United Kingdom                               2,245        2,265         (20 )      (1 %)
Asia Pacific                                 3,345          376       2,969       790 %
                                        $   20,792     $ 14,362     $ 6,430        45 %

Our revenues are derived primarily from sales of our microcoils used in the treatment of cerebral vascular diseases. The overall increase in revenues in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 was primarily due to an increase in the number of microcoil products sold during this period. Factors driving the increase included growth in the overall market for embolic coils, an increase in our share of both the domestic and foreign markets in which we participate, expansion of our direct and distributor sales force and the introduction of new products.

Revenues from embolic coils increased 43% to $19.4 million for the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 primarily due to the increased market penetration of the Cashmere™ microcoil system launched in the third quarter of fiscal 2008 and an increase in distributor sales primarily in Japan and Latin America. Revenues from Asia Pacific increased to $3.3 million in the second quarter of fiscal 2009 and included product sales to our distributor in Japan of $3.0 million, compared with revenues of $376,000 in the second quarter of fiscal 2008 which included no sales to our distributor in Japan. In December 2007, we received regulatory approval to sell our stretch-resistant microcoils in Japan which had a favorable impact on product sales to our distributor in Japan in this quarter. Revenues from Latin America increased to $0.7 million in the second quarter of fiscal 2009 compared with revenues of $354,000 in the second quarter of fiscal 2008 primarily due to a change in our revenue recognition policy for sales made to Latin American distributors from a cash collection basis to upon shipment basis (see Note 2) and an overall increase in product sales to our distributors in the region. Revenues from the United Kingdom remained relatively flat for the second quarter of fiscal 2009 as compared to the same period of the prior year. Revenues from our non-embolic and accessories products were $1.3 million in the second quarter of fiscal 2009 compared with revenues of $0.7 million in the second quarter of fiscal 2008. 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 our launch of the next-generation DeltaPaq microcoil system and an occlusion balloon catheter family. Products introduced in the past 24 months comprised 24% of our revenues in the second quarter of fiscal 2009.

In July 2008, we received regulatory approval to sell our Cerecyte microcoils in Japan. We shipped products to Goodman of approximately $3.0 million in the second quarter of fiscal 2009. We will also begin selling our products in China upon receiving regulatory approvals. However, the timing of product approvals in China has been 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. We do not expect to recognize revenues from sales in China this fiscal year.

Gross Profit

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 PHAROS stent product and royalties related to certain access device products. The increase in cost of goods sold during the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 was primarily related to the increase in sales of our products.

Gross margin was 73% in the second quarter of fiscal 2009 and 78% in the second quarter of fiscal 2008. The decrease was primarily due to higher sales to distributors at lower margins primarily in Japan and Latin America. We expect our gross margin to fluctuate in future periods based on the mix of our product sales and the level of distributor sales.

Operating Expenses

Research and Development

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 second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 primarily due to an increase of $323,000 related to increased headcount and salary increases for current employees, partially offset by a decrease of $100,000 associated with technology acquisitions primarily related to a non-refundable acquisition fee in connection with the letter of intent signed with ReVasc to acquire the rights to a revascularization technology incurred in the second quarter of fiscal 2008.

Sales and Marketing

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 second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 primarily due to an increase of $0.5 million in sales incentives resulting from the higher level of sales and changes in the sales compensation structure, an increase of $378,000 in personnel and travel costs primarily resulting from an increase in sales and marketing personnel in North America, Europe and Asia, partially offset by a decrease in tradeshow and meeting expenses of $143,000.

General and Administrative

General and administrative expenses consist primarily of compensation and related costs for finance, human resources, regulatory, insurance, and professional services. Professional services are principally comprised of outside legal, audit and Sarbanes Oxley compliance. General and administrative expenses increased in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 primarily due to an increase of $0.8 million related to higher finance and administrative personnel costs due to increased headcount and salary increases for current employees, an increase of $258,000 in stock-based compensation expense, partially offset by a decrease in legal fees of $159,000.

Other income (expense), net, consists primarily of interest income and foreign currency gains and losses. Total other expense, net, increased by $1.2 million in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 primarily due to foreign exchange losses resulting from differences in exchange rates between the time of the recording of the transaction and settlement of foreign currency denominated receivables and payables and a decrease in interest income resulting from lower average cash and cash equivalents balances earning interest.

                                Three months ended
                                   September 30,                Change
                                 2008           2007          $           %
                                     (Dollars in thousands)
Interest income               $       80       $  351     $   (271 )      (77 %)
Interest expense                       -           (2 )          2       (100 %)
Other income (expense), net         (681 )        282         (963 )     (341 %)
                              $     (601 )     $  631     $ (1,232 )     (195 %)

Income Taxes

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. For the three months ended September 30, 2008, we recorded an income tax expense of approximately $111,000. The income tax expense for the three months ended September 30, 2008 includes income tax expense of $217,000 related to operating profits for our Swiss subsidiary, and a non-current tax benefit of approximately $106,000 for the tax effect of the amortization related to the identifiable intangible assets acquired in the Neurologic transaction which is not deductible for tax purposes and the tax benefit from operating losses for our United Kingdom subsidiary.

As of March 31, 2008, we had federal, state and foreign net operating loss carryforwards ("NOLs") that are available to reduce future taxable income of approximately $42.5 million, $27.6 million and $1.6 million, respectively. The federal NOLs will expire at various dates beginning in 2012, state NOLs will expire beginning in 2013 and the foreign NOLs will expire beginning in 2013. We also have federal and state tax research and development credit carryforwards of approximately $1.2 million and $1.1 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 September 30, 2008 to offset our federal and state deferred tax assets.

Since the adoption of FIN 48, we have recognized a $232,000 increase in our unrecognized tax benefits. We do not expect our unrecognized tax benefits to change significantly over the next twelve months. At September 30, 2008, we had no accrued interest or penalties related to tax contingencies.

Six Months Ended September 30, 2008 and 2007

Revenues

                                          Six months ended
                                            September 30,              Change
                                          2008         2007          $           %
                                             (Dollars in thousands)
Americas                                $ 21,940     $ 17,938     $ 4,002        22 %
Europe (excluding the United Kingdom)      7,497        6,870         627         9 %
United Kingdom                             4,188        4,520        (332 )      (7 %)
Asia Pacific                               5,491        1,824       3,667       201 %
                                        $ 39,116     $ 31,152     $ 7,964        26 %

The overall increase in revenues in the first six months of fiscal 2009 compared to the first six months of fiscal 2008 was primarily due to an increase in the number of microcoil products sold during this period.

Revenues from embolic coils increased 25% to $36.9 million for the first six months of fiscal 2009 as compared to the first six months of fiscal 2008 primarily due to the increased market penetration of the Cashmere™ microcoil system launched in the third quarter of fiscal 2008 and an increase in distributor sales primarily in Japan and Latin America. Revenues from Asia Pacific increased to $5.5 million in the first six months of fiscal 2009 and included product sales to our distributor in Japan of $4.8 million, compared with revenues of $1.8 million in the first six months of fiscal 2008 which included $1.1 million sales to our distributor in Japan. Revenues from Latin America increased to $2.1 million in the first six months of fiscal 2009 compared with revenues of $0.7 million in the first six months of fiscal 2008 primarily due to a change in our revenue recognition policy for sales made to Latin American distributors from a cash collection basis to upon shipment basis (see Note 2) and an overall increase in product sales to our distributors in the region. As a result of a change in revenue recognition policy for sales made to Latin American distributors, we recognized approximately $0.7 million of Latin American deferred revenue in the first six months of fiscal 2009. Procedure volume in the United Kingdom slowed in the first quarter of fiscal 2009, resulting in a decline in revenue to $4.2 million in the first six months of fiscal 2009 compared with revenues of $4.5 million in the first six months of fiscal 2008. Revenues from our non-embolic and accessories products were $2.1 million in the first six months of fiscal 2009 compared with revenues of $1.6 million in the first six months of fiscal 2008. Products introduced in the past 24 months comprised 23% of our revenues in the first six months of fiscal 2009.

Gross Profit

The increase in cost of goods sold during the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 was primarily related to the increase in sales of our products.

Gross margin was 74% in the first six months of fiscal 2009 and 78% in the first six months of fiscal 2008. The decrease was primarily due to higher sales to distributors at lower margins primarily in Japan and Latin America. We expect our gross margin to fluctuate in future periods based on the mix of our product sales and the level of distributor sales.

Operating Expenses

Research and Development

Research and development expenses increased in the first six months of fiscal 2009 compared to the first six months of fiscal 2008 primarily due to an increase of $0.8 million related to increased headcount and increased salaries for current employees, an increase of $152,000 related to materials and supplies purchased for engineering projects, as well as an increase of $111,000 in stock-based compensation expense.

Sales and Marketing

Sales and marketing expenses increased in the first six months of fiscal 2009 compared to the first six months of fiscal 2008 primarily due to an increase of $1.0 million in travel and personnel costs resulting from an increase in sales . . .