The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the 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 Annual Report on Form 10-K 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 I, Item 1A "Risk Factors" above and elsewhere in this Annual Report on Form 10-K.

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 that our products provide a safe and reliable alternative to more invasive neurosurgical procedures for treating aneurysms. Our proprietary three-dimensional, embolic coils anatomically conform 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, balloon catheters, 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, in March 2006. We also plan 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%, 5% and 3% of our revenues in fiscal 2009, 2008 and 2007, 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. In select hospitals, our products are held on consignment, and remain on site, free of charge until used. Revenue is generally recognized upon shipment after the receipt of a purchase order. In arrangements which specify the title transfer upon delivery, revenue is not recognized until the product is delivered. In the case of consigned goods, revenue is recognized when a replenishment order is made.

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 gross margin percentage may also decrease in those quarters in which we have a higher proportion of sales to distributors with lower average selling prices.

Our product development efforts are primarily focused on expanding our product offerings for the hemorrhagic and ischemic stroke markets. In August 2004, we introduced our Cerecyte® microcoil product line and we have launched ten new products in the last 24 months, including microcoils, stents, microcatheters, guidewires and balloon catheters. During fiscal 2009, we launched the Neuropath® guide catheter, which combines robust proximal support with a highly flexible and visible tip designed to facilitate atraumatic vascular access. The Neuropath® guide catheter is used as a conduit for delivery of the microcatheter or other devices, such as coils, stents and balloons, to the aneurysm. We intend to continue to pursue this non-embolic product line expansion with the goal of increasing our revenue opportunity per procedure. We also launched Cerecyte and stretch resistant versions of our DeltaPaq™ microcoil system for the treatment of cerebral aneurysms. Our DeltaPaq microcoil system is designed to enable physicians to achieve greater coil packing density within the aneurysm which may reduce the rate of recanalization and the need for re-treatment. The DeltaPaq microcoil system supplements our framing and finishing coils in the filling segment of the coil market. Additionally, we launched the 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 FDA conditional approval of our investigational device exemption for the PHAROS™ VISSIT study. The VISSIT study is the first industry sponsored, randomized, prospective clinical trial designed to compare the clinical outcomes between patients who are stented for intracranial ischemic stenosis versus treated with medical therapy. We are in the process of initiating study sites in the United States, Europe and China.

We intend to continue to expand our direct sales force in North America, Europe and Asia as necessary and further 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 $9.3 million, $6.3 million and $8.7 million in fiscal 2009, 2008 and 2007, respectively. We plan to begin selling our products in China upon receiving regulatory approvals. The timing of these approvals is 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 that 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 during fiscal 2009 and we may not recognize revenues from China in fiscal 2010.

We currently anticipate that the broadening of our product line and our further expansion into the Asian market will be primarily funded with our currently available cash and cash expected to be generated from operations. We introduced our first proprietary, three-dimensional microcoil in May 2000. Our revenues have grown from $1.8 million in fiscal 2001 to $78.2 million in fiscal 2009.

We have incurred annual net losses since our inception, including net losses of $11.1 million, $16.3 million, and $5.5 million in fiscal 2009, 2008, and 2007, respectively. However, in the fourth quarter of fiscal 2009 we achieved our first profitable quarter of $0.6 million as a result of our revenue growth and expense management, and we expect to achieve profitability for the full year in fiscal 2010. As of March 31, 2009, we had cash and cash equivalents of $17.1 million. We believe that our current cash position and the cash expected to be generated from operations 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 continue to be profitable in the foreseeable future as we expand our research and development, manufacturing, and sales activities and expand geographically. As of March 31, 2009, we had an accumulated deficit of $82.4 million.

Recent Developments

On September 22, 2008, we entered into a Settlement and License Agreement (the "Settlement and License Agreement") with Boston Scientific Corporation and Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation (collectively "Boston Scientific") and a Settlement and Release Agreement (the "Settlement and Release Agreement") with The Regents of the University of California (the "Regents") in order to resolve pending patent litigation between Boston Scientific and us (the "Patent Litigation"). On October 8, 2008, the Court entered an order dismissing the Patent Litigation with prejudice. For further discussion of the Settlement and License Agreement, please see "Patent Litigation" under "Item 3 - Legal Proceedings," above.

On November 5, 2008, we entered into a credit agreement with Wells Fargo Bank to provide us with a revolving line of credit (the "Credit Agreement"). The Credit Agreement provides for maximum borrowings in the amount of up to $15.0 million. If borrowings under the Credit Agreement exceed $7.5 million, all borrowings are subject to a borrowing base which is based on eligible accounts receivable. Borrowings are secured by a first priority security interest in all of our assets (except for certain permitted liens that are senior to the bank's security interest). At our option, borrowings bear interest at either 2.25% over the bank's prime rate or 3.50% over the one-month, two-month or three-month LIBOR. The Credit Agreement requires that we comply with certain financial and other covenants for borrowings to be permitted. The more significant financial covenants include (i) a minimum modified quick ratio and (ii) a minimum profitability, excluding certain non-cash items. On May 20, 2009, we amended the Credit Agreement with Wells Fargo Bank extending the maturity date to August 1, 2010 and adjusting the minimum limits for the financial covenants based on our financial forecast for fiscal 2010.

On January 1, 2009, we merged MDT into Micrus Endovascular Corporation.

On July 28, 2005, we entered into a Technology Transfer Agreement with Vascular FX, a Delaware limited liability company ("Vascular FX"), pursuant to which we purchased the intellectual property of Vascular FX. The transaction included a cash purchase price of $1.5 million paid at closing followed by milestone payments of $2.5 million paid on January 31 and May 31, 2006, and royalty payments on potential future product sales. There are no future milestone payments to Vascular FX under the terms of the agreement.

On January 28, 2009, we amended the Technology Transfer Agreement with Vascular FX to modify the royalty provision and eliminate the claw-back provisions that would have required us to license back the acquired technology to Vascular FX under certain circumstances. Under the amended agreement, we will pay Vascular FX a royalty equal to 25% of the aggregate net sales of deflectable catheter products sold during the royalty period subject to the mandatory minimum provision not less than $250,000 per year. The royalty period is six years beginning from November 1, 2007.

Results of Operations

The following table sets forth the results of our operations, expressed as percentages of revenues, for the fiscal years ended March 31, 2009, 2008 and 2007:

                                                        Years Ended March 31,
                                                     2009        2008        2007
                                                      %            %           %
      Consolidated Statements of Operations Data:
      Revenues                                         100 %       100 %       100 %
      Cost of goods sold                                27 %        25 %        26 %
      Gross profit                                      73 %        75 %        74 %
      Operating expenses:
      Research and development                          13 %        20 %        13 %
      Sales and marketing                               37 %        42 %        41 %
      General and administrative                        35 %        39 %        33 %
      Impairment of intangible assets                    1 %         0 %         0 %
      Total operating expenses                          86 %       101 %        87 %
      Loss from operations                             (13 ) %     (26 ) %     (13 ) %
      Interest and investment income                     0 %         2 %         3 %
      Interest expense                                  (0 ) %       0 %         0 %
      Other income (expense), net                       (2 ) %       1 %         1 %
      Loss before income taxes                         (15 ) %     (23 ) %      (9 ) %
      Income tax benefit                                (1 ) %       0 %         0 %
      Net loss                                         (14 ) %     (23 ) %      (9 ) %

Fiscal Years Ended March 31, 2009 and 2008

Revenues

                                           Years Ended March 31,              Change
                                            2009             2008           $           %
                                                (In thousands, except percentages)
 Americas                                $    44,067       $ 37,565     $  6,502        17 %
 Europe (excluding the United Kingdom)        15,930         15,095          835         6 %
 United Kingdom                                7,531          9,100       (1,569 )     (17 ) %
 Asia Pacific                                 10,668          7,453        3,215        43 %
                                         $    78,196       $ 69,213     $  8,983        13 %

Our revenues are derived primarily from sales of our microcoils used in the treatment of cerebral vascular diseases. The overall increase in revenues in fiscal 2009 compared to fiscal 2008 was primarily due to an increase in the number of microcoil products sold. Factors driving the increase included growth in the overall market for embolic coils, an increase in market share in both the Americas and Asia Pacific, and the introduction of new products.

Revenues from the Americas increased 17% to $44.1 million and revenues from Europe increased 6% to $15.9 million, both compared to fiscal 2008. Revenues from the United Kingdom decreased 17% to $7.5 million as compared with $9.1 million for fiscal 2008, primarily due to the unfavorable impact on revenues from the weakening of the British pound against the U.S. dollar. Revenues from Asia Pacific increased 43% to $10.7 million and included product sales to our distributor in Japan of $9.3 million, compared with revenues of $7.5 million for fiscal 2008 which included sales to our distributor in Japan of $6.3 million. We plan to begin selling our products in China upon receiving regulatory approvals. We did not recognize revenues from sales to China during fiscal 2009.

Revenues from Latin America increased to $3.1 million in fiscal 2009 compared with revenues of $1.6 million in fiscal 2008 due to an overall increase in product sales to our distributors in the region and 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 of the "Notes to Consolidated Financial Statements," which are included in "Item 8 - Financial Statements and Supplementary Data"). As a result of the change in our revenue recognition policy for sales made to Latin American distributors, we recognized approximately $0.7 million of Latin American deferred revenue in the first quarter of fiscal 2009.

Revenues from embolic coils increased 12% to $73.1 million for fiscal 2009 as compared to fiscal 2008 primarily due to the launch of the DeltaPaq™ microcoil system and increased market penetration of both the Cashmere™ and the Presidio® microcoil systems, partially offset by the unfavorable impact of foreign currency exchange rates, most notably the weakening of the British pound against the U.S. dollar. Revenues from our non-embolic and accessories products increased to $4.9 million in fiscal 2009 compared with revenues of $3.7 million in fiscal 2008 primarily due to the launch of the Neuropath® guide catheter and PHAROS™ Vitesse™ stent, and volume increases across multiple product lines. 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, including our launch of the next-generation DeltaPaq™ microcoil system and an Ascent™ balloon catheter family.

New products continue to represent an important component of our growth strategy, with 16% of our revenues in fiscal 2009 coming from products introduced in the past 24 months. Among these, our Cashmere microcoil line represented 8% of the total revenue for fiscal 2009. We are also pleased with the strong reception for our newly launched DeltaPaq microcoil system, which comprised 6% of fiscal year 2009 revenues. With the launch of the Neuropath® guide catheter and the Ascent™ balloon catheter, we are now in a position to capture a significantly greater portion of hemorrhagic procedure revenues.

Gross Profit

                                    Years Ended March 31,             Change
                                     2009             2008          $          %
                                        (In thousands, except percentages)
             Cost of goods sold   $    20,847       $ 17,301     $ 3,546       20 %
             Gross profit         $    57,349       $ 51,912     $ 5,437       10 %

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 fiscal 2009 as compared to fiscal 2008 was primarily related to the increase in sales of our products as well as an increase of $235,000 in royalties.

Gross margin was 73% in fiscal 2009 and 75% in fiscal 2008. The decrease was primarily due to higher levels of 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

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 decreased in fiscal 2009 compared to fiscal 2008 primarily due to a decrease of $3.9 million in technology acquisition costs mainly due to a $3.0 million charge in fiscal 2008 for in-process research and development in connection with the acquisition of ReVasc Technologies, Inc. to obtain the rights to pre-regulatory approved revascularization technology and a $0.9 million charge in fiscal 2008 associated with the acquisition of thrombectomy technologies from Genesis. In addition, there was a decrease in outside services of $0.9 million primarily associated with the development of our stent product. This decrease was partially offset by an increase of $0.9 million in personnel cost due to increased headcount at our Florida operations as we ramp up research and development efforts for neurovascular access and delivery products, and an increase of $303,000 in consulting fees.

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 decreased slightly in fiscal 2009 compared to fiscal 2008 primarily due to termination costs of $0.7 million related to sales personnel in Europe in fiscal 2008, as well as a decrease of $232,000 in recruiting expense and a decrease of $154,000 in education and training expense. These decreases were partially offset by higher sales incentives compensation of $0.6 million resulting from higher level of sales and changes in the sales compensation structure, an increase of $213,000 in product samples and an increase of $174,000 in stock-based compensation expense.

General and Administrative

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 remained essentially unchanged in fiscal 2009 compared to fiscal 2008. General and administrative expenses included increases of $1.7 million in patent litigation settlement cost in connection with the patent litigation with Boston Scientific, higher finance and administrative personnel costs of $1.2 million due to increased headcount and salary increases for current employees, additional expense of $0.5 million for estimated sales tax in certain states and an increase of $367,000 in stock-based compensation expense. These increases were partially offset by a decrease of $3.7 million in legal fees primarily resulting from the settlement of the patent litigation with Boston Scientific in September 2008 and the conclusion of the United States Department of Justice monitorship in July 2008.

Impairment of Intangibles Assets

In the fourth quarter of fiscal 2009, we performed an assessment of our intangible assets acquired from Neurologic. Management concluded from the assessment that an impairment existed for the intangible asset group (distribution agreement, customer relationships and non-compete agreements) as the undiscounted value was less than its carrying value. As a result, we recorded an impairment charge of $462,000 for this asset group based on the amount by which the carrying amount of these assets exceeded their fair value. There was no impairment charges related to intangible assets in fiscal 2008.

Other Income (Expense), Net

                                         Years Ended March 31,              Change
                                           2009            2008           $           %
                                               (In thousands, except percentages)
   Interest and investment income      $        258       $ 1,223     $   (965 )      (79 ) %
   Interest expense                             (52 )          (3 )        (49 )     1633 %
   Other income (expense), net               (2,111 )         488       (2,599 )     (533 ) %
   Total other income (expense), net   $     (1,905 )     $ 1,708     $ (3,613 )     (212 ) %

Interest and investment income consists of interest earned on interest bearing accounts. Interest and investment income decreased in fiscal 2009 compared to fiscal 2008 due to lower cash and investment balances earning interest.

Other income (expense), net consists primarily of foreign exchange gains and losses resulting from differences in exchange rates between the time of recording of the transaction and the settlement of foreign currency denominated receivables and payables. Other income (expense), net decreased in fiscal 2009 compared to fiscal 2008 primarily due to foreign exchange losses resulting from the re-measurement of foreign currency transactions, most notably the impact of the weakening of the British pound against the U.S. dollar.

Income Taxes

                                          Years Ended March 31,
                                       2009                       2008
                                    (In thousands, except percentages)
            Income tax benefit   $            (502 )            $    (194 )
            Effective tax rate                  (4 )%                  (1 )%

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 taxes. We had an income tax benefit of approximately $502,000 and $194,000 in fiscal 2009 and 2008, respectively. The net income tax benefit in fiscal 2009 consists primarily of deferred tax benefit for the tax effect of the amortization related to the intangible assets acquired in the Neurologic transaction which is not deductible, the reduction in deferred tax liability due to the impairment of such intangible assets, and losses from our United Kingdom subsidiary. The net income tax benefit in fiscal 2008 includes a deferred income tax expense of approximately $72,000 for the Swiss subsidiary's operating profits and a deferred tax benefit of approximately $266,000 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, 2009, we had federal, state and foreign net operating loss carryforwards ("NOLs") of approximately $40.5 million, $30.5 million and $4.6 million, respectively. The federal NOLs will expire at various dates beginning in 2012, the state NOLs expire beginning in 2013 and the foreign NOLs will expire beginning in 2013. We also had federal and state research and development tax credit carryforwards of approximately $1.3 million and $1.3 million, respectively, as of March 31, 2009. The federal credits will . . .