##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 1, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 000-51348
 ev3 Inc.
  Delaware
    
    32-0138874(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 9600 54 th Avenue North, Suite 100
Plymouth, Minnesota 55442
 (763) 398-7000
 þ o
  o þ o
 o þ




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##### 



ev3 Inc.
FORM 10-Q
For the Quarterly Period Ended July 1, 2007
 TABLE OF CONTENTS
 Description
    
    PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets as of July 1, 2007 (unaudited) and December 31, 2006
    
    
    1Consolidated Statements of Operations for the three and six months ended July 1, 2007
and July 2, 2006 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the six months ended July 1, 2007
and July 2, 2006 (unaudited)
    
    
    3Notes to the Consolidated Financial Statements
    
    
    4ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30ITEM 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    32ITEM 1A. Risk Factors
    
    
    32ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33ITEM 3. Defaults Upon Senior Securities
    
    
    34ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    35ITEM 5. Other Information
    
    
    35ITEM 6. Exhibits
    
    
    35SIGNATURE PAGE
    
    
    36Exhibit Index
    
    
    37Underwriting AgreementCertification of CEOCertification of CFOCertification of CEOCertification of CFO
  This report contains not only historical information, but also forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those
sections. We refer you to the information under the heading Part I. Item 2. Managements
Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking
Statements.
 In this report, references to ev3, the company, we, our or us, unless the context
otherwise requires, refer to ev3 Inc. and its subsidiaries.
 All trademarks or trade names referred to in this report are the property of their respective
owners.




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 ev3 Inc.
 
 CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except per share amounts)
 July 1,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    57,919
    
    
    $
    24,053Short-term investments
    
    
    7,800
    
    
    
    14,700Accounts receivable, less allowance of $3,877 and $3,924, respectively
    
    
    56,046
    
    
    
    45,137Inventories, net
    
    
    44,297
    
    
    
    42,124Prepaid expenses and other assets
    
    
    4,913
    
    
    
    7,162Other receivables
    
    
    2,446
    
    
    
    2,669Total current assets
    
    
    173,421
    
    
    
    135,845Restricted cash
    
    
    1,310
    
    
    
    2,022Property and equipment, net
    
    
    23,960
    
    
    
    24,072Goodwill
    
    
    149,061
    
    
    
    149,061Other intangible assets, net
    
    
    41,650
    
    
    
    40,014Other assets
    
    
    730
    
    
    
    1,812Total assets
    
    $
    390,132
    
    
    $
    352,826Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    10,782
    
    
    $
    13,140Accrued compensation and benefits
    
    
    15,676
    
    
    
    16,382Accrued liabilities
    
    
    14,745
    
    
    
    10,102Current portion of long-term debt
    
    
    3,346
    
    
    
    2,143Total current liabilities
    
    
    44,549
    
    
    
    41,767Long-term debt
    
    
    8,095
    
    
    
    5,357Other long-term liabilities
    
    
    902
    
    
    
    468Total liabilities
    
    
    53,546
    
    
    
    47,592Stockholders equityCommon stock, $0.01 par value, 100,000,000 shares authorized, shares
issued and outstanding: 60,889,666 shares at July 1, 2007 and
57,594,742 at December 31, 2006
    
    
    609
    
    
    
    576Additional paid in capital
    
    
    972,743
    
    
    
    919,221Accumulated deficit
    
    
    (636,660
    )
    
    
    (614,578
    )Accumulated other comprehensive income (expense)
    
    
    (106
    )
    
    
    15Total stockholders equity
    
    
    336,586
    
    
    
    305,234Total liabilities and stockholders equity
    
    $
    390,132
    
    
    $
    352,826
  1




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ev3 Inc.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars in thousands, except per share amounts)
 (unaudited)
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Net sales
    
    $
    65,396
    
    
    $
    50,620
    
    
    $
    126,895
    
    
    $
    92,857Operating expenses:Cost of goods sold (a)
    
    
    22,362
    
    
    
    18,179
    
    
    
    42,819
    
    
    
    34,667Sales, general and administrative (a)
    
    
    40,882
    
    
    
    35,808
    
    
    
    80,019
    
    
    
    73,669Research and development (a)
    
    
    11,323
    
    
    
    6,047
    
    
    
    18,756
    
    
    
    12,821Amortization of intangible assets
    
    
    3,864
    
    
    
    4,282
    
    
    
    7,964
    
    
    
    8,525(Gain) loss on sale of assets, net
    
    
    (1,004
    )
    
    
    (46
    )
    
    
    (988
    )
    
    
    124Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,786Total operating expenses
    
    
    77,427
    
    
    
    64,270
    
    
    
    148,570
    
    
    
    131,592Loss from operations
    
    
    (12,031
    )
    
    
    (13,650
    )
    
    
    (21,675
    )
    
    
    (38,735
    )Other income:Gain on sale of investments, net
    
    
    
    
    
    
    (1,063
    )
    
    
    
    
    
    
    (1,063
    )Interest income, net
    
    
    (297
    )
    
    
    (514
    )
    
    
    (406
    )
    
    
    (1,213
    )Other income, net
    
    
    (195
    )
    
    
    (1,327
    )
    
    
    (512
    )
    
    
    (1,381
    )Loss before income taxes
    
    
    (11,539
    )
    
    
    (10,746
    )
    
    
    (20,757
    )
    
    
    (35,078
    )Income tax expense
    
    
    332
    
    
    
    77
    
    
    
    608
    
    
    
    246Net loss
    
    $
    (11,871
    )
    
    $
    (10,823
    )
    
    $
    (21,365
    )
    
    $
    (35,324
    )Earnings per share:Net loss per common share (basic and diluted)
    
    $
    (0.20
    )
    
    $
    (0.19
    )
    
    $
    (0.37
    )
    
    $
    (0.63
    )Weighted average shares outstanding
    
    
    59,543,827
    
    
    
    56,698,043
    
    
    
    58,529,041
    
    
    
    56,319,427
 
 (a)
    
    Includes stock based compensation charges of: Cost of goods sold
    
    $
    187
    
    
    $
    155
    
    
    $
    345
    
    
    $
    369Sales, general and administrative
    
    
    2,207
    
    
    
    1,799
    
    
    
    4,066
    
    
    
    3,165Research and development
    
    
    266
    
    
    
    158
    
    
    
    448
    
    
    
    372$
    2,660
    
    
    $
    2,112
    
    
    $
    4,859
    
    
    $
    3,906
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ev3 Inc.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands, except per share amounts)
 (unaudited)
 Six Months EndedJuly 1, 2007
    
    
    July 2, 2006Operating activitiesNet loss
    
    $
    (21,365
    )
    
    $
    (35,324
    )Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization
    
    
    11,574
    
    
    
    11,097Provision for bad debts and sales returns
    
    
    661
    
    
    
    234Provision for inventory obsolescence
    
    
    2,175
    
    
    
    1,739Acquired in-process research and development
    
    
    
    
    
    
    1,786Gain on sale of investments
    
    
    
    
    
    
    (1,063
    )(Gain) loss on disposal of assets
    
    
    (988
    )
    
    
    124Stock compensation expense
    
    
    4,859
    
    
    
    3,906Change in operating assets and liabilities:Accounts receivable
    
    
    (11,587
    )
    
    
    (7,435
    )Inventories
    
    
    (4,349
    )
    
    
    (2,070
    )Prepaids and other assets
    
    
    646
    
    
    
    (83
    )Accounts payable
    
    
    (2,365
    )
    
    
    (700
    )Accrued expenses and other liabilities
    
    
    3,520
    
    
    
    (3,654
    )Net cash used in operating activities
    
    
    (17,219
    )
    
    
    (31,443
    )Investing activitiesPurchase of short-term investments
    
    
    
    
    
    
    (6,750
    )Proceeds from sale of short-term investments
    
    
    6,900
    
    
    
    300Purchase of property and equipment
    
    
    (3,519
    )
    
    
    (7,360
    )Purchase of intangible assets
    
    
    (7,579
    )
    
    
    (500
    )Proceeds from sale of property and equipment
    
    
    2,005
    
    
    
    68Proceeds from sale of minority investment
    
    
    
    
    
    
    1,063Acquisitions, net of cash acquired
    
    
    
    
    
    
    (170
    )Change in restricted cash
    
    
    722
    
    
    
    (108
    )Net cash used in investing activities
    
    
    (1,471
    )
    
    
    (13,457
    )Financing activitiesProceeds from issuance of common stock
    
    
    44,653
    
    
    
    Proceeds from issuance of debt
    
    
    5,000
    
    
    
    Payments on long-term debt
    
    
    (1,072
    )
    
    
    Payments on capital lease obligations
    
    
    (68
    )
    
    
    (60
    )Proceeds from exercise of stock options
    
    
    4,043
    
    
    
    3,890Net cash provided by financing activities
    
    
    52,556
    
    
    
    3,830Effect of exchange rate changes on cash
    
    
    
    
    
    
    261Net increase (decrease) in cash and cash equivalents
    
    
    33,866
    
    
    
    (40,809
    )Cash and cash equivalents, beginning of period
    
    
    24,053
    
    
    
    69,592Cash and cash equivalents, end of period
    
    $
    57,919
    
    
    $
    28,783Supplemental non-cash disclosure:Net assets acquired in conjunction with MTI step acquisition (see Note 6)
    
    $
    
    
    
    $
    95,438Financed insurance policies (see Note 18)
    
    $
    
    
    
    $
    3,500
  3




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ev3 Inc.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Description of Business
  2. Basis of Presentation
    3. Stock-Based Compensation
    4




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Three Months Ended
    
    July 1, 2007
    
    
    July 2, 2006Risk free interest rate
    
    
    4.6
    %
    
    
    4.9
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    43.7
    %
    
    
    51.2
    %Expected option term
    
    3.85 years
        
    4 years
 Six Months Ended
    
    July 1, 2007
    
    
    July 2, 2006Risk free interest rate
    
    
    4.7
    %
    
    
    4.5
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    45.0
    %
    
    
    50.0
    %Expected option term
    
    3.85 years
    
    
    4 years
 A summary of option activity for all plans (dollars in thousands, except per share
amounts) during the six months ended July 1, 2007 is as follows:
 Weighted-Average
    
    
    AggregateAwarded Shares
    
    
    Exercise Price Per
    
    
    IntrinsicOutstanding
    
    
    Share
    
    
    ValueBalance at January 1, 2007
    
    
    5,359,248
    
    
    $
    12.47Granted (1)
    
    
    1,020,516
    
    
    $
    17.72Exercised
    
    
    (386,077
    )
    
    $
    10.47Forfeited
    
    
    (297,227
    )
    
    $
    14.27Expired
    
    
    (43,145
    )
    
    $
    17.98Balance at July 1, 2007
    
    
    5,653,315
    
    
    $
    13.41
    
    
    $
    21,816Options exercisable at July 1, 2007
    
    
    2,934,713
    
    
    $
    11.73
    
    
    $
    16,372
 
 (1)
    
    The weighted average fair value for options granted was $7.10. 5




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A summary of restricted stock award activity for all plans during the six months ended July 1,
2007 is as follows:
 Awarded
    
    
    Weighted-AverageShares
    
    
    Grant Date FairOutstanding
    
    
    ValueNonvested balance at January 1, 2007
    
    
    217,774
    
    
    $
    15.42Granted
    
    
    533,809
    
    
    $
    17.79Vested
    
    
    (2,500
    )
    
    $
    13.99Forfeited
    
    
    (56,591
    )
    
    $
    16.78Nonvested balance at July 1, 2007
    
    
    692,492
    
    
    $
    17.05
  4. Recent Accounting Pronouncements
    6




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5. Liquidity and Capital Resources
     7




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The following summarizes the changes in stockholders equity (dollars in thousands) since December
31, 2006:
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Additional Paid in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    EquityBalance December 31, 2006
    
    
    57,594,742
    
    
    $
    576
    
    
    $
    919,221
    
    
    $
    (614,578
    )
    
    $
    15
    
    
    $
    305,234Cumulative effect of
adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (717
    )
    
    
    
    
    
    
    (717
    )Adjusted Balance
December 31, 2006
    
    
    57,594,742
    
    
    $
    576
    
    
    $
    919,221
    
    
    $
    (615,295
    )
    
    $
    15
    
    
    $
    304,517Common stock issued in
conjunction with
secondary offering
    
    
    2,500,000
    
    
    
    25
    
    
    
    44,628
    
    
    
    
    
    
    
    
    
    
    
    44,653Compensation expense on
equity awards and stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    4,859
    
    
    
    
    
    
    
    
    
    
    
    4,859Exercise of options
    
    
    386,077
    
    
    
    4
    
    
    
    4,039
    
    
    
    
    
    
    
    
    
    
    
    4,043Restricted stock
grants, net of
cancellations
    
    
    408,847
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,365
    )
    
    
    
    
    
    
    (21,365
    )Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    (121
    )Comprehensive (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,486
    )Balance July 1, 2007
    
    
    60,889,666
    
    
    $
    609
    
    
    $
    972,743
    
    
    $
    (636,660
    )
    
    $
    (106
    )
    
    $
    336,586
 6. MTI Step Acquisition
   The following table presents the purchase price for the acquisition (in thousands) on January 6,
2006:
 2006Fair value of shares/options issued
    
    $
    95,438Interest acquired in historical book value of MTI
    
    
    (12,850
    )Excess purchase price over historical book values
    
    $
    82,588
 8




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The following summarizes the allocation of the excess purchase price over historical book values
(in thousands) arising from the acquisition:
 2006Inventory
    
    $
    668Developed technology
    
    
    15,548Customer relationships
    
    
    9,964Trademarks and tradenames
    
    
    2,029Acquired in-process research and development
    
    
    1,786Goodwill
    
    
    54,605Accrued liabilities
    
    
    (2,012
    )Total
    
    $
    82,588
   7. Short-Term Investments
  8. Inventories
 Inventory consists of the following (in thousands):
 July 1, 2007
    
    
    December 31, 2006Raw materials
    
    $
    7,365
    
    
    $
    7,100Work in-progress
    
    
    2,820
    
    
    
    3,271Finished goods
    
    
    38,619
    
    
    
    36,47848,804
    
    
    
    46,849Inventory reserve
    
    
    (4,507
    )
    
    
    (4,725
    )Inventory, net
    
    $
    44,297
    
    
    $
    42,124
 9




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9. Property and Equipment, Net
 Property and equipment consists of the following (in thousands):
 July 1, 2007
    
    
    December 31, 2006Machinery and equipment
    
    $
    23,079
    
    
    $
    20,472Office furniture and equipment
    
    
    12,710
    
    
    
    11,440Leasehold improvements
    
    
    10,099
    
    
    
    9,750Construction in progress
    
    
    1,093
    
    
    
    2,04046,981
    
    
    
    43,702Less:Accumulated depreciation and amortization
    
    
    (23,021
    )
    
    
    (19,630
    )Property and equipment, net
    
    $
    23,960
    
    
    $
    24,072
  10. Goodwill and Other Intangible Assets
 The balance at July 1, 2007 is as follows (in thousands):
 CardioPeripheral
    
    Neurovascular
    
    TotalBalance as of July 1, 2007
    
    $
    71,307
    
    
    $
    77,754
    
    
    $
    149,061
  Other intangible assets consist of the following (in thousands):
 Weighted
    
    
    July 1, 2007
    
    
    December 31, 2006Average
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetUseful Life
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying(in years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountPatents and licenses
    
    
    5.0
    
    
    $
    11,696
    
    
    $
    (4,394
    )
    
    $
    7,302
    
    
    $
    11,435
    
    
    $
    (4,009
    )
    
    $
    7,426Developed technology
    
    
    6.0
    
    
    
    63,616
    
    
    
    (43,972
    )
    
    
    19,644
    
    
    
    63,616
    
    
    
    (40,119
    )
    
    
    23,497Trademarks and tradenames
    
    
    7.0
    
    
    
    5,122
    
    
    
    (2,960
    )
    
    
    2,162
    
    
    
    5,122
    
    
    
    (2,634
    )
    
    
    2,488Customer relationships
    
    
    5.0
    
    
    
    16,094
    
    
    
    (10,971
    )
    
    
    5,123
    
    
    
    16,094
    
    
    
    (9,491
    )
    
    
    6,603Distribution rights
    
    
    2.5
    
    
    
    9,274
    
    
    
    (1,855
    )
    
    
    7,419
    
    
    
    
    
    
    
    
    
    
    
    Other intangible assets
    
    
    
    
    
    $
    105,802
    
    
    $
    (64,152
    )
    
    $
    41,650
    
    
    $
    96,267
    
    
    $
    (56,253
    )
    
    $
    40,014
   10




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2007
    
    $
    15,0742008
    
    
    11,4902009
    
    
    6,9042010
    
    
    3,9062011
    
    
    2,492
 12. Accrued Liabilities
 Accrued liabilities consist of the following (in thousands):
 July 1, 2007
    
    
    December 31, 2006Accrued professional services
    
    $
    4,828
    
    
    $
    1,900Accrued royalties
    
    
    2,399
    
    
    
    845Accrued clinical studies
    
    
    318
    
    
    
    359Office closure
    
    
    235
    
    
    
    345Accrued other
    
    
    6,695
    
    
    
    6,653Total accrued liabilities
    
    $
    14,475
    
    
    $
    10,102
 13. Long-Term Debt
 Long-term debt consists of the following (in thousands):
 July 1, 2007
    
    
    December 31, 2006Equipment term loan
    
    $
    11,441
    
    
    $
    7,500Less: current portion
    
    
    (3,346
    )
    
    
    (2,143
    )Total long-term debt
    
    $
    8,095
    
    
    $
    5,357
  Annual maturities of our long-term debt (inclusive of amounts already paid in the six months ended
July 1, 2007) are as follows (in thousands):
 2007
    
    $
    1,5612008
    
    
    3,5712009
    
    
    3,5712010
    
    
    2,5002011
    
    
    238Total
    
    $
    11,441
 11




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14. Gain (Loss) on Sale of Assets
   15. Interest (Income) Expense
 Interest (income) expense consists of the following (in thousands):
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Interest expense
    
    $
    393
    
    
    $
    67
    
    
    $
    668
    
    
    $
    101Interest (income)
    
    
    (690
    )
    
    
    (581
    )
    
    
    (1,074
    )
    
    
    (1,314
    )Total interest (income) expense, net
    
    $
    (297
    )
    
    $
    (514
    )
    
    $
    (406
    )
    
    $
    (1,213
    )
 16. Other Comprehensive Income (Loss)
 The following table provides a reconciliation of net loss to comprehensive income (loss) (in
thousands):
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 1, 2006Net loss
    
    $
    (11,871
    )
    
    $
    (10,823
    )
    
    $
    (21,365
    )
    
    $
    (35,324
    )Changes in foreign currency translation
    
    
    (48
    )
    
    
    (346
    )
    
    
    (121
    )
    
    
    (254
    )Total comprehensive income (loss)
    
    $
    (11,919
    )
    
    $
    (11,169
    )
    
    $
    (21,486
    )
    
    $
    (35,578
    )
 17. Income Taxes
   12




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18. Commitments and Contingencies
 Letters of Credit
  Financed Insurance Policies
  Earn-Out Contingencies
  Contingencies
   13




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
   14




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15




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##### Table of Contents



19. Segment and Geographic Information
  The following is segment information (in thousands):
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Net salesCardio Peripheral:Stents
    
    $
    22,153
    
    
    $
    16,020
    
    
    $
    41,959
    
    
    $
    29,066Thrombectomy and embolic protection
    
    
    8,443
    
    
    
    5,642
    
    
    
    14,661
    
    
    
    9,679Procedural support and other
    
    $
    10,035
    
    
    $
    8,919
    
    
    $
    20,502
    
    
    $
    17,168Total Cardio Peripheral
    
    $
    40,631
    
    
    $
    30,581
    
    
    $
    77,122
    
    
    $
    55,913Neurovascular:Embolic products
    
    
    12,827
    
    
    
    9,412
    
    
    
    25,753
    
    
    
    16,795Neuro access and delivery products and other
    
    
    11,938
    
    
    
    10,627
    
    
    
    24,020
    
    
    
    20,149Total Neurovascular
    
    $
    24,765
    
    
    $
    20,039
    
    
    $
    49,773
    
    
    $
    36,944Total net sales
    
    $
    65,396
    
    
    $
    50,620
    
    
    $
    126,895
    
    
    $
    92,857Gross profitCardio Peripheral
    
    $
    24,119
    
    
    $
    17,208
    
    
    $
    46,081
    
    
    $
    30,135Neurovascular
    
    
    18,915
    
    
    
    15,233
    
    
    
    37,995
    
    
    
    28,055Total
    
    $
    43,034
    
    
    $
    32,441
    
    
    $
    84,076
    
    
    $
    58,190Operating expense
    
    
    55,065
    
    
    
    46,091
    
    
    
    105,751
    
    
    
    96,925Loss from operations
    
    $
    (12,031
    )
    
    $
    (13,650
    )
    
    $
    (21,675
    )
    
    $
    (38,735
    )
 16




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##### Table of Contents



July 1,
    
    
    December 31,Total assets
    
    2007
    
    
    2006Cardio Peripheral
    
    $
    240,327
    
    
    $
    209,414Neurovascular
    
    
    149,805
    
    
    
    143,412Total
    
    $
    390,132
    
    
    $
    352,826
 The following table presents net sales and long-lived assets by geographic area (in thousands):
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2007
    
    
    July 2, 2006
    
    
    July 1, 2007
    
    
    July 2, 2006Geographic DataNet SalesUnited States
    
    $
    39,576
    
    
    $
    30,689
    
    
    $
    74,716
    
    
    $
    55,463International
    
    
    25,820
    
    
    
    19,931
    
    
    
    52,179
    
    
    
    37,394Total net sales
    
    $
    65,396
    
    
    $
    50,620
    
    
    $
    126,895
    
    
    $
    92,857
 July 1,
    
    
    December 31,Long-lived Assets
    
    2007
    
    
    2006United States
    
    $
    23,159
    
    
    $
    23,422International
    
    
    801
    
    
    
    650Total long-lived assets
    
    $
    23,960
    
    
    $
    24,072
 20. Related Party Transaction
  21. Subsequent Event
   17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
      18




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Recent Development
    19




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentJuly 1, 2007
    
    
    July 2, 2006
    
    
    Change
    
    
    July 1, 2007
    
    
    July 2, 2006
    
    
    ChangeResults of Operations:Net sales
    
    $
    65,396
    
    
    $
    50,620
    
    
    
    29.2
    %
    
    $
    126,895
    
    
    $
    92,857
    
    
    
    36.7
    %Operating expenses:Cost of goods sold (a)
    
    
    22,362
    
    
    
    18,179
    
    
    
    23.0
    %
    
    
    42,819
    
    
    
    34,667
    
    
    
    23.5
    %Sales, general and administrative (a)
    
    
    40,882
    
    
    
    35,808
    
    
    
    14.2
    %
    
    
    80,019
    
    
    
    73,669
    
    
    
    8.6
    %Research and development (a)
    
    
    11,323
    
    
    
    6,047
    
    
    
    87.2
    %
    
    
    18,756
    
    
    
    12,821
    
    
    
    46.3
    %Amortization of intangible assets
    
    
    3,864
    
    
    
    4,282
    
    
    
    (9.8
    )%
    
    
    7,964
    
    
    
    8,525
    
    
    
    (6.6
    )%(Gain) loss on sale of assets, net
    
    
    (1,004
    )
    
    
    (46
    )
    
    NM
    
    
    (988
    )
    
    
    124
    
    
    NMAcquired in-process research and
development
    
    
    
    
    
    
    
    
    
    NM
    
    
    
    
    
    
    1,786
    
    
    NMTotal operating expenses
    
    
    77,427
    
    
    
    64,270
    
    
    
    20.5
    %
    
    
    148,570
    
    
    
    131,592
    
    
    
    (12.9
    )%Loss from operations
    
    
    (12,031
    )
    
    
    (13,650
    )
    
    
    (11.9
    )%
    
    
    (21,675
    )
    
    
    (38,735
    )
    
    
    (44.0
    )%Other income:Gain on sale of investments, net
    
    
    
    
    
    
    (1,063
    )
    
    NM
    
    
    
    
    
    
    (1,063
    )
    
    NMInterest income, net
    
    
    (297
    )
    
    
    (514
    )
    
    
    (42.2
    )%
    
    
    (406
    )
    
    
    (1,213
    )
    
    
    (66.5
    )%Other income, net
    
    
    (195
    )
    
    
    (1,327
    )
    
    
    (85.3
    )%
    
    
    (512
    )
    
    
    (1,381
    )
    
    
    (62.9
    )%Loss before income taxes
    
    
    (11,539
    )
    
    
    (10,746
    )
    
    
    7.4
    %
    
    
    (20,757
    )
    
    
    (35,078
    )
    
    
    (40.8
    )%Income tax expense
    
    
    332
    
    
    
    77
    
    
    NM
    
    
    608
    
    
    
    246
    
    
    NMNet loss
    
    $
    (11,871
    )
    
    $
    (10,823
    )
    
    
    (9.7
    )%
    
    $
    (21,365
    )
    
    $
    (35,324
    )
    
    
    (39.5
    )%Net loss per common share (basic and
diluted)
    
    $
    (0.20
    )
    
    $
    (0.19
    )
    
    
    
    
    
    $
    (0.37
    )
    
    $
    (0.63
    )Weighted average shares outstanding
    
    
    59,543,827
    
    
    
    56,698,043
    
    
    
    
    
    
    
    58,529,041
    
    
    
    56,319,427(a)  Includes stock-based compensation charges of:Cost of goods sold
    
    $
    187
    
    
    $
    155
    
    


    
    
    
    

    $
    345
    
    
    $
    369Sales, general and administrative
    
    
    2,207
    
    
    
    1,799
    
    
    
    
    
    
    
    4,066
    
    
    
    3,165Research and development
    
    
    266
    
    
    
    158
    
    
    
    
    
    
    
    448
    
    
    
    372$
    2,660
    
    
    $
    2,112
    
    
    
    
    
    
    $
    4,859
    
    
    $
    3,906
  Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentNET SALES BY SEGMENT:
    
    July 1, 2007
    
    
    July 2, 2006
    
    
    Change
    
    
    July 1, 2007
    
    
    July 2, 2006
    
    
    ChangeCardio Peripheral:Stents
    
    $
    22,153
    
    
    $
    16,020
    
    
    
    38.3
    %
    
    $
    41,959
    
    
    $
    29,066
    
    
    
    44.4
    %Thrombectomy and embolic protection
    
    
    8,443
    
    
    
    5,642
    
    
    
    49.6
    %
    
    
    14,661
    
    
    
    9,679
    
    
    
    51.5
    %Procedural support and other
    
    
    10,035
    
    
    
    8,919
    
    
    
    12.5
    %
    
    
    20,502
    
    
    
    17,168
    
    
    
    19.4
    %Total Cardio Peripheral
    
    $
    40,631
    
    
    $
    30,581
    
    
    
    32.9
    %
    
    $
    77,122
    
    
    $
    55,913
    
    
    
    37.9
    %Neurovascular:Embolic products
    
    
    12,827
    
    
    
    9,412
    
    
    
    36.3
    %
    
    
    25,753
    
    
    
    16,795
    
    
    
    53.3
    %Neuro access and delivery products
and other
    
    
    11,938
    
    
    
    10,627
    
    
    
    12.3
    %
    
    
    24,020
    
    
    
    20,149
    
    
    
    19.2
    %Total Neurovascular
    
    $
    24,765
    
    
    $
    20,039
    
    
    
    23.6
    %
    
    $
    49,773
    
    
    $
    36,944
    
    
    
    34.7
    %Total
    
    $
    65,396
    
    
    $
    50,620
    
    
    
    29.2
    %
    
    $
    126,895
    
    
    $
    92,857
    
    
    
    36.7
    %
 20




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##### Table of Contents



Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentNET SALES BY GEOGRAPHY:
    
    July 1, 2007
    
    
    July 2, 2006
    
    
    Change
    
    
    July 1, 2007
    
    
    July 2, 2006
    
    
    ChangeUnited States
    
    $
    39,576
    
    
    $
    30,689
    
    
    
    29.0
    %
    
    $
    74,716
    
    
    $
    55,463
    
    
    
    34.7
    %InternationalBefore foreign exchange impact
    
    
    24,694
    
    
    
    19,931
    
    
    
    23.9
    %
    
    
    49,685
    
    
    
    37,394
    
    
    
    32.9
    %Foreign exchange impact
    
    
    1,126
    
    
    
    
    
    
    
    
    
    
    
    2,494
    
    
    
    
    
    
    
    Total
    
    
    25,820
    
    
    
    19,931
    
    
    
    29.5
    %
    
    
    52,179
    
    
    
    37,394
    
    
    
    39.5
    %Total
    
    $
    65,396
    
    
    $
    50,620
    
    
    
    29.2
    %
    
    $
    126,895
    
    
    $
    92,857
    
    
    
    36.7
    %
 Comparison of the Three Months Ended July 1, 2007 to the Three Months Ended July 2, 2006
 Net sales
 Net sales of cardio peripheral products
 Net sales of neurovascular products
 Net sales by geography
 Cost of goods sold
 21




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##### Table of Contents



Sales, general and administrative expense
 Research and development
 Amortization of intangible assets
 Gain (loss) on sale of assets, net
 Interest income, net
 Other income, net
 Income tax expense Accounting for Uncertainty in
Income Taxes
 Comparison of the Six Months Ended July 1, 2007 to the Six Months Ended July 2, 2006
 Net sales
 Net sales of cardio peripheral products
 22




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##### Table of Contents



Net sales of neurovascular products
 Net sales by geography
 Cost of goods sold
 Sales, general and administrative expense
 Research and development
 Amortization of intangible assets
 Gain (loss) on sale of assets, net
 23




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##### Table of Contents



Interest income, net
 Other income, net
 Income tax expense Accounting for
Uncertainty in Income Taxes
 Liquidity and Capital Resources
 July 1,
    
    December 31,Balance Sheet Data
    
    2007
    
    2006(in thousands)Cash and cash equivalents
    
    $
    57,919
    
    
    $
    24,053Short-term investments
    
    
    7,800
    
    
    
    14,700Total current assets
    
    
    173,421
    
    
    
    135,845Total assets
    
    
    390,132
    
    
    
    352,826Total current liabilities
    
    
    44,549
    
    
    
    41,767Total liabilities
    
    
    53,546
    
    
    
    47,592Total stockholders equity
    
    
    390,132
    
    
    
    305,234
 Financing history.
 Cash, cash equivalents and short-term investments.
 Credit facility.
 24




---



##### Table of Contents



Operating activities.
 Investing activities.
 Financing activities.
 Contractual cash obligations
 Other liquidity information.
 25




---



##### Table of Contents



Credit Risk.
 26




---



##### Table of Contents



Related Party Transaction
  Critical Accounting Policies and Estimates
  Accounting for Income Taxes
     Seasonality
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  27




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##### Table of Contents



Forward-Looking Statements
   
    
    Risks associated with our proposed merger with FoxHollow Technologies, Inc., as
described in more detail under the heading Part II  Item 1A. Risk Factors contained
elsewhere in this report.
    
    History of operating losses and negative cash flow;
    
    Lack of market acceptance of new products;
    
    Delays in product introduction;
    
    Exposure to assertions of intellectual property claims and failure to protect our intellectual property;
 28




---



##### Table of Contents




    
    Effects of litigation, including threatened or pending litigation, on matters relating
to patent infringement, employment, and commercial disputes;
    
    Failure of our business strategy, which relies on assumptions about the market for our products;
    
    Failure to obtain additional capital when needed or on acceptable terms;
    
    Disruption in our ability to manufacture our products or the ability of our key
suppliers to provide us products or components or raw materials for products resulting in
our inability to supply market demand for our products;
    
    Increases in prices for raw materials;
    
    Failure to retain senior management or replace lost senior management;
    
    Employee slowdowns, strikes or similar actions;
    
    Significant and unexpected claims under our EverFlex self-expanding stent worldwide
fracture-free guarantee program in excess of our reserves;
    
    Failure to integrate effectively newly acquired operations;
    
    Incurrence of additional debt, contingent liabilities and expenses in connection with future acquisitions;
    
    Failure of our customers or patients to obtain third party reimbursement for their purchases of our products;
    
    Consolidation in the healthcare industry, which could lead to demands for price
concessions or to the exclusion of some suppliers from certain of our markets;
    
    Failure to comply with applicable laws and regulations and to obtain and maintain
required regulatory approvals for our products in a cost-effective manner or at all;
    
    Adverse changes in applicable laws or regulations;
    
    Exposure to product liability claims;
    
    Risks inherent in operating internationally and selling and shipping our products and
purchasing our products and components internationally;
    
    Fluctuations in foreign currency exchange rates and interest rates;
    
    Obligation to make significant milestone payments not currently reflected in our financial statements;
    
    Reliance on independent sales distributors and sales associates to market and sell our
products in certain foreign countries, including our reliance on Medtronic for sales of our
products in Japan;
    
    Loss of customers;
    
    Disruption in the supply of products of Invatec S.r.l. that we distribute or our relationship with Invatec;
    
    Dependence upon a few of our products to generate a large portion of our net sales and
exposure if drug-eluting stents become a dominant therapy in the peripheral vascular stent
market and we are not able to develop or acquire a drug-eluting stent to market and sell;
    
    Failure to develop innovative and successful new products and technologies;
    
    Highly competitive nature of the markets in which we sell our products and the
introduction of competing products;
    
    Inability to meet performance enhancement objectives, including efficiency and cost
reduction strategies;
    
    Reliance on our management information systems for inventory management, distribution
and other functions and to maintain our research and development and clinical data;
    
    Failure to comply with our covenants under our loan and security agreement with Silicon Valley Bank;
    
    Inability to use net operating losses to reduce tax liability if we become profitable;
    
    Absence of expected returns from the amount of intangible assets we have recorded;
    
    Changes in generally accepted accounting principles;
 29




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##### Table of Contents




    
    Conditions and changes in medical device industry or in general economic and business conditions;
    
    Conflicts of interests due to our ownership structure; or
    
    Ineffectiveness of our internal controls.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  30




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  31




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Our merger with FoxHollow Technologies, Inc. is subject to certain conditions to closing that could
result in the merger not being consummated or being delayed, either of which could negatively
impact our stock price and future business and results of operations.
  Whether or not the merger is completed, the announcement and pendency of the merger could impact or
cause disruptions in our business, which could have an adverse effect on our business and results
of operations.
  
    
    our employees may experience uncertainty about their future roles with the combined
company, which might adversely affect our ability to retain and hire key personnel and
other employees;
    
    the attention of our management may be directed toward the completion of the merger and
transaction-related considerations and may be diverted from the day-to-day operations and
pursuit of other opportunities that could have been beneficial to our business; and
    
    distributors or other vendors or suppliers may seek to modify or terminate their
business relationships with us.
  32




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##### Table of Contents



We may be unable to successfully integrate our operations with FoxHollows or to realize the
anticipated cost savings and other potential benefits of the merger in a timely manner or at all.
As a result, the value of our common stock may be adversely affected.
    The
issuance of shares of our common stock to FoxHollow stockholders in the merger will
substantially dilute the aggregate voting power and reduce the percentage interests of our current
stockholders.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Recent Sales of Unregistered Equity Securities
  Use of Proceeds
  33




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##### Table of Contents



Issuer Purchases of Equity Securities
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  34




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    Our Annual Meeting of Stockholders was held on May 15, 2007.(b)
    
    The results of the stockholder votes were as follows:
 For
    
    
    Against/Withhold
    
    
    Abstain
    
    
    Broker Non-Votes1.
    
    
    Election of
Directors  for terms
expiring at the 2010
Annual Meeting of
StockholdersJohn K. Bakewell
    
    
    56,402,775
    
    
    
    118,661
    
    
    
    
    
    
    
    Richard B. Emmitt
    
    
    56,283,462
    
    
    
    237,974
    
    
    
    
    
    
    
    Dale A. Spencer
    
    
    53,891,262
    
    
    
    2,630,174
    
    
    
    
    
    
    
    2.
    
    
    Approval of ev3
Inc. Second Amended
and Restated 2005
Incentive Stock Plan
    
    
    44,850,940
    
    
    
    7,856,784
    
    
    
    18,154
    
    
    
    3,795,5583.
    
    
    Ratification of
Independent Registered
Public Accounting Firm
    
    
    56,460,975
    
    
    
    58,427
    
    
    
    2,034
    
    
    
    
   
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  Exhibit No.
    
    Description10.1
    
    Underwriting Agreement dated April 19, 2007 among ev3 Inc.,
the Selling Stockholders listed on Schedule B thereto and Banc
of America Securities LLC, Piper Jaffray & Co., JP Morgan
Securities Inc., as Representatives of the Several
Underwriters (Filed herewith)10.2
    
    ev3 Inc. Second Amended and Restated 2005 Incentive Stock Plan
(Incorporated by reference to Exhibit 10.1 to ev3s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on May 17, 2007 (File No. 000-51348))10.3
    
    Intellectual Property Transfer Agreement dated as of June 15,
2007 between Atritech, Inc. and ev3 Endovascular, Inc.
(Incorporated by reference to Exhibit 10.1 to ev3s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on June 21, 2007 (File No. 000-51348))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)
 35




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##### Table of Contents



SIGNATURES
  August 8, 2007
    ev3 Inc.By:
    /s/ James M. CorbettJames M. CorbettPresident and Chief Executive Officer
(principal executive officer) By:
    /s/ Patrick D. SpanglerPatrick D. SpanglerChief Financial Officer and Treasurer
(principal financial and accounting officer) 36




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##### Table of Contents



ev3 Inc.
QUARTERLY REPORT ON FORM 10-Q
 
 EXHIBIT INDEX
 Exhibit No.
    
    Description
    
    Method of Filing10.1
    
    Underwriting Agreement
dated April 19, 2007 among
ev3 Inc., the Selling
Stockholders listed on
Schedule B thereto and Banc
of America Securities LLC,
Piper Jaffray & Co., JP
Morgan Securities Inc., as
Representatives of the
Several Underwriters
    
    Filed herewith10.2
    
    ev3 Inc. Second
Amended and Restated 2005
Incentive Stock Plan
    
    Incorporated by
reference to Exhibit 10.1
to ev3s Current Report on
Form 8-K as filed with the
Securities and Exchange
Commission on May 17, 2007
(File No. 000-51348)10.3
    
    Intellectual Property
Transfer Agreement dated as
of June 15, 2007 between
Atritech, Inc. and ev3
Endovascular, Inc.
    
    Incorporated by
reference to Exhibit 10.1
to ev3s Current Report on
Form 8-K as filed with the
Securities and Exchange
Commission on June 21, 2007
(File No. 000-51348)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 herewith31.2
    
    Certification of Chief
Financial Officer Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002
and SEC Rule 13a-14(a)
    
    Filed herewith32.1
    
    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 herewith32.2
    
    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
 37