** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

**FORM 10-Q/A**

** **

**(Amendment No. 1)**

 

**(Mark one)**

**ý****                                ****QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended July 3,2005**

 

**o****                                ****TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thetransition period from                     to                        .**

 

**Commission file number:  0-51348**

** **

**ev3 Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **32-0138874**                        |
|----------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of |       | (IRS  Employer Identification Number) |
| incorporation  or organization)  |       |                                  |

 

**960054****th Avenue North, Suite 100Plymouth, Minnesota 55442**

(Address of principal executive offices)

 

**(763)398-7000**

(Registrant’s telephone number including area code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES ý  NO  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). YES  o  NO  ý

 

As of August 1,2005, there were 49,116,454 shares of common stock, par value $0.01 per share,of the registrant outstanding.

 

 

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**ev3Inc.**

**FORM 10-Q**

**Forthe Quarterly Period Ended July 3, 2005**

** **

EXPLANATORY NOTE

 

The purpose of this Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”)to the Quarterly Report on Form 10-Q for the quarter ended July 3,2005 (the “Original Form 10-Q”) of **ev3**Inc. (the “Company”) is to restate the Company’s consolidated statement of cashflows for the six months ended July 3, 2005 included in the Original Form 10-Q,as filed with the Securities and Exchange Commission (the “SEC”) on August 17,2005 (the “Original Filing Date”). On February 20, 2006, the Company’smanagement and Audit Committee of the Board of Directors determined that theCompany’s consolidated statement of cash flows for the six months ended July 3,2005 required restatement to correct an error in the classification of a $36.5million payment by the Company of accrued interest on the Company’s demandnotes payable in conjunction with the completion of the Company’s initialpublic offering on June 21, 2005. The interest payment was reported as acash out-flow under “financing activities” and should have been reported as acash out-flow under “operating activities” under generally accepted accountingprinciples. The restatement does not affect the net change in cash for the sixmonths ended July 3, 2005 and has no impact on the Company’s consolidatedbalance sheet as of July 3, 2005, the consolidated statement of operationsand related net loss per common share attributable to common stockholders forthe three and six months ended July 3, 2005 or the reported changes instockholders’ equity (deficit) for the three and six months ended July 3,2005. See Note 2 in the notes to the consolidated financial statements forfurther information relating to the restatement.

 

For the convenience of the reader, this Form 10-Q/Asets forth the Original Form 10-Q in its entirety. However, this Form 10-Q/Aonly amends and restates Items 1, 2 and 4 of Part I of the Original Form 10-Q,in each case solely as a result of, and to reflect the restatement, and noother information in the Original Form 10-Q is amended hereby. Except forthe restatement, the foregoing items have not been updated to reflect otherevents occurring after the Original Filing Date or to modify or update thosedisclosures affected by subsequent events. In addition, pursuant to the rules ofthe SEC, Item 6 of Part II of the Original Form 10-Q has been amendedto contain currently-dated certifications from the Company’s Chief ExecutiveOfficer and Chief Financial Officer, as required by Sections 302 and 906 of theSarbanes-Oxley Act of 2002. The certifications of the Company’s Chief ExecutiveOfficer and Chief Financial Officer are attached to this Form 10-Q/A asExhibits 31.01, 31.02, 32.01 and 32.02.

 

Except for the foregoing amended information,this Form 10-Q/A continues to speak as of the Original Filing Date, andthe Company has not updated the disclosure contained herein to reflect eventsthat occurred at a later date. Other events occurring after the filing of theOriginal Form 10-Q or other disclosures necessary to reflect subsequentevents have been addressed in the Company’s Quarterly Report on Form 10-Qfor the quarter ended October 2, 2005 or will be addressed in any reportsfiled with the SEC subsequent to the date of this filing. Concurrently with thefiling of this Form 10-Q/A, the Company is filing Amendment No. 1 on Form 10-Q/Ato its Quarterly Report on Form 10-Q for the quarter ended October 2,2005.

 

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** **

**TABLE OF CONTENTS**

** **
| **Description**    |                                                                                                                                  |   |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                                                  |   |   |
| **PART I.**   | **FINANCIAL  INFORMATION**                                                                                                            |   |   |
|               |                                                                                                                                  |   |   |
| ITEM 1.            | Financial  Statements                                                                                                                 |   |   |
|               |                                                                                                                                  |   |   |
|               | Consolidated  Balance Sheets as of July 3, 2005 (unaudited) and December 31, 2004                                           |   |   |
|               |                                                                                                                                  |   |   |
|               | Consolidated  Statements of Operations for the three months and six months ended  July 3, 2005 and July 4, 2004 (unaudited) |   |   |
|               |                                                                                                                                  |   |   |
|               | Consolidated  Statements of Cash Flows for the six months ended July 3, 2005 and  July 4, 2004 (unaudited)                  |   |   |
|               |                                                                                                                                  |   |   |
|               | Notes  to the Consolidated Financial Statements                                                                                       |   |   |
|               |                                                                                                                                  |   |   |
| ITEM  2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           |   |   |
|               |                                                                                                                                  |   |   |
| ITEM 3.            | Quantitative and Qualitative Disclosures About Market Risk                                                                            |   |   |
|               |                                                                                                                                  |   |   |
| ITEM 4.            | Controls and Procedures                                                                                                               |   |   |
|               |                                                                                                                                  |   |   |
| **PART II.**  | **OTHER  INFORMATION**                                                                                                                |   |   |
|               |                                                                                                                                  |   |   |
| ITEM  1.           | Legal  Proceedings                                                                                                                    |   |   |
|               |                                                                                                                                  |   |   |
| ITEM 2.            | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                          |   |   |
|               |                                                                                                                                  |   |   |
| ITEM 3.            | Defaults Upon Senior Securities                                                                                                       |   |   |
|               |                                                                                                                                  |   |   |
| ITEM 4             | Submission of Matters to a Vote of Security Holders                                                                                   |   |   |
|               |                                                                                                                                  |   |   |
| ITEM  5.           | Other  Information                                                                                                                    |   |   |
|               |                                                                                                                                  |   |   |
| ITEM  6.           | Exhibits                                                                                                                              |   |   |
|               |                                                                                                                                  |   |   |
| SIGNATURE  PAGE    |                                                                                                                                  |   |
|               |                                                                                                                                  |   |   |
| Exhibit Index |                                                                                                                                  |   |
|                    |                                                                                                                                       |        |  |  |

 

*In thisreport, references to “ev3,” “the company,” “we,” “our” or “us,” unless thecontext otherwise requires, refer to ev3 Inc. and its subsidiaries.*

 

*Alltrademarks or trade names referred to in this report are the property of theirrespective owners.*

 

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**PART I:****  ****FINANCIAL INFORMATION**

**ITEM I:****      ****FINANCIAL STATEMENTS**

 

**ev3Inc.**

**COMBINED CONSOLIDATED BALANCE SHEETS**

*(Dollarsin thousands, except per share amounts)*

 
| ** **                                                                                                                                            | ** ** | **July 3,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(unaudited)**        | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                            | * *   | * *               | * *   | * *                    | * *   |
| ***Current assets***                                                                                                                                  |       |                   |       |                        |       |
| Cash and cash equivalents                                                                                                                             |       | $                      | 128,399    |                        | $          | 20,131 |   |
| Accounts receivable, less allowance of $3,233 and $2,694,  respectively                                                                               |       | 22,128                 |       | 18,956                      |       |
| Inventories                                                                                                                                           |       | 28,219                 |       | 22,500                      |       |
| Prepaid expenses and other assets                                                                                                                     |       | 6,030                  |       | 4,576                       |       |
| Other receivables                                                                                                                                     |       | 2,549                  |       | 2,446                       |       |
| *Total current assets*                                                                                                                                |       | 187,325                |       | 68,609                      |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| Restricted cash                                                                                                                                       |       | 3,074                  |       | 2,638                       |       |
| Property and equipment, net                                                                                                                           |       | 13,030                 |       | 9,130                       |       |
| Goodwill                                                                                                                                              |       | 94,456                 |       | 94,514                      |       |
| Other intangible assets, net                                                                                                                          |       | 30,844                 |       | 31,851                      |       |
| Other assets                                                                                                                                          |       | 4,017                  |       | 5,304                       |       |
| *Total assets*                                                                                                                                        |       | $                      | 332,746    |                        | $          | 212,046 |   |
|                                                                                                                                                  |       |                   |       |                        |       |
| **Liabilities and stockholders’ equity  (deficit)**                                                                                              |       |                   |       |                        |       |
| ***Current liabilities***                                                                                                                             |       |                   |       |                        |       |
| Accounts payable                                                                                                                                      |       | $                      | 11,703     |                        | $          | 8,931 |   |
| Accrued compensation and benefits                                                                                                                     |       | 11,176                 |       | 9,523                       |       |
| Accrued liabilities                                                                                                                                   |       | 14,300                 |       | 13,821                      |       |
| Accrued acquisition consideration                                                                                                                     |       | —                 |       | 3,750                       |       |
| *Total current liabilities*                                                                                                                           |       | 37,179                 |       | 36,025                      |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| Demand notes payable — related parties                                                                                                           |       | —                 |       | 299,453                     |       |
| Other long-term liabilities                                                                                                                           |       | 561                    |       | 702                         |       |
| *Total liabilities*                                                                                                                                   |       | 37,740                 |       | 336,180                     |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| Commitments and contingencies                                                                                                                         |       | —                 |       | —                      |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| Class A preferred membership units: stated value $3.56;  24,040,718 units authorized; issued and outstanding: zero and 24,040,718,  respectively |       | —                 |       | 95,105                      |       |
| Class B preferred membership units: stated value $3.56;  41,077,336 units authorized; issued and outstanding: zero and 41,077,336,  respectively |       | —                 |       | 158,923                     |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| Minority interest                                                                                                                                     |       | 13,754                 |       | 16,310                      |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| ***Stockholders’ equity (deficit)***                                                                                                             |       |                   |       |                        |       |
|                                                                                                                                                  |       |                   |       |                        |       |
| Members’ capital                                                                                                                                 |       | —                 |       | 47,927                      |       |
| Common stock: $0.01 par value; 100,000,000 shares authorized; issued and  outstanding: 48,910,654 and zero, respectively                              |       | 489                    |       | —                      |       |
| Additional paid in capital                                                                                                                            |       | 801,252                |       | —                      |       |
| Accumulated deficit                                                                                                                                   |       | (520,208               | )          | (440,705                    | )          |
| Accumulated other comprehensive loss                                                                                                                  |       | (281                   | )          | (1,694                      | )          |
| *Total stockholders’ equity (deficit)*                                                                                                           |       | 281,252                |       | (394,472                    | )          |
| *Total liabilities and stockholders’ equity  (deficit)*                                                                                          |       | $                      | 332,746    |                        | $          | 212,046 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

1

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**ev3 Inc.**

**CONSOLIDATED STATEMENTS OF OPERATIONS***(Dollarsin thousands, except per share amounts)******(unaudited)*

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **July 3,  2005** | ** ** | **July 4,  2004**         | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| **Net sales**                                                                        |       | $                      | 31,540     |                           | $          | 20,569 |   | $ | 59,222 |   | $ | 41,149 |   |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| **Operating expenses**                                                               |       |                   |       |                           |       |   |   |   |   |
| Cost of goods sold (a)                                                               |       | 12,785                 |       | 9,368                          |       | 24,894 |   | 18,157 |   |
| Sales, general and administrative (a)                                                |       | 32,297                 |       | 23,520                         |       | 64,157 |   | 47,957 |   |
| Research and development (a)                                                         |       | 11,891                 |       | 10,589                         |       | 22,217 |   | 19,743 |   |
| Amortization of intangible assets                                                    |       | 2,548                  |       | 2,447                          |       | 5,203 |   | 4,978 |   |
| (Gain) loss on sale or disposal of assets, net                                       |       | 111                    |       | (1                             | )          | 164 |   | 19 |   |
| Acquired in-process research and development                                         |       | 868                    |       | —                         |       | 868 |   | — |   |
| Total operating expenses                                                             |       | 60,500                 |       | 45,923                         |       | 117,503 |   | 90,854 |   |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| Loss from operations                                                                 |       | (28,960                | )          | (25,354                        | )          | (58,281 | ) | (49,705 | ) |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| **Other (income) expense:**                                                          |       |                   |       |                           |       |   |   |   |   |
| Gain on sale of investments, net                                                     |       | (878                   | )          | (1,728                         | )          | (4,611 | ) | (1,728 | ) |
| Interest expense, net                                                                |       | 6,078                  |       | 4,458                          |       | 11,786 |   | 10,613 |   |
| Minority interest in loss of subsidiary                                              |       | (705                   | )          | (1,315                         | )          | (726 | ) | (5,072 | ) |
| Other expense, net                                                                   |       | 1,828                  |       | 206                            |       | 2,920 |   | 106 |   |
| **Loss before income taxes**                                                         |       | (35,283                | )          | (26,975                        | )          | (67,650 | ) | (53,624 | ) |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| Income tax benefit                                                                   |       | (61                    | )          | —                         |       | (59 | ) | — |   |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| **Net loss**                                                                         |       | (35,222                | )          | (26,975                        | )          | (67,591 | ) | (53,624 | ) |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| Accretion of preferred membership units to redemption value                          |       | 5,635                  |       | 5,869                          |       | 12,061 |   | 11,804 |   |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| **Net loss attributable to common  shareholders**                                    |       | $                      | (40,857    | )                              | $          | (32,844 | ) | $ | (79,652 | ) | $ | (65,428 | ) |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| Net loss per common share attributed to common shareholders (basic  and diluted) (b) |       | $                      | (4.60      | )                              | $          | (18.29 | ) | $ | (13.95 | ) | $ | (37.36 | ) |
|                                                                                 |       |                   |       |                           |       |   |   |   |   |
| Weighted average common shares outstanding (b)                                       |       | 8,877,898              |       | 1,795,745                      |       | 5,711,852 |   | 1,751,092 |   |

 

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| (a) Includes stock based compensation charges of: |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Cost of goods sold                                     |   | $      | 135    |   | $      | 47     |   | $      | 247    |   | $ | 98 |   |
| Sales, general and administrative                      |   | 591    |   | 206    |   | 1,045  |   | 1,373  |   |
| Research and development                               |   | 189    |   | 182    |   | 434    |   | 398    |   |
|                                                   |   | $      | 915    |   | $      | 435    |   | $      | 1,726  |   | $ | 1,869 |   |

 

(b) Net loss per commonshare attributable to common shareholders reflects the June 21, 20051-for-6 reverse stock split for all periods presented.

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

2

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**ev3 Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS ***(Dollarsin thousands, except per share amounts)******(unaudited)*

 
| ** **                                                                                        | ** ** | **Six Months Ended**** ** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                        | ** ** | **July 3,  2005**** **         | ** ** | **July 4,  2004**** ** | ** ** |
| ** **                                                                                        | ** ** | **RESTATED**                             | ** ** | ** ** | ** ** |
| **Operating activities**                                                                          |       |                                     |       |   |   |
| Net loss                                                                                          |       | $                                        | (67,591    | ) | $ | (53,624 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities                       |       |                                     |       |   |   |
| Depreciation and amortization                                                                     |       | 7,340                                    |       | 6,990 |   |
| Provision for bad debts                                                                           |       | 327                                      |       | 278 |   |
| Provision for inventory obsolescence                                                              |       | 1,156                                    |       | 264 |   |
| Acquired in-process research and development                                                      |       | 868                                      |       | — |   |
| Loss on disposal of assets                                                                        |       | 157                                      |       | 19 |   |
| Amortization of beneficial conversion feature and non-cash interest  expense                      |       | —                                   |       | 1,857 |   |
| Gain on sale of investment                                                                        |       | (4,611                                   | )          | (1,728 | ) |
| Stock compensation expense                                                                        |       | 1,726                                    |       | 1,869 |   |
| Minority interest in loss of subsidiary                                                           |       | (726                                     | )          | (5,072 | ) |
| Increase (decrease) in cash resulting from changes in operating  assets and liabilities           |       |                                     |       |   |   |
| Accounts receivable                                                                               |       | (3,965                                   | )          | (3,847 | ) |
| Inventories                                                                                       |       | (6,980                                   | )          | (4,534 | ) |
| Prepaids and other assets                                                                         |       | 102                                      |       | (667 | ) |
| Accounts payable                                                                                  |       | 3,024                                    |       | 3,672 |   |
| Accrued expenses and other liabilities                                                            |       | 2,509                                    |       | 292 |   |
| Change in accrued interest on demand notes payable                                                |       | (24,319                                  | )          | 8,752 |   |
| Net cash used in operating activities                                                             |       | (90,983                                  | )          | (45,479 | ) |
| **Investing activities**                                                                          | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                                |       | (6,119                                   | )          | (1,483 | ) |
| Purchase of patents and licenses                                                                  |       | (982                                     | )          | (571 | ) |
| Proceeds from sale of property and equipment                                                      |       | 8                                        |       | — |   |
| Proceeds from sale of investments                                                                 |       | 4,611                                    |       | 1,728 |   |
| Acquisitions, net of cash acquired                                                                |       | (1,626                                   | )          | (3,750 | ) |
| Change in restricted cash                                                                         |       | (221                                     | )          | (31 | ) |
| Other                                                                                             |       | 894                                      |       | — |   |
| Net cash used in investing activities                                                             |       | (3,435                                   | )          | (4,107 | ) |
| **Financing activities**                                                                          |       |                                     |       |   |   |
| Issuance of demand notes payable                                                                  |       | 49,100                                   |       | 30,840 |   |
| Proceeds from issuance of notes payable, net of costs                                             |       | —                                   |       | 21,008 |   |
| Proceeds from exercise of stock options                                                           |       | 660                                      |       | 79 |   |
| Proceeds from issuance of subsidiary stock to minority shareholders                               |       | 227                                      |       | 178 |   |
| Proceeds from initial public offering, net                                                        |       | 152,713                                  |       | — |   |
| Other                                                                                             |       | —                                   |       | (827 | ) |
| Net cash provided by financing activities                                                         |       | 202,700                                  |       | 51,278 |   |
|                                                                                              |       |                                     |       |   |   |
| Effect of exchange rate changes on cash                                                           |       | (14                                      | )          | (8 | ) |
| Net increase in cash and cash equivalents                                                         |       | 108,268                                  |       | 1,684 |   |
|                                                                                              |       |                                     |       |   |   |
| Cash and cash equivalents, beginning of year                                                      |       | 20,131                                   |       | 23,625 |   |
| Cash and cash equivalents, end of year                                                            |       | $                                        | 128,399    |   | $ | 25,309 |   |
|                                                                                              |       |                                     |       |   |   |
| Supplemental disclosure of non-cash activities:                                                   |       |                                     |       |   |   |
| Assets acquired in conjunction with MTI step acquisition (see Note 6)                             |       | $                                        | 7,536      |   | $ | — |   |
| Contribution of demand notes payable upon initial public offering  (see Note 11)                  |       | $                                        | 324,230    |   | $ | — |   |
| Preferred membership units converted to common stock upon initial  public offering  (see Note 12) |       | $                                        | 266,089    |   | $ | — |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

3

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**ev3 Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS***(unaudited)*

 

**1. Description of Business**

 

 ev3Inc. (the “Company”) is a global medical device company focused oncatheter-based, or endovascular, technologies for the minimally invasivetreatment of vascular diseases and disorders. The Company develops,manufactures and markets a wide range of products that includes stents, embolicprotection devices, thrombectomy devices, balloon angioplasty catheters,foreign object retrieval devices, guidewires, embolic coils, liquid embolics,microcatheters, and occlusion balloon systems. The Company markets its productsin the United States, Europe, Canada, and Japan through a direct sales force,and through distributors in certain other international markets.

 

TheCompany holds ownership interests directly in two companies: ev3 Endovascular, Inc.(“ev3 Endovascular”) and Micro Investment, LLC (“MII”), a holding company thatowns a controlling interest in Micro Therapeutics, Inc. (“MTI”), a publiclytraded operating company. The Company’s majority equity holder, Warburg, PincusEquity Partners, L.P. and certain of its affiliates (collectively “WarburgPincus”), owns a majority, controlling interest in ev3 Inc.The Company is organized in two businesssegments: cardio peripheral and neurovascular. The Company  manages its business and reports itsoperations internally and externally on this basis. The Company’s cardioperipheral segment contains products that are used in both cardiovascular and peripheralvascular procedures by cardiologists, radiologists, vascular surgeons and otherendovascular specialists. The Company’s neurovascular segment contains productsthat are used primarily by neuro-radiologists and neurosurgeons forneurovascular procedures.

 

**2. Basis of Presentation**

 

Theaccompanying unaudited financial statements have been prepared by the Companyin accordance with accounting principles generally accepted in the UnitedStates of America (U.S.) for interim financial information and pursuant to theinstructions to Form 10-Q and Article 10 of Regulation S-X of theSecurities and Exchange Commission. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (consisting  of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded. The results for the three and six months ended July 3, 2005 arenot necessarily indicative of the results that may be expected for theyear ending December 31, 2005, or for any future period. These financialstatements and notes should be read in conjunction with the audited financialstatements and the notes thereto included in the Company’s registrationstatement on Form S-1, initially filed with the Securities and ExchangeCommission on April 5, 2005 (File No. 333-123851), as subsequentlyamended (the “Registration Statement”).

 

The consolidated financialstatements of ev3 Inc. include the financial results of MTI, which ev3Inc. consolidates for accounting purposes but is not wholly owned. On May 26,2005, Warburg Pincus and The Vertical Group L.P. and certain of its affiliates(collectively “Vertical”) contributed all of the shares of MTI’s common stockdirectly owned by them to ev3 LLC in exchange for common membership units. Thesecommon membership units were subsequently converted into shares of ev3 Inc.common stock in connection with a subsequent merger of ev3 LLC with and intoev3 Inc. on June 21, 2005. As a result of this merger, ev3 Inc. became theholding company of ev3 LLC’s subsidiaries.****Themerger of ev3 LLC with and into ev3 Inc. was accounted for as a combinationunder common control with the result that the financial statements for allperiods presented were such that the historical financial statements of thegroup were carried forward without adjustment.

 

As thecontrolling shareholder of the Company, the contribution of the shares byWarburg Pincus, representing a 15.7% interest in MTI as of May 26, 2005,was accounted for as a transfer of assets between entities under common controlresulting in the retention of historical based accounting. These consolidatedfinancial statements give effect to the contribution of MTI shares owned byWarburg Pincus as though such contribution occurred in 2003 and 2004 whenWarburg Pincus acquired its interest in MTI. The contribution of the MTI sharesowned by Vertical, representing a 4.3% interest in MTI as of May 26, 2005,was accounted for under the purchase method of

 

4

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accountingon the contribution date (see Note 6). As of July 3, 2005, ev3 Inc. owned70.3% of the outstanding shares of common stock of MTI. The consolidation ofMTI for accounting purposes results in all of MTI’s assets and liabilitiesbeing included in the Company’s consolidated balance sheets. Although all ofMTI’s assets are included in the Company’s consolidated balance sheets, not allof these assets would be available to the Company for distribution to itsstockholders in the event of MTI’s liquidation.

 

Prior to the consummation of the Company’s initial public offering onJune 21, 2005, the Company amended and restated its certificate ofincorporation to authorize 100,000,000 shares of common stock, par value $0.01per share, and 100,000,000 shares of preferred stock, par value $0.01 pershare. On June 21, 2005, immediately prior to the Company’s initial publicoffering, the Company completed a one-for-six reverse stock split of itsoutstanding common stock. All share and per share amounts for all periodspresented in these consolidated financial statements reflect this split.

 

The Company operates on a manufacturing calendar with its fiscal yearalways ending on December 31. Each quarter is 13 weeks, consisting of onefive-week and two four-week periods. Accordingly, the first three fiscalquarters in 2004 ended on April 4, July 4 and October 3. Thecorresponding fiscal quarters in 2005 ended or end on April 3, July 3and October 2.

 

***Restatement***

 

In the course of finalizing the Company’s consolidated financialstatements for the fiscal year ended December 31, 2005, the Companydetermined that its consolidated statement of cash flows for the six monthsended July 3, 2005 should be restated to correct an error in theclassification of a $36.5 million payment by the Company of accrued interest onthe Company’s demand notes payable made by the Company in conjunction with thecompletion of the Company’s initial public offering on June 21, 2005. The interestpayment was reported as a cash out-flow under “financing activities” and shouldhave been reported as a cash out-flow under “operating activities” undergenerally accepted accounting principles. The restatement does not affect thenet change in cash for the six months ended July 3, 2005 and has no impacton the Company’s consolidated balance sheet as of July 3, 2005, theconsolidated statement of operations and the related net loss per common shareattributable to common stockholders for the three and six months endedJuly 3, 2005 or the reported changes in stockholders’ equity (deficit) forthe three and six months ended July 3, 2005.

 

A summary of the effects of the restatement on the Company’sconsolidated statement of cash flows for the six months ended July 3, 2005is as follows (in thousands):

 
| ** **                                         | ** ** | **Six Months Ended  July 3, 2005** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                         | ** ** | **As  Reported**                                       | ** ** | **As  Restated** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                                | ** ** |
| Operating  activities:                             |       |                                                   |       |   |   |
| Accrued interest on notes payable                  |       | $                                                      | 12,156     |   | — |   |
| Change in accrued interest on demand notes payable |       | —                                                 |       | $ | (24,319 | ) |
|                                               |       |                                                   |       |   |   |
| Net cash used in operating activities              |       | (54,508                                                | )          | (90,983 | ) |
|                                               |       |                                                   |       |   |   |
| Investing  activities:                             |       |                                                   |       |   |   |
| Net cash  used in investing activities             |       | (3,435                                                 | )          | (3,435 | ) |
|                                               |       |                                                   |       |   |   |
| Financing  activities:                             |       |                                                   |       |   |   |
| Payments on demand notes payable                   |       | (36,475                                                | )          | — |   |
| Net cash provided by financing activities          |       | 166,225                                                |       | 202,700 |   |
|                                               |       |                                                   |       |   |   |
| Effect of exchange rate changes on cash            |       | (14                                                    | )          | (14 | ) |
|                                               |       |                                                   |       |   |   |
| Net increase in cash and cash equivalents          |       | 108,268                                                |       | 108,268 |   |
|                                               |       |                                                   |       |   |   |
| Cash and cash equivalents, beginning of year       |       | 20,131                                                 |       | 20,131 |   |
|                                               |       |                                                   |       |   |   |
| Cash and  cash equivalents, end of period          |       | $                                                      | 128,399    |   | $ | 128,399 |   |

 

5

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**3. Stock Based Compensation**

 

TheCompany accounts for its stock based compensation plans under the fair valuerecognition provisions of SFAS 123, *Accountingfor Stock Based Compensation.*Under the fair value method,compensation expense is measured at the grant date based on the estimated fairvalue of the award. The fair value is estimated using the Black-Scholes optionpricing model and is recognized over the service period, which is typically thevesting period.  The Company recognizedcompensation expense related to stock options of $915 thousand and $1.7 millionfor the three and six months ended July 3, 2005, respectively, as comparedto the compensation expense related to stock options of $435 thousand and $1.9million for the three and six months ended July 4, 2004, respectively.

 

TheCompany used the Black-Scholes option pricing model, with a minimum valuepricing method, for measuring the fair value of its options granted for theyear ended December 31, 2004 and for the three-month period ended April 3,2005. The minimum value pricing method does not take into considerationvolatility. In accordance with SFAS 123, subsequent to April 5, 2005,the date of the Company’s initial filing of the registration statement relatingto its initial public offering with the Securities and Exchange Commission, theCompany used the Black-Scholes model, including a volatility assumption, toestimate the fair value of all option grants. Forfeitures and cancellations arerecognized as they occur. Expense previously recognized related to options thatare cancelled or forfeited prior to vesting is reversed in the period of thecancellation or forfeiture.

 

Thefair value of options was estimated at the date of grant using theBlack-Scholes option pricing model with the following assumptions by plan:   

 

| ** **              | ** ** | **July 3, 2005** | ** ** | **July 4, 2004** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **ev3 Inc.**          | ** ** | **MTI**                    | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** |
| Risk free interest rate |       | 3.8                        | %          | 3.6                        | %          | 3.5 | % | 3.7 | % |
| Expected dividend yield |       | 0.0                        | %          | 0.0                        | %          | 0.0 | % | 0.0 | % |
| Expected volatility     |       | 50.0                       | %          | 44.9                       | %          | — |   | 63.0 | % |
| Expected option term    |       | 4 years                    |       | 4 years                    |       | 5 years |   | 4 years |   |

 

Inaccordance with the provisions of SFAS 123 and Emerging Issues Task ForceIssue 96-18, *Accounting for EquityInstruments that are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods or Services*, the Company accountsfor non-employee equity based awards, in which goods or services are theconsideration received for the equity instruments issued, at their fair value.The assumptions used to determine fair value under the Black-Scholes pricingmodel are as disclosed above for ev3 Inc. and MTI as appropriate.

 

**4. New Accounting Pronouncements**

 

In November 2004,the FASB issued SFAS 151, *InventoryCosts, An Amendment of Accounting Research Bulletin No. 43, Chapter 4*,which adopts wording from the International Accounting Standards Board’s (“IASB”)IAS 2 *Inventories* in an effort toimprove the comparability of cross-border financial reporting. The new standardindicates that abnormal freight, handling costs, and wasted materials(spoilage) are required to be treated as current period charges rather than asa portion of inventory cost. Additionally, the standard clarifies that fixedproduction overhead should be allocated based on the normal capacity of aproduction facility. The statement is effective for the

 

6

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Companybeginning in 2006. Adoption is not expected to have a material impact on theCompany’s consolidated earnings, financial position or cash flows.

 

On December 16,2004, the FASB issued SFAS 123(R), *Share-BasedPayment*, which is a revision of SFAS 123 and supersedes APBOpinion 25. SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be valued at fair value on thedate of grant, and to be expensed over the applicable vesting period and iseffective for the Company on January 1, 2006. The Company has not yetdetermined the impact of the provisions of SFAS 123(R) on its consolidatedearnings, financial position or cash flows.

 

**5. Liquidity and Capital Resources**

 

On June 21,2005, the Company completed an initial public offering in which it sold11,765,000 shares of common stock at $14.00 per share for net cash proceeds of$152.7 million, net of underwriting discounts and other offering costs. Immediatelyprior to the consummation of the offering, ev3 LLC merged with and into ev3Inc. and 24,040,718 Class A preferred membership units, 41,077,336 Class Bpreferred membership units, and 18,799,962 common membership units of ev3 LLCwere converted into 83,918,016 shares of common stock of ev3 Inc. (on apre-split basis). Immediately thereafter, the Company completed a one for sixreverse stock split whereby the 83,918,016 shares of common stock wereconverted into 13,986,350 shares of common stock. Prior to the consummation ofthe offering, and subsequent to the reverse stock split, the Company alsoissued 21,964,815 and 1,194,489 shares of common stock to Warburg Pincus andVertical, respectively, in exchange for their contribution of $324.2 millionaggregate principal amount of demand notes and accrued and unpaid interestthereon. The remaining balance of the accrued and unpaid interest on the demandnotes, totaling $36.5 million, was repaid using proceeds from the offering.

 

*The following summarizes the changes in stockholders’ equity(deficit) since December 31, 2004:*

*(in thousands, except unit andshare amounts)*

 
| ** **                                         | ** ** | ** **     | ** ** | ** **        | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** **  | ** ** |
|----------------------------------------------------|------------|----------------|------------|-------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                         | ** ** | ** **     | ** ** | ** **        | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**    | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**   | ** ** |
| ** **                                         | ** ** | ** **     | ** ** | **Members’** | ** ** | **Common Stock** | ** ** | **Paid In** | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Stockholders’** | ** ** |
| ** **                                         | ** ** | **Units**      | ** ** | **Capital**       | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit**            | ** ** | **Deficit** | ** ** |
| **Balance January 1,  2005**                  | ** ** | **15,293,490** | ** ** | **$**             | **47,927** | ** **            | **—** | ** **       | **$**      | **—**        | ** ** | **$**                  | **—** | ** **             | **$**      | **(1,694**  | **)**      | **$** | **(440,705** | **)** | **$** | **(394,472** | **)** |
| Accretion of preferred  membership units           |       | —         |       | —            |       | —                |       | —           |       | —            |       | —                 |       | (6,426                 | )          | (6,426      | )          |
| Compensation expense on  unit options              |       | —         |       | 796               |       | —                |       | —           |       | —            |       | —                 |       | —                 |       | 796         |       |
| Exercise of unit options                           |       | 495,809        |       | 651               |       | —                |       | —           |       | —            |       | —                 |       | —                 |       | 651         |       |
| Comprehensive loss:                                |       |           |       |              |       |                  |       |             |       |              |       |                   |       |                   |       |        |       |
| Net loss                                           |       |           |       |              |       |                  |       |             |       |              |       | —                 |       | (32,369                | )          | (32,369     | )          |
| Cumulative translation  adjustment                 |       |           |       |              |       |                  |       |             |       |              |       | 770                    |       | —                 |       | 770         |       |
| Comprehensive loss:                                |       |           |       |              |       |                  |       |             |       |              |       | 770                    |       | (32,369                | )          | (31,599     | )          |
| **Balance April 3,  2005**                    | ** ** | **15,789,299** | ** ** | **$**             | **49,374** | ** **            | **—** | ** **       | **$**      | **—**        | ** ** | **$**                  | **—** | ** **             | **$**      | **(924**    | **)**      | **$** | **(479,500** | **)** | **$** | **(431,050** | **)** |
| Accretion of preferred  membership units           |       | —         |       | —            |       | —                |       | —           |       | —            |       | —                 |       | (5,635                 | )          | (5,635      | )          |
| Compensation expense on  unit/stock options        |       | —         |       | 513               |       | —                |       | —           |       | 409               |       | —                 |       | —                 |       | 922         |       |
| Exercise of unit options                           |       | 6,331          |       | 9                 |       | —                |       | —           |       | —            |       | —                 |       | —                 |       | 9           |       |
| Members’ contribution                         |       | 3,004,332      |       | 8,404             |       | —                |       | —           |       | —            |       | —                 |       | —                 |       | 8,404       |       |
| Conversion of preferred  / common membership units |       | (18,799,962    | )          | (58,300           | )          | 83,918,016            |       | 839              |       | 323,550           |       | —                 |       | —                 |       | 266,089     |       |

 

7

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| ** **                                                       | ** ** | ** ** | ** ** | ** **        | ** ** | ** **            | ** **     | ** **       | ** ** | ** **        | ** ** | **Accumulated**        | ** **  | ** **             | ** ** | ** **  | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-----------------------|----------------|------------------|------------|-------------------|------------|------------------------|-------------|------------------------|------------|-------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **        | ** ** | ** **            | ** **     | ** **       | ** ** | **Additional**    | ** ** | **Other**              | ** **  | ** **             | ** ** | **Total**   | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | **Members’** | ** ** | **Common Stock** | ** **     | **Paid In** | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** **  | **Stockholders’** | ** ** |
| ** **                                                       | ** ** | **Units**  | ** ** | **Capital**       | ** ** | **Shares**            | ** **     | **Amount**       | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** **  | **Deficit**            | ** ** | **Deficit** | ** ** |
| 1-for-6 reverse common  stock split                              |       | —     |       | —            |       | (69,931,666           | )              | (699             | )          | 699               |       | —                 |        | —                 |       | —      |       |
| Contribution of demand  notes                                    |       | —     |       | —            |       | 23,159,304            |           | 231              |       | 323,999           |       | —                 |        | —                 |       | 324,230     |       |
| Common stock issued in  conjunction with initial public offering |       | —     |       | —            |       | 11,765,000            |           | 118              |       | 152,595           |       | —                 |        | —                 |       | 152,713     |       |
| Comprehensive loss:                                              |       |       |       |              |       |                  |           |             |       |              |       |                   |        |                   |       |        |       |
| Net loss                                                         |       |       |       |              |       |                  |           |             |       |              |       | —                 |        | (35,222                | )          | (35,222     | )          |
| Cumulative translation  adjustment                               |       |       |       |              |       |                  |           |             |       |              |       | 643                    |        | —                 |       | 643         |       |
| Gain on change in  ownership % of MTI                            |       |       |       |              |       |                  |           |             |       |              |       | —                 |        | 149                    |       | 149         |       |
| Comprehensive loss:                                              |       |       |       |              |       |                  |           |             |       |              |       | 643                    |        | (35,073                | )          | (34,430     | )          |
| **Balance July 3,  2005**                                   |       | —     | ** ** | **$**             | **—** | ** **            | **48,910,654** | ** **       | **$**      | **489**           | ** ** | **$**                  | **801,252** | ** **             | **$**      | **(281**    | **)**      | **$** | **(520,208** | **)** | **$** | **281,252** | ** ** |
|                                                                  |            |            |            |                   |            |                       |                |                  |            |                   |            |                        |             |                        |            |             |            |  |  |  |  |  |  |  |  |

 

Comprehensiveloss consists of net loss, gains on changes of interest related to ownershipchanges in MTI, and the effects of foreign currency translation. The componentsof comprehensive loss resulted in a decrease to our net loss of $792 thousandand $1.6 million for the three and six months ended July 3, 2005,respectively, and a decrease to our net loss of $47 thousand and $742 thousandfor the three and  six months ended July 4,2004, respectively.

 

TheCompany’s future liquidity and capital requirements will be influenced bynumerous factors, including clinical research and product development programs,receipt of and time required to obtain regulatory clearances and approvals,sales and marketing programs and continuing acceptance of the Company’sproducts in the marketplace. The Company believes that the resources generatedthrough its initial public offering are sufficient to meet the Company’sliquidity requirements through the end of fiscal 2006; however, if the Companyrequires additional working capital, but is not able to raise additional funds,it may be required to significantly curtail or cease ongoing operations.

 

**6. MTI Step Acquisitions**

 

TheCompany, through its wholly owned subsidiary, MII, has acquired a controlling interestin MTI in various step investments. MTI is a publicly held Delaware corporationthat develops, manufactures and markets minimally invasive medical devices fordiagnosis and treatment primarily of neurovascular diseases. The investmentswere accounted for using the step acquisition method prescribed by ARB 51,*Consolidated Financial Statements*.Step acquisition accounting requires the allocation of the excess purchaseprice to the fair value of net assets acquired. The excess purchase price isdetermined as the difference between the cash paid and the historical bookvalue of the interest in net assets acquired.

 

On May 26,2005, the shares of MTI’s common stock directly held by Warburg Pincus andVertical were contributed to ev3 LLC in exchange for 10,804,500 and 3,004,332common membership units, respectively. These common membership units weresubsequently converted into shares of ev3 Inc. common stock in connection withthe subsequent merger of ev3 LLC with and into ev3 Inc. on June 21, 2005.  MTI sharescontributed by Warburg Pincus, representing a 15.7% interest in MTI, have beenaccounted for as a transfer of assets between entities under common control andthe consolidated financial statements give effect to the contribution byWarburg Pincus as though such contributions occurred in 2003 and 2004 whenWarburg Pincus acquired its interest in MTI. Shares of MTI contributed byVertical, representing a 4.3% interest, have been accounted for under thepurchase method of accounting at the date of the contribution by Vertical. As aresult, the Company held an approximate interest in MTI of 70.3% and 66.0% at July 3,2005 and December 31, 2004, respectively.

 

Thenumber of membership units of ev3 LLC issued in exchange for the MTI sharesdirectly held by Warburg Pincus and Vertical was determined based on fair value.Fair value of the MTI shares contributed was measured as the average closingprice per share of MTI’s common stock on the NASDAQ National Market System forthe twenty trading days from and including the date the Company’s RegistrationStatement with respect to the Company’s initial public offering was first filedby the Company with the Securities and Exchange Commission. Fair value of

 

8

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ev3LLC’s equity issued in exchange for the MTI shares was based on the midpoint ofthe range of estimated initial public offering prices per share, afterconsideration of the reverse stock split (See Note 2).

 

*The following summarizes the allocation of the excesspurchase price over historical book values arising from the May 26, 2005contribution of MTI shares by Vertical (in thousands):*

 

| ** **                                   | ** ** | **May 26,  2005** | ** **  |
|----------------------------------------------|------------|------------------------|-------------|
|                                         |       |                   |        |   |
| Inventory                                    |       | $                      |  104   |   |
| Developed technology                         |       | 2,043                  |        |
| Customer relationships                       |       | 894                    |        |
| Trademarks and tradenames                    |       | 458                    |        |
| Acquired in-process research and development |       | 868                    |        |
| Goodwill                                     |       | 2,066                  |        |
| Minority interest                            |       | 2,021                  |        |
| Accrued liabilities                          |       | (50                    | )           |
|                                         |       |                   |        |
| Total                                        |       | $                      |  8,404 |   |

 

Theacquired in-process research and development charge was estimated consideringan appraisal and represents the estimated fair value of the in-process projectsat the date of contribution of the MTI shares. As of the acquisition date, thein-process projects had not yet reached technological feasibility and had noalternative use. The primary basis for determining technological feasibility ofthese projects is obtaining regulatory approval to market the products.Accordingly, the value attributable to these projects, which had yet to obtainregulatory approval, was expensed in conjunction with the acquisition. If theprojects are not successful, or completed in a timely manner, the Company may notrealize the financial benefits expected from these projects.

 

To theextent that investments in MTI by third party investors reduced the Company’sownership interest, the difference between the carrying value of the interestindirectly sold by the Company, and the consideration paid by the third partyinvestor is considered a change in interest transaction. The Company hasadopted an accounting policy of recording change of interest gains or losseswithin equity as permitted by Staff Accounting Bulletin (“SAB”) 5H. Change ofinterest gains recorded in equity were $149 thousand and $149 thousand for thethree and six months ended July 3, 2005, respectively, as compared with$71 thousand and $731 thousand for the three months and six months ended July 4,2004, respectively.

 

**7. Inventories**

 

 *Inventory consists of the following (in thousands):*

 

| ** **        | ** ** | **July 3,****2005** | ** ** | **December 31,****2004** | ** ** |
|-------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **        | ** ** | ** **               | ** ** | ** **                    | ** ** |
| Raw materials     |       | $                        | 6,826      |                          | $          | 6,874 |   |
| Work-in-progress  |       | 1,859                    |       | 1,832                         |       |
| Finished goods    |       | 23,128                   |       | 17,481                        |       |
|              |       |                     |       |                          |       |
|              |       | 31,813                   |       | 26,187                        |       |
| Inventory reserve |       | (3,594                   | )          | (3,687                        | )          |
|              |       |                     |       |                          |       |
| Inventory, net    |       | $                        | 28,219     |                          | $          | 22,500 |   |

 

9

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**8. Goodwill and Other Intangible Assets**

 

 *The changes in the carrying amount of goodwill byoperating segment for the three and six months ended July 3, 2005 were asfollows (in thousands):*

 
| ** **                                               | ** ** | **Cardio  Peripheral** | ** ** | **Neuro-  vascular** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
| Balance as of January 1, 2005                       |       | $                      | 73,431     |                 | $          | 21,083    |       | $ | 94,514 |   |
| Settlement of litigation over purchase price adjustments |       | (2,124                 | )          | —               |       | (2,124    | )          |
|                                                     |       |                   |       |                 |       |      |       |
| Balance as of April 3, 2005                         |       | 71,307                 |       | 21,083               |       | 92,390    |       |
| Goodwill related to MTI step acquisitions                |       | —                 |       | 2,066                |       | 2,066     |       |
|                                                     |       |                   |       |                 |       |      |       |
| Balance as of July 3, 2005                          |       | $                      | 71,307     |                 | $          | 23,149    |       | $ | 94,456 |   |

 

*Other intangible assets consist of the following (inthousands):*

 
| ** **                 | ** ** | ** **                                               | **July 3, 2005** | ** **                  | **December 31, 2004** | ** **                    |
|----------------------------|------------|----------------------------------------------------------|----------------------------|-----------------------------|---------------------------------|-------------------------------|
| ** **                 | ** ** | **Weighted  average  useful life  (in years)** | ** **                 | **Gross  Carrying  Amount** | ** **                      | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| ** **                 | ** ** | ** **                                               | ** **                 | ** **                  | ** **                      | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Patents  and licenses      |       | 5.0                                                      |                       | $                           | 4,189                           |                          | $ | (1,762 | ) | $ | 2,427 |   | $ | 3,496 |   | $ | (1,655 | ) | $ | 1,841 |   |
| Developed  technology      |       | 6.0                                                      |                       | 51,472                      |                            | (26,986                       | ) | 24,486 |   | 47,836 |   | (21,126 | ) | 26,710 |   |
| Trademarks  and tradenames |       | 5.0                                                      |                       | 3,085                       |                            | (1,358                        | ) | 1,727 |   | 2,627 |   | (1,041 | ) | 1,586 |   |
| Customer  relationships    |       | 5.0                                                      |                       | 6,071                       |                            | (3,867                        | ) | 2,204 |   | 5,177 |   | (3,463 | ) | 1,714 |   |
| Other  intangible assets   |       |                                                     |                       | $                           | 64,817                          |                          | $ | (33,973 | ) | $ | 30,844 |   | $ | 59,136 |   | $ | (27,285 | ) | $ | 31,851 |   |

 

Intangibleassets are amortized using methods which approximate the benefit provided bythe utilization of the assets. Patents and licenses, developed technology andtrademarks and tradenames are amortized on a straight line basis. Customerrelationships are amortized using the double declining balance method. TheCompany continually evaluates the amortization period and carrying basis ofintangible assets to determine whether later events and circumstances warrant arevised estimated useful life or reduction in value.

 

Totalamortization of intangibles was $2.5 million and $5.2 million for the three andsix months ended July 3, 2005, respectively, as compared to  $2.4 million and $5.0 million for the threeand six months ended July 4, 2004. The

 

10

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estimatedamortization expense (inclusive of amortization expense already recorded forthe six months ended July 3, 2005) for the five years ending December 31is as follows (in thousands):

 

| 2005 |   | $     | 10,568 |   |
|------|--------|-------|--------|--------|
| 2006 |   | 9,409 |   |
| 2007 |   | 7,140 |   |
| 2008 |   | 3,818 |   |
| 2009 |   | 1,369 |   |

 

**9. Investments**

 

MTIhad a licensing agreement and an approximate 14% interest in Genyx Medical, Inc.(“Genyx”). The carrying value of MTI’s investment in Genyx was $0 as of December 31,2004, and MTI had no obligation to fund Genyx’s operations. In January 2005,MTI sold its interest in Genyx and recorded a gain of $3.7 million.

 

Inconnection with the 2002 sale of its investment in Enteric Medical Technologies, Inc.,MTI has a right to receive certain contingent consideration. In the threemonths ended July 3, 2005 and July 4, 2004, MTI received $878thousand and $1.7 million, respectively, based upon the achievement of certainmilestones.  These receipts wererecognized as additional gain on sale of investment when received by MTI.

 

**10. Accrued Liabilities**

 

*Accrued liabilities consist of the following (in thousands):***   **

 

| ** **                    | ** ** | **July 3,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Accrued professional services |       | $                      | 2,903      |                        | $          | 3,591 |   |
| Accrued clinical studies      |       | 2,899                  |       | 1,580                       |       |
| Office closure                |       | 1,919                  |       | 2,698                       |       |
| Accrued other                 |       | 6,589                  |       | 5,952                       |       |
|                          |       |                   |       |                        |       |
| Total accrued liabilities     |       | $                      | 14,300     |                        | $          | 13,821 |   |

 

**11. Debt**

 

At June 21,2005, the closing date of the Company’s initial public offering, ev3Endovascular had outstanding $316.0 million aggregate principal amount ofdemand notes plus $44.7 million of accrued and unpaid interest thereon. Thesenotes were payable to Warburg Pincus, our majority stockholder, and Vertical, oursecond largest stockholder. Immediately prior to the Company’s initial publicoffering, the Company issued 21,964,815 and 1,194,489 shares of common stock toWarburg Pincus and Vertical, respectively, in exchange for their contributionof $324.2 million principal amount of the demand notes and a portion of theaccrued and unpaid interest thereon. Upon successful consummation of theinitial public offering, the Company utilized $36.5 million of the net proceedsto repay the remaining accrued and unpaid interest, reducing the Company’s debtbalance to zero at June 21, 2005.

 

On May 6,2005, MTI entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”),which will expire on May 6, 2007. Pursuant to the terms of the Agreement,MTI may borrow up to the lesser of (i) $3.0 million

 

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or (ii) thesum of (a) 80% of MTI’s eligible accounts receivable, which exclude amongother things accounts receivable relating to international sales, and (b) thelesser of (1) 30% of MTI’s eligible inventory, which excludes among otherthings inventory located outside of the United States, (2) 50% ofoutstanding loans under (a) above or (3) $750 thousand. Alloutstanding amounts under the Agreement bear interest at a variable rate equalto SVB’s prime rate plus 2%. The Agreement also contains customary covenantsregarding operations of MTI’s business and financial covenants relating tominimum tangible net worth. As of July 3, 2005, MTI had no borrowingsunder the Agreement.

 

**12. Redeemable Convertible Preferred Membership Units**

 

Inconnection with the merger of ev3 LLC with and into ev3 Inc., 24,040,718 Class Apreferred membership units of ev3 LLC with a carrying value of $98.7 millionand 41,077,336 Class B preferred membership units of ev3 LLC with acarrying value of $167.4 million were converted into common membership units ofev3 LLC, and subsequently into shares of the Company’s common stock, on a 1:1basis. The newly converted shares were then subject to a 1-for-6 reverse stocksplit (See Note 2).

 

Pursuantto the terms of the preferred membership units, prior to conversion they werebeing accreted to a redemption value and that accretion for the three and sixmonths ended July 3, 2005 was $5.6 million and $12.1 million, respectively.Accretion for the three and six months ended July 4, 2004 was $5.9 millionand $11.8 million, respectively. Accretion was discontinued at the time ofconversion.

 

**13. Equity Based Compensation Plans**

 

Upon consummation of theCompany’s initial public offering, the ev3 LLC 2003 Incentive Plan wasterminated with respect to options available for grant that were not grantedprior to the offering and the ev3 Inc. 2005 Incentive Stock Plan becameeffective. Subject to adjustment as provided in the plan, 2,000,000 shares ofthe Company’s common stock are available for issuance under the plan. Under theplan, the Company’s eligible employees, outside directors and consultantsmay be awarded options, stock grants, stock units or stock appreciationrights. The terms and conditions of an option, stock grant, stock unit or stockappreciation right (including any vesting or forfeiture conditions) are setforth in the certificate evidencing the grant. During the three months endedJuly 3, 2005, options to purchase 56,859 shares of ev3 LLC commonmembership units were granted under the ev3 LLC 2003 Incentive Plan. Inconnection with the merger of ev3 LLC with and into ev3 Inc., these optionswere converted into options to purchase an equivalent number of shares of theCompany’s common stock.  During the threemonths ended July 3, 2005, options to purchase 1,491,619 shares of theCompany’s common stock were granted under the ev3 Inc. 2005 Incentive Stock Plan.     

 

**14. Commitments and Contingencies**

 

*Letters of Credit*

 

As of July 3,2005, the Company had $2.4 million of outstanding letters of credit. Theseoutstanding commitments are fully collateralized by restricted cash.

 

*Contingencies*

 

TheCompany’s acquisition agreements relating to the purchase of MitraLife, ApprivaMedical, Inc. and Dendron GmbH require the Company to make additionalpayments to the sellers of these businesses if certain milestones related toregulatory steps in the product commercialization process are achieved. Thepotential milestone payments total $25.0 million, $175.0 million and$15.0 million with respect to the MitraLife, Appriva and Dendronacquisitions, respectively, during the period of 2003 to 2009. On September 29,2004, the Company sold substantially all of the assets constituting theMitraLife business to Edwards Lifesciences and is no longer pursuingcommercialization of the product line acquired in the MitraLife transaction. Asof the date that the Company sold these assets to Edwards Lifesciences, none ofthe milestones set forth in the Company’s agreement with the sellers ofMitraLife had been met. The Company has determined that it has no currentobligations in respect of these

 

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milestonepayments, and the Company does not believe that it is likely that it will haveobligations with respect to these milestones in the future. The Company hasdetermined that the first milestone with respect to the Appriva agreement wasnot achieved by the January 1, 2005 milestone date and that the firstmilestone is not payable. It is possible that the Company will meet one or moreof the remaining milestones with respect to the Appriva acquisition and couldbecome obligated to make the corresponding milestone payments totaling $125.0 millionin periods subsequent to 2005. Under the terms of the stock purchase agreement theCompany entered into in connection with its acquisition of Dendron, the Companymay be required to make additional payments which are contingent uponDendron products achieving certain revenue targets between 2003 and 2008. In2003, the $4.0 million revenue target for sales of Dendron products during2003 was met. Accordingly, an additional payment to the former Dendronstockholders of $3.75 million was made in 2004. In 2004, the$5.0 million revenue target for sales of Dendron products during 2004 wasmet. Accordingly, a payment to the former Dendron stockholders of$3.75 million was accrued in 2004 and was paid during the second quarter of 2005. The Company may be requiredto make a final payment of $7.5 million, which is contingent upon Dendronproducts achieving annual revenues of $25 million in any year during theperiod between 2003 and 2008. Any such final payment would be due in the yearfollowing the year of target achievement.

 

TheCompany is from time to time subject to, and is presently involved in,litigation or other legal proceedings.

 

In September 2000,Dendron, which was acquired by MTI in 2002, was named as the defendant in threepatent infringement lawsuits brought by the Regents of the University ofCalifornia, as the plaintiff, in the District Court (Landgericht) inDusseldorf, Germany. The complaints requested a judgment that Dendron’s EDC Icoil device infringed three European patents held by the plaintiff and askedfor relief in the form of an injunction that would prevent Dendron fromproducing and selling the devices within Germany and selling from Germany tocustomers abroad, as well as an award of damages caused by Dendron’s allegedinfringement, and other costs, disbursements and attorneys’ fees. In August 2001,the court issued a written decision that the EDC I coil devices did infringethe plaintiff’s patents, enjoined Dendron from selling the devices withinGermany and from Germany to customers abroad, and requested that Dendrondisclose the individual products’ costs as the basis for awarding damages. In September 2001,Dendron appealed the decision. In addition, Dendron instituted challenges tothe validity of each of these patents by filing opposition proceedings with theEuropean Patent Office, or EPO, against one of the patents (MTI joined Dendronin this action in connection with its acquisition of Dendron), and by filing,with MTI, nullity proceedings with the German Federal Patents Court against theGerman component of the other two patents. The opposition proceedings with theEPO on the one patent are complete, and the EPO has rejected the opposition andhas upheld the validity of the one patent.

 

On July 4,2001, the University of California filed another suit against Dendron allegingthat the EDC I coil device infringed another European patent held by theplaintiff. The complaint was filed in the District Court of Dusseldorf, Germanyseeking additional monetary and injunctive relief. In April 2002, theCourt found that EDC I coil devices did infringe the plaintiff’s patent. Thepatent involved is the same patent that was involved in the case before theEnglish Patents Court (see below) and that was ruled by a Dutch court to beinvalid (see below). The opposition proceedings on the patent are complete, andthe EPO has rejected the opposition and has upheld the validity of the patent. Thecase is under appeal and an oral hearing is scheduled to be held in theDusseldorf Court of Appeal on March 9, 2006.

 

Anaccrual for the matters discussed above was included in the balance sheet ofDendron as of the date of its acquisition by MTI. As of July 3, 2005,approximately $800 thousand was recorded in accrued liabilities in ourconsolidated balance sheet. Dendron ceased all activities with respect to theEDC I coil device prior to MTI’s October 2002 acquisition of Dendron.

 

Concurrentwith its acquisition of Dendron, MTI initiated a series of legal actionsrelated to its Sapphire coils in the Netherlands and the United Kingdom, whichincluded a cross-border action that was heard by a Dutch court, as furtherdescribed below. The primary purpose of these actions was to assert bothinvalidity and non-infringement by MTI of certain patents held by others. Therange of patents at issue are held by the Regents of the University ofCalifornia, with Boston Scientific Corporation subsidiaries named as exclusivelicensees, collectively referred to as the “patent holders,” related todetachable coils and certain delivery catheters.

 

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In October 2003,the Dutch court ruled that the three patents at issue related to detachablecoils are valid and that MTI’s Sapphire coils do infringe such patents. TheDutch court also ruled that the patent holders’ patent at issue related to thedelivery catheter was invalid. Under the court’s ruling, MTI has been enjoinedfrom engaging in infringing activities related to the Sapphire coils in mostcountries within the European Union, and may be liable forthen-unspecified monetary damages for activities engaged in by MTI since September 27,2002. In February 2005, MTI received an initial claim from the patentholders with respect to monetary damages, amounting to €3.6 million, orapproximately $4.3 million as of July 3, 2005, with which MTIdisagrees. Court hearings will be held regarding these claims. MTI has filed anappeal with the Dutch court, and believes that since the date of injunction ineach separate country it is in compliance with the Dutch court’s injunction andMTI intends to continue such compliance. Because the Company believes that MTIhas valid legal grounds for appeal, it has determined that a loss is notprobable at this time as defined by SFAS 5, *Accounting for Contingencies*. However, there can be noassurance that the ultimate resolution of this matter will not result in amaterial adverse effect on the Company’s business, financial condition orresults of operations.

 

In January 2003,MTI initiated a legal action in the English Patents Court seeking a declarationthat a patent held by the patent holders related to delivery catheters wasinvalid, and that MTI’s products did not infringe this patent. The patent inquestion was the U.K. designation of the same patent that was found by theDutch court in October 2003 to be invalid, as discussed above. The patentholders counterclaimed for alleged infringement by MTI. In February 2005,the court approved an interim settlement between the parties under which thepatent holders are required to surrender such patent to the U.K. Comptroller ofPatents, and to pay MTI’s costs associated with the legal action, includinginterest. As a result, MTI received interim payments from the patent holdersaggregating £500 thousand (equivalent to approximately $950 thousand based onthe dates of receipt), which MTI recorded as a reduction of litigation expenseupon receipt of such funds in February and March 2005. The partiesintend to continue discussions regarding payment by the patent holders of theremaining costs incurred by MTI in such litigation. As a result of the interimsettlement, MTI anticipates that it will no longer be involved in litigation inthe United Kingdom, although no assurance can be given that no other litigationinvolving MTI may arise in the United Kingdom.

 

In theUnited States, concurrent with the FDA’s marketing clearance of the Sapphireline of embolic coils received in July 2003, MTI initiated a declaratoryjudgment action against the patent holders in the United States District Courtfor the Western District of Wisconsin. The action included assertions ofnon-infringement by MTI and invalidity of a range of patents held by the patentholders related to detachable coils and certain delivery catheters. In October 2003,the court dismissed MTI’s actions for procedural reasons without prejudice andwithout decision as to the merits of the parties’ positions. In December 2003,the University of California filed an action against MTI in the United StatesDistrict Court for the Northern District of California alleging infringement byMTI with respect to a range of patents held by the University of Californiarelated to detachable coils and certain delivery systems. MTI has filed acounterclaim against the University of California asserting non-infringement byMTI, invalidity of the patents and inequitable conduct in the procurement ofcertain patents. In addition, MTI filed a claim against the University ofCalifornia and Boston Scientific Corporation for violation of federal antitrustlaws, with the result that the court has subsequently decided to add BostonScientific as a party to the litigation. A trial date has not been set. Becausethese matters are in early stages, the Company cannot estimate the possible lossor range of loss, if any, associated with their resolution. However, there canbe no assurance that the ultimate resolution of these matters will not resultin a material adverse effect on the Company’s business, financial condition orresults of operations.

 

In March 2005,Medtronic, Inc. contacted the Company to express its view that the Company’sProtégé stents infringe on one or more of Medtronic’s patents. The Companyinformed Medtronic that it disagrees with Medtronic’s assertions, and has sincehad several discussions with Medtronic. No lawsuit with respect to this matterhas been filed. The Company also received notice from an individual claimingthat he believes that the Company’s PLAATO device infringes on two of hispatents. The Company has informed this individual that it does not believe thatits PLAATO device infringes on these patents. On March 30, 2005, theCompany was served with a complaint by Boston Scientific Corporation and one ofits affiliates which claims that some of the Company’s products, including itsSpideRX Embolic Protection Device, infringe certain of Boston Scientific’spatents. This action was brought in the United States District Court for theDistrict of Minnesota. The Company has answered the complaint and intends tovigorously defend this action. Because these matters are in early stages, theCompany cannot estimate the possible loss or range of loss, if any, associatedwith their resolution. However, there can be no assurance that

 

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the ultimate resolution ofthese matters will not result in a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

During 2002, the Company acquired ApprivaMedical, Inc., a developer of a technology to reduce stroke in patientswith atrial fibrillation which provided the platform for the Company’scurrent PLAATO device. The acquisition agreement relating to the Company’sacquisition of Appriva contains four milestones to which payments relate. The firstmilestone was required by its terms to be achieved by January 1, 2005 inorder to trigger a payment equal to $50 million. The Company hasdetermined that the first milestone was not achieved by January 1, 2005and that the first milestone is not payable. On May 20, 2005, MichaelLesh, as an individual seller of Appriva stock and  purportingto represent certain other sellers of Appriva  stock, fileda complaint in the Superior Court of the State of Delaware with individually specifieddamages aggregating $70 million and other unspecified damages for severalallegations, including that  the Company, along with otherdefendants,  breached the acquisition agreement and an implied covenant ofgood faith and fair dealing by willfully failing to take the steps necessary tomeet the first milestone under the agreement, and  thereby alsofailing to meet certain other milestones, and further that one milestone wasactually met.  The complaint also alleges fraud, negligentmisrepresentation and violation of state securities laws in connection with thenegotiation of the acquisition agreement. The Company believes theseallegations are without merit and intends to vigorously defend this action. On August 5,2005, the Company’s attorneys received a letter from attorneys representingcertain other sellers of Appriva stock (who are not purported to be representedin the action filed by Lesh), asking the Company’s attorneys to enter into adialogue regarding their assertions that certain milestones should have beenpaid. The Company believes their assertions are without merit. Failure to reachagreement with these new claimants on a resolution of the parties’ differences,could lead to additional litigation on this matter. Because these matters arein early stages, the Company cannot estimate the possible loss or range ofloss, if any, associated with their resolution. However, there can be noassurance that the ultimate resolution of these matters will not result in amaterial adverse effect on the Company’s business, financial condition orresults of operations.

 

**15. Segment and Geographic Information**

 

 *The following is segment and geographicinformation (in thousands):*

 

| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **July 3,  2005**** ** | ** ** | **July 4,  2004**** ** | ** ** | **July 3,  2005**** ** | ** ** | **July 4,  2004**** ** | ** ** |
| **Segment Data**                    |       |                             |       |                             |       |   |   |   |   |
| **Net sales**                       |       |                             |       |                             |       |   |   |   |   |
| **Cardio Peripheral**               |       |                             |       |                             |       |   |   |   |   |
| Stents                              |       | $                                | 8,781      |                             | $          | 4,681 |   | $ | 15,879 |   | $ | 10,005 |   |
| Thrombectomy and embolic protection |       | 3,223                            |       | 1,835                            |       | 6,461 |   | 3,935 |   |
| Procedural support and other        |       | 7,204                            |       | 5,647                            |       | 13,709 |   | 11,792 |   |
| Total Cardio Peripheral             |       | $                                | 19,208     |                             | $          | 12,163 |   | $ | 36,049 |   | $ | 25,732 |   |
|                                |       |                             |       |                             |       |   |   |   |   |
| **Neurovascular**                   |       |                             |       |                             |       |   |   |   |   |
| Embolic products                    |       | 4,219                            |       | 3,209                            |       | 8,197 |   | 5,487 |   |
| Neuro access and delivery products  |       | 8,113                            |       | 5,197                            |       | 14,976 |   | 9,930 |   |
| Total Neurovascular                 |       | $                                | 12,332     |                             | $          | 8,406 |   | $ | 23,173 |   | $ | 15,417 |   |
|                                |       |                             |       |                             |       |   |   |   |   |
| Total net sales                     |       | $                                | 31,540     |                             | $          | 20,569 |   | $ | 59,222 |   | $ | 41,149 |   |
| ** **                          | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| ** **                          | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross Profit**                    | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cardio peripheral                   |       | $                                | 10,314     |                             | $          | 6,307 |   | $ | 19,001 |   | $ | 14,337 |   |
| Neurovascular                       |       | 8,441                            |       | 4,894                            |       | 15,328 |   | 8,655 |   |
|                                |       |                             |       |                             |       |   |   |   |   |
| Total gross profit (1)              |       | 18,755                           |       | 11,201                           |       | 34,328 |   | 22,992 |   |
|                                |       |                             |       |                             |       |   |   |   |   |
| Operating expenses                  |       | 47,715                           |       | 36,555                           |       | 92,609 |   | 72,697 |   |
| Loss from Operations                |       | $                                | (28,960    | )                                | $          | (25,354 | ) | $ | (58,281 | ) | $ | (49,705 | ) |

 

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(1) Gross profit forinternal measurement purposes is defined as net sales less cost of goods soldexcluding the amortization of intangible assets.

 

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| ** **        | ** ** | **July 3,  2005**** ** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|----------------------------------|------------|-----------------------------|------------|
| **Total assets**  | ** ** | ** **                       | ** ** | ** **                  | ** ** |
| Cardio Peripheral |       | $                                | 270,573    |                        | $          | 146,722 |   |
| Neurovascular     |       | 62,173                           |       | 65,324                      |       |
| ** **        | ** ** | ** **                       | ** ** | ** **                  | ** ** |
| Total assets      |       | $                                | 332,746    |                        | $          | 216,046 |   |

 
| ** **          | ** ** | **Three Months Ended**** ** | ** ** | **Six Months Ended**** ** | ** ** |
|---------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **July 3,  2005**** **           | ** ** | **July 4,  2004**** **         | ** ** | **July 3,  2005**** ** | ** ** | **July 4,  2004**** ** | ** ** |
| **Geographic Data** | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**       | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States       |       | $                                          | 15,939     | ** **                               | $          | 10,212 |   | $ | 30,060 |   | $ | 20,710 |   |
| International       |       | 15,601                                     |       | 10,357                                   |       | 29,162 |   | 20,439 |   |
| ** **          | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** |   |   |   |
| Total net sales     |       | $                                          | 31,540     |                                     | $          | 20,569 |   | $ | 59,222 |   | $ | 41,419 |   |

 

**16. Earnings Per Share**

 

Thefollowing outstanding convertible preferred units of ev3 LLC, convertibledemand notes, and options of the Company and ev3 LLC were excluded from thecomputation of diluted earnings per share as they had an antidilutive effect. Inconnection with the merger of ev3 LLC with and into ev3 Inc. immediately priorto the Company’s initial public offering, each preferred membership unit of ev3 LLC was converted into a share ofour common stock and each option to purchase common membership units of ev3 LLCwas converted into an option to purchase an equivalent number of shares of theCompany’s common stock (see Note 13).

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **July 3,  2005**** ** | ** ** | **July 4,  2004**** ** | ** ** | **July 3,  2005**** ** | ** ** | **July 4,  2004**** ** | ** ** |
| Convertible preferred stock class A (assuming conversion using  the contractual conversion ratio to common units) |       | —                           |       | 24,040,718                       |       | — |   | 24,040,718 |   |
| Convertible preferred stock class B (assuming conversion using  the contractual conversion ratio to common units) |       | —                           |       | 41,077,336                       |       | — |   | 41,077,336 |   |
| Convertible demand notes (assuming conversion at stated value into  common units)                                      |       | —                           |       | 64,611,847                       |       | — |   | 64,611,847 |   |
| Options                                                                                                                |       | 3,493,961                        |       | 1,388,468                        |       | 3,493,961 |   | 1,388,468 |   |
|                                                                                                                   |       | 3,493,961                        |       | 131,118,369                      |       | 3,493,961 |   | 131,118,369 |   |

 

**17. Subsequent Events**

 

On July 20,2005, subsequent to the end of the fiscal quarter, the Company sold 205,800shares of common stock pursuant to the over-allotment option granted to theunderwriters in connection with its initial public offering. Net

 

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proceedsto the Company from this sale totaled $2.5 million, after deductingunderwriting discounts and commissions and offering expenses, and increased theCompany’s outstanding shares to 49,116,454.

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

 

Thefollowing management’s discussion and analysis of financial condition and resultsof operations describes the principal factors affecting the results of ouroperations, financial condition and changes in financial condition for thethree and six months ended July 3, 2005. You should read this discussiontogether with the accompanying unaudited consolidated financial statements,related notes and other financial information included herein. As discussedunder the heading “Forward-Looking Statements” below, the following discussionand other portions of this report may contain predictions, estimates andother forward-looking statements that involve a number of risks anduncertainties, including those discussed under the heading “Risk Factors” belowand elsewhere in this report. These risks could cause our actual results todiffer materially from any future performance suggested in such forward-lookingstatements.

 

**Restatement**

 

As discussed in Note 2 to our consolidated financial statements, in thecourse of finalizing our consolidated financial statements for the fiscal yearended December 31, 2005, we determined that our consolidated statement ofcash flows for the six months ended July 3, 2005 should be restated tocorrect an error in the classification of a $36.5 million payment of accruedinterest on our demand notes payable made by us in conjunction with thecompletion of our initial public offering on June 21, 2005. The interest paymentwas reported as a cash out-flow under “financing activities” and should havebeen reported as a cash out-flow under “operating activities” under generallyaccepted accounting principles. The restatement does not affect the net changein cash for the six months ended July 3, 2005 and has no impact on ourconsolidated balance sheet as of July 3, 2005, the consolidated statementof operations and the related net loss per common share attributable to commonstockholders for the three and six months ended July 3, 2005 or thereported changes in stockholders’ equity (deficit) for the three and six monthsended July 3, 2005. The “Liquidity and Capital Resources” section ofthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations has been updated to reflect this restatement.

 

**Overview**

 

We are a global medicaldevice company focused on catheter-based, or endovascular, technologies for theminimally invasive treatment of vascular diseases and disorders. Our broadproduct portfolio is focused on applications in each of the three sub-marketsof the endovascular device market: peripheral vascular, cardiovascular andneurovascular. We sell over 100 products consisting of over 1,000 SKUs in thesemarkets. From 2000 to 2002, our investor group acquired certain of the assetsin our cardio peripheral division to build the foundation of our currentperipheral and cardiovascular product portfolios. During this period, ourinvestor group also purchased certain neurovascular assets to expand ourneurovascular product portfolio and, through a series of investments,obtained our indirect controlling investment in Micro Therapeutics, Inc.,or MTI. Beginning in 2002, we entered into long-term, exclusive agreements tomarket or distribute MTI’s full product portfolio in Europe, Japan, Canada andthe major markets of Asia Pacific and Latin America. Since our last acquisitionin 2002, we have dedicated significant capital and management effort to advancethe acquired technologies and broaden our product lines in order to execute ourstrategies.

 

We have corporateinfrastructure and direct sales capabilities in the United States, Canada,Europe and Japan and have established distribution relationships in other largeinternational markets. Our corporate headquarters is located in Plymouth,Minnesota and contains our manufacturing, research and development, and U.S.sales operations for our peripheral vascular and cardiovascular product lines. MTIis headquartered in Irvine, California, which contains our manufacturing,research and development, and U.S. sales operations for our neurovascularproduct lines. Outside of the United States, our primary offices are in Paris,France and Tokyo, Japan. During the three and six months ended July 3,2005, approximately 49.5% and 49.2% of our net sales, respectively, weregenerated outside of the United States, as a result of which we are sensitiveto risks related to fluctuation in exchange rates, which could affect ourbusiness results in the future.

 

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Since our inception, we havefocused on building our U.S. and international direct sales and marketinginfrastructure that now includes a sales force of 199 direct salesrepresentatives as of August 1, 2005 in the United States, Canada, Europeand Japan. Our direct sales representatives accounted for approximately 87% and88% of our net sales during the three and the six months ended July 3,2005, respectively, with the balance generated by independent distributors. In2004,****we increased our U.S. directsales force from 44 to 82 and our Japan sales force from four to eleven. Inorder to drive sales growth, we have invested heavily throughout our history innew product development, clinical trials to obtain regulatory approvals and theexpansion of our global distribution system. As a result, our costs andexpenses have significantly exceeded our net sales, resulting in an accumulateddeficit of $520.2 million at July 3, 2005. Consequently, we have financedour operations through debt and equity offerings. We expect to continue togenerate operating losses for at least the next 18 months.

 

Ourcash, cash equivalents and short-term investments available to fund currentoperations were $128.4 million and $20.1 million at July 3, 2005 and December 31,2004, respectively. We completed an initial public offering of our common stockon June 21, 2005 in which we sold 11,765,000 shares of our common stock at$14.00 per share, resulting in net proceeds to us of approximately $152.8million, after deducting underwriting discounts and commissions and offeringexpenses. We used $36.5 million of these net proceeds to repay a portion of theaccrued and unpaid interest on certain demand notes held by Warburg, PincusEquity Partners, L.P. and certain of its affiliates, which we refer tocollectively as Warburg Pincus, and The Vertical Group L.P. and certain of itsaffiliates, which we refer to collectively as Vertical. In addition, on July 20,2005, we sold 205,800 shares of common stock pursuant to an over-allotmentoption granted to the underwriters which resulted in net proceeds to us of  $2.5 million, after deducting underwritingdiscounts and commissions and offering expenses. We invested the remainingportion of the net proceeds in short-term, investment-grade, interest bearingsecurities. We expect to use these funds for general corporate purposes, which may includefunding the operations of MTI. We expect our cash balance to decrease as wecontinue to use cash to fund our operations. We do not have any debt forborrowed money. We believe our cash, cash equivalents and short-terminvestments will be sufficient to meet our liquidity requirements through theend of fiscal 2006. There can be no assurance, however, that we will be able toachieve such positive cash flow or that we will not need additional financingto fund our operations.

 

We believe the overallmarket for endovascular devices will grow as the demand for minimally invasivetreatment of vascular diseases and disorders continues to increase. Our broadproduct portfolio is focused on applications that we estimate represented anaddressable worldwide endovascular market opportunity of approximately$1.6 billion in 2004. We intend to capitalize on this market opportunityby the continued introduction of new products. We intend to originate these newproducts primarily through our internal research and development and clinicalefforts, but we may supplement them with acquisitions or other externalcollaborations. Additionally, our growth has been, and will continue to be,impacted by our expansion into new geographic markets and the expansion of ourdirect sales organization in existing geographic markets

 

We report and manage our operations in tworeportable business segments based on similarities in the products sold,customer base and distribution system. Our cardio peripheral segment containsproducts that are used in both cardiovascular and peripheral vascularprocedures by cardiologists, radiologists and vascular surgeons. Ourneurovascular segment contains products that are used primarily byneuro-radiologists and neurosurgeons. Our sales activities and operations arealigned closely with our business segments. We generally have dedicated cardioperipheral sales teams in the United States and Europe that target customerswho often perform procedures in both anatomic areas (cardiovascular andperipheral vascular). We generally have separate, dedicated neurovascular salesteams in the United States and Europe that are specifically focused on thiscustomer base.

 

MTI, our public operatingsubsidiary, is focused on the neurovascular market. However, a small portion ofMTI’s sales relate to products sold into the cardio peripheral market, which weclassify as cardio peripheral sales in our reporting. In addition, some of MTI’ssales are generated at a transfer price to our international sales entitieswhere they are resold by our sales organization. For consolidated reporting,these intercompany sales are eliminated. As a result, the neurovascular saleswe report will be different from the sales that MTI reports publicly. Based onMTI’s public financial statements, approximately 41.5% of our net sales and6.2% of our net losses during the three months ended July 3, 2005 and41.3% of our net sales and 3.3% of our net losses during the six months ended July 3,2005 were attributable to MTI.

 

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On January 28, 2005, we were formed as a subsidiary of ev3 LLC.Immediately prior to the closing of our initial public offering onJune 21, 2005, ev3 LLC merged with and into us, and we became the holdingcompany for all of ev3 LLC’s subsidiaries. Warburg Pincus and Vertical directlyowned an aggregate of 9,704,819 shares of MTI’s common stock, or 20.0% of theoutstanding shares of MTI’s common stock as of May 1, 2005. OnMay 26, 2005, pursuant to a contribution and exchange agreement dated asof April 4, 2005, Warburg Pincus and Vertical contributed these shares ofMTI’s common stock to ev3 LLC in exchange for 10,804,500 and 3,004,332 commonmembership units of ev3 LLC, respectively. As a result of the merger describedabove, as of July 3, 2005, we owned 34,041,578 shares of MTI’s commonstock, or 70.3% of the outstanding shares of MTI’s common stock.

 

As the controlling stockholder, the contribution of the MTI shares byWarburg Pincus, representing a 15.7% interest in MTI as of May 26, 2005,was accounted for as a transfer of assets between entities under common controlresulting in the retention of historical based accounting. The consolidatedfinancial statements included in this report  give effect to thecontribution of MTI shares owned by Warburg Pincus as though such contributionoccurred in 2003 and 2004 when Warburg Pincus acquired its interest in MTI. Thecontribution of the MTI shares owned by Vertical  was accounted for underthe purchase method of accounting on the contribution date. As of July 3,2005 and December 31, 2004, we owned 70.3% and 66.0% of the outstandingshares of common stock of MTI, respectively. The following results ofoperations data include the financial results of MTI, which we consolidate foraccounting purposes but is not wholly owned. The consolidation of MTI foraccounting purposes results in all of MTI’s assets and liabilities beingincluded in our consolidated balance sheets. Although all of MTI’s assets areincluded in our consolidated balance sheets, not all of these assets would beavailable to us for distribution to our stockholders in the event of MTI’sliquidation.

 

Immediately prior to theconsummation of our initial public offering, we completed a one-for-six reversestock split of our outstanding common stock. All share and per share amountsfor all periods presented in this report reflect this split.

 

**Sales and Expense Components**

 

Thefollowing is a description of the primary components of our net sales andexpenses:

 

*Net sales.*  We derive our net sales from the sale ofendovascular devices in two primary business segments: cardio peripheral andneurovascular devices. Most of our sales are generated by our global, directsales force and are shipped and billed to hospitals or clinics throughout theworld. In countries where we do not have a direct sales force, sales aregenerated by shipments to distributors who, in turn, sell to hospitals andclinics. In cases where our products are held in consignment at a customer’slocation, we generate sales at the time the product is used in surgery ratherthan at shipment. We charge our customers for shipping and record shippingincome as part of net sales.

 

*Cost of goods sold.*  We manufacture a substantial majority ofthe products that we sell. Our cost of goods sold consists primarily of directlabor, allocated manufacturing overhead, raw materials and components andexcludes amortization of intangible assets, which is presented as a separatecomponent of operating expenses.

 

*Sales, general and administrative expenses.*  Our selling and marketingexpenses consist primarily of sales commissions and support costs for ourglobal, direct distribution system, royalty and consulting expenses associatedwith our medical advisors, marketing costs and facility costs, including any costsrelated to closing facilities. General and administrative expenses consistprimarily of salaries and benefits, compliance systems, accounting, finance,legal, information technology, human resources and freight expense that we payto ship products to customers.

 

*Research and development.*  Research and development expense includescosts associated with the design, development, testing, deployment, enhancementand regulatory approval of our products. It also includes costs associated withdesign and execution of clinical trials and regulatory submissions.

 

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*Amortization of intangible assets.*  Intangible assets, such aspurchased completed technology, distribution channels, intellectual property,including trademarks and patents, are amortized over their estimated usefullife. We amortize intangible assets over periods ranging from 5 to 8 years.

 

*(Gain) loss on sale of assets, net.*  (Gain) loss on sale ofassets, net includes the difference between the proceeds received from the saleof an operating asset and its carrying value.

 

*Acquired in-process research and development.*  Acquired in-process researchand development is related to value assigned to those projects acquired inbusiness combinations or in the acquisition of assets for which the relatedproducts have not received regulatory approval and have no alternative futureuse.

 

*Gain on sale of investments, net.*  Gain on sale of investments,net includes the difference between the proceeds received from the sale of aninvestment and its carrying value. In addition, this caption includes lossesfrom other than temporary declines in investments accounted for on a costbasis.

 

*Interest expense, net.*  Interest expense, net consists primarilyof interest associated with loans from our principal investors, Warburg Pincusand Vertical.

 

*Minority interest in loss of subsidiary.*  Minority interest in loss ofsubsidiary is the portion of MTI’s net losses allocated to minoritystockholders.

 

*Other  expense, net.*  Other expense, net primarilyincludes foreign exchange losses net of certain other expenses.

 

*Income tax benefit.*  Income tax benefit is generated in certainof our European subsidiaries. Due to our history of operating losses, we havenot recorded a provision for U.S. income taxes through 2004 and the six monthsended July 3, 2005.

 

*Accretionof preferred membership units to redemption value.*  Accretion of preferred membershipunits to redemption value represents the increase in carrying value of preferredmembership units of ev3 LLC prior to ev3 LLC’s merger with and into us onJune 21, 2005. The increase in carrying value was based on the rights towhich the preferred membership units were entitled related to a liquidation,dissolution or winding up of ev3 LLC. Accretion was recorded as a reduction tomembers’ equity and increased the loss attributable to common unit holders.Accretion was discontinued upon conversion of the preferred units to commonmembership units, and subsequently into shares of our common stock, onJune 21, 2005, in connection with the merger.

 

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**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, our results ofoperations expressed as dollar amounts (in thousands), and the changes betweenthe specified periods expressed as percent increases or decreases: 

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
|                                                                               | ** ** | **July 3,  2005**           | ** ** | **July 4,  2004**         | ** ** | **Percent  Change** | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** | **Percent  Change** | ** ** |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Net sales                                                                          |       | $                                | 31,540     |                           | $          | 20,569 |   | 53.3 | % | $ | 59,222 |   | $ | 41,149 |   | 43.9 | % |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Operating expenses                                                                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Cost of goods sold (1)                                                             |       | 12,785                           |       | 9,368                          |       | 36.5 | % | 24,894 |   | 18,157 |   | 37.1 | % |
| Sales, general and administrative (1)                                              |       | 32,297                           |       | 23,520                         |       | 37.3 | % | 64,157 |   | 47,957 |   | 33.8 | % |
| Research and development (1)                                                       |       | 11,891                           |       | 10,589                         |       | 12.3 | % | 22,217 |   | 19,743 |   | 12.5 | % |
| Amortization of intangible assets                                                  |       | 2,548                            |       | 2,447                          |       | 4.1 | % | 5,203 |   | 4,978 |   | 4.5 | % |
| (Gain) loss on sale or disposal of assets, net                                     |       | 111                              |       | (1                             | )          | NM |   | 164 |   | 19 |   | 763.2 | % |
| Acquired in-process research and development                                       |       | 868                              |       | —                         |       | NM |   | 868 |   | — |   | NM |   |
| Total operating expenses                                                           |       | 60,500                           |       | 45,923                         |       | 31.7 | % | 117,503 |   | 90,854 |   | 29.3 | % |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Loss from operations                                                               |       | (28,960                          | )          | (25,354                        | )          | 14.2 | % | (58,281 | ) | (49,705 | ) | 17.3 | % |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Other (income) expense:                                                            |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Gain on sale of investments, net                                                   |       | (878                             | )          | (1,728                         | )          | (49.2 | )% | (4,611 | ) | (1,728 | ) | 166.8 | % |
| Interest expense, net                                                              |       | 6,078                            |       | 4,458                          |       | 36.3 | % | 11,786 |   | 10,613 |   | 11.1 | % |
| Minority interest in loss of subsidiary                                            |       | (705                             | )          | (1,315                         | )          | (46.4 | )% | (726 | ) | (5,072 | ) | (85.7 | )% |
| Other expense, net                                                                 |       | 1,828                            |       | 206                            |       | 787.4 | % | 2,920 |   | 106 |   | 2654.7 | % |
| Loss before income taxes                                                           |       | (35,283                          | )          | (26,975                        | )          | 30.8 | % | (67,650 | ) | (53,624 | ) | 26.2 | % |
| Income tax benefit                                                                 |       | (61                              | )          | —                         |       | NM |   | (59 | ) | — |   | NM |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Net loss                                                                           |       | (35,222                          | )          | (26,975                        | )          | 30.6 | % | (67,591 | ) | (53,624 | ) | 26.0 | % |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Accretion of preferred membership units to redemption value (2)                    |       | 5,635                            |       | 5,869                          |       |   |   | 12,061 |   | 11,804 |   |   |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Net loss attributable to common stockholders                                       |       | $                                | (40,857    | )                              | $          | (32,844 | ) | 24.4 | % | $ | (79,652 | ) | $ | (65,428 | ) | 21.7 | % |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Net loss per common share attributable to common stockholders (basic  and diluted) |       | $                                | (4.60      | )                              | $          | (18.29 | ) |   |   | $ | (13.95 | ) | $ | (37.36 | ) |   |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding                                         |       | 8,877,898                        |       | 1,795,745                      |       |   |   | 5,711,852 |   | 1,751,092 |   |   |   |

 

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| (1) Includes stock based compensation charges of: |   |   |   |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Cost of goods sold                                     |   | $      | 135    |   | $      | 47     |   |   |   | $      | 247    |   | $      | 98 |   |   |   |
| Sales, general and administrative                      |   | 591    |   | 206    |   |   |   | 1,045  |   | 1,373  |   |   |   |
| Research and development                               |   | 189    |   | 182    |   |   |   | 434    |   | 398    |   |   |   |
|                                                   |   | $      | 915    |   | $      | 435    |   |   |   | $      | 1,726  |   | $      | 1,869 |   |   |   |

 

(2)              The accretion of preferred membership units toredemption value presented above is based on the rights to which the Class Aand Class B preferred membership unit holders of ev3 LLC were entitled relatedto a liquidation, dissolution or winding up of ev3 LLC. Notwithstanding thisaccretion right, in connection with the merger of ev3 LLC with and into us,each membership unit representing a preferred equity interest in ev3 LLC wasconverted into the right to receive one share of our common stock and did notreceive any additional rights with respect to the liquidation preference. As aresult, no further accretion related to these preferred units will be recorded.

 

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Thefollowing tables set forth, for the periods indicated, our net sales by segmentand geography expressed as dollar amounts (in thousands) and the changes in netsales between the specified periods expressed as percentages: 

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **NET SALES BY SEGMENT** | ** ** | **July 3,  2005**           | ** ** | **July 4,  2004**         | ** ** | **Percent  Change** | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** | **Percent  Change** | ** ** |
|                                    |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Cardio Peripheral                       |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Stents                                  |       | $                                | 8,781      |                           | $          | 4,681 |   | 87.6 | % | $ | 15,879 |   | $ | 10,005 |   | 58.7 | % |
| Thrombectomy and embolic protection     |       | 3,223                            |       | 1,835                          |       | 75.6 | % | 6,461 |   | 3,935 |   | 64.2 | % |
| Procedural support and other            |       | 7,204                            |       | 5,647                          |       | 27.6 | % | 13,709 |   | 11,792 |   | 16.3 | % |
| Total Cardio Peripheral                 |       | $                                | 19,208     |                           | $          | 12,163 |   | 57.9 | % | $ | 36,049 |   | $ | 25,732 |   | 40.1 | % |
|                                    |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Neurovascular                           |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Embolic products                        |       | 4,219                            |       | 3,209                          |       | 31.5 | % | 8,197 |   | 5,487 |   | 49.4 | % |
| Neuro access and delivery products      |       | 8,113                            |       | 5,197                          |       | 56.1 | % | 14,976 |   | 9,930 |   | 50.8 | % |
| Total Neurovascular                     |       | $                                | 12,332     |                           | $          | 8,406 |   | 46.7 | % | $ | 23,173 |   | $ | 15,417 |   | 50.3 | % |
|                                    |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Total net sales                         |       | $                                | 31,540     |                           | $          | 20,569 |   | 53.3 | % | $ | 59,222 |   | $ | 41,149 |   | 43.9 | % |

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **NET SALES BY GEOGRAPHY**     | ** ** | **July 3,  2005**           | ** ** | **July 4,  2004**         | ** ** | **Percent  Change** | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** | **Percent  Change** | ** ** |
|                           |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| United States                  |       | $                                | 15,939     |                           | $          | 10,212 |   | 56.1 | % | $ | 30,060 |   | $ | 20,710 |   | 45.1 | % |
| International                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Before foreign exchange impact |       | 15,146                           |       | 10,357                         |       | 46.2 | % | 28,212 |   | 20,439 |   | 38.0 | % |
| Foreign exchange impact        |       | 455                              |       | —                         |       | — |   | 950 |   | — |   | — |   |
| Total                          |       | 15,601                           |       | 10,357                         |       | 50.6 | % | 29,162 |   | 20,439 |   | 42.7 | % |
|                           |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Total net sales                |       | $                                | 31,540     |                           | $          | 20,569 |   | 53.3 | % | $ | 59,222 |   | $ | 41,149 |   | 43.9 | % |

 

***Comparison of the Three Months Ended July 3, 2005 tothe Three Months Ended July 4, 2004***

 

*Net sales.*  Net sales increased 53.3% to $31.5 millionin the three months ended July 3, 2005 compared to $20.6 million in thethree months ended July 4, 2004, primarily as a result of continued unitsales growth in the 23 new product introductions since October 1, 2004 andthe expansion of our distribution system. We increased our U.S. direct salesforce from 44 persons at the beginning of 2004 to 82 persons at the beginningof 2005, with most of the growth occurring in the fourth quarter of 2004. Thesales force expansion was primarily to support new product introductions thatbegan in late 2004 and continued in the first and second quarters of 2005. Weintroduced 16 new products in the first quarter of 2005 and 3 new products in thesecond quarter of 2005. We expect to introduce additional new products duringthe remainder of the year.

 

*Net sales of cardio peripheral products.*  Net sales of cardioperipheral products increased 57.9% to $19.2 million in the three months ended July 3,2005 compared to $12.2 million in the three months ended July 4, 2004.This sales growth was primarily the result of new product introductions and theexpansion of our U.S. sales force in the fourth quarter of 2004 as describedabove, partially offset by sales declines in older generation products. Key newproduct launches since the second quarter of 2004 that contributed to the salesincrease for the three months ended July 3, 2005 included the ProtégéLong, Primus and ParaMount Mini stents, the SpideRX embolic protection system,the X-Sizer thrombectomy catheter system and Invatec percutaneous transluminalangioplasty, or PTA, balloon catheters.

 

Netsales in our stent product line increased 87.6% to $8.8 million in the threemonths ended July 3, 2005 compared to $4.7 million in the three monthsended July 4, 2004. This increase is attributable to the introduction ofthe Protégé, Primus and ParaMount Mini families of stents into the U.S. andinternational markets during the previous twelve months, partially offset bysales declines in older generation products. Net sales of our thrombectomy and

 

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embolicprotection devices increased 75.6% to $3.2 million in the three monthsended July 3, 2005 compared to the three months ended July 4, 2004largely due to the introduction of the SpideRX internationally and theintroduction of the X-Sizer in the United States in late 2004. Net sales in ourprocedural support  and other productline increased 27.6% to $7.2 million in the three months ended July 3,2005 compared to $5.6 million in the three months ended July 4, 2004. Thisincrease is primarily attributable to the increase in sales of our PTA balloonswhich were launched early in  2005. Weexpect cardio peripheral net sales to increase during the remainder of 2005primarily as a result of introducing several new products during the year,especially in our stent family, and continued market penetration from ourrecently expanded sales force.

 

*Net sales of neurovascular products.*  Net sales of ourneurovascular products increased 46.7% to $12.3 million in the three monthsended July 3, 2005 compared to $8.4 million in the three months ended July 4,2004, primarily as a result of volume increases in the NXT families of emboliccoils and continued penetration by our microcatheters and  occlusion balloon systems. We experienced a31.5% increase, or $1.0 million, in net sales of our embolic products in thethree months ended July 3, 2005 over the comparable period in 2004primarily due to volume increases in sales of the NXT coil family. Net sales ofour neuro access and delivery products increased 56.1% to $8.1 million in thethree months ended July 3, 2005 compared to the three months ended July 4,2004 due primarily to volume increases across multiple product lines includingthe Echelon microcatheters, the Marathon microcatheter, and the HyperForm andHyperGlide occlusion balloon systems.

 

*Net sales by geography.*  Net sales in the United States increased56.1% to $15.9 million in the three months ended July 3, 2005 compared to$10.2 million in the three months ended July 4, 2004. International netsales increased 50.6% to $15.6 million in the three months ended July 3,2005 compared to $10.4 million in the three months ended July 4, 2004 andrepresented approximately 50% of company-wide sales in both periods. Ourinternational net sales in the three months ended July 3, 2005 includes afavorable currency impact of approximately 3.0%, or $0.5 million, compared tothe three months ended July 4, 2004, principally resulting from the performance of the Euro against the U.S.dollar. Company-wide, 87% of our net sales were generated by our direct salesoperations during the three months ended July 3, 2005 compared to 86% in thecomparable period of 2004. Our direct sales force operations in Europecontributed $3.0 million, or 57%, of the total international sales growth, withthe remainder coming from our distribution operations in the Asia Pacificmarkets and our direct sales force operations in Japan. The sales growth in ourinternational markets was primarily a result of new product introductions andincreased penetration.

 

*Cost of goods sold.*  Cost of goods sold increased 36.5% to$12.8 million in the three months ended July 3, 2005 compared to $9.4million in the three months ended July 4, 2004 as a result of increasedsales as discussed above. As a percentage of net sales, cost of goods solddecreased to 40.5% of net sales in the three months ended July 3, 2005compared to 45.5% of net sales in the three months ended July 4, 2004.This decrease was attributable to improved yields in the manufacturing ofrecently released products related to increases in volumes and increasedefficiencies associated with the consolidation of our manufacturing facilities.In our cardio peripheral segment, cost of goods sold as a percent of net salesdecreased to 46.3% in the three months ended July 3, 2005 compared to48.1% in the three months ended July 4, 2004. This decrease was dueprimarily to leveraging fixed costs relative to higher sales and production. Inour neurovascular segment, cost of goods sold as a percent of sales decreasedto 31.6% in the three months ended July 3, 2005 compared to 41.8% in thethree months ended July 4, 2004 due to increased production volume. Weexpect cost of goods sold as a percentage of net sales to continue to declineduring 2005 due to higher volume in our manufacturing facilities and efficiencyimprovements from manufacturing initiatives.

 

*Sales, general and administrative expense.*  Sales, general andadministrative expense increased 37.3% to $32.3 million in the three monthsended July 3, 2005 compared to $23.5 million in the three months ended July 4,2004. The increase was due to a $7.0 million increase in selling expensesprimarily related to the increase in the U.S. direct sales force describedabove and an increase in expenses related to expanding our international salespresence, a $1.5 million increase in marketing and distribution expensesand $0.4 million of costs related to our initial public offering which did notoccur in the second quarter of 2004.  These increases were partially offset by anapproximately $1.2 million decrease in legal  expenses at MTI. ** **We expect sales,general and administrative expenses to decline as a percentage of net sales aswe believe our current infrastructure can support a higher level of sales.

 

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*Research and development.*  Research and development expense increased12.3% to $11.9 million in the three months ended July 3, 2005 compared to$10.6 million in the three months ended July 4, 2004. This increase wasprimarily due to a $0.9 million increase in clinical trial expenses in ourcardio peripheral segment and a $0.8 million increase in product developmentexpenses in our neurovascular segment, partially offset by a $0.5 millionreduction in clinical and regulatory expenses in our neurovascular segmentrelated to the completion of certain clinical trials. The remaining $0.1million increase is due to increases in other research and development expenses. Research and development expense, asa percentage of net sales, decreased to 38% for the three months ended July 3,2005 from 51% for the three months ended July 4, 2004. We expect researchand development spending to decline both in total dollars and as a percentageof net sales as we complete several clinical trials during the second half of2005 and we continue to expand our sales base.

 

*Amortization of intangible assets.*  Amortization of intangibleassets increased 4.1% to $2.5 million in the three months ended July 3,2005 compared to $2.4 million in the three months ended July 4, 2004. Thisincrease is primarily a result of additional amortizable intangible assetsrelated to Vertical’s  May 26, 2005contribution to ev3 LLC of shares of MTI. This contribution was accounted forunder the purchase method of accounting based upon the proportionate ownershipcontributed to ev3 LLC and resulted in an increase in amortizable intangibleassets of approximately $3.4 million.

 

*(Gain) loss on sale or disposal of assets, net.*  (Gain) loss on sale ordisposal of assets, net was immaterial in the three months ended July 3,2005 and July 4, 2004.

 

*Acquired in-process research and development.*  We incurred a charge foracquired in-process research and development of $0.9 million in the threemonths ended July 3, 2005 as a result of the Vertical’s May 26, 2005contribution to ev3 LLC of shares of MTI. This contribution was accounted forunder the purchase method of accounting based upon the proportionate ownershipcontributed to ev3 LLC. We did not incur charges for acquired in-processresearch and development expense in the three months ended July 4, 2004. Fora discussion of this amount, see Note 6 to our unaudited consolidated financialstatements included in this report.

 

*Gain on sale of investments, net.*  Gain on sale of investments,net was  $0.9 million in the threemonths ended July 3,  2005 comparedto $1.7 million in the three months ended July 4, 2004. The gains inboth periods were the result of our receipt of milestone payments relating tothe 2002 sale of an investment in Enteric Medical Technologies,  Inc.

 

*Interest expense, net.*  Interest expense, net increased 36.3% to$6.1 million in the three months ended July 3, 2005 compared to$4.5 million in the three months ended July 4, 2004. The increase isdue to additional borrowings of $85.9 million subsequent to the second quarterof 2004 which resulted in a higher average outstanding debt balance during thesecond quarter of 2005 as compared to the second quarter of 2004.

 

*Minority interest in loss of subsidiary.*  Minority interest in loss ofsubsidiary, which represents the portion of MTI’s losses allocated to minorityinvestors, was $0.7 million in the three months ended July 3, 2005compared to $1.3 million in the three months ended July 4, 2004. Thedecrease is due  primarily to lowerlosses at MTI in the three months ended July 3, 2005 compared to the threemonths ended July 4, 2004.

 

*Other expense, net.*  Other expense, net was $1.8 million in thethree months ended July 3, 2005 compared to other expense, net of $0.2million in the three months ended July 4, 2004. The increase in otherexpense, net is primarily related to increases in foreign exchange losses inthe three months ended July 3, 2005 compared to the three months ended July 4,2004.

 

*Income tax benefit.*  We incurred a modest income tax benefit inthe three months ended July 3, 2005 related to certain of our Europeansales offices and we incurred no income tax expense or benefit in the threemonths ended July 4, 2004.  Werecorded no provision for U.S. income taxes in the three months ended July 3,2005 or July 4, 2004 due to our history of operating losses.

 

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*Accretion of preferred membership units to redemption value.*  Accretionof preferred membership units to redemption value decreased 4.0% to $5.6million in the three months ended July 3, 2005 compared to $5.9 million inthe three months ended July 4, 2004 primarily due to the conversion of thepreferred membership units into common membership units, and subsequently intoshares of common stock, on June 21, 2005 in conjunction with the merger ofev3 LLC with and into us immediately prior to our initial public offering. Accretionwas discontinued upon conversion of the preferred units to common membershipunits.

 

***Comparison of the Six Months Ended July 3, 2005 to theSix Months Ended July 4, 2004***

 

*Net sales.*  Net sales increased 43.9% to$59.2 million in the six months ended July 3, 2005 compared to$41.1 million in the six months ended July 4, 2004, primarily as aresult of new product introductions and the expansion of our distributionsystem during 2004. We increased our U.S. direct sales force from 44 persons atthe beginning of 2004 to 82 persons at the beginning of 2005 with most of thegrowth occurring in the fourth quarter of 2004. The sales force expansion wasprimarily to support new product introductions that began in late 2004 andcontinued in the first and second quarters of 2005. We introduced 16 newproducts in the first quarter of 2005 and 3 new products in the second quarterof 2005.

 

*Net sales of cardio peripheral products.*  Net sales of cardioperipheral products increased 40.1% to $36.0 million in the six monthsended July 3, 2005 compared to $25.7 million in the six months ended July 4,2004. This sales growth was primarily the result of new product introductionsand the expansion of our U.S. sales force in the fourth quarter of 2004 asdescribed above, partially offset by sales declines in older generationproducts. Key new product launches that contributed to the sales increase forthe six months ended July 3, 2005 included the Protégé Long and ParaMountMini stents, SpideRX embolic protection system and the X-Sizer thrombectomycatheter. Net sales in our stent product line increased 58.7% to$15.9 million in the six months ended July 3, 2005 compared to$10.0 million in the six months ended July 4, 2004. This increase isattributable to the introduction of the Protégé, Primus and ParaMount Minifamilies of stents into the U.S. and international markets during 2004,partially offset by sales declines in older generation products. Net sales ofour thrombectomy and embolic protection devices increased 64.2% to$6.5 million in the six months ended July 3, 2005 compared to the sixmonths ended July 4, 2004 largely due to the introduction of the SpideRXinternationally and the introduction of the X-Sizer in the United States inlate 2004. Net sales of our procedural support and other products increased16.3% to $13.7 million in the six months ended July 3, 2005 compared tothe six months ended July 4, 2004, largely due to the introduction of PTAballoon catheters in early 2005.

 

*Net sales of neurovascular products.*  Net sales of ourneurovascular products increased 50.3% to $23.2 million in the six monthsended July 3, 2005 compared to $15.4 million in the six months ended July 4,2004, primarily as a result of volume increases in the NXT families of embolic coilsand continued penetration by our microcatheters and occlusion balloon systems.Net sales of our neuro access and delivery products increased 50.8% to $15.0million in the six months ended July 3, 2005 compared to the six monthsended July 4, 2004 largely as a result of volume increases across multipleproduct lines including the Echelon microcatheters, the Marathon microcatheter,and the HyperForm and HyperGlide occlusion balloon systems. Net sales ofour embolic products increased 49.4% to $8.2 million in the six months ended July 3,2005 compared to the six months ended July 4, 2004 primarily due to volumeincreases in sales of the NXT families of embolic coils.

 

*Net sales by geography.*  Net sales in the United States increased45.1% to $30.1 million in the six months ended July 3, 2005 comparedto $20.7 million in the six months ended July 4, 2004. Internationalnet sales increased 42.7% to $29.2 million in the six months ended July 3,2005 compared to $20.4 million in six months ended July 4, 2004 andrepresented 49.2% of company-wide sales in the six months ended July 3,2005 compared to 49.7% in the six months ended July 4, 2004. Ourinternational net sales for the six months ended July 3, 2005 include afavorable currency impact of approximately 3.4%, or $1.0 million, comparedto the six months ended July 4, 2004, principally resulting from theperformance of the Euro against the U.S. dollar.  Our direct sales force operations in Europecontributed $5.2 million, or 60%, of the total international sales growth, withthe remainder coming from our distribution operations in the Asia Pacificmarkets and our direct sales force operations in Japan. The sales growth in ourinternational markets was primarily a result of new product introductions andincreased penetration.

 

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*Cost ofgoods sold*.   Costof goods sold increased 37.1% to $24.9 million in the six months ended July 3,2005 compared to $18.2 million in the six months ended July 4, 2004primarily as a result of increased sales, as discussed above. As a percentageof net sales, cost of goods sold decreased to 42.0% of net sales in the sixmonths ended July 3, 2005 compared to 44.1% of net sales in the six monthsended July 4, 2004. This decrease was primarily attributable toinitiatives in our neurovascular segment.  In our cardio peripheral segment, cost ofgoods sold as a percent of net sales increased to 47.3% in the six months endedJuly 3, 2005 compared to 44.3% in the six months ended July 4, 2004,primarily due to production scrap and other start up costs related to theintroduction of new products. In our neurovascular segment, cost of goods soldas a percent of net sales decreased to 33.9% in the six months ended July 3,2005 compared to 43.9% in the six months ended July 4, 2004 due toincreased production volume.

 

*Sales, general and administrative expense.*  Sales, general andadministrative expense increased 33.8% to $64.2 million in the six monthsended July 3, 2005 compared to $48.0 million in the six months ended July 4,2004. The increase was due to a $12.1 million increase in selling expensesprimarily related to the increase in the U.S. direct sales force described aboveand an increase in expenses related to expanding our international salespresence, a $2.0 million increase in marketing and distribution expensesand a $1.8 million increase in general and administrative expenses. Theseincreases were partially offset by an approximately $1.0 million decreasein legal  expenses at MTI.

 

*Research and development.*  Research and development expense increased12.5% to $22.2 million in the six months ended July 3, 2005 comparedto $19.7 million in the six months ended July 4, 2004. This increasewas primarily due to a $2.2 million increase in clinical trial expenses in ourcardio peripheral segment and an $1.4 million increase in product developmentexpenses primarily in our neurovascular segment, partially offset by a $1.2million reduction in clinical and regulatory expenses in our neurovascularsegment related to the completion of certain clinical trials. The remaining$0.1 million increase is due to increases in other research and developmentexpenses. Research and development expenses, as a percentage of net sales,decreased to 38% for the six months ended July 3, 2005 from 48% for thesix months ended July 4, 2004.

 

*Amortization of intangible assets.*  Amortization of intangibleassets increased 4.5% to $5.2 million in the six months ended July 3,2005 compared to $5.0 million in the six months ended July 4, 2004.This increase is primarily a result of additional amortizable intangible assetsrelated to Vertical’s May 26, 2005 contribution to ev3 LLC of shares ofMTI. This contribution was accounted for under the purchase method ofaccounting based upon the proportionate ownership contributed to ev3 LLC andresulted in an increase in the amortizable intangible assets of approximately$3.4 million.

 

*(Gain) loss on sale or disposal of assets, net.*  (Gain) loss on sale ordisposal of assets, net was immaterial in the six months ended July 3,2005 and July 4, 2004.

 

*Acquired in-process research and development.*  During the six months ended July 3,2005, we incurred a charge of $0.9 million for acquired in-processresearch and development as a result of Vertical’s contribution to ev3 LLC ofshares of MTI. This contribution was accounted for under the purchase method ofaccounting based upon the proportionate ownership contributed to ev3 LLC. For adiscussion of this amount, see Note 6 to our unaudited consolidated financialstatements included in this report. We did not incur charges for acquiredin-process research and development expense during the six months ended July 4,2004.

 

*Gain on sale of investments, net.*  Gain on sale of investments,net was  $4.6 million in the sixmonths ended July 3, 2005 compared to $1.7 million in the six monthsended July 4, 2004. During the six months ended July 3, 2005, wereceived a $3.7 million milestone payment related to the sale of our investmentin Genyx Medical, Inc. and we received a $0.9 million milestonepayment relating to the 2002 sale of an investment in Enteric MedicalTechnologies, Inc. During the six months ended July 4, 2004, wereceived a $1.7 milestone payment relating to the 2002 sale of the investmentin Enteric Medical Technologies, Inc.

 

*Interest expense, net.*  Interest expense, net increased 11.1% to$11.8 million in the six months ended July 3, 2005 compared to$10.6 million for the six months ended July 4, 2004. Interestexpense, net increased by $3.2 million,

 

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primarilydue to  additional borrowings of$85.9 million subsequent to the second quarter of 2004 which resulted in ahigher average outstanding debt balance during the six months ended July 3,2005 as compared to the six months ended July 4, 2004. The increase waspartially offset by a $2.0 million charge incurred in the first six monthsof 2004 related to a beneficial conversion feature arising from the minorityinterests’ participation in two financings of MTI during the year.

 

*Minority interest in loss of subsidiary.*  Minority interest in loss ofsubsidiary, which represents the portion of MTI’s losses allocated to minorityinvestors, was $0.7 million in the six months ended July 3, 2005 and$5.1 million in the six months ended July 4, 2004. The decrease isprimarily due to lower losses at MTI in the six months ended July 3, 2005compared to the six months ended July 4, 2004.

 

*Other expense, net.*  Other expense, net was $2.9 millionin the six months ended July 3, 2005 compared to $0.1 million in thesix months ended July 4, 2004. This increase is primarily related toincreases in foreign exchange losses in the six months ended July 3, 2005compared to the six months ended July 4, 2004.

 

*Income tax benefit.*  We incurred a modest income tax benefit inthe six months ended July 3, 2005 related to certain of our European salesoffices and we incurred no income tax expense or benefit in the six monthsended July 4, 2004. We recorded no provision for U.S. income taxes inthe six months ended July 3, 2005 or July 4, 2004 due to our historyof operating losses.

 

*Accretion of preferred membership units to redemption value.*  Accretionof preferred membership units to redemption value increased 2.2% to$12.1 million in the six months ended July 3, 2005 compared to$11.8 million in the six months ended July 4, 2004 due to highercarrying values of preferred investments during the six months ended July 3,2005, offset by a decrease in accretion caused by conversion of the preferredmembership units into common membership units, and subsequently into shares ofcommon stock, on June 21, 2005 in connection with the merger of ev3 LLCwith and into us immediately prior to our initial public offering.  Accretion was discontinued upon conversion ofthe preferred units to common membership units on June 21, 2005.

 

**Liquidity and Capital Resources**

 

*Financing history.*  Since inception, we have generatedsignificant operating losses. These operating losses, including cumulativenon-cash charges for acquired in-process research and development of $127million since inception, have resulted in an accumulated deficit of $520.2million as of July 3, 2005. Historically, our liquidity needs and theliquidity needs of MTI have been met separately. In general, MTI has beenfunded through equity private placements and the issuance of promissory notes,while we have been funded through a series of preferred investments andthrough the issuance of demand notes to private investors and most recently ourinitial public offering. We have negotiated an agreement with Warburg Pincuspursuant to which we have the first right to negotiate an investment in MTI tofurther fund MTI’s operations, if necessary, and we may elect to do so inthe future. The following provides a discussion of our liquidity and capitalresources including MTI, followed by a brief discussion of the liquidity andcapital resources of MTI on an independent basis.

 

*Cash and cash equivalents.*  As of July 3, 2005, we had cash andcash equivalents of $128.4 million. 

 

| **Balance Sheet Data****(in thousands)** | ** ** | **As of July 3, 2005**** ** | ** ** | **As of December 31, 2004**** ** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                           | ** ** | ** **                                                | ** ** |
| Cash and cash equivalents                               |       | $                                                    | 128,399    |                                                      | $          | 20,131 |   |
| Current assets                                          |       | 187,325                                              |       | 68,609                                                    |       |
| Total assets                                            |       | 332,746                                              |       | 212,046                                                   |       |
| Current liabilities excluding demand notes              |       | 37,179                                               |       | 36,025                                                    |       |
| Demand notes payable—related parties               |       | —                                               |       | 299,453                                                   |       |
| Total liabilities                                       |       | 37,740                                               |       | 336,180                                                   |       |
| Preferred membership units                              |       | —                                               |       | 254,028                                                   |       |
| Total stockholders’ equity (deficit)               |       | $                                                    | 281,252    |                                                      | $          | (394,472 | ) |

 

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*Contractual cash obligations.*  At July 3, 2005, we hadcontractual cash obligations and commercial commitments as follows: 

 
| ** **              | ** ** | **Payments Due by Period**** ** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **Total**** **                                 | ** ** | **Less than  1 Year**** ** | ** ** | **1-3 Years**** ** | ** ** | **3-5 Years**** ** | ** ** | **More than  5 Years**** ** | ** ** |
| ** **              | ** ** | **(dollars in thousands)**                | ** ** |
| Purchase commitments(1) |       | $                                                   | 50,299     |   | $ | 11,406 |   | $ | 38,893 |   | $ | — |   | $ | — |   |
| Operating leases(2)     |       | 9,414                                               |       | 3,575 |   | 4,138 |   | 1,553 |   | 148 |   |
|                    |       |                                                |       |   |   |   |   |   |   |   |   |
| Total                   |       | $                                                   | 59,713     |   | $ | 14,981 |   | $ | 43,031 |   | $ | 1,553 |   | $ | 148 |   |

 

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(1)          Represents commitments for minimum inventory purchases related to ourdistribution agreement with Invatec S.r.l. We do not have any other significantpurchase obligations for the delivery of goods or services or other commercialcommitments.

 

(2)          The amounts reflected in the table above for operatingleases represent future minimum lease payments under non-cancelable operatingleases primarily for certain office space, warehouse space, computers andvehicles. Portions of these payments are denominated in foreign currencies andwere translated in the tables above based on their respective U.S. dollarexchange rates at July 3, 2005. These future payments are subject toforeign currency exchange rate risk. In accordance with U.S. generally acceptedaccounting principles, or GAAP, our operating leases are not recognized in ourconsolidated balance sheet.

 

*Operating activities.   *Cash used in operations during the sixmonths ended July 3, 2005 was $91.0 million, reflecting primarily thenet losses during the period and the change in accrued interest resulting from ourrepayment of $36.5 million of accrued and unpaid interest on demand notespayable in conjunction with the completion of our initial public offering on June 21,2005. This usage was partially offset by non-cash charges for depreciation andamortization and non-cash interest expense presented as accrued interest onnotes payable. Our net loss also reflected $4.6 million of gain recognized onthe sale of investments, as discussed below. The increases in accountsreceivable and inventories during the six months ended July 3, 2005 arerelated to increases in sales volume during the period and building inventoryin preparation for new product launches. We expect that operations willcontinue to consume cash during the remainder of 2005.

 

*Investing activities.   *Cash used by investing activities duringthe six months ended July 3, 2005 was $3.4 million primarily due to$6.1 million in purchases of property and equipment during the period anda $3.7 million milestone payment related to a previous acquisition. The net useof cash from investing activities was reduced by the receipt of $3.7 million from the sale of certainassets by Genyx Medical, Inc., in which MTI holds a minority interest, thereceipt of $2.1 million in a settlement of an acquisition dispute and a $0.9million milestone payment related to the 2002 sale of an investment in EntericMedical Technologies, Inc. Historically, our capital expenditures haveconsisted of purchased manufacturing equipment, research and testing equipment,computer systems and office furniture and equipment. We continue to makeinvestments in property and equipment and expect to incur an additional $8.0million in capital expenditures during the balance of 2005.

 

*Financing activities.   *Cash provided by financing activities was$202.7 million during the six months ended July 3, 2005, consistingof $152.8 million of net proceeds received from our initial public offering in June 2005and proceeds of $49.1 million from the issuance of demand notes.

 

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*Other liquidity information.* On July 20, 2005, subsequent to the end of oursecond fiscal quarter, we sold 205,800 shares of  common stock pursuant to the over-allotmentoption granted to the underwriters in connection with our initial publicoffering. Net proceeds to us from this sale totaled $2.5 million, afterdeducting underwriting discounts and commissions and offering expenses.

 

Theacquisition agreements relating to our purchase of MitraLife, Appriva Medical, Inc.and Dendron GmbH require us to make additional payments to the sellers of thesebusinesses if certain milestones related to regulatory steps in the productcommercialization process are achieved. The potential milestone payments total$25.0 million, $175.0 million and $15.0 million with respect tothe MitraLife, Appriva and Dendron acquisitions, respectively, during theperiod of 2003 to 2009. We do not believe it is likely that we will haveobligations with respect to the MitraLife milestones in the future. We havedetermined that the first milestone with respect to the Appriva agreement wasnot achieved by the January 1, 2005 milestone date and that the firstmilestone is not payable. It is possible that we will meet one or more of theremaining milestones with respect to the Appriva acquisition and could becomeobligated to make the corresponding milestone payments totaling$125.0 million in periods subsequent to 2005. Under the terms of the stockpurchase agreement we entered into in connection with our acquisition ofDendron, we may be required to make additional payments which arecontingent upon Dendron products achieving certain revenue targets between 2003and 2008. In 2003, the $4.0 million revenue target for sales of Dendronproducts during 2003 was met. Accordingly, an additional payment to the formerDendron stockholders of $3.75 million was made in 2004. In 2004, the$5.0 million revenue target for sales of Dendron products during 2004 wasmet. Accordingly, a payment to the former Dendron stockholders of$3.75 million was accrued in 2004 and was paid during the second quarterof 2005. We may be required to make a final payment of $7.5 million,which is contingent upon Dendron products achieving annual revenues of$25 million in any year during the period between 2003 and 2008. Any suchfinal payment would be due in the year following the year of target achievement.

 

Ourfuture liquidity and capital requirements will be influenced by numerousfactors, including clinical research and product development programs, receiptof and time required to obtain regulatory clearances and approvals, sales andmarketing programs and continuing acceptance of our products in themarketplace. We believe that the resources generated through our initial publicoffering are sufficient to meet our liquidity requirements through the end offiscal 2006; however, if we require additional working capital, but are notable to raise additional funds, we may be required to significantlycurtail or cease ongoing operations.

 

On May 6,2005, MTI entered into an asset-based credit agreement with a bank that,subject to customary covenants, can provide up to $3.0 million of cash fundingbased on MTI’s U.S. accounts receivable and inventory balances. The loan iscollateralized by substantially all of MTI’s assets and expires in May 2007,as further described below. MTI is also in discussions with the bank regardinga loan arrangement that would be based on balances of international accountsreceivable and inventory, although there is no assurance that MTI will enterinto a definitive agreement with the proposed lender. In addition, MTI has receiveda support letter from Warburg Pincus pursuant to which Warburg Pincus hasagreed to provide additional funding, up to $5.0 million, to MTI if neededto fund MTI’s operations. The Warburg Pincus commitment is effective through July 4,2006 and will be reduced to the extent of proceeds, if any, that becomeavailable from a third party lender, including amounts available under thecredit facility described above, or any amounts raised in a third partyfinancing. We have negotiated an agreement with Warburg Pincus pursuant towhich we have the first right to negotiate an investment in MTI to further fundMTI’s operations, if necessary, and we may elect to do so in the future.Pursuant to this agreement, we have agreed in principle  with MTI to provide MTI with a creditfacility of $3.3 million, consisting of a $2.3 million term loan and a $1.0million letter of credit, bearing interest at a floating prime rate plus 2.3%,which will provide financing to support MTI’s facility expansion needs. We arein negotiations with MTI regarding the additional terms of this creditfacility.

 

In theevent that we require additional working capital to fund future operations, we may negotiatea financing arrangement with an independent institutional lender, sell notes topublic or private investors or sell additional shares of stock. There is noassurance that any financing transaction will be available on terms acceptableto us, or at all, or that any financing transaction will not be dilutive to ourstockholders. If we require additional working capital, but are not able toraise additional funds, we may be required to significantly curtail orcease our ongoing operations. From time to time, we may also sell a giventechnology or intellectual property having a development timeline ordevelopment cost that is inconsistent with our investment horizon or which doesnot adequately 

 

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complementour existing product portfolio. Our future liquidity and capital requirementswill be influenced by numerous factors, including the extent and duration offuture operating losses, the level and timing of future sales and expenditures,market acceptance of new products, the results and scope of ongoing researchand development projects, competing technologies, market and regulatorydevelopments, and the future course of intellectual property litigation. SeeNote 5 and Note 14 to our consolidated financial statements includedin this report and Part II, Item II, “Legal Proceedings” in this report.

 

***MTI Financings and Liquidity***

 

As of July 3,2005, we owned 70.3% of the outstanding shares of common stock of MTI andtherefore consolidated MTI under generally accepted accounting principles.Although all of MTI’s assets are included in our consolidated balance sheets,not all of these assets would be available to us or our stockholders in theevent of MTI’s liquidation. Because MTI has historically funded its operationsindependently from us, the following is a separate discussion of MTI’s financingsand liquidity on a stand-alone basis. Historically, MTI has been funded throughequity private placements and the issuance of promissory notes. In threeseparate transactions since 2002, MTI has sold 27.5 million shares of itscommon stock and received approximately $68 million in net proceeds.

 

Inaddition to its operations, MTI has received cash payments from two privatemedical device companies in which it owned a minority equity interest. In January 2005,MTI received $3.7 million as a result of the consummation of a sale of certainassets by Genyx Medical, Inc. In May 2004, MTI received $1.7 millionof the amounts set aside in escrow in connection with Boston Scientific’smerger with Enteric Medical Technologies, Inc. In May 2005, MTIreceived $878 thousand of the remaining portion of escrowed amounts under themerger agreement. MTI expects to receive the remaining amount of approximately$850 thousand in May 2006, provided that no indemnification claims aremade by Boston Scientific against the amounts in escrow.

 

*Cash and cash equivalents.*  As of July 3, 2005, MTI had cash andcash equivalents of $5.5 million.

 

*Operating activities.*  Cash used in MTI’s operations during thesix months ended July 3, 2005 was $7.0 million, reflecting primarily the lossfrom operations, increases in trade receivables from third-party customers andinventories, increases in prepaid expenses, and increases in accounts payableand accrued compensation and decreases in accrued liabilities, which representpayments of bonuses earned during 2004 and employee termination benefits inconnection with MTI’s December 2004 closure of its German facility,respectively. Partially offsetting such changes was a decrease in the amountreceivable from us. We expect that MTI’s operations will continue to consumecash during the second half of 2005.

 

*Investing activities.*  Cash provided by MTI’s investingactivities during the six months ended July 3, 2005 was $259 thousand,primarily resulting from the receipt of $3.7 million from the sale of assets ofGenyx Medical, Inc, receipt of $878 thousand in connection with BostonScientific’s acquisition of Enteric Medical Technologies, Inc., bothdescribed above, and the restoration to cash of certificates of deposit,aggregating $880 thousand, that had been segregated from cash balances duringthe period that such certificates of deposit served as collateral for bankletters of credit which expired in 2005. Cash provided by investing MTI’sactivities during the six months ended July 3, 2005 was offset by a $3.7million payment to the former Dendron stockholders and the acquisition ofproperty and equipment and capitalized patents costs. While continuedinvestments will be made by MTI in property and equipment, MTI had nosignificant capital expenditure commitments as of July 3, 2005.

 

*Financing activities.*  Cash provided by MTI’s financingactivities was immaterial during the three months ended July 3, 2005.

 

*Other liquidity information.*

 

On May 6,2005, MTI entered into an asset-based credit agreement with a bank that,subject to customary covenants, provides up to $3.0 million of cash fundingbased on MTI’s U.S. accounts receivable and inventory balances. The loan iscollateralized by substantially all of MTI’s assets and expires in May 2007.MTI is also in discussions with the bank regarding a loan arrangement thatwould be based on balances of international accounts receivable and

 

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inventory,although there is no assurance that MTI will enter into a definitive agreementwith the proposed lender. In addition, MTI has received a support letter fromWarburg Pincus pursuant to which Warburg Pincus has agreed to provideadditional funding of up to $5.0 million to MTI, if needed, to fund MTI’soperations. The Warburg Pincus commitment is effective through July 4,2006 and will be reduced to the extent of proceeds, if any, that becomeavailable from a third party lender, including amounts available under thecredit facility described above, or any amounts raised in a third partyfinancing. We believe that MTI’s existing cash at July 3, 2005, and theproceeds under the funding commitment of Warburg Pincus, will be sufficient tofund MTI’s operations in 2005. There is no assurance that any additional financingtransactions will be available on terms acceptable to MTI or us, or at all, orthat any financing transactions will not be dilutive to current MTIstockholders or our stockholders. There is no assurance that MTI will achievecash flow positive operations or that, if achieved, such cash flow positiveoperations will be sustainable.

 

Inconnection with its acquisition of Dendron, MTI may be required to makeadditional payments which are contingent upon Dendron products achievingcertain revenue targets between 2003 and 2008, as described above under “—Liquidityand Capital Resources—Other Liquidity Information.” In addition, German taxingauthorities have not audited the income tax returns of Dendron since MTI’sacquisition of Dendron in October 2002. While we believe that Dendron hasmade its tax filings in conformity with German tax regulations, we are unableto predict what, if any, areas of inquiry might be pursued by German taxauthorities in connection with an audit in general, or specifically in connectionwith either MTI’s acquisition of Dendron or the subsequent closure of MTI’sGerman manufacturing facility or whether, or to what extent, Dendron will besubject to additional liability or tax.

 

**Critical Accounting Policies and Estimates**

 

Wehave adopted various accounting policies to prepare our consolidated financialstatements in accordance with U.S. GAAP. Our most significant accountingpolicies are described in Note 3 to our consolidated financial statementsincluded elsewhere in this report. The preparation of our consolidatedfinancial statements in conformity with U.S. GAAP requires us to make estimatesand assumptions that affect the amounts reported in our consolidated financialstatements and accompanying notes. Our estimates and assumptions, includingthose related to bad debts, inventories, intangible assets, sales returns anddiscounts, and income taxes are updated as appropriate.

 

Certainof our more critical accounting policies require the application of significantjudgment by management in selecting the appropriate assumptions for calculatingfinancial estimates. By their nature, these judgments are subject to aninherent degree of uncertainty. These judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our physician customers, and informationavailable from other outside sources, as appropriate. Different, reasonableestimates could have been used in the current period. Additionally, changes in accountingestimates are reasonably likely to occur from period to period. Both of thesefactors could have a material impact on the presentation of our financialcondition, changes in financial condition or results of operations.

 

Webelieve that the following financial estimates are both important to theportrayal of our financial condition and results of operations and requiresubjective or complex judgments. Further, we believe that the items discussedbelow are properly recorded in our consolidated financial statements for allperiods presented. Management has discussed the development, selection, anddisclosure of our most critical financial estimates with the audit committee ofour board of directors and our independent auditors. The judgments about thosefinancial estimates are based on information available as of the date of ourconsolidated financial statements. Those financial estimates include:

 

***Revenue Recognition***

 

Werecognize revenue in accordance with Securities and Exchange Commission Staff AccountingBulletin No. 101, *Revenue Recognitionin Financial Statements*, which requires that four basic criteriamust be met before sales can be recognized: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have been rendered;(3) the price is fixed or determinable; and (4) collectibility isreasonably assured. These criteria are met at the time of shipment when risk ofloss and title passes to the customer or distributor, unless a consignment

 

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arrangementexists. Sales from consignment arrangements are recognized upon writtenacknowledgement that the product has been used by the customer indicating thata sale is complete. Our terms of sale for regular sales are typically FOBshipping point, net 30 days. Regular sales include orders from customersfor replacement of customer stock, replenishment of customer consignmentproduct, orders for a scheduled case/surgery and stocking orders.

 

Weallow customers to return defective or damaged products for credit. Ourestimate for sales returns is based upon contractual commitments and historicalreturn experience which we analyze both by distribution channel and bygeography and is recorded as a reduction of sales. Historically our returnexperience has been low with return rates approximating 3% of sales.

 

***Allowance for Doubtful Accounts***

 

Wemake judgments as to our ability to collect outstanding receivables and provideallowance for a portion of receivables when collection becomes doubtful.Provisions are made based upon a specific review of all significant outstandingaccount balances and the overall quality and age of those balances notspecifically reviewed. In determining the provision for invoices notspecifically reviewed, we analyze historical collection experience and currenteconomic trends. If the historical data used to calculate the allowanceprovided for doubtful accounts does not reflect our future ability to collectoutstanding receivables or if the financial condition of customers were todeteriorate, resulting in impairment of their ability to make payments, anincrease in the provision for doubtful accounts may be required. Wemaintain a large customer base that mitigates the risk of concentration withone customer. However, if the overall condition of the health care industrywere to deteriorate, resulting in an impairment of our customers’ ability tomake payments, significant additional allowances could be required.

 

Ouraccounts receivable balance was $22.1 million and $19.0 million, netof accounts receivable allowances, comprised of both allowances for doubtfulaccounts and sales returns of $3.2 million and $2.7 million, at July 3,2005 and December 31, 2004, respectively.

 

***Excess and Obsolete Inventory***

 

We calculatean inventory reserve for estimated obsolescence or excess inventory based onhistorical turnover and assumptions about future demand for our products andmarket conditions. Our industry is characterized by regular new productdevelopment, and as such, our inventory is at risk of obsolescence followingthe introduction and development of new or enhanced products. Our estimates andassumptions for excess and obsolete inventory are reviewed and updated on aquarterly basis. The estimates we use for demand are also used for near-termcapacity planning and inventory purchasing and are consistent with our salesforecasts. Future product introductions and related inventories may requireadditional reserves based upon changes in market demand or introduction ofcompeting technologies. Increases in the reserve for excess and obsoleteinventory result in a corresponding expense to cost of goods sold. Our reservefor excess and obsolete inventory was $3.6 million and $3.7 millionat July 3, 2005 and December 31, 2004, respectively.

 

***Valuation of Acquired In-Process Research and Development,Goodwill and Other Intangible Assets***

 

Whenwe acquire another company, the purchase price is allocated, as applicable,between acquired in-process research and development (IPR&D), otheridentifiable intangible assets, tangible net assets and goodwill as required byU.S. GAAP. In-process research and development is defined as the value assignedto those projects for which the related products have not received regulatory approvaland have no alternative future use. Determining the portion of the purchaseprice allocated to in-process research and development and other intangibleassets requires us to make significant estimates that may change overtime. During the three months ended July 3, 2005, we recorded an IPR&Dcharge of $0.9 million related to the May 26, 2005 contribution to ev3 LLCby Vertical of certain shares of MTI directly held by Vertical.

 

Theincome approach was used to determine the fair values of the acquired IPR&D.This approach establishes fair value by estimating the after-tax cash flowsattributable to the in-process project over its useful life and thendiscounting these after-tax cash flows back to the present value. Revenueestimates were based on relative market

 

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size,expected market growth rates and market share penetration. Gross marginestimates were based on the estimated cost of the product at the time ofintroduction and historical gross margins for similar products offered by us orby competitors in the marketplace. The estimated selling, general andadministrative expenses were based on historical operating expenses of theacquired company as well as long-term expense levels based on industry comparables.The costs to complete each project were based on estimated direct projectexpenses as well as the remaining labor hours and related overhead costs. Inarriving at the value of acquired in-process research and development projects,we considered the project’s stage of completion, the complexity of the work tobe completed, the costs already incurred, the remaining costs to complete theproject, the contribution of core technologies, the expected introduction dateand the estimated useful life of the technology. The discount rate used toarrive at the present value of acquired in-process research and development asof the acquisition date was based on the time value of money and medicaltechnology investment risk factors. The discount rates used ranged from 15% to34%. We believe that the estimated acquired in-process research and developmentamounts determined represent the fair value at the date of acquisition and donot exceed the amount a third party would pay for the projects.

 

Goodwillrepresents the excess of the aggregate purchase price over the fair value ofnet assets, including IPR&D, of the acquired businesses. Goodwill is testedfor impairment annually, or more frequently if changes in circumstance or theoccurrence of events suggest an impairment exists. The test for impairmentrequires us to make several estimates about fair value, most of which are basedon projected future cash flows. Our estimates associated with the goodwillimpairment tests are considered critical due to the amount of goodwill recordedon our consolidated balance sheets and the judgment required in determiningfair value amounts, including projected future cash flows. Goodwill was$94.5 million at July 3, 2005 and December 31, 2004.

 

 Other intangible assets consist primarily ofpurchased developed technology, patents, customer relationships and trademarksand are amortized over their estimated useful lives, ranging from 5 to8 years. We review these intangible assets for impairmentannually during our fourth fiscal quarter or as changes in circumstance orthe occurrence of events suggest the remaining value may not berecoverable. Other intangible assets, net of accumulated amortization, were$30.8 million and $31.9 million at July 3, 2005 and December 31,2004, respectively.

 

Theevaluation of asset impairments related to goodwill and other intangible assetsrequire us to make assumptions about future cash flows over the life of theassets being evaluated. These assumptions require significant judgment andactual results may differ from assumed or estimated amounts.

 

***Accounting for Income Taxes***

 

As part ofthe process of preparing our consolidated financial statements, we are requiredto determine our income taxes in each of the jurisdictions in which we operate.This process involves estimating our actual current tax expense together withassessing temporary differences resulting from recognition of items for incometax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included on our consolidated balance sheets. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and, to the extent we believe that recovery is notlikely, we must establish a valuation allowance. To the extent we establish avaluation allowance or increase this allowance in a period, we must reflectthis increase as an expense within the tax provision in our consolidatedstatement of operations.

 

Management’sjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. We will continue to monitor therealizability of our deferred tax assets and adjust the valuation allowanceaccordingly.

 

**Seasonality**

 

Ourbusiness is seasonal in nature. Historically, demand for our products has beenthe highest in our fourth fiscal quarter. We traditionally experience lowersales volumes in our third fiscal quarter than throughout the rest of the year asa result of the European holiday schedule during the summer months.

 

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**Off-Balance Sheet Arrangements**

 

We donot have any off-balance sheet arrangements, as defined by the rules andregulations of the Securities and Exchange Commission. As a result, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these arrangements.

 

**Recent Accounting Pronouncements**

 

In November 2004,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards, or SFAS, 151, *InventoryCosts, An Amendment of Accounting Research Bulletin No. 43, Chapter 4*,which adopts wording from the International Accounting Standards Board’s, orIASB, IAS 2 *Inventories* in aneffort to improve the comparability of cross-border financial reporting. Thenew standard indicates that abnormal freight, handling costs and wastedmaterials (spoilage) are required to be treated as current period charges ratherthan as a portion of inventory cost. Additionally, the standard clarifies thatfixed production overhead should be allocated based on the normal capacity of aproduction facility. The statement is effective for us beginning in 2006.Adoption is not expected to have a material impact on our consolidatedearnings, financial position or cash flows.

 

On December 16,2004, the FASB issued SFAS 123(R), *Share-BasedPayment*, which is a revision of SFAS 123, *Accounting for Stock-Based Compensation,*and supersedes APB Opinion 25, *Accountingfor Stock Issued to Employees*. SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theapplicable vesting period and is effective for us on January 1, 2006. Wehave not yet determined the impact of the provisions of SFAS 123(R) on ourconsolidated earnings, financial position or cash flows.

 

**Forward-LookingStatements**

 

This quarterly report on Form 10-Qcontains not only historical information, but also forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and are subject to the safe harborcreated by those sections. In addition, we or others on our behalf may makeforward-looking statements from time to time in oral presentations, includingtelephone conferences and/or web casts open to the public, in press releases orreports, on our Internet web site or otherwise. All statements other thanstatements of historical facts included in this report that address activities,events or developments that we expect, believe or anticipate will or may occurin the future are forward-looking statements including, in particular, thestatements about ev3’s plans (including MTI), objectives, strategies andprospects regarding, among other things, the financial condition, results ofoperations and business of ev3 Inc. and its subsidiaries. We have identifiedsome of these forward-looking statements with words like “believe,” “may,” “could,”“might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,”“intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue”and other words and terms of similar meaning. These forward-looking statements may becontained in the notes to our consolidated financial statements and elsewherein this report, including under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”.

 

We wish to caution readersnot to place undue reliance on any forward-looking statement that speaks onlyas of the date made and to recognize that forward-looking statements arepredictions of future results, which may not occur as anticipated. Actualresults could differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed under the heading “Risk Factors” below, as well as others that we may considerimmaterial or do not anticipate at this time. Although we believe that theexpectations reflected in our forward-looking statements are reasonable, we donot know whether our expectations will prove correct. Our expectationsreflected in our forward-looking statements can be affected by inaccurateassumptions we might make or by known or unknown risks and uncertainties,including those described below under the heading “Risk Factors”. The risks anduncertainties described under the heading “Risk Factors” below are notexclusive and further information concerning us and our business, includingfactors that potentially could materially affect our financial results orcondition, may emerge from time to time. We assume no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements. We advise you, however,to consult any further disclosures we make on related subjects in our annualreports on

 

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Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K we file with orfurnish to the Securities and Exchange Commission.

 

**RiskFactors**

 

***We have a history of operating losses and negative cash flow.***

 

Our operations to date haveconsumed substantial amounts of cash, and we expect this condition to continue.We had an accumulated deficit of $520.2 million at July 3, 2005. Ourability to achieve cash flow positive operations will be influenced by manyfactors, including the extent and duration of our future operating losses, thelevel and timing of future sales and expenditures, market acceptance of newproducts, the results and scope of ongoing research and development projects,competing technologies, market and regulatory developments and the futurecourse of intellectual property litigation. If adequate cash flow is notavailable to us, our business will be negatively impacted.

 

***Some of our products are emerging technologies or have been recentlyintroduced into the market and may not achieve market acceptance once theyare introduced into their markets, which could adversely affect our business.***

 

Even if we are successful indeveloping safe and effective products that receive regulatory approval, ourproducts may not gain market acceptance. Our market share for our existingproducts may not grow, and our products that have yet to be introduced may notbe accepted in the market. We will need to invest in significant training andeducation of our physician customers to achieve market acceptance of ourproducts with no assurance of success. In order for any of our products to beaccepted, we must address the needs of potential customers and our customersmust believe our products are effective and commercially beneficial. However,even if customers accept our products, this acceptance may not translateinto sales if our competitors have developed similar products that ourcustomers prefer. If our products do not gain market acceptance or if ourcustomers prefer our competitors’ products, our business could be adverselyaffected.

 

***Delays in product introductions could adversely affect our net sales.***

 

The endovascular devicemarket is highly competitive and designs change often to adjust to patentconstraints and to changing market preferences. Therefore, product life cyclesare relatively short. As a result, any delays in our product launches may significantlyimpede our ability to enter or compete in a given market and may reducethe sales that we are able to generate from these products. We may experiencedelays in any phase of a product launch, including during research anddevelopment, clinical trials, manufacturing, marketing and the educationprocess. In addition, our suppliers of products that we do not manufacture cansuffer similar delays, which could cause delays in our product introductions. Ifwe suffer delays in product introductions, our net sales could be adverselyaffected.

 

***If third parties claim that we infringe upon their intellectualproperty rights, we may incur liabilities and costs and may have toredesign or discontinue selling the affected product.***

 

The medical device industryis litigious with respect to patents and other intellectual property rights.Companies operating in our industry routinely seek patent protection for theirproduct designs, and many of our principal competitors have large patentportfolios. Companies in the medical device industry have used intellectualproperty litigation to gain a competitive advantage. Whether a productinfringes a patent involves complex legal and factual issues, the determinationof which is often uncertain. We face the risk of claims that we have infringedon third parties’ intellectual property rights. Prior to launching major newproducts in our key markets, we normally evaluate existing intellectualproperty rights. However, our competitors may also have filed for patentprotection which is not as yet a matter of public knowledge or claim trademarkrights that have not been revealed through our availability searches. Ourefforts to identify and avoid infringing on third parties’ intellectualproperty rights may not always be successful. Any claims of patent orother intellectual property infringement, even those without merit, could:

 

•                                          be expensive and time consuming to defend;

 

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•                                          result in us being required to paysignificant damages to third parties;

 

•                                          cause us to cease making or selling productsthat incorporate the challenged intellectual property;

 

•                                          require us to redesign, reengineer or rebrandour products, if feasible;

 

•                                          require us to enter into royalty or licensingagreements in order to obtain the right to use a third party’s intellectualproperty, which agreements may not be available on terms acceptable to usor at all;

 

•                                          divert the attention of our management; or

 

•                                          result in our customers or potentialcustomers deferring or limiting their purchase or use of the affected productsuntil resolution of the litigation.

 

In addition, new patentsobtained by our competitors could threaten a product’s continued life in themarket even after it has already been introduced.

 

***We are currently a party to a number of intellectual property claims,the resolution of which could have a material adverse effect on our businessand results of operations.***

 

We cannot assure you that wedo not infringe any patents or other proprietary rights held by third parties.In that regard, in March 2005, Medtronic, Inc. contacted us toexpress its view that our Protégé stents infringe on one or more of its patents.We informed Medtronic that we disagree with its assertions, and have since hadseveral discussions with Medtronic. No lawsuit with respect to this matter hasbeen filed. We also received notice from an individual regarding ourPercutaneous Left Atrial Appendage Transcatheter Occlusion device, or PLAATO®,which is designed to reduce the risk of stroke by occluding the left atrialappendage, a small pocket attached to the heart’s left upper chamber that haslimited functional use and is the location of a majority of blood clots in theheart. The individual claims that he believes our PLAATO device infringes ontwo of his patents. We have informed this individual that we do not believethat our PLAATO device infringes on these patents. In March 2005, we wereserved with a complaint by Boston Scientific Corporation and one of itsaffiliates which claims that some of our products, including our SpideRXEmbolic Protection Device, infringe on certain of Boston Scientific’s patents. BostonScientific is seeking monetary damages from us and to enjoin us from thealleged infringement. We have answered the complaint, and we intend tovigorously defend this action. Because these matters are in early stages, wecannot estimate the possible loss or range of loss, if any, associated withtheir resolution. However, there can be no assurance that the ultimateresolution of these matters will not result in a material adverse effect on ourbusiness, financial condition or results of operations. If our products werefound to infringe on any proprietary rights of a third party, we could berequired to pay significant damages or license fees to the third party or ceaseproduction, marketing and distribution of those products, which could in turn havea material adverse effect on our business, financial condition and results ofoperations. Litigation may also be necessary to enforce patent rights wehold or to protect trade secrets or techniques we own.

 

We may also be subjectto disputes as to the ownership of patents that we may develop with othercompanies. Such disputes could result in the enjoining of sales of our productsor our being required to pay commercially unreasonable licensing fees. If thisoccurs, our net sales or the cost of selling the infringing product, andtherefore our results of operations, would be negatively affected.

 

MTI is involved in severalpatent disputes. Prior to MTI’s acquisition of Dendron GmbH, Dendron becameinvolved in litigation in Europe involving patents covering certain of itsproducts, which litigation is still active. Concurrent with its acquisition ofDendron, MTI initiated a series of legal actions in the Netherlands andthe United Kingdom with the primary purpose of asserting both invalidity andnon-infringement by it of certain patents held by others with respect todetachable coils and certain delivery systems. In addition, the patent holdersagainst whom MTI initiated the actions in the Netherlands and the UnitedKingdom have initiated legal actions against MTI in the United States thatallege infringement by MTI of certain patents held by them. An adversedetermination in a judicial or administrative proceeding or failure to obtainlicenses, if necessary, could prevent MTI from

 

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manufacturing and sellingits products, which would in turn have an adverse effect on our business andresults of operations.

 

***If there is a disruption in the supply of the products of InvatecS.r.l. that we distribute or if our relationship with Invatec is impaired, ournet sales and results of operations would be adversely impacted.***

 

We have entered into anagreement with Invatec S.r.l., or Invatec, an Italian manufacturer ofendovascular medical devices which prior to our arrangement have not beenmarketed or sold under the Invatec brand in the United States, to distributeInvatec’s branded products throughout the United States. Although our contractwith Invatec gives us the exclusive right to market Invatec’s products usingthe Invatec brand in the United States, Invatec retained the right to sell itsproducts into the United States under other brands, which it currently does. In2004, we increased our U.S. cardio peripheral sales force by adding 40 newsales representatives partially in reliance on this agreement and have investedsignificantly in regulatory, intellectual property and clinical activities tosupport the introduction of Invatec’s products in the United States. Oursuccess in marketing the Invatec products will depend on these new salespersonnel becoming proficient in the product line, building physicianrelationships and executing sales orders. If we are unable to market Invatec’sproducts successfully or if our agreement with Invatec is terminated, our netsales and results of operations would suffer. If we do not meet our performancerequirements under the agreement, the agreement may be terminated byInvatec and we may be obligated to make substantial payments to Invatec. Inaddition, even if we market Invatec’s products successfully, if Invatec isunable to produce enough of its products to meet our demands, including ifInvatec sells its inventory to our competitors rather than to us for marketingunder their own brands, we may not be able to meet our customers’ demandsand our net sales and results of operations may suffer. We also may notbe successful in managing the larger inventory and greater variety of productofferings that we will experience in connection with the Invatec relationshipand our net sales and results of operations may be adversely impacted.

 

***If our patents and other intellectual property rights do not adequatelyprotect our products, we may lose market share to our competitors and beunable to operate our business profitably.***

 

Our success dependssignificantly on our ability to protect our proprietary rights to thetechnologies used in our products. We rely on patent protection, as well as acombination of copyright and trademark laws and nondisclosure, confidentialityand other contractual arrangements to protect our proprietary technology. However,these legal means afford only limited protection and may not adequatelyprotect our rights or permit us to gain or keep any competitive advantage. Inaddition, we cannot be assured that any of our pending patent applications willresult in the issuance of a patent to us. The United States Patent andTrademark Office, or PTO, may deny or require significant narrowing ofclaims in our pending patent applications, and patents issued as a result of thepending patent applications, if any, may not provide us with significantcommercial protection or be issued in a form that is advantageous to us. Wecould also incur substantial costs in proceedings before the PTO. Theseproceedings could result in adverse decisions as to the priority of ourinventions and the narrowing or invalidation of claims in issued patents. Ourissued patents and those that may be issued in the future may bechallenged, invalidated or circumvented, which could limit our ability to stopcompetitors from marketing related products. Although we have taken steps toprotect our intellectual property and proprietary technology, there is noassurance that third parties will not be able to design around our patents. Wealso rely on unpatented proprietary technology. We cannot assure you that wecan meaningfully protect all our rights in our unpatented proprietarytechnology or that others will not independently develop substantiallyequivalent proprietary products or processes or otherwise gain access to ourunpatented proprietary technology. We seek to protect our know-how and otherunpatented proprietary technology, in part with confidentiality agreementsand intellectual property assignment agreements with our employees, independentdistributors and consultants. However, such agreements may not beenforceable or may not provide meaningful protection for our proprietaryinformation in the event of unauthorized use or disclosure or other breaches ofthe agreements or in the event that our competitors discover or independentlydevelop similar or identical designs or other proprietary information. Inaddition, we rely on the use of registered trademarks with respect to the brandnames of some of our products. We also rely on common law trademark protectionfor some brand names, which are not protected to the same extent as our rightsin the use of our registered trademarks.

 

Furthermore, the laws offoreign countries may not protect our intellectual property rights to thesame extent as the laws of the United States. For example, foreign countriesgenerally do not allow patents to cover methods for performing surgicalprocedures. If we cannot adequately protect our intellectual property rights inthese foreign

 

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countries, our competitors may beable to compete more directly with us, which could adversely affect ourcompetitive position and our business.

 

We also hold licenses fromthird parties that are necessary to utilize certain technologies used in thedesign and manufacturing of some of our products. The loss of such licenseswould prevent us from manufacturing, marketing and selling these products,which could harm our business.

 

***We manufacture our products at single locations. Any disruption inthese manufacturing facilities or any patent infringement claims with respectto our manufacturing process could adversely affect our business and results ofoperations.***

 

We have relied to dateprincipally on our manufacturing facility in Plymouth, Minnesota and our formerfacility in New Brighton, Minnesota, and MTI’s facility in Irvine, California. We  closed our New Brighton facility in July 2005and moved its operations to our Plymouth facility. The Plymouth and Irvinefacilities and the manufacturing equipment we use to produce our products wouldbe difficult to replace and could require substantial lead-time to repair orreplace. Our facilities may be affected by natural or man-made disasters. Inthe event one of our two facilities was affected by a disaster, we would beforced to rely on third-party manufacturers if we could not shift productionto  our other manufacturing facility. Inthe case of a device with a pre-market approval application we may berequired to obtain prior FDA or notified body approval of an alternatemanufacturing facility, which could delay or prevent our marketing of theaffected product until such approval is obtained. Although we believe wepossess adequate insurance for damage to our property and the disruption of ourbusiness from casualties, such insurance may not be sufficient to coverall of our potential losses and may not continue to be available to us onacceptable terms, or at all. It is also possible that one of our competitorscould claim that our manufacturing process violates an existing patent. If wewere unsuccessful in defending such a claim, we may be forced to stopproduction at one or both of our manufacturing facilities in the United Statesand to seek alternative facilities. Even if we are able to identify suchalternative facilities, we may incur additional costs and we may experiencea disruption in the supply of our products until those facilities are available.Any disruption in our manufacturing capacity could have an adverse impact onour ability to produce sufficient inventory of our products or may requireus to incur additional expenses in order to produce sufficient inventory, andtherefore may adversely affect our net sales and results of operations. Anydisruption or delay at our manufacturing facilities could impair our ability tomeet the demand of our customers and our customers may cancel orders orpurchase products from our competitors, which could adversely affect ourbusiness and results of operations.

 

***If we lose the services of our chief executive officer or other keypersonnel, we may not be able to manage our operations and meet ourstrategic objectives.***

 

Our future success depends,in large part, on the continued service of James M. Corbett, our president andchief executive officer. Mr. Corbett’s continuation with us is integral toour future success, based on his significant expertise and knowledge of ourbusiness and products. Although we have key person insurance with respect to Mr. Corbett,any loss or interruption of the services of Mr. Corbett couldsignificantly reduce our ability to effectively manage our operations andimplement our strategy. Also, we depend on the continued service of keymanagerial, scientific, sales and technical personnel, as well as our abilityto continue to attract and retain additional highly qualified personnel. Wecompete for such personnel with other companies, academic institutions,government entities and other organizations. Any loss or interruption of theservices of our other key personnel, employee slowdowns, strikes or similaractions could also significantly reduce our ability to effectively manage ouroperations and meet our strategic objectives because we cannot assure you thatwe would be able to find an appropriate replacement should the need arise.

 

We also compete forexperienced medical device sales personnel. If we are unable to hire and retainqualified sales personnel, our sales could be negatively impacted.

 

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***Our dependence on key suppliers puts us at risk of interruptions in theavailability of our products, which could reduce our net sales and adverselyaffect our results of operations. In addition, increases in prices for rawmaterial and components used in our products could adversely affect our resultsof operations.***

 

We rely on a limited numberof suppliers for the raw materials and components used in our products. Our rawmaterials and components are generally acquired through purchase orders placedin the ordinary course of business, and we do not have any guaranteed orcontractual supply arrangements with many of our key or single source suppliers.In addition, we also rely on independent contract manufacturers for some of ourproducts. Independent manufacturers have possession of and in some cases holdtitle to molds for certain manufactured components of our products. Ourdependence on third-party suppliers involves several risks, including limitedcontrol over pricing, availability, quality and delivery schedules, as well asmanufacturing yields and costs. Suppliers of raw materials and components may decide,or be required, for reasons beyond our control to cease supplying raw materialsand components to us. Shortages of raw materials, quality control problems,production capacity constraints or delays by our contract manufacturers couldnegatively affect our ability to meet our production obligations and result inincreased prices for affected parts. Any such shortage, constraint or delay may resultin delays in shipments of our products or components, which could adverselyaffect our net sales and  results ofoperations.

 

In addition, the Food andDrug Administration, or FDA, and foreign regulations may requireadditional testing of any raw materials or components from new suppliers priorto our use of these materials or components. In the case of a device with apre-market approval application, we may be required to obtain prior FDAapproval of a new supplier, which could delay or prevent our access or use ofsuch raw materials or components or our marketing of affected products untilsuch approval is granted. In the case of a device with clearance under Section 510(k)of the Federal Food, Drug and Cosmetic Act, which we refer to as a 510(k), we may berequired to submit a new 510(k) if a change in a raw material or componentsupplier results in a change in a material or component supplied that is notwithin the 510(k) cleared device specifications. If we need to establishadditional or replacement suppliers for some of these components, our access tothe components might be delayed while we qualify such suppliers and obtain anynecessary FDA approvals. Our suppliers of finished goods are also subject toregulatory inspection and scrutiny. Any adverse regulatory finding or actionagainst those suppliers could impact their ability to supply us goods fordistribution and sale.

 

***We or MTI may require additional capital in the future, which may notbe available or may be available only on unfavorable terms.***

 

Our and MTI’s capital requirementsdepend on many factors, including the amount of expenditures on intellectualproperty and technologies, the number of clinical trials which we conduct andnew product development. To the extent that our or MTI’s existing capital isinsufficient to meet these requirements and cover any losses, we will need toraise additional funds through financings or borrowings or curtail our growthand reduce our assets. From time to time we may also sell a giventechnology or intellectual property having a development timeline ordevelopment cost that is inconsistent with our investment horizon or which doesnot adequately complement our existing product portfolio. We and MTI have eachhistorically relied on financing from Warburg Pincus and Vertical, but therecan be no assurance that Warburg Pincus, Vertical or other investors willprovide such financing in the future. Any equity or debt financing, ifavailable at all, may be on terms that are not favorable to us. Equityfinancings could result in dilution to our stockholders, and the securitiesissued in future financings may have rights, preferences and privilegesthat are senior to those of our common stock. If our need for capital arisesbecause of significant losses, the occurrence of these losses may make itmore difficult for us to raise the necessary capital. In addition, because MTIis not our wholly owned subsidiary, our creditors are limited in their abilityto satisfy their claims against us by seeking recourse to MTI’s assets, whichcould impair our ability to obtain financing.

 

***We may experience conflicts of interest with MTI with respect tobusiness opportunities and other matters.***

 

Our neurovascular operationsare comprised of our interest in and relationships with MTI. MTI is a publiccompany whose stock is traded on the NASDAQ National Market System. We own70.3% of the outstanding shares of common stock of MTI based on the number ofshares outstanding as of July 3, 2005. In addition, our board of directorsis comprised of seven persons, four of whom are also members of the board ofdirectors of MTI. These directors are James M. Corbett, Richard B. Emmitt, DaleA. Spencer and Elizabeth H. Weatherman. Our

 

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relationships with MTI aresignificant elements of our business. Under a number of agreements that we haveentered into with MTI, we:

 

•                                          are a distributor of certain of MTI’sproducts;

 

•                                          perform inventory and administrativeservices with respect to finished goods inventory of certain of MTI’s neurovascularproducts;

 

•                                          provide MTI with marketing, salessolicitation, inventory management, accounting, invoicing, collection andadministrative services in certain countries other than the United States andCanada; and

 

•                                          provide MTI distributor management servicesin certain countries other than the United States and Canada where MTI has anexisting third-party distributor for its products.

 

Although MTI is ourcontrolled subsidiary, it is not our wholly owned subsidiary, and conflicts ofinterest may arise with respect to transactions involving businessdealings between us and MTI, potential acquisitions of businesses or products,development of products and other matters with respect to which our bestinterests and the best interests of our stockholders may conflict with thebest interests of the public stockholders of MTI. Because a portion of MTI isowned by minority stockholders, we cannot treat MTI as we would a wholly ownedsubsidiary. With respect to our transactions with MTI, although we have formeda special committee of our board of directors that consists of all of thenon-MTI directors to alleviate conflict of interest concerns, we cannot assureyou that we will negotiate terms that are as favorable to us as if suchtransactions were with an unaffiliated third party or that any conflicts ofinterest will be resolved in our favor. Further, the fiduciary duties of themembers of MTI’s board of directors may result in actions that are not inour stockholders’ best interests. Because of its importance to our business, wemay elect to fund MTI’s operations in circumstances in which we undertakea large amount of risk but which will benefit all of MTI’s stockholders,including its public stockholders, and from which we may only receive theeconomic benefit in proportion to our ownership interest in MTI. In addition,we are required to share any dividends that are declared by MTI on its commonstock or other distributions of its assets with MTI’s public stockholders on apro rata basis, which will restrict our ability to access any funds and assetsheld by MTI.

 

***The value of our interest in MTI may decline or our interest inMTI could be diluted.***

 

Any decline in the marketprice of MTI’s common stock on the NASDAQ National Market System will cause thevalue of the shares of MTI’s common stock which we own to decline. MTI has notbeen profitable since its founding and may continue to incur significantlosses and negative cash flows in the future, which could negatively impact themarket price of its common stock and the value of the MTI shares that we own. Forexample, MTI may engage in equity financings or acquisitions of businessesor assets using equity that result in the dilution of our interest in MTI. Althoughwe have the right to provide financing to MTI before Warburg Pincus orVertical, if we decline to exercise this right, Warburg Pincus or Vertical  may also elect to provide financingdirectly to MTI in the future. In the event that MTI raises additional capitalthrough equity offerings to Warburg Pincus, Vertical  or other investors, our ownership interest inMTI could be diluted.

 

***Our sales would decline if our customers or their patients cannotobtain third party reimbursement for their purchases of our products.***

 

Sales of our products dependin part on the reimbursement by governmental and private health carepayors to our physician customers or their patients for the purchase and use ofour products. In the United States, health care providers that purchase ourproducts generally rely on third-party payors, principally federal Medicare,state Medicaid and private health insurance plans, to pay for all or a portionof the cost of endovascular procedures. Reimbursement systems in internationalmarkets vary significantly by country, and by region within some countries, andreimbursement approvals must be obtained on a country-by-country basis and cantake up to 18 months or longer. Many international markets havegovernment-managed health care systems that govern reimbursement for newdevices and procedures. In most markets, there are private insurance systems aswell as government-managed systems. Additionally, some foreign reimbursementsystems provide for limited payments in a given period and

 

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therefore result in extendedpayment periods. Any delays in obtaining, or an inability to obtain,reimbursement approvals could have a material adverse effect on our business. Inaddition, if the reimbursement policies of domestic or foreign governmental orprivate health care payors were to change, our customers would likely changetheir purchasing patterns and/or the frequency of their purchases of theaffected products. Additionally, payors continue to review their coveragepolicies carefully for existing and new therapies and can, without notice, denycoverage for treatments that include the use of our products. Our businesswould be negatively impacted to the extent any such changes reducereimbursement for our products.

 

In addition, some healthcare providers in the United States have adopted or are considering a managedcare system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Health care providers may attempt tocontrol costs by authorizing fewer elective surgical procedures or by requiringthe use of the least expensive devices possible, which could adversely affectthe demand for our products or the price at which we can sell our products.

 

We also sell a number of ourproducts to physician customers who may elect to use these products inways that are not within the scope of the approval or clearance given by theFDA, often referred to as “off-label” use. In the event that governmental orprivate health care payors limit reimbursement for products used off-label,sales of our products and our business would be materially adversely affected.

 

***Our products and facilities are subject to extensive regulation withwhich compliance is costly and which exposes us to penalties for non-compliance.We may not be able to obtain required regulatory approvals for ourproducts in a cost-effective manner or at all, which could adversely affect ourbusiness and results of operations.***

 

The production and marketingof our products and our ongoing research and development, preclinical testingand clinical trial activities are subject to extensive regulation and review bynumerous governmental authorities both in the United States and abroad. U.S.and foreign regulations applicable to medical devices are wide-ranging andgovern, among other things, the testing, marketing and pre-market review of newmedical devices, in addition to regulating manufacturing practices, reporting,advertising, exporting, labeling and record keeping procedures. We are requiredto obtain FDA approval or clearance before we can market our products in theUnited States and certain foreign countries. The regulatory process requiressignificant time, effort and expenditures to bring our products to market, andwe cannot assure that any of our products will be approved for sale. Anyfailure to obtain regulatory approvals or clearances could prevent us fromsuccessfully marketing our products, which could adversely affect our businessand results of operations. Our failure to comply with applicable regulatoryrequirements could result in governmental agencies:

 

•                                          imposing fines and penalties on us;

 

•                                          preventing us from manufacturing or sellingour products;

 

•                                          bringing civil or criminal charges againstus;

 

•                                          delaying the introduction of our new productsinto the market;

 

•                                          recalling or seizing our products; or

 

•                                          withdrawing or denying approvals orclearances for our products.

 

If any or all of theforegoing were to occur, we may not be able to meet the demands of ourcustomers and our customers may cancel orders or purchase products fromour competitors, which could adversely affect our business and results ofoperations.

 

Even if regulatory approvalor clearance of a product is granted, the approval or clearance could limit theuses for which the product may be labeled and promoted, which may limitthe market for our products. Further, for a marketed product, its manufacturerand manufacturing facilities are subject to periodic reviews and inspections byFDA and foreign regulatory authorities. Subsequent discovery of problems with aproduct, manufacturer or facility

 

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may result inrestrictions on the product, manufacturer or facility, including withdrawal ofthe product from the market or other enforcement actions. In addition,regulatory agencies may not agree with the extent or speed of correctiveactions relating to product or manufacturing problems.

 

We are currently conductingclinical studies of some of our products under an investigational deviceexemption. Clinical studies must be conducted in compliance with regulations ofthe FDA and those of regulatory agencies in other countries in which we conductclinical studies. The data collected from these clinical investigations willultimately be used to support market clearance for these products. There is noassurance that regulatory bodies will accept the data from these clinicalstudies or that they will ultimately allow market clearance for these products.

 

When required, with respectto the products we market in the United States we have obtained pre-marketnotification clearance under Section 510(k), but we do not believe certainmodifications we have made to our products require us to submit new 510(k)notifications. However, if the FDA disagrees with us and requires us to submita new 510(k) notification for modifications to our existing products, we may besubject to enforcement actions by the FDA and be required to stop marketing theproducts while the FDA reviews the 510(k) notification. If the FDA requires usto go through a lengthier, more rigorous examination than we had expected, ourproduct introductions or modifications could be delayed or canceled, whichcould cause our sales to decline. In addition, the FDA may determine thatfuture products will require the more costly, lengthy and uncertain pre-marketapproval application process. Products that are approved through a pre-marketapproval application generally need FDA approval before they can be modified. Ifwe fail to submit changes to products developed under investigational deviceexemptions or pre-market approval applications in a timely or adequate manner,we may become subject to regulatory actions.

 

Because we are subject toextensive regulation in the countries in which we operate, we are subject tothe risk that regulations could change in a way that would expose us toadditional costs, penalties or liabilities. For example, in the United Stateswe sell a number of our products to physicians who may elect to use theseproducts in ways that are not within the scope of the approval or clearancegiven by the FDA or for other than FDA-approved indications, often referred toas “off-label” use. There are laws and regulations prohibiting the promotion ofproducts for such off-label use which restrict our ability to market ourproducts and could affect our growth. Although we have strict policies againstthe unlawful promotion of products for off-label use and we train our employeeson these policies, it is possible that one or more of our employees will notfollow the policies, or that regulations would change in a way that may hinderour ability to sell such products or make it more costly to do so, which couldexpose us to financial penalties as well as loss of approval to market and sellthe affected products. If we want to market any of our products for use in waysfor which they are not currently approved, we may need to conduct clinicaltrials and obtain approval from appropriate regulatory bodies, which could betime-consuming and costly. In addition, off-label use may not be safe oreffective and may result in unfavorable outcomes to patients, resulting inpotential liability to us. Penalties or liabilities stemming from off-label usecould have a material adverse effect on our results of operations. In addition,if physicians cease or lessen their use of products for other than FDA-approvedindications, sales of our products could decline, which could materiallyadversely affect our net sales and results of operations.

 

If additional regulatoryrequirements are implemented in the foreign countries in which we sell ourproducts, the cost of developing or selling our products may increase. Forexample, in Japan, new regulations became effective on April 1, 2005 whichincrease the regulatory and quality assurance requirements for both ourmanufacturing facilities and our offices located in Japan in order to obtainand maintain regulatory approval to market our products there. While parts ofthe new regulations are still being defined, we expect that the new regulationswill result in higher costs and delays in securing approval to market ourproducts in Japan. In addition, we depend on our distributors outside theUnited States in seeking regulatory approval to market our devices in othercountries and we are therefore dependent on persons outside of our directcontrol to secure such approvals. For example, we are highly dependent ondistributors in emerging markets such as China and Brazil for regulatorysubmissions and approvals and do not have direct access to health care agenciesin those markets to ensure timely regulatory approvals or prompt resolution ofregulatory or compliance matters. If our distributors fail to obtain therequired approvals or do not do so in a timely manner, our net sales from ourinternational operations and our results of operations may be adverselyaffected.

 

In addition, our business,properties and products are subject to foreign, federal, state and local lawsand regulations relating to the protection of the environment, naturalresources and worker health and safety and the use,

 

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management, storage, anddisposal of hazardous substances, wastes, and other regulated materials.Because we own and operate real property, various environmental laws also may imposeliability on us for the costs of cleaning up and responding to hazardoussubstances that may have been released on our property, including releasesunknown to us. These environmental laws and regulations also could require usto pay for environmental remediation and response costs at third-partylocations where we disposed of or recycled hazardous substances. The costs ofcomplying with these various environmental requirements, as they now exist or may bealtered in the future, could adversely affect our financial condition andresults of operations.

 

***A number of our products are in clinical trials. If these trials areunsuccessful, or if the FDA or other regulatory agencies do not accept theresults of such trials, these products may not successfully come to marketand our business prospects may suffer.***

 

Several of our products arein the early stages of development. Some of our products only recently emergedfrom clinical trials and others have not yet reached the clinical trial stage. Wecurrently have four ongoing clinical trials relating to four products that weexpect to contribute significantly to our net sales in the future. These trialsinclude the CREATE trial designed to evaluate the use of our SpideRX EmbolicProtection Devices and our Protégé Self-Expanding Stent System in carotidartery stenting procedures in patients who are high risk candidates for carotidendarterectomy, as well as our PLAATO system designed for stroke reduction. Wecannot assure you that we will be successful in reaching the endpoints in thesetrials or, if we do, that the FDA or other regulatory agencies will accept theresults and approve the devices for sale. Further, we continually evaluate thepotential financial benefits and costs of our clinical trials and the productsbeing evaluated in them. If we determine that the costs associated withattaining regulatory approval of a product exceed the potential financialbenefits of that product or if the projected development timeline isinconsistent with our investment horizon, we may choose to stop a clinicaltrial and/or the development of a product.

 

Our ability to market ourproducts in the United States will depend upon a number of factors, includingour ability to demonstrate the safety and efficacy of our products with validclinical data. Our ability to market our products outside of the United Statesis also subject to regulatory approval, including our ability to demonstratethe safety of our products in the clinical setting. Our products may notbe found to be safe and, where required, effective in clinical trials and may notultimately be approved for marketing by U.S. or foreign regulatory authorities.Our failure to develop safe and effective products that are approved for saleon a timely basis would have a negative impact on our net sales. In particular,if we do not reach the endpoints or obtain FDA approval with respect to ourproducts, our future growth may be significantly hampered. In addition,some of the products for which we are currently conducting trials are alreadyapproved for sale outside of the United States. As a result, while our trialsare ongoing, unfavorable data may arise in connection with usage of ourproducts outside the United States which could adversely impact the approval ofsuch products in the United States. Conversely, unfavorable data from clinicaltrials in the United States may adversely impact sales of our productsoutside of the United States.

 

***The risks inherent in operating internationally and the risks ofselling and shipping our products and of purchasing our components and productsinternationally may adversely impact our net sales, results of operationsand financial condition.***

 

We derive a significantportion of our net sales from operations in international markets. For the sixmonths ended July 3, 2005 and July 4, 2004, 49.2% and  49.7% of our net sales, respectively, werederived from our international operations. Our international distributionsystem consists of eight direct sales offices and approximately 50 stockingdistribution partners. In addition, we purchase some components and products onthe international market. The sale and shipping of our products and servicesacross international borders, as well as the purchase of components andproducts from international sources, subject us to extensive U.S. and foreigngovernmental trade regulations. Compliance with such regulations is costly andexposes us to penalties for non-compliance. We are reviewing our trade controlpractices as part of our ongoing commitment to further enhance ourcompliance policies and procedures. As part of this review, we haveidentified instances in which we may have incorrectly reported informationabout certain shipments imported into the United States and Europe. While webelieve that no monies are owed to any government as a result of thesepotential reporting errors other than processing fees of a nonmaterial amount,we may incur penalties, additional fees, interest and duty payments if thecustoms regulators disagree with our assessment. Any failure to comply withapplicable legal and regulatory obligations could impact us in a variety ofways that include, but are not limited to, significant criminal, civil andadministrative penalties, including

 

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imprisonment of individuals,fines and penalties, denial of export privileges, seizure of shipments,restrictions on certain business activities, and exclusion or debarment fromgovernment contracting. Also, the failure to comply with applicable legal andregulatory obligations could result in the disruption of our shipping and salesactivities.

 

In addition, most of thecountries in which we sell our products are, to some degree, subject to political,economic and/or social instability. Our international sales operations exposeus and our representatives, agents and distributors to risks inherent inoperating in foreign jurisdictions. These risks include:

 

•                                          the imposition of additional U.S. and foreigngovernmental controls or regulations;

 

•                                          the imposition of costly and lengthy newexport licensing requirements;

 

•                                          the imposition of U.S. and/or internationalsanctions against a country, company, person or entity with whom the companydoes business that would restrict or prohibit continued business with thesanctioned country, company, person or entity;

 

•                                          economic instability;

 

•                                          a shortage of high-quality sales people anddistributors;

 

•                                          loss of any key personnel that possessproprietary knowledge, or who are otherwise important to our success in certaininternational markets;

 

•                                          changes in third-party reimbursement policiesthat may require some of the patients who receive our products to directlyabsorb medical costs or that may necessitate the reduction of the sellingprices of our products;

 

•                                          changes in duties and tariffs, licenseobligations and other non-tariff barriers to trade;

 

•                                          the imposition of new trade restrictions;

 

•                                          the imposition of restrictions on theactivities of foreign agents, representatives and distributors;

 

•                                          scrutiny of foreign tax authorities whichcould result in significant fines, penalties and additional taxes being imposedon us;

 

•                                          pricing pressure that we may experienceinternationally;

 

•                                          laws and business practices favoring localcompanies;

 

•                                          longer payment cycles;

 

•                                          difficulties in enforcing agreements andcollecting receivables through certain foreign legal systems;

 

•                                          difficulties in enforcing or defendingintellectual property rights; and

 

•                                          exposure to different legal and politicalstandards due to our conducting business in over 50 countries.

 

We cannot assure you thatone or more of the factors will not harm our business. Any material decrease inour international sales would adversely impact our net sales, results ofoperations and financial condition. Our international sales are predominatelyin Europe. In Europe, health care regulation and reimbursement for medical

 

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devices vary significantlyfrom country to country. This changing environment could adversely affect ourability to sell our products in some European countries.

 

***Fluctuations in foreign currency exchange rates could result indeclines in our reported net sales and earnings.***

 

Because the majority of ourinternational sales are denominated in local currencies and not in U.S.dollars, our reported net sales and earnings are subject to fluctuations inforeign exchange rates. Our international net sales were favorably affected bythe impact of foreign currency fluctuations totaling $1.4 million in the sixmonths ended July 4, 2004 and $1.0 million in the six months ended July 3,2005. However, we cannot assure you that we will benefit from the impact offoreign currency fluctuations in the future and foreign currency fluctuationsin the future may adversely affect our net sales and earnings. At present,we do not engage in hedging transactions to protect against uncertainly infuture exchange rates between particular foreign currencies and the U.S.dollar.

 

***We may become obligated to make large milestone payments that arenot currently reflected in our financial statements in certain circumstances,which would negatively impact our cash flows from operations.***

 

Pursuant to the acquisitionagreements relating to our purchase of MitraLife and Appriva Medical, Inc.in January 2002 and August 2002, respectively, we agreed to makecertain additional payments to the sellers of these businesses in the eventthat we achieve contractually defined milestones. Generally, in each case,these milestone payments become due upon the completion of specific regulatorysteps in the product commercialization process. With respect to the MitraLifeacquisition, the maximum potential milestone payments totaled $25 million,and with respect to the Appriva acquisition, the maximum potential milestonepayments totaled $175 million.

 

On September 29, 2004,we sold substantially all of the assets constituting the MitraLife business toEdwards Lifesciences and we are no longer pursuing commercialization of theproduct line acquired in the MitraLife transaction. As of the date that we soldthese assets to Edwards Lifesciences, none of the milestones set forth in ouragreement with the sellers of MitraLife had been met. We have determined thatwe have no current obligations in respect of these milestone payments, and wedo not believe that it is likely that we will have obligations with respect tothese milestones in the future. Although we do not believe it is likely thatthese milestone payment obligations will become due in the future, it ispossible that the former stockholders of MitraLife could disagree and make aclaim for such payments. Any such dispute could be costly, result in paymentsin such amounts being made and divert our management’s time and attention awayfrom our business.

 

The Appriva acquisitionagreement contains four milestones to which payments relate. The firstmilestone was required by its terms to be achieved by January 1, 2005 inorder to trigger a payment equal to $50 million. We have determined thatthe first milestone was not achieved by January 1, 2005 and that the firstmilestone is not payable, although it is possible that we could meet one ormore of the remaining milestones with respect to the Appriva acquisition andcould become obligated to make the corresponding milestone payments totaling$125 million. On May 20, 2005 Michael Lesh,  as anindividual seller of Appriva stock and purporting to representcertain  other sellers of Appriva  stock, filed acomplaint in the Superior Court of the State of Delaware with individuallyspecified damages aggregating $70 million and other unspecified damagesfor several allegations, including that we, along with other defendants, breached the acquisition agreement and an implied covenant of good faith andfair dealing by willfully failing to take the steps necessary to meet the firstmilestone under the agreement,  and  thereby also failing tomeet certain other milestones, and further that one milestone was actually met. The complaint also alleges fraud, negligent misrepresentation andviolation of state securities laws in connection with the negotiation of theacquisition agreement. We believe these allegations are without merit andintend to vigorously defend this action. However, the defense and resolution ofthis or any similar dispute could be costly and may divert our management’stime and attention away from our business. On August 5, 2005, ourattorneys received a letter from attorneys representing certain other sellersof Appriva stock (who are not purported to be represented in the action filedby Lesh), asking our attorneys to enter into a dialogue regarding theirassertions that certain milestone payments should have been made. We believetheir assertions are without merit. Failure to reach agreement with these newclaimants on a resolution of our differences could lead to additionallitigation on this matter. In the event any such milestone payments become dueand/or any other damages become payable, our costs would increasecorrespondingly which would negatively impact our cash flow from operations.

 

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***We rely on our independent sales distributors and sales associates tomarket and sell our products outside of the United States, Canada, Europe andJapan.***

 

Sales of our products inlocations outside of the United States, Canada, Europe and Japan represented12% and 15% of our net sales in the six months ended July 3, 2005 and July 4,2004, respectively. Our success outside of the United States, Canada, Europeand Japan depends largely upon marketing arrangements with independent salesdistributors and sales associates, in particular their sales and serviceexpertise and relationships with the customers in the marketplace. Independentdistributors and sales associates may terminate their relationship withus, or devote insufficient sales efforts to our products. We do not control ourindependent distributors and they may not be successful in implementingour marketing plans. In addition, many of our independent distributors outsideof the United States, Canada, Europe and Japan initially obtain and maintainforeign regulatory approval for sale of our products in their respectivecountries. Our failure to maintain our existing relationships with ourindependent distributors and sales associates outside of the United States,Canada, Europe and Japan, or our failure to recruit and retain additionalskilled independent sales distributors and sales associates in these locations,could have an adverse effect on our operations. We have experienced turnoverwith some of our independent distributors in the past that has adverselyaffected our short-term financial results while we transitioned to newindependent distributors. Similar occurrences could happen in the future.

 

***If physicians do not recommend and endorse our products, our sales may declineor we may be unable to increase our sales and profits.***

 

In order for us to sell ourproducts, physicians must recommend and endorse them. We may not obtainthe necessary recommendations or endorsements from physicians. Acceptance ofour products depends on educating the medical community as to the distinctivecharacteristics, perceived benefits, safety, clinical efficacy andcost-effectiveness of our products compared to products of our competitors, andon training physicians in the proper application of our products. If we are notsuccessful in obtaining the recommendations or endorsements of physicians forour products, our sales may decline or we may be unable to increaseour sales and profits.

 

***If we fail to comply with the U.S. Federal Anti-Kickback Statute andsimilar state laws, we could be subject to criminal and civil penalties andexclusion from the Medicare and Medicaid programs, which could have a materialadverse effect on our business and results of operations.***

 

A provision of the SocialSecurity Act, commonly referred to as the Federal Anti-Kickback Statute,prohibits the offer, payment, solicitation or receipt of any form ofremuneration in return for referring, ordering, leasing, purchasing orarranging for or recommending the ordering, purchasing or leasing of items orservices payable by Medicare, Medicaid or any other Federal health care program.The Federal Anti-Kickback Statute is very broad in scope and many of itsprovisions have not been uniformly or definitively interpreted by existing caselaw or regulations. In addition, most of the states in which our products aresold have adopted laws similar to the Federal Anti-Kickback Statute, and someof these laws are even broader than the Federal Anti-Kickback Statute in thattheir prohibitions are not limited to items or services paid for by a Federalhealth care program but, instead, apply regardless of the source of payment. Violationsof the Federal Anti-Kickback Statute may result in substantial civil orcriminal penalties and exclusion from participation in Federal health careprograms.

 

All of our financialrelationships with health care providers and others who provide products orservices to Federal health care program beneficiaries are potentially governedby the Federal Anti-Kickback Statute and similar state laws. We believe ouroperations are in material compliance with the Federal Anti-Kickback Statuteand similar state laws. However, we cannot assure you that we will not besubject to investigations or litigation alleging violations of these laws,which could be time-consuming and costly to us and could divert management’sattention from operating our business, which could have a material adverseeffect on our business. In addition, if our arrangements were found to violatethe Federal Anti-Kickback Statute or similar state laws, it could have amaterial adverse effect on our business and results of operations.

 

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***Our business strategy relies on assumptions about the market for ourproducts, which, if incorrect, would adversely affect our business prospectsand profitability.***

 

We are focused on the marketfor endovascular devices used to treat vascular diseases and disorders. Webelieve that the aging of the general population and increasingly inactivelifestyles will continue and that these trends will increase the need for ourproducts. However, the projected demand for our products could materiallydiffer from actual demand if our assumptions regarding these trends andacceptance of our products by the medical community prove to be incorrect or donot materialize or if drug therapies gain more widespread acceptance as aviable alternative treatment, which in each case would adversely affect ourbusiness prospects and profitability.

 

***If MTI’s manufacturing facility does not have sufficient capacity or ifMTI experiences a delay in the proposed relocation of its existingmanufacturing facility, the production of our neurovascular products may bedelayed.***

 

The expansion of MTI’smanufacturing capacity will be necessary in the future. MTI is currently indiscussion with a prospective landlord for the leasing of a larger facility,which will include significantly greater manufacturing capacity. MTI expects toincur approximately $3.0 million for facilities, tooling and equipment,regulatory approvals and leasehold improvements for the new facility. We expectto enter into definitive agreements with MTI to lend MTI up to $3.3 million forthe payment of the expenses associated with the relocation. If MTI is not ableto achieve the expected improved efficiencies from its new manufacturingfacility or if MTI experiences any delay in completing its relocation orregulatory qualification of its new facility, the production of ourneurovascular products may be delayed and our net sales and business couldbe materially adversely affected.

 

***Our business, net sales and results of operations may suffer if wedo not pass the required regulatory inspections for our new location formanufacturing peripheral stents.***

 

We closed our New Brighton,Minnesota manufacturing facility in July 2005 and are currently in theprocess of integrating our manufacturing operations formerly located in NewBrighton, Minnesota, where we manufactured our peripheral stent product line,with our manufacturing operations in Plymouth, Minnesota. We will be requiredto pass regulatory inspections of the FDA, and possibly other regulatoryagencies of countries in which we sell our products, in connection with the newmanufacturing operations in Plymouth. If we do not pass these inspections or donot pass them on our expected schedule, we may not have sufficientinventory of various products, which may result in a backlog of orders,customer dissatisfaction and a reduction in sales. Consequently, our business,net sales and results of operations may suffer. In addition, we arerequired to submit a pre-market approval supplement application to the FDA forapproval of the change in manufacturing facilities for any devices marketedunder a pre-market approval application. If we do not obtain timely approval ofany required supplement application, our business, net sales and results ofoperations may also be negatively impacted.

 

***One of our families of products generates a large portion of our netsales. Our net sales and business prospects would be adversely affected if salesof this product were to decline.***

 

We are dependent on ourProtégé GPS family of stents, which generated more than 10% of our net sales infiscal 2004 and more than 15% of our net sales in the six months ended July 3,2005. If our Protégé GPS stents were to no longer be available for sale in anykey market because of regulatory, intellectual property or any other reason,our net sales from these products and from products that typically constituteancillary purchases would significantly decline. A significant decline in ournet sales could also negatively impact our product development activities andtherefore our business prospects.

 

In March 2005,Medtronic, Inc. contacted us to express its view that our Protégé stentsinfringe on one or more of its patents, as described above. We informedMedtronic that we disagree with its assertions, and have since had severaldiscussions with Medtronic. No lawsuit with respect to this matter has beenfiled.

 

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***We are exposed to product liability claims that could have an adverseeffect on our business and results of operations.***

 

The manufacture and sale ofmedical devices exposes us to significant risk of product liability claims,some of which may have a negative impact on our business. Our existingproducts were developed relatively recently and defects or risks that we havenot yet identified may give rise to product liability claims. In addition,we have recently initiated a new quality control system and a new manufacturingmodel which has not been in effect long enough for us to have the confidencethat any errors or mistakes in implementation have been corrected. Our existingproduct liability insurance coverage may be inadequate to protect us fromany liabilities we may incur or we may not be able to maintainadequate product liability insurance at acceptable rates. If a productliability claim or series of claims is brought against us for uninsuredliabilities or in excess of our insurance coverage and it is ultimatelydetermined that we are liable, our business could suffer. Additionally, wecould experience a material design or manufacturing failure in our products, aquality system failure, other safety issues or heightened regulatory scrutinythat would warrant a recall of some of our products. A recall of some of ourproducts could also result in increased product liability claims. Further,while we train our physician customers on the proper usage of our products, wecannot ensure that they will implement our instructions accurately. If ourproducts are used incorrectly by our customers, injury may result and thiscould give rise to product liability claims against us. Any losses that we may sufferfrom any liability claims, and the effect that any product liability litigationmay have upon the reputation and marketability of our products, may divertmanagement’s attention from other matters and may have a negative impacton our business and our results of operations.

 

***Our net sales could decline significantly if drug-eluting stents becomea dominant therapy in the peripheral vascular stent market and we are not ableto develop or acquire a drug-eluting stent to market and sell.***

 

The peripheral vascularmarket is currently comprised exclusively of bare metal, or non drug-eluting,stents. However, there are clinical situations in the periphery in which adrug-eluting stent may demonstrate clinical superiority over bare metalstents. To the extent that our peripheral stent customers seek stents with drugcoatings and we do not market and sell a drug-eluting peripheral stent or onethat achieves market acceptance, we may not be able to compete aseffectively with those of our competitors that are able to develop and sell adrug-eluting stent, and our peripheral stent sales could decline. If ourperipheral stent sales were to decline, we could experience a significantdecline in sales of some of our other products which are routinely purchased inconjunction with stent purchases.

 

***If we are unable to continue to develop and market new products andtechnologies, we may experience a decrease in demand for our products orour products could become obsolete, and our business would suffer.***

 

We are continually engagedin product development and improvement programs, and new products represent asignificant component of our growth rate. We may not be able to competeeffectively with our competitors unless we can keep up with existing or newproducts and technologies in the endovascular device market. If we do notcontinue to introduce new products and technologies, or if those products andtechnologies are not accepted, we may not be successful and our businesswould suffer. Moreover, many of our clinical trials have durations of severalyears and it is possible that competing therapies, such as drug therapies, may beintroduced while our products are still undergoing clinical trials. This couldreduce the potential demand for our products and negatively impact our businessprospects. Additionally, our competitors’ new products and technologies may beatour products to market, may be more effective or less expensive than ourproducts or render our products obsolete.

 

***The marketing of our products requires a significant amount of time andexpense and we may not have the resources to successfully market ourproducts, which would adversely affect our business and results of operations.***

 

The marketing of ourproducts requires a significant amount of time and expense in order to identifythe physicians who may use our products, invest in training and education,and employ a sales force that is large enough to interact with the targetedphysicians. In addition, the marketing of our products requires interactionwith many subspecialists who are moving into new practice areas and may requiremore training and education from our personnel than would be required withphysicians who are not expanding their practice areas. We may not haveadequate resources to market our products successfully against largercompetitors which have more resources than

 

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we do. If we cannot marketour products successfully, our business and results of operations would beadversely affected.

 

***We face competition from other companies, many of which havesubstantially greater resources than we do and may be able to develop moreeffective products or offer their products at lower prices than we can, whichcould adversely impact our business, net sales and results of operations. Consolidationin the medical technology industry would exacerbate these risks.***

 

The markets in which wecompete are highly competitive, subject to change and significantly affected bynew product introductions and other activities of industry participants. Themarkets for our products are also dominated by a small number of largecompanies, and we are a much smaller company relative to our primarycompetitors. Our products compete with other medical devices, including Invatecmanufactured products sold in the United States under other brand names, surgicalprocedures and pharmaceutical products. A number of the companies in themedical technology industry, including manufacturers of peripheral vascular,cardiovascular and neurovascular products, have substantially greater capitalresources, larger customer bases, broader product lines, larger sales forces,greater marketing and management resources, larger research and developmentstaffs and larger facilities than ours and have established reputations withour target customers, as well as worldwide distribution channels that are moreeffective than ours. In addition, the industry has recently experienced someconsolidation. Consolidation could make the competitive environment moredifficult for smaller companies. Because of the size of the vascular diseasemarket opportunity, competitors and potential competitors have historicallydedicated and will continue to dedicate significant resources to aggressivelypromote their products. New product developments that could compete with usmore effectively are likely because the vascular disease market ischaracterized by extensive research efforts and technological progress. Competitorsmay develop technologies and products that are safer, more effective,easier to use, less expensive or more readily accepted than ours. Theirproducts could make our technology and products obsolete or noncompetitive. Ourcompetitors may also be able to achieve more efficient manufacturing anddistribution operations than we can and may offer lower prices than wecould offer profitably. We expect that as our products mature, we will be ableto produce our products in a more cost effective manner and therefore be ableto compete more effectively, but it is possible that we may not achievesuch cost reductions. Any of these competitive factors could adversely impactour business, net sales and results of operations.

 

We also compete with othermanufacturers of medical devices for clinical sites to conduct human trials. Ifwe are not able to locate clinical sites on a timely or cost-effective basis,this could impede our ability to conduct trials of our products and, therefore,our ability to obtain required regulatory clearance or approval.

 

***We rely on our management information systems for inventory management,distribution and other functions and to maintain our research and developmentand clinical data. If our information systems fail to adequately perform thesefunctions or if we experience an interruption in their operation, our businessand results of operations could be adversely affected.***

 

The efficient operation ofour business is dependent on our management information systems. We rely on ourmanagement information systems to effectively manage accounting and financialfunctions; manage order entry, order fulfillment and inventory replenishmentprocesses; and to maintain our research and development and clinical data. Thefailure of our management information systems to perform as we anticipatecould disrupt our business and product development and could result indecreased sales, increased overhead costs, excess inventory and productshortages, causing our business and results of operations to suffer. Inaddition, our management information systems are vulnerable to damage orinterruption from:

 

•                                          earthquake, fire, flood and other naturaldisasters;

 

•                                          terrorist attacks and attacks by computerviruses or hackers; and

 

•                                          power loss or computer systems, Internet,telecommunications or data network failure.

 

Any such interruption couldadversely affect our business and results of operations.

 

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***Existing or future acquisitions of businesses could negatively affectour results of operations if we fail to integrate the acquired businessessuccessfully into our existing operations or if we discover previouslyundisclosed liabilities.***

 

In order to build our coretechnology platform, we have acquired several businesses since our inceptionand we may acquire additional businesses in the future. Our ability togrow through acquisitions depends upon our ability to identify, negotiate,complete and integrate suitable acquisitions and to obtain any necessaryfinancing. Even if we complete acquisitions, we may experience:

 

•                                          difficulties in integrating any acquiredcompanies, personnel and products into our existing business;

 

•                                          delays in realizing projected efficiencies,cost savings, revenue synergies and other benefits of the acquired company orproducts;

 

•                                          inaccurate assessment of undisclosed,contingent or other liabilities or problems;

 

•                                          diversion of our management’s time andattention from other business concerns;

 

•                                          limited or no direct prior experience in newmarkets or countries we may enter;

 

•                                          higher costs of integration than weanticipated; or

 

•                                          difficulties in retaining key employees ofthe acquired business who are necessary to manage these acquisitions.

 

In addition, an acquisitioncould materially impair our operating results and liquidity by causing us toincur debt or reallocate amounts of capital from other operating initiatives orrequiring us to amortize acquisition expenses and acquired assets or incurnon-recurring charges as a result of incorrect estimates made in the accountingfor acquisitions. We may also discover deficiencies in internal controls,data adequacy and integrity, product quality, regulatory compliance and productliabilities which we did not uncover prior to our acquisition of suchbusinesses, which could result in us becoming subject to penalties or otherliabilities. Any difficulties in the integration of acquired businesses orunexpected penalties or liabilities in connection with such businesses couldhave a material adverse effect on our results of operations and financialcondition. These risks could be heightened if we complete several acquisitionswithin a relatively short period of time.

 

***If MTI fails to timely report its financial results or produce itsfinancial statements, we may not be able to timely report our financialresults or comply with Securities and Exchange Commission reporting and certificationrequirements, and our stock price may decline.***

 

As the owner of acontrolling interest in MTI, we consolidate the financial results of MTI in our consolidated financialstatements. MTI accounted for a material portion of our net sales and gross profitin the six months ended July 3, 2005 and July 4, 2004. As a result,our ability to report our financial results, produce our consolidated financialstatements and file required reports with the Securities and ExchangeCommission, or the SEC, in a timely manner will require MTI to provide us withits financial results and financial statements in a timely manner. If MTI failsto timely produce its financial results and financial statements, we may notbe able to report our financial results or comply with SEC reportingrequirements. In addition, if the officers of MTI are not able to make thecertifications required under the Sarbanes-Oxley Act of 2002, or theSarbanes-Oxley Act, and SEC rules, our officers may not be able to maketheir required certifications. As a result, we may be subject to SECenforcement action and civil litigation, and our stock price may decline.

 

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***If we become profitable, we cannot assure you that our net operatinglosses will be available to reduce our tax liability.***

 

Our ability to use, or theamount of, our net operating losses, may be limited or reduced. Thebusinesses purchased by us in 2001 and 2002 experienced “ownership changes”within the meaning of Section 382 of the Internal Revenue Code. Generally,a change of more than 50 percentage points in the ownership of a company’sshares, by value, over the three-year period ending on the date the shares wereacquired constitutes an ownership change, and these ownership changes limit ourability to use the acquired company’s net operating losses. Furthermore, thenumber of shares of our common stock issued in our initial public offering may besufficient, taking into account prior or future shifts in our ownership over athree-year period, to cause us to undergo an ownership change. As a result, ourability to use our existing net operating losses that are not currently subjectto limitation to offset U.S. federal taxable income if we become profitable may alsobecome subject to substantial limitations. Further, the amount of our netoperating losses could be reduced if any tax deductions taken by us are limitedor disallowed by the Internal Revenue Service. All of these limitations couldpotentially result in increased future tax liability for us.

 

***One of our principal stockholders and its affiliates will be able toinfluence matters requiring stockholder approval and could discourage thepurchase of our outstanding shares at a premium.***

 

As of August 1, 2005,Warburg Pincus beneficially owned approximately 76% of our outstanding commonstock. This concentration of ownership may have the effect of delaying,preventing or deterring a change in control of our company, could deprive ourstockholders of an opportunity to receive a premium for their common stock as part ofa sale or merger of our company and may negatively affect the market priceof our common stock. Transactions that could be affected by this concentrationof ownership include proxy contests, tender offers, mergers or other purchasesof common stock that could give you the opportunity to realize a premium overthe then-prevailing market price for shares of our common stock.

 

As a result of WarburgPincus’ share ownership and representation on our board of directors, WarburgPincus will be able to influence all affairs and actions of our company,including matters requiring stockholder approval, such as the election ofdirectors and approval of significant corporate transactions. The interests ofour principal stockholder may differ from the interests of the otherstockholders. For example, Warburg Pincus could oppose a third party offer toacquire us that you might consider attractive, and the third party may notbe able or willing to proceed unless Warburg Pincus supports the offer. Inaddition, if our board of directors supports a transaction requiring anamendment to our certificate of incorporation, Warburg Pincus is currently in aposition to defeat any required stockholder approval of the proposed amendment.If our board of directors supports an acquisition of us by means of a merger ora similar transaction, the vote of Warburg Pincus alone is currently sufficientto approve or block the transaction under Delaware law. In each of these casesand in similar situations, you may disagree with Warburg Pincus as towhether the action opposed or supported by Warburg Pincus is in the bestinterest of our stockholders.

 

***Our equity investors may have conflicts of interests with you orus in the future.***

 

Our equity investors priorto our initial public offering, including Warburg Pincus, may makeinvestments in companies and from time to time acquire and hold interests inbusinesses that compete directly or indirectly with us. These other investmentsmay:

 

•                                          create competing financial demands on ourequity investors;

 

•                                          create potential conflicts of interest; and

 

•                                          require efforts consistent with applicablelaw to keep the other businesses separate from our operations.

 

These equity investors may alsopursue acquisition opportunities that may be complementary to our businessand, as a result, those acquisition opportunities may not be available tous. Furthermore, these equity investors may have an interest in ourcompany pursuing acquisitions, divestitures, financings or other transactionsthat, in their judgment, could enhance their equity investment, even thoughsuch transactions might involve risks to our stockholders. In

 

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addition, these equityinvestors’ rights to vote or dispose of equity interests in our company are notsubject to restrictions in favor of our company other than as may berequired by applicable law.

 

***We are a “controlled company” within the meaning of the NASDAQ NationalMarket System rules and, as a result, are exempt from certain corporategovernance requirements.***

 

Because Warburg Pincuscontrols more than 50% of the voting power of our common stock, we areconsidered to a “controlled company” for the purposes of the NASDAQ NationalMarket System quotation requirements. As such, we are permitted, and haveelected, to opt out of the NASDAQ National Market System quotation requirementsthat would otherwise require our board of directors to have a majority ofindependent directors, our board nominations to be selected, or recommended forthe board’s selection either by a nominating committee comprised entirely ofindependent directors or by a majority of our independent directors and ourcompensation committee to be comprised entirely of independent directors. Accordingly,you may not have the same protections afforded to stockholders ofcompanies that are subject to all of the NASDAQ National Market Systemcorporate governance requirements.

 

***Our corporate documents and Delaware law contain provisions that coulddiscourage, delay or prevent a change in control of our company.***

 

Provisions in our amendedand restated certificate of incorporation and amended and restated bylaws may discourage,delay or prevent a merger or acquisition involving us that our stockholders may considerfavorable. For example, our amended and restated certificate of incorporationauthorizes our board of directors to issue up to 100 million shares of “blankcheck” preferred stock. Without stockholder approval, the board of directorshas the authority to attach special rights, including voting and dividendrights, to this preferred stock. With these rights, preferred stockholderscould make it more difficult for a third party to acquire us. In addition, ouramended and restated certificate of incorporation provides for a staggeredboard of directors, whereby directors serve for three year terms, withapproximately one third of the directors coming up for reelection each year. Havinga staggered board will make it more difficult for a third party to obtaincontrol of our board of directors through a proxy contest, which may be anecessary step in an acquisition of us that is not favored by our board ofdirectors.

 

We are also subject to theanti-takeover provisions of Section 203 of the Delaware GeneralCorporation Law. Under these provisions, if anyone becomes an “interestedstockholder,” we may not enter into a “business combination” with thatperson for three years without special approval, which could discourage a thirdparty from making a takeover offer and could delay or prevent a change ofcontrol. For purposes of Section 203, “interested stockholder” means,generally, someone owning 15% or more of our outstanding voting stock or anaffiliate of ours that owned 15% or more of our outstanding voting stock duringthe past three years, subject to certain exceptions as described in Section 203.Under one such exception, Warburg Pincus does not constitute an “interestedstockholder.”

 

***The requirements of being a public company may strain our resourcesand distract management.***

 

As a public company, we aresubject to the reporting requirements of the Securities Exchange Act of 1934,as amended, or the Exchange Act, and the Sarbanes-Oxley Act. These requirementsmay place a strain on our people, systems and resources. The Exchange Actrequires that we file annual, quarterly and current reports with respect to ourbusiness and financial condition. The Sarbanes-Oxley Act requires that wemaintain effective disclosure controls and procedures and internal controlsover financial reporting. In order to improve the effectiveness of ourdisclosure controls and procedures and internal control over financialreporting, significant resources and management oversight will be required. Thismay divert management’s attention from other business concerns, whichcould have a material adverse effect on our business, financial condition,results of operations and cash flows.

 

***We will incur increased costs as a result of being a public company.***

 

As a public company, we willincur significant legal, accounting and other expenses that we did not incur asa private company. In addition, the Sarbanes-Oxley Act, as well as new rules subsequentlyimplemented by the SEC and the NASDAQ National Market System, have requiredchanges in corporate governance practices of public companies. We expect thesenew rules and regulations to increase our legal and financial compliancecosts

 

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significantly and to makesome activities more time-consuming and costly. For example, in anticipation ofbecoming a public company, we created additional board committees and adoptedpolicies regarding internal controls and disclosure controls and procedures. Inaddition, we will incur additional costs associated with our public companyreporting requirements. We may need to hire additional accounting andfinancial staff with appropriate public company experience and technicalaccounting knowledge, and we cannot assure you that we will be able to do so ina timely fashion or without incurring material costs. We also expect these new rules andregulations to make it more difficult and more expensive for us to obtaindirector and officer liability insurance and we may be required to acceptreduced policy limits and coverage or incur substantially higher costs toobtain the same or similar coverage. As a result, it may be more difficultfor us to attract and retain qualified persons to serve on our board ofdirectors or as executive officers. We are currently evaluating and monitoringdevelopments with respect to these new rules, and we cannot predict or estimatethe amount of additional costs we may incur or the timing of such costs.

 

***If we are unable to successfully address the material weaknesses in ourinternal controls, our ability to report our financial results on a timely andaccurate basis may be adversely affected.***

 

As of July 3, 2005, we did not maintain effective controls over the preparation, review and presentation and disclosure of our consolidated statement of cash flows. Specifically, we incorrectly reported an interest payment on demand notes payable as a financing cash out-flow instead of an operating cash out-flow, in accordance with generally accepted accounting principles. This control deficiency resulted in the restatement of our consolidated financial statements for the quarter ended July 3, 2005 and the quarter ended October 2, 2005. Additionally, this control deficiency could result in a misstatement of the presentation and disclosure of our operating and financing cash flows in our consolidated financial statements that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness in our internal control over financial reporting as of July 3, 2005. A material weakness is a control deficiency or a combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. Although we are taking steps to remediate the material weakness, we cannot assure that this control deficiency will not result in a misstatement in the future. These steps include a thorough review of the classification requirements of each component line item and the individual elements that comprise each line item of the statement of cash flows, in accordance with generally accepted accounting principles.

 

In connection with theiraudits of our consolidated financial statements for the years ended December 31,2003 and 2004, our independent registered public accounting firm reported twoconditions, which together constituted a material weakness in our internalcontrol over financial reporting regarding our ability to produce financialstatements free from material misstatements. Our independent registered publicaccounting firm reported to us that we did not have a sufficient number ofsenior level financial personnel, and our controls over non-routinetransactions did not ensure that accounting considerations were identified andappropriately recorded. These two conditions, in combination, constituted amaterial weakness in our internal control over financial reporting.

 

Our management and audit committee agreedthat the conditions identified by our independent registered public accountingfirm in their audits of the consolidated financial statements for the yearsended December 31, 2003 and 2004 constituted a material weakness. Wedeveloped a plan to address this material weakness that included the additionof a new chief financial officer, a director of external reporting andadditional professional accounting personnel. On an interim basis, we engagedtwo senior financial consultants in the fourth quarter of 2004 to provide animmediate expansion in our technical finance and accounting resources. Theseindividuals were retained through June 2005 to ensure adequate time fortransition to our new full-time employees. During the six months ended July 3,2005, we hired a new chief financial officer, effective April 2005, whohas 19 years of experience in the medical device manufacturing industry workingfor both public and private companies. We also hired a new controller in April 2005,who came to us from a Big Four public accounting firm and has significantexperience in both public and private accounting. The controller overseesexternal reporting with assistance from a newly promoted senior analyst. Ourprior controller, who has been with us for approximately four years, has becomeour Director of International Finance. In May 2005, we added an additionalsenior staff level accounting position. With the addition of these individuals,we believe that we have a sufficient number of skilled personnel to reasonablyensure that we have the ability to produce financial statements free frommaterial misstatements. We

 

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have also engaged a consulting firm to assistus in assessing our internal control over financial reporting and remediatingany control deficiencies. We will continue to assess the adequacy andappropriateness of our financial staff and adjust accordingly as changes in ourbusiness warrant.

 

We have had only limitedoperating experience with the remedial measures we have made to date to correctthe material weaknesses described above and we cannot provide assurance thatthe measures we have taken to date or any future measures will adequatelyremediate the material weaknesses described above. In addition, we cannot becertain that additional material weaknesses in our internal control overfinancial reporting will not be discovered in the future. Any failure toremediate the material weaknesses described above or to implement required newor improved controls, or difficulties encountered in their implementation,could harm our operating results, cause us to fail to meet our reportingobligations or result in additional material misstatements in our consolidatedfinancial statements. Any such failure also could adversely affect the resultsof the periodic management evaluations and annual auditor attestation reportsregarding the effectiveness of our “internal control over financial reporting”that will be required when the Securities and Exchange Commission’s rules underSection 404 of the Sarbanes-Oxley Act become applicable to us beginningwith our annual report on Form 10-K for the year ending December 31,2006 to be filed in early 2007. Inadequate internal control over financialreporting could also cause investors to lose confidence in our reportedfinancial information, which could cause our stock price to decline.

 

***We will be exposed to risks relating to evaluations of controlsrequired by Section 404 of the Sarbanes-Oxley Act.***

 

Changing laws, regulationsand standards relating to corporate governance and public disclosure, includingthe Sarbanes-Oxley Act and related regulations implemented by the SEC and theNASDAQ National Market System, are creating uncertainty for public companies,increasing legal and financial compliance costs and making some activities moretime consuming. We will be evaluating our internal control over financialreporting to allow management to report on, and our independent registeredpublic accountants to attest to, our internal control over financial reporting.We will be performing the system and process evaluation and testing (and anynecessary remediation) required to comply with the management certification andauditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.While we anticipate being able to fully implement the requirements of Section 404by our December 31, 2006 deadline, we cannot be certain as to the timingof completion of our evaluation, testing and remediation actions or the impactof the same on our operations since there is presently no precedent availableby which to measure compliance adequacy. If we are not able to implement therequirements of Section 404 in a timely manner or with adequatecompliance, we may be subject to sanctions or investigation by regulatoryauthorities, including the SEC or the NASDAQ National Market System. This typeof action could adversely affect our financial results or investors’ confidencein our company and our ability to access capital markets, and could cause ourstock price to decline. In addition, the controls and procedures that we willimplement may not comply with all of the relevant rules andregulations of the SEC and the NASDAQ National Market System. If we fail todevelop and maintain effective controls and procedures, we may be unableto provide the required financial information in a timely and reliable manner.

 
| **ITEM 3.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|-------------|----------------------------------------------------------------|

 

We are exposed to variousmarket risks, which are potential losses arising from adverse changes in marketrates and prices, such as interest rates and foreign exchange fluctuations. Wedo not enter into derivatives or other financial instruments for trading orspeculative purposes.

 

***Interest Rate Risk***

 

We currently have littleexposure to a change in interest rates. Our borrowings to date have all been ata fixed rate of interest. We have no variable rate debt or lease obligations.

 

***Foreign Currency Exchange Rate Risk***

 

Fluctuations in the rate ofexchange between the U.S. dollar and foreign currencies could adversely affectour financial results. In the three and six months ended July 3, 2005,approximately 37% and 38%, respectively, of our net sales were denominated inforeign currencies. We expect that foreign currencies will continue torepresent a

 

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similarly significantpercentage of our net sales in the future. Selling, marketing andadministrative costs related to these sales are largely denominated in the samerespective currency, thereby limiting our transaction risk exposure. Wetherefore believe that the risk of a significant impact on our operating incomefrom foreign currency fluctuations is minimal. However, for sales notdenominated in U.S. dollars, if there is an increase in the rate at which aforeign currency is exchanged for U.S. dollars, it will require more of theforeign currency to equal a specified amount of U.S. dollars than before the rateincrease. In such cases and if we price our products in the foreign currency,we will receive less in U.S. dollars than we did before the rate increase wentinto effect. If we price our products in U.S. dollars and competitors pricetheir products in local currency, an increase in the relative strength of theU.S. dollar could result in our price not being competitive in a market wherebusiness is transacted in the local currency.

 

Approximately 67% and 68% ofour net sales denominated in foreign currencies in the three and six monthsended July 3, 2005, respectively, were derived from European Unioncountries and were denominated in the Euro. Additionally, we have significantintercompany receivables from our foreign subsidiaries, which are denominatedin foreign currencies, principally the Euro. Our principal exchange rate risktherefore exists between the U.S. dollar and the Euro. Fluctuations from thebeginning to the end of any given reporting period result in the remeasurementof our foreign currency-denominated receivables and payables, generatingcurrency transaction gains or losses that impact our non-operatingincome/expense levels in the respective period and are reported in other(income) expense, net in our consolidated financial statements. We recorded a$1.9 million and $3.1 million foreign currency transaction loss in the threeand six months ended July 3, 2005, respectively, related to thetranslation of our foreign denominated net receivables into U.S. dollars. We donot currently hedge our exposure to foreign currency exchange rate fluctuations.We may, however, hedge such exposure to foreign currency exchange rates in thefuture.

 
| **ITEM 4.** | **CONTROLS AND PROCEDURES** |
|-------------|-----------------------------|

 

**Evaluation of Disclosure Controls and Procedures**

 

We maintain disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) that are designed to ensurethat information required to be disclosed by us in the reports we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized, and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,we recognize that any controls and procedures, no matter how well designed andoperated can provide only reasonable assurance of achieving the desired controlobjectives and we necessarily are required to apply our judgment in evaluatingthe cost-benefit relationship of possible controls and procedures.

 

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered in this quarterly report on Form 10-Q/A. The evaluation of our disclosure controls and procedures by our Chief Executive Officer and Chief Financial Officer included a review of the restatement of our consolidated statement of cash flows for the six months ended July 3, 2005 described in Item 1, Note 2 of this Form 10-Q/A. Based on this evaluation and because of the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered in this quarterly report on Form 10-Q/A. To address the material weaknesses described below, we have expanded our disclosure controls and procedures to include additional analysis and other procedures over the preparation of the financial statements included in this Form 10-Q/A. Accordingly, our management has concluded that the financial statements included in this  Form 10-Q/A fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

 

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**Changes inInternal Control Over Financial Reporting**

 

A material weakness is acontrol deficiency or a combination of control deficiencies that result in morethan a remote likelihood that a material misstatement of the annual or interimconsolidated financial statements will not be prevented or detected. As of July 3,2005, we did not maintain effective controls over the preparation, review andpresentation and disclosure of our consolidated statement of cash flows.Specifically, we incorrectly reported an interest payment on demand notespayable as a financing cash out-flow instead of an operating cash out-flow, inaccordance with generally accepted accounting principles. This controldeficiency resulted in the restatement of our consolidated financial statementsfor the quarter ended July 3, 2005 and the quarter ended October 2, 2005.Additionally, this control deficiency could result in a misstatement of thepresentation and disclosure of our operating and financing cash flows in ourconsolidated financial statements that would result in a material misstatementin our annual or interim consolidated financial statements that would not beprevented or detected. Accordingly, management determined that this controldeficiency constitutes a material weakness in our internal control overfinancial reporting as of July 3, 2005.

 

In connection with their audits of our consolidated financialstatements for the years ended December 31, 2003 and 2004, our independentregistered public accounting firm reported two conditions, which togetherconstitute a material weakness in our internal control over financial reportingregarding our ability to produce financial statements free from materialmisstatements. Our independent registered public accounting firm reported toour Board of Directors that we did not have a sufficient number of senior levelfinancial personnel, and our controls over non-routine transactions did notensure that accounting considerations are identified and appropriately recorded.These two conditions, in combination, constituted a material weakness in ourinternal control over financial reporting.

 

We developed a plan to address this materialweakness that included the addition of a new chief financial officer, adirector of external reporting and additional professional accounting personnel.On an interim basis, we engaged two senior financial consultants in the fourthquarter of 2004 to provide an immediate expansion in our technical finance andaccounting resources. These individuals were retained through June 2005 toensure adequate time for transition to our new full-time employees. During thesix months ended July 3, 2005, we hired a new chief financial officer,effective April 2005, who has 19 years of experience in the medical devicemanufacturing industry working for both public and private companies. We alsohired a new controller in April 2005, who came to us from a Big Fourpublic accounting firm and has significant experience in both public andprivate accounting. The controller oversees external reporting with assistancefrom a newly promoted senior analyst. Our prior controller, who has been withus for approximately four years, has become our Director of InternationalFinance. In May 2005, we added an additional senior staff level accountingposition. With the addition of these individuals, we believe that we have a sufficientnumber of skilled  personnel toreasonably ensure that we have the ability to produce financial statements freefrom material misstatements. We have also engaged a consulting firm to assistus in assessing our internal control over financial reporting and remediatingany control deficiencies. We will continue to assess the adequacy andappropriateness of our financial staff and adjust accordingly as changes in ourbusiness warrant. However, given the lack of tenure of these individuals withour company, we will need additional time in order to demonstrate that we haveadequately remediated the material weakness identified by our independentregistered public accounting firm in connection with their audits of ourconsolidated financial statements for the years ended December 31, 2003and 2004 as described in the preceding paragraph.

 

Except as described above, there was no change in our internal control over financial reporting that occurred during our quarter ended July 3, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

**Planfor Remediation of Material Weakness**

 

Management is taking steps to remediate the material weakness in our internal control over financial reporting relating to the presentation of our cash flows. These steps include a thorough review of the classification requirements of each component line item and the individual elements that comprise each line item of the statement of cash flows, in accordance with generally accepted accounting principles. Management believes the additional control procedures designed, and when implemented will fully remediate this material weakness. Although we are not certain when the material weakness will be fully remediated, we will need a period of time over which to demonstrate that these controls are functioning appropriately to conclude that we have adequately remediated the material weakness.

 

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**PART II- OTHER INFORMATION**

 
| **ITEM 1.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

We are from time to timesubject to, and are presently involved in, litigation or other legalproceedings.

 

In September 2000,Dendron, which was acquired by MTI in 2002, was named as the defendant in threepatent infringement lawsuits brought by the Regents of the University ofCalifornia, as the plaintiff, in the District Court (Landgericht) inDusseldorf, Germany. The complaints requested a judgment that Dendron’s EDC Icoil device infringed three European patents held by the plaintiff and askedfor relief in the form of an injunction that would prevent Dendron fromproducing and selling the devices within Germany and selling from Germany tocustomers abroad, as well as an award of damages caused by Dendron’s allegedinfringement, and other costs, disbursements and attorneys’ fees. In August 2001,the court issued a written decision that EDC I coil devices did infringe theplaintiff’s patents, enjoined Dendron from selling the devices within Germanyand from Germany to customers abroad, and requested that Dendron disclose theindividual products’ costs as the basis for awarding damages. In September 2001,Dendron appealed the decision. In addition, Dendron instituted challenges tothe validity of each of these patents by filing opposition proceedings with theEuropean Patent Office, or EPO, against one of the patents (MTI joined Dendronin this action in connection with its acquisition of Dendron), and by filing,with MTI, nullity proceedings with the German Federal Patents Court against theGerman component of the other two patents. The opposition proceedings with theEPO on the one patent are complete, and the EPO has rejected the opposition andhas upheld the validity of the one patent.

 

On July 4, 2001, theUniversity of California filed another suit against Dendron alleging that theEDC I coil device infringed another European patent held by the plaintiff.The complaint was filed in the District Court of Dusseldorf, Germany seekingadditional monetary and injunctive relief. In April 2002, the Court foundthat EDC I coil devices did infringe the plaintiff’s patent. The patentinvolved is the same patent that was involved in the case before the EnglishPatents Court (see below) and that was ruled by a Dutch court to be invalid(see below). The opposition proceedings on the patent are complete, and the EPOhas rejected the opposition and has upheld the validity of the patent. The caseis under appeal and an oral hearing is scheduled to be held in the DusseldorfCourt of Appeal on March 9, 2006.

 

An accrual for the mattersdiscussed above was included in the balance sheet of Dendron as of the date ofits acquisition by MTI. As of July 3, 2005, approximately $800 thousandwas recorded  in accrued liabilities inour consolidated financial statements included in this report. Dendron ceasedall activities with respect to the EDC I coil device prior to MTI’s October 2002acquisition of Dendron.

 

Concurrent with itsacquisition of Dendron, MTI initiated a series of legal actions related toits Sapphire coils in the Netherlands and the United Kingdom, which included across-border action that was heard by a Dutch court, as further described below.The primary purpose of these actions was to assert both invalidity andnon-infringement by MTI of certain patents held by others. The range of patentsat issue are held by the Regents of the University of California, with BostonScientific Corporation subsidiaries named as exclusive licensees, collectivelyreferred to as the “patent holders,” related to detachable coils and certaindelivery catheters.

 

In October 2003, theDutch court ruled the three patents at issue related to detachable coils arevalid and that MTI’s Sapphire coils do infringe such patents. The Dutch courtalso ruled that the patent holders’ patent at issue related to the deliverycatheter was invalid. Under the court’s ruling, MTI has been enjoined fromengaging in infringing activities related to the Sapphire coils in mostcountries within the European Union, and may be liable forthen-unspecified monetary damages for activities engaged in by MTI since September 27,2002. In February 2005, MTI received an initial claim from the patentholders with respect to monetary damages, amounting to €3.6 million, orapproximately $4.3 million as of July 3, 2005, with which MTIdisagrees. Court hearings will be held regarding these claims. MTI has filed anappeal with the Dutch court, and believes that since the date of injunction ineach separate country it is in compliance with the Dutch court’s injunction andMTI intends to continue such compliance. Because we believe that MTI has validlegal grounds for appeal, we have determined that a loss is not probable atthis time as defined by SFAS 5, *Accountingfor Contingencies.*However, there can be no assurance that theultimate resolution of this matter will not result in a material adverse effecton our business, financial condition or results of operations.

 

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In January 2003, MTIinitiated a legal action in the English Patents Court seeking a declarationthat a patent held by the patent holders related to delivery catheters wasinvalid, and that MTI’s products did not infringe this patent. The patent inquestion was the U.K. designation of the same patent that was found by theDutch court in October 2003 to be invalid, as discussed above. The patentholders counterclaimed for alleged infringement by MTI. In February 2005,the court approved an interim settlement between the parties under which thepatent holders are required to surrender such patent to the U.K. Comptroller ofPatents, and to pay MTI’s costs associated with the legal action, includinginterest. As a result, MTI received interim payments from the patent holdersaggregating £500 (equivalent to approximately $0.9 million based on the datesof receipt), which MTI recorded as a reduction of litigation expense uponreceipt of such funds in February and March 2005. The parties intendto continue discussions regarding payment by the patent holders of theremaining costs incurred by MTI in such litigation. As a result of the interimsettlement, MTI anticipates that it will no longer be involved in litigation inthe United Kingdom, although no assurance can be given that no other litigationinvolving MTI may arise in the United Kingdom.

 

In the United States,concurrent with the FDA’s marketing clearance of the Sapphire line of emboliccoils received in July 2003, MTI initiated a declaratory judgment actionagainst the patent holders in the United States District Court for the WesternDistrict of Wisconsin. The action included assertions of non-infringement byMTI and invalidity of a range of patents held by the patent holders related todetachable coils and certain delivery catheters. In October 2003, thecourt dismissed MTI’s actions for procedural reasons without prejudice andwithout decision as to the merits of the parties’ positions. In December 2003,the University of California filed an action against MTI in the United StatesDistrict Court for the Northern District of California alleging infringement byMTI with respect to a range of patents held by the University of Californiarelated to detachable coils and certain delivery systems. MTI has filed acounterclaim against the University of California asserting non-infringement byMTI, invalidity of the patents and inequitable conduct in the procurement ofcertain patents. In addition, MTI filed a claim against the University ofCalifornia and Boston Scientific Corporation for violation of federal antitrustlaws, with the result that the court has subsequently decided to add BostonScientific as a party to the litigation. A trial date has not been set. Becausethese matters are in early stages, we cannot estimate the possible loss or rangeof loss, if any, associated with their resolution. However, there can be noassurance that the ultimate resolution of these matters will not result in amaterial adverse effect on our business, financial condition or results ofoperations.

 

In March 2005, Medtronic, Inc.contacted us to express its view that our Protégé stents infringe on one ormore of its patents. We informed Medtronic that we disagree with itsassertions, and have since had several discussions with Medtronic. No lawsuitwith respect to this matter has been filed. We also received notice from anindividual claiming that he believes that our PLAATO device infringes on two ofhis patents. We have informed this individual that we do not believe that ourPLAATO device infringes on these patents. On March 30, 2005, we wereserved with a complaint by Boston Scientific Corporation and one of itsaffiliates which claims that some of our products, including our SpideRXEmbolic Protection Device, infringe certain of Boston Scientific’s patents. Thisaction was brought in the United States District Court for the District ofMinnesota. We have answered the complaint and intend to vigorously defend thisaction. Because these matters are in early stages, we cannot estimate thepossible loss or range of loss, if any, associated with their resolution. However,there can be no assurance that the ultimate resolution of these matters willnot result in a material adverse effect on our business, financial condition orresults of operations.

 

The acquisition agreementrelating to our acquisition of Appriva Medical, Inc. contains fourmilestones to which payments relate. The first milestone was required by itsterms to be achieved by January 1, 2005 in order to trigger a paymentequal to $50 million. We have determined that the first milestone was notachieved by January 1, 2005 and that the first milestone is not payable. OnMay 20, 2005, Michael Lesh,  as an individual seller of Apprivastock and  purporting to represent certain  othersellers of Appriva  stock, filed a complaint in the SuperiorCourt of the State of Delaware with individually specified damages aggregating$70 million and other unspecified damages for several allegations,including that  we, along with other defendants, breached theacquisition agreement and an implied covenant of good faith and fair dealing bywillfully failing to take the steps necessary to meet the first milestone underthe agreement,  and  thereby also failing to meet certain othermilestones, and further that one milestone was actually met.  Thecomplaint also alleges fraud, negligent misrepresentation and violation ofstate securities laws in connection with the negotiation of the acquisitionagreement. We believe these allegations are without merit and intend tovigorously defend this action. On August 5, 2005 our attorneys received aletter from attorneys representing certain other sellers of Appriva stock (whoare not purported to be represented in the action

 

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filed by Lesh), asking ourattorneys to enter into a dialogue regarding their assertions that certainmilestones should have been paid. We believe their assertions are withoutmerit. Failure to reach agreement with these new claimants on a resolution ofour differences could lead to additional litigation on this matter. Becausethese matters are in an early stages, we cannot estimate the possible loss orrange of loss, if any, associated with their resolution. However, there can beno assurance that the ultimate resolution of these matters will not result in amaterial adverse effect on our business, financial condition or results ofoperations.

 

**ITEM 2.****                                                    ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

**RecentSales of Unregistered Equity Securities**

 

Pursuant to a contributionand exchange agreement dated as of April 4, 2005, on May 26, 2005,ev3 LLC issued 13,808,832 common membership units to Warburg, Pincus EquityPartners, L.P. and certain of its affiliates, Vertical Fund I, L.P. andVertical Fund II, L.P. (collectively, the “Contributors”) in exchange for thecontribution to ev3 LLC by the Contributors of an aggregate of 9,704,819 sharesof the common stock of MTI.

 

Pursuant to a mergeragreement dated as of April 4, 2005, in connection with the merger of ev3LLC with and into us, on June 21, 2005, we issued an aggregate of83,918,016 shares of our common stock to the holders of units of membershipinterests in ev3 LLC.

 

Pursuant to a notecontribution and exchange agreement dated as of April 4, 2005, on June 21,2005, we issued an aggregate of 23,159,304 shares of our common stock to theContributors in exchange for the contribution to us by the Contributors of$316.0 million aggregate principal amount of demand notes of ev3Endovascular, Inc., our wholly owned subsidiary, plus $8.2 million ofaccrued and unpaid interest thereon.

 

Pursuant to the exercise ofoptions to purchase membership units of ev3 LLC under the ev3 LLC 2003incentive plan, ev3 LLC issued 1,057 membership units to various current and formeremployees during the three months ended July 3, 2005. These membershipunits were subsequently converted into shares of our common stock in connectionwith the merger of ev3 LLC with and into us.

 

Except as described above,there were no other unregistered sales by us of equity securities during thequarter ended July 3, 2005.

 

No underwriting commissions or discounts were paid with respect to thesales of the unregistered securities described above. In addition, all of theabove sales were made in reliance on Rule 701, Regulation D andSection 4(2) under the Securities Act of 1933, as amended (the“Securities Act”). With regard to our reliance upon the exemptions underRegulation D and Section 4(2) under the Securities Act, certaininquiries of the purchasers were made by us to establish that such salesqualified for such exemptions from the registration requirements. With regardto our reliance upon the Rule 701 exemption, all such issuances were toemployees, former employees or independent consultants.

 

**Use of Proceeds**

 

On June 15, 2005, ourregistration statement on Form S-1 (Registration No. 333-123851) wasdeclared effective. Pursuant to the registration statement, we registered(1) 11,765,000 shares of our common stock, par value $0.01 per share, tobe sold in our initial public offering and (2) 1,764,750 shares of ourcommon stock, all or a portion of which were to be sold upon the exercise ofthe underwriters’ over-allotment option (including up to 35,900 shares to besold by a selling stockholder). On June 21, 2005, we completed the sale of11,765,000 shares of common stock to the public at an initial public offeringprice of $14.00 per share. Piper Jaffray & Co., Banc of AmericaSecurities LLC, Bear, Stearns & Co. Inc. and Thomas Weisel PartnersLLC acted as underwriters for our initial public offering. On July 20,2005, the underwriters purchased an additional 205,800 shares of common stockfrom us and 4,200 shares of common stock from the selling stockholder pursuantto the exercise of their over-allotment option. As a result, an aggregate of11,975,000 shares of our common stock were sold before the termination of ourinitial public offering. The aggregate public offering price for the 11,970,800shares of common stock sold by us and the 4,200 shares of common stock sold bythe selling stockholder was $167.6 million. The underwriters received an

 

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underwriting discount of(1) $0.70 per share for the 11,765,000 shares sold by us on June 21,2005 and (2) $0.98 per share for the 205,800 sold by us and the 4,200shares sold by the selling stockholder on July 20, 2005 pursuant to theunderwriters’ over-allotment option.

 

Our initial public offeringresulted in gross proceeds to us of $167.6 million. Expenses related to theinitial public offering were as follows: approximately $8.4 million for underwriting discounts and commissionsand approximately $3.9 million for other expenses, for total expenses ofapproximately $12.3 million. None of the offering expenses resulted in director indirect payments to any of our directors, officers or their associates, topersons owning 10% or more of our common stock or to any of our affiliates. Allof the offering expenses were paid to others.

 

After deduction of offeringexpenses, we received net proceeds of approximately $155.3 million in ourinitial public offering, including shares sold by us pursuant to theunderwriters’ over-allotment option. As of July 3, 2005, the proceeds fromour initial public offering and available cash were used as follows:  $36.5 million of the net proceeds were usedto repay a portion of the accrued and unpaid interest on the demand notes andthe remaining net proceeds were invested in short-term, investment-grade,interest bearing securities. We cannot predict whether the proceeds will yielda favorable return. Other than $36.5 million of the net proceeds used to repaya portion of the accrued and unpaid interest on demand notes held by WarburgPincus, which is our majority stockholder, and Vertical, which is one of ourstockholders, none of the net proceeds from our initial public offering haveresulted in direct or indirect payments to directors, officers or theirassociates, to persons who owned 10% or more of our common stock or to any ofour affiliates.

 

We expect to use theremaining $119 million in net proceeds from our initial public offering forgeneral corporate purposes, which may include funding the operations ofMTI. We do not currently have any more specific plans with respect to the useof these net proceeds. Our management has broad discretion as to the use of thenet proceeds. While we have no present understandings, commitments oragreements to enter into any potential acquisitions, we may use a portionof the net proceeds for the acquisition of, or investment in, technologies orproducts that complement our business. As required by Securities and ExchangeCommission regulations, we will provide further detail on our use of the netproceeds from our initial public offering in future periodic reports.

 

**IssuerPurchases of Equity Securities**

 

We did not purchase any shares of our commonstock or other securities registered pursuant to Sections 12 of the SecuritiesExchange Act of 1934, as amended, during the quarter ended July 3, 2005,and our board of directors has not authorized any repurchase plan or programfor purchase of our shares of common stock or other securities on the openmarket or otherwise.

 
| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES** |
|-------------|-------------------------------------|

 

Not applicable.

 
| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|---------------------------------------------------------|

 

In connection with ourpreparations for our initial public offering, our stockholders took action bywritten consent pursuant to Section 228 of the Delaware GeneralCorporation Law on three occasions during our quarter ended July 3, 2005.

 

On March 1, 2005, ev3LLC, our sole stockholder at that time, acted by written consent to: (1) approveour initial public offering; (2) approve the merger of ev3 LLC with andinto us and the related merger agreement; (3) approve a stock contributionand exchange agreement pursuant to which certain of ev3 LLC’s members agreed tocontribute shares of common stock of MTI to ev3 LLC in exchange for membershipunits of ev3 LLC; (4) approve a note contribution and exchange agreementpursuant to which certain of ev3 LLC’s members agreed to contribute to usdemand notes of ev3 Endovascular, Inc. in exchange for shares of ourcommon stock; (5) increase the size of our board of directors from five (5) membersto seven (7) members; and (6) approve the election of 

 

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Haywood D. Cochrane andDouglas W. Kohrs to our board of directors, with James M. Corbett, Richard B.Emmitt, Dale A. Spencer, Thomas E. Timbie and Elizabeth H. Weathermancontinuing as directors.

 

On June 6, 2005, ev3LLC, our sole stockholder at that time, acted by written consent to: (1) approvean Amended and Restated Certificate of Incorporation pursuant to which, amongother things, we are authorized to issue 100,000,000 shares of our commonstock; (2) approve certain indemnification agreements between us and eachof our directors and executive officers and certain of our other officers andemployees; and (3) approve the ev3 Inc. 2005 Incentive Stock Plan, a form ofoption grant notice and the reservation of 2,000,000 shares of our common stockfor issuance pursuant to grants made under the 2005 Incentive Stock Plan.

 

On June 21, 2005,stockholders holding 83,039,611 outstanding shares of our common stock (on apre-split basis), representing 99% of our outstanding shares of common stock atsuch time, acted by written consent to approve a one for six reverse stocksplit of our common stock prior to the consummation of our initial publicoffering and a Certificate of Amendment to our Amended and Restated Certificateof Incorporation effecting such reverse stock split.

 
| **ITEM 5.** | **OTHER INFORMATION** |
|-------------|-----------------------|

 

On June 16,2005, we entered into an Underwriting Agreement (the “Underwriting Agreement”)with Piper Jaffray & Co. (“Piper Jaffray”) and Banc of AmericaSecurities LLC (“BAS” and together with Piper Jaffray, the “Representatives”)as representatives of the several underwriters (the “Underwriters”) named in Schedule Athereto and Dale A. Spencer, one of our directors, as a selling stockholder(the “Selling Stockholder”). Pursuant to the Underwriting Agreement, amongother things, we agreed to issue and sell to the Underwriters an aggregate of11,765,000 shares of our common stock, par value $0.01 per share, at a purchaseprice, after deducting underwriting discounts and commissions, of $13.30 pershare, in our initial public offering of our common stock. We also granted theUnderwriters an option to purchase up to 1,728,850 additional shares of ourcommon stock and the Selling Stockholder granted the Underwriters an option topurchase up to 35,900 shares of our common stock at a purchase price, afterdeducting underwriting discounts and commissions, of $13.02 per share, to coverover-allotments, if any. On June 21, 2005, we closed our initial publicoffering, resulting in net proceeds to us of approximately $152.8 million,after deducting underwriting discounts and commissions and estimated offeringexpenses. Warburg Pincus and Vertical purchased 3,196,750 and 168,250 shares ofour common stock, respectively, in the offering. On July 15, 2005, theUnderwriters exercised a portion of the over-allotment option. Pursuant to thisexercise, on July 20, 2005, we sold an additional 205,800 shares of ourcommon stock and the Selling Stockholder sold 4,200 shares of our common stockat a purchase price of $13.02 per share, resulting in additional net proceedsto us of approximately $2.5 million, after deducting underwriting discounts andcommissions and estimated offering expenses.

 

As described in our finalprospectus in connection with our initial public offering, on June 21,2005, we entered into a registration rights agreement with certain of ourstockholders, directors, officers and employees, including, among others,Warburg Pincus, The Vertical Group, Dale A. Spencer, James M. Corbett, StacyEnxing Seng and L. Cecily Hines, who we refer to as the holders, with respectto shares of our common stock held by them. Pursuant to the registration rightsagreement, we agreed to:

 

•                  use our reasonable best efforts to effect upto two registered offerings of at least $10 million each upon the demandof the holders of not less than a majority of the shares of our common stockthen held by the holders;

 

•                  use our best efforts to effect up to threeregistrations of at least $1 million each on Form S-3, once we becomeeligible to use such form, if any holder so requests; and

 

•                  maintain the effectiveness of each suchregistration statement for a period of 120 days or until the distributionof the registrable securities pursuant to the registration statement iscomplete.

 

Pursuant to the registrationrights agreement, the holders also have incidental or “piggyback” registrationrights with respect to any registrable shares, subject to certain volume andmarketing restrictions imposed by the underwriters of

 

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the offering with respect towhich the rights are exercised. We also agreed to use our best efforts toqualify for the use of Form S-3 for secondary sales. These rights werewaived in connection with our initial public offering through December 13,2005, subject to extension in certain circumstances. We agreed to bear theexpenses, including the fees and disbursements of one legal counsel for theholders, in connection with the registration of the registrable securities,except for any underwriting commissions relating to the sale of the registrablesecurities.

 

On August 16, 2005, our board ofdirectors approved amendments (the “Amendments”) to Sections 3.01 and 3.02 ofour amended and restated bylaws for the purpose of reflecting theclassification of our board of directors contained in our amended and restatedcertificate of incorporation. The Amendments were effective as of such date. TheAmendments are reflected in the amended and restated bylaws filed as Exhibit 3.3to this report, which are incorporated by reference herein.

 
| **ITEM 6.** | **EXHIBITS** |
|-------------|--------------|

 

The following exhibits arebeing filed or furnished with this quarterly report on Form 10-Q:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Agreement and Plan of  Merger, dated as of April 4, 2005, by and between ev3 LLC and  ev3 Inc. (Incorporated by reference to Exhibit 2.1 to ev3’s  Registration Statement on Form S-1 (File No. 333-123851), filed  with the Securities and Exchange Commission on April 5, 2005)                                                                                                                                                                                                                                                    |
| 2.2                  |       | Contribution and Exchange  Agreement, dated as of April 4, 2005, by and among the institutional  stockholders listed on Schedule I thereto, ev3 LLC, ev3 Inc. and  Micro Therapeutics, Inc. (Incorporated by reference to Exhibit 2.2  to ev3’s Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commission on April 5, 2005)                                                                                                                                                  |
| 2.3                  |       | Note Contribution and  Exchange Agreement, dated as of April 4, 2005, by and among the  noteholders listed on Schedule I thereto and ev3 Inc. (Incorporated  by reference to Exhibit 2.3 to ev3’s Registration Statement on Form S-1  (File No. 333-123851), filed with the Securities and Exchange Commission  on April 5, 2005)                                                                                                                                                                                                    |
| 3.1                  |       | Amended and Restated  Certificate of Incorporation of ev3 Inc. (Incorporated by reference to Exhibit 3.1  to ev3’s Amendment No. 5 to Registration Statement on Form S-1  (File No. 333-123851), filed with the Securities and Exchange Commission  on June 14, 2005)                                                                                                                                                                                                                                                                     |
| 3.2                  |       | Amendment to Amended and  Restated Certificate of Incorporation of ev3 Inc. (Incorporated by  reference to Exhibit 99.1 to ev3’s Current Report on Form 8-K (File  No. 000-51348), filed with the Securities and Exchange Commission on June 27,  2005)                                                                                                                                                                                                                                                                                        |
| 3.3                  |       | Amended and Restated  Bylaws of ev3 Inc. (Incorporated by reference to Exhibit 3.3 to ev3’s  Quarterly Report on Form 10-Q (File No. 000-51348), filed with the  Securities and Exchange Commission on August 17, 2005)                                                                                                                                                                                                                                                                                                                        |
| 4.1                  |       | Form of Stock  Certificate (Incorporated by reference to Exhibit 4.1 to ev3’s Amendment  No. 4 to Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commission on June 2, 2005)                                                                                                                                                                                                                                                                                                           |
| 4.2                  |       | Registration Rights  Agreement, dated as of June 21, 2005, by and among ev3 Inc.,  Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands  Equity Partners I, C.V., Warburg, Pincus Netherlands Equity  Partners III, C.V., Vertical Fund I, L.P., Vertical Fund II,  L.P. and certain other investors party thereto. (Incorporated by reference to  Exhibit 4.2 to ev3’s Quarterly Report on Form 10-Q (File No. 000-51348),  filed with the Securities and Exchange Commission on August 17, 2005) |
| 10.1                 |       | Underwriting Agreement,  dated as of June 16, 2005, by and among ev3 Inc., Piper Jaffray &  Co., Banc of America Securities LLC and Dale A. Spencer (Incorporated by  reference to Exhibit 10.1 to ev3’s Quarterly Report on Form 10-Q  (File No. 000-51348), filed with the Securities and Exchange Commission  on August 17, 2005)                                                                                                                                                                                                  |
| 10.2                 |       | Corporate Opportunity  Agreement, dated as of April 4, 2005, by and among the institutional  stockholders listed on Schedule I thereto and ev3 Inc.  (Incorporated by reference to Exhibit 10.32 to ev3’s Registration  Statement on Form S-1 (File No. 333-123851), filed with the  Securities and Exchange Commission on April 5, 2005)                                                                                                                                                                                            |
| 10.3                 |       | First Amendment to Amended  and Restated Sales Representative Agreement, dated April 6, 2005,                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | by and between Micro  Therapeutics, Inc. and ev3 International, Inc. (Incorporated by  reference to Exhibit 10.52 to Micro Therapeutics’ Current Report on Form 8-K  (File No. 000-06523), filed with the Securities and Exchange Commission  on April 7, 2005)                                            |
| 10.4                 |       | ev3 Inc. Amended and  Restated 2005 Incentive Stock Plan (Incorporated by reference to Exhibit 10.4  to ev3’s Quarterly Report on Form 10-Q (File No. 000-51348), filed  with the Securities and Exchange Commission on August 17, 2005)                                                                             |
| 10.5                 |       | Loan and Security  Agreement, dated May 6, 2005, by and between Micro Therapeutics, Inc.  and Silicon Valley Bank (Incorporated by reference to Exhibit 10.56 to  Micro Therapeutics’ Current Report on Form 8-K (File No. 000-06523),  filed with the Securities and Exchange Commission on May 10, 2005) |
| 31.1                 |       | Certification of Chief Executive  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and  SEC Rule 13a-14(a) (Filed herewith)                                                                                                                                                                                   |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 and SEC Rule 13a-14(a) (Filed herewith)                                                                                                                                                                                   |
| 32.1                 |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished  herewith)                                                                                                                                                           |
| 32.2                 |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished  herewith)                                                                                                                                                           |
|                      |            |                                                                                                                                                                                                                                                                                                                                               |  |

 

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** **

**SIGNATURES**

** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused this AmendmentNo. 1 on Form 10-Q/A to our Quarterly Report on Form 10-Q forthe quarter ended July 3, 2005 to be signed on its behalf by theundersigned, hereunto duly authorized.

 
| February 24, 2006 | **ev3 Inc.** |
|------------------------|--------------|
|                   |         |
|                   | By:          | /s/ James M. Corbett    |
|                   |         | James M. Corbett |
|                   |         | President and Chief  Executive Officer |
|                   |         | (principal executive  officer) |
|                   |         |   |
|                   | By:          | /s/ Patrick D. Spangler |
|                   |         | Patrick D. Spangler |
|                   |         | Chief Financial Officer  and Treasurer |
|                   |         | (principal financial and  accounting officer) |

 

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**ev3 Inc.QUARTERLY REPORT ON FORM 10-QEXHIBIT INDEX**

** **
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                      | ** ** | **Method of Filing**                                                                                                                                                                                                               |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Agreement and Plan of  Merger, dated as of April 4, 2005, by and between ev3 LLC and ev3 Inc.                                                                                                                                                                                                                                   |       | Incorporated by reference  to Exhibit 2.1 to ev3’s Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commissionon April 5, 2005                           |
| 2.2                  |       | Contribution and Exchange  Agreement, dated as of April 4, 2005, by and among the institutional  stockholders listed on Schedule I thereto, ev3 LLC, ev3 Inc. and Micro  Therapeutics, Inc.                                                                                                                           |       | Incorporated by reference  to Exhibit 2.2 to ev3’s Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commissionon April 5, 2005                           |
| 2.3                  |       | Note Contribution and  Exchange Agreement, dated as of April 4, 2005, by and among the  noteholders listed on Schedule I thereto and ev3 Inc.                                                                                                                                                                              |       | Incorporated by reference  to Exhibit 2.3 to ev3’s Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commissionon April 5, 2005                           |
| 3.1                  |       | Amended and Restated  Certificate of Incorporation of ev3 Inc.                                                                                                                                                                                                                                                                       |       | Incorporated by reference  to Exhibit 3.1 to ev3’s Amendment No. 5 to Registration Statement  on Form S-1 (File No. 333-123851), filed with the Securities and  Exchange Commission on June 14, 2005 |
| 3.2                  |       | Amendment to Amended and  Restated Certificate of Incorporation of ev3 Inc.                                                                                                                                                                                                                                                          |       | Incorporated by reference  to Exhibit 99.1 to ev3’s Current Report on Form 8-K (File No. 000-51348),  filed with the Securities and Exchange Commissionon June 27, 2005                                   |
| 3.3                  |       | Amended and Restated  Bylaws of ev3 Inc.                                                                                                                                                                                                                                                                                             |       | Incorporated by reference  to Exhibit 3.3 to ev3’s Quarterly Report on Form 10-Q (File No. 000-51348),  filed with the Securities and Exchange Commission on August 17, 2005                              |
| 4.1                  |       | Form of Stock  Certificate                                                                                                                                                                                                                                                                                                      |       | Incorporated by reference  to Exhibit 4.1 to ev3’s Amendment No. 4 to Registration Statement  on Form S-1 (File No. 333-123851), filed with the Securities and  Exchange Commission on June 2, 2005  |
| 4.2                  |       | Registration Rights  Agreement, dated as of June 21, 2005, by and among ev3 Inc., Warburg,  Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I,  C.V., Warburg, Pincus Netherlands Equity Partners III, C.V., Vertical Fund I,  L.P., Vertical Fund II, L.P. and certain other investors party thereto |       | Incorporated by reference  to Exhibit 4.2 to ev3’s Quarterly Report on Form 10-Q (File No. 000-51348),  filed with the Securities and Exchange Commission on August 17, 2005                              |
| 10.1                 |       | Underwriting Agreement,  dated as of June 16, 2005, by and among ev3 Inc., Piper Jaffray &  Co., Banc of America                                                                                                                                                                                                       |       | Incorporated by reference  to Exhibit 10.1 to ev3’s Quarterly Report on                                                                                                                                                  |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                   | ** ** | **Method of Filing**                                                                                                                                                                                            |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | Securities LLC and Dale A.  Spencer                                                                                                                                               |       | Form 10-Q (File No. 000-51348),  filed with the Securities and Exchange Commission on August 17, 2005                                                                                            |
| 10.2                 |       | Corporate Opportunity  Agreement, dated as of April 4, 2005, by and among the institutional stockholders  listed on Schedule I thereto and ev3 Inc.                     |       | Incorporated by reference  to Exhibit 10.32 to ev3’s Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commission on April 5, 2005     |
| 10.3                 |       | First Amendment to Amended  and Restated Sales Representative Agreement, dated April 6, 2005, by and  between Micro Therapeutics, Inc. and ev3 International, Inc. |       | Incorporated by reference  to Exhibit 10.52 to Micro Therapeutics’ Current Report on Form 8-K  (File No. 000-06523), filed with the Securities and Exchange Commissionon April 7, 2005 |
| 10.4                 |       | ev3 Inc. Amended and  Restated 2005 Incentive Stock Plan                                                                                                                          |       | Incorporated by reference  to Exhibit 10.4 to ev3’s Quarterly Report on Form 10-Q (File No. 000-51348),  filed with the Securities and Exchange Commission on August 17, 2005          |
| 10.5                 |       | Loan and Security  Agreement, dated May 6, 2005, by and between Micro Therapeutics, Inc.  and Silicon Valley Bank                                                       |       | Incorporated by reference  to Exhibit 10.56 to Micro Therapeutics’ Current Report on Form 8-K  (File No. 000-06523), filed with the Securities and Exchange Commissionon May 10, 2005  |
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 and SEC Rule 13a-14                                                |       | Filed herewith.                                                                                                                                                                                                 |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 and SEC Rule 13a-14                                                |       | Filed herewith.                                                                                                                                                                                                 |
| 32.1                 |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                     |       | Furnished herewith.                                                                                                                                                                                             |
| 32.2                 |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                     |       | Furnished herewith.                                                                                                                                                                                             |

 

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