** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **
| **(Mark one)**                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                                                                              | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                              |
| **For the quarterly period ended April 2, 2006**                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                              |
| **o**                                                                                                                                                                                                                                                                                                   | **TRANSITION REPORT UNDER 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.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**9600 54****th Avenue North, Suite 100Plymouth, Minnesota 55442**

(Address ofprincipal executive offices)

 

**(763) 398-7000**

(Registrant’stelephone number including area code)

 

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

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and larger accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer: o |   | Accelerated filer: o |   | Non-accelerated filer: ý |
|----------------------------|--------|----------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o  NO  ý

 

As of May 1, 2006, there were 56,699,478shares of common stock, par value $0.01 per share, of the registrantoutstanding.

 

 

----

 

**ev3 Inc.**

**FORM 10-Q**

**For the Quarterly PeriodEnded April 2, 2006**

** **

**TABLEOF CONTENTS**

** **
| **Description** | ** **                                                                                  |
|-----------------|---------------------------------------------------------------------------------------------|
| ** **      | ** **                                                                                  |   |
| **PART I.**     | **FINANCIAL  INFORMATION**                                                                  |   |
| ** **      | ** **                                                                                  |   |
| ITEM  1.        | Financial  Statements                                                                       |   |
|            |                                                                                        |   |
|            |                                                                                        | Consolidated  Balance Sheets as of April 2, 2006 (unaudited) and December 31, 2005 |   |
|            |                                                                                        |   |   |
|            |                                                                                        | Consolidated  Statements of Operations for the three months ended April 2, 2006 and   April 3, 2005 (unaudited) |   |
|            |                                                                                        |   |   |
|            |                                                                                        | Consolidated  Statements of Cash Flows for the three months ended April 2, 2006 and  April 3, 2005 (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 1A.        | Risk  Factors                                                                               |   |
|            |                                                                                        |   |
| 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  |                                                                                        |

 

*This report contains not onlyhistorical information, but also forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934, as amended, and are subject to the safeharbor created by those sections. We refer you to the information under theheading “Part I. Item 2. Management’s Discussion and Analysis of FinancialCondition 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 namesreferred to in this report are the property of their respective owners.*

 

----

 

**PART I: FINANCIALINFORMATION**

**ITEM I:  FINANCIALSTATEMENTS**

 

**ev3 Inc.CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except per share/unit amounts)**

 
| ** **                                                                                                                                                                       | ** ** | **April 2,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                       |       |                    |       |                        |       |
| ***Current assets***                                                                                                                                                             |       |                    |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                       |       | $                       | 37,365     |                        | $          | 69,592 |   |
| Short-term  investments                                                                                                                                                          |       | 18,650                  |       | 12,000                      |       |
| Accounts  receivable, less allowance of $3,675 and $3,607, respectively                                                                                                          |       | 30,948                  |       | 28,519                      |       |
| Inventories                                                                                                                                                                      |       | 34,079                  |       | 32,987                      |       |
| Prepaid  expenses and other assets                                                                                                                                               |       | 5,815                   |       | 7,042                       |       |
| Other  receivables                                                                                                                                                               |       | 1,430                   |       | 1,535                       |       |
| *Total  current assets*                                                                                                                                                          |       | 128,287                 |       | 151,675                     |       |
| Restricted  cash                                                                                                                                                                 |       | 3,344                   |       | 3,102                       |       |
| Property and  equipment, net                                                                                                                                                     |       | 19,171                  |       | 17,877                      |       |
| Goodwill                                                                                                                                                                         |       | 149,160                 |       | 94,456                      |       |
| Other  intangible assets, net                                                                                                                                                    |       | 49,691                  |       | 26,230                      |       |
| Other assets                                                                                                                                                                     |       | 3,245                   |       | 3,488                       |       |
| *Total  assets*                                                                                                                                                                  |       | $                       | 352,898    |                        | $          | 296,828 |   |
|                                                                                                                                                                             |       |                    |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                   |       |                    |       |                        |       |
| ***Current liabilities***                                                                                                                                                        |       |                    |       |                        |       |
| Accounts  payable                                                                                                                                                                |       | $                       | 9,451      |                        | $          | 11,716 |   |
| Accrued  compensation and benefits                                                                                                                                               |       | 11,055                  |       | 14,612                      |       |
| Accrued  liabilities                                                                                                                                                             |       | 12,188                  |       | 11,343                      |       |
| Total  current liabilities                                                                                                                                                       |       | 32,694                  |       | 37,671                      |       |
| Other  long-term liabilities                                                                                                                                                     |       | 741                     |       | 852                         |       |
| *Total  liabilities*                                                                                                                                                             |       | 33,435                  |       | 38,523                      |       |
|                                                                                                                                                                             |       |                    |       |                        |       |
| Minority  interest                                                                                                                                                               |       | —                  |       | 12,850                      |       |
| ***Stockholders’ equity***                                                                                                                                                  |       |                    |       |                        |       |
| Common  stock, $0.01 par value, 100,000,000 shares authorized, shares issued  and outstanding: 56,524,877 shares at April 2, 2006 and 49,350,647 at  December 31, 2005 |       | 565                     |       | 493                         |       |
| Additional  paid in capital                                                                                                                                                      |       | 905,377                 |       | 807,032                     |       |
| Accumulated  deficit                                                                                                                                                             |       | (586,708                | )          | (562,207                    | )          |
| Accumulated  other comprehensive income                                                                                                                                          |       | 229                     |       | 137                         |       |
|                                                                                                                                                                             |       |                    |       |                        |       |
| *Total  stockholders’ equity*                                                                                                                                               |       | 319,463                 |       | 245,455                     |       |
| *Total  liabilities and stockholders’ equity*                                                                                                                               |       | $                       | 352,898    |                        | $          | 296,828 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

1

----

 

**ev3 Inc.CONSOLIDATED STATEMENTS OFOPERATIONS(Dollars in thousands, except per share/unit amounts)**

**(unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net sales                                                    |       | $                                | 42,237     |   | $ | 27,682 |   |
|                                                         |       |                             |       |   |   |   |   |
| Operating  expenses:                                         |       |                             |       |   |   |
| Cost of  goods sold(a)                                       |       | 16,488                           |       | 12,109 |   |
| Sales,  general and administrative(a)                        |       | 37,861                           |       | 31,860 |   |
| Research and  development(a)                                 |       | 6,774                            |       | 10,326 |   |
| Amortization  of intangible assets                           |       | 4,243                            |       | 2,655 |   |
| Loss on sale  of assets, net                                 |       | 170                              |       | 53 |   |
| Acquired  in-process research and development                |       | 1,786                            |       | — |   |
| Total  operating expenses                                    |       | 67,322                           |       | 57,003 |   |
| Loss from  operations                                        |       | (25,085                          | )          | (29,321 | ) |
|                                                         |       |                             |       |   |   |
| Other  (income) expense:                                     |       |                             |       |   |   |
| Gain on sale  of investments, net                            |       | —                           |       | (3,733 | ) |
| Interest  (income) expense, net                              |       | (699                             | )          | 5,708 |   |
| Minority  interest in loss of subsidiary                     |       | —                           |       | (21 | ) |
| Other  (income) expense, net                                 |       | (54                              | )          | 1,092 |   |
| Loss before  income taxes                                    |       | (24,332                          | )          | (32,367 | ) |
| Income tax  expense                                          |       | 169                              |       | 2 |   |
| Net loss                                                     |       | (24,501                          | )          | (32,369 | ) |
| Accretion of  preferred membership units to redemption value |       | —                           |       | 6,426 |   |
| Net loss  attributable to common holders                     |       | $                                | (24,501    | ) | $ | (38,795 | ) |
| Net loss per  common share/unit (basic and diluted)(b)  |       | $                                | (0.44      | ) | $ | (14.84 | ) |
| Weighted  average shares/unit outstanding(b)                 |       | 55,944,925                       |       | 2,613,823 |   |

 

----

(a)             Includesstock based compensation charges of:

 
| Cost of  goods sold                |   | $     | 214    |   | $      | 112 |   |
|------------------------------------|--------|-------|--------|--------|--------|-----|--------|
| Sales, general  and administrative |   | 1,366 |   | 454    |   |
| Research and  development          |   | 214   |   | 245    |   |
|                               |   | $     | 1,794  |   | $      | 811 |   |

 

(b)            Net lossper common share/unit attributable to common holders and the weighted averagecommon shares outstanding reflect the June 21, 2005 one-for-six reversestock split for all periods presented.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

2

----

 

**ev3 Inc.CONSOLIDATED STATEMENTS OF CASHFLOWS(Dollars in thousands, except per share/unit amounts)**

**(unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **April 2,  2006**          | ** ** | **April 3, 2005** | ** ** |
| **Operating  activities**                                                   |       |                             |       |   |   |
| Net loss                                                                    |       | $                                | (24,501    | ) | $ | (32,369 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities |       |                             |       |   |   |
| Depreciation  and amortization                                              |       | 5,516                            |       | 3,623 |   |
| Provision  for bad debts                                                    |       | 50                               |       | 183 |   |
| Provision  for inventory obsolescence                                       |       | 556                              |       | 843 |   |
| Acquired  in-process research and development                               |       | 1,786                            |       | — |   |
| Loss on  disposal of assets                                                 |       | 170                              |       | 53 |   |
| Gain on  sales of investments                                               |       | —                           |       | (3,733 | ) |
| Stock  compensation expense                                                 |       | 1,794                            |       | 811 |   |
| Minority  interest in loss of subsidiary                                    |       | —                           |       | (21 | ) |
| Change in  operating assets and liabilities:                                |       |                             |       |   |   |
| Accounts  receivable                                                        |       | (2,240                           | )          | (2,420 | ) |
| Inventories                                                                 |       | (1,007                           | )          | (4,581 | ) |
| Prepaids and  other assets                                                  |       | (481                             | )          | 1,580 |   |
| Accounts  payable                                                           |       | (2,300                           | )          | 4,955 |   |
| Accrued  expenses and other liabilities                                     |       | (2,861                           | )          | (2,091 | ) |
| Accrued  interest on notes payable                                          |       | —                           |       | 5,820 |   |
| Net cash  used in operating activities                                      |       | (23,518                          | )          | (27,347 | ) |
| **Investing  activities**                                                   |       |                             |       |   |   |
| Purchase of  short-term investments                                         |       | (6,650                           | )          | — |   |
| Purchase of  property and equipment                                         |       | (2,740                           | )          | (3,137 | ) |
| Purchase of  patents and licenses                                           |       | (173                             | )          | (231 | ) |
| Proceeds  from sale of assets                                               |       | 21                               |       | — |   |
| Proceeds  from sale of minority investment                                  |       | —                           |       | 3,733 |   |
| Acquisitions,  net of cash acquired                                         |       | (170                             | )          | 2,124 |   |
| Change in  restricted cash                                                  |       | (238                             | )          | (14 | ) |
| Other                                                                       |       | —                           |       | 888 |   |
| Net cash  (used in) provided by investing activities                        |       | (9,950                           | )          | 3,363 |   |
| **Financing  activities**                                                   |       |                             |       |   |   |
| Issuance of  demand notes payable                                           |       | —                           |       | 49,100 |   |
| Payments on capital  lease obligations                                      |       | (30                              | )          | — |   |
| Proceeds  from exercise of stock options                                    |       | 1,185                            |       | 655 |   |
| Other                                                                       |       | —                           |       | (247 | ) |
| Net cash  provided by financing activities                                  |       | 1,155                            |       | 49,508 |   |
| Effect of  exchange rate changes on cash                                    |       | 86                               |       | 212 |   |
| Net  (decrease) increase in cash and cash equivalents                       |       | (32,227                          | )          | 25,736 |   |
| Cash and  cash equivalents, beginning of period                             |       | 69,592                           |       | 20,131 |   |
| Cash and  cash equivalents, end of period                                   |       | $                                | 37,365     |   | $ | 45,867 |   |
|                                                                        |       |                             |       |   |   |
| Supplemental  non-cash disclosure:                                          |       |                             |       |   |   |
| Net assets  acquired in conjunction with MTI step acquisition (see Note 5)  |       | $                                | 95,438     |   | $ | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

----

 

**ev3Inc.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per unit/share amounts)**

 

**1.**                 Descriptionof Business

** **

ev3 Inc. (“we,” “our” or “us”) is a global medicaldevice company focused on catheter-based, or endovascular, technologies for theminimally invasive treatment of vascular diseases and disorders. We develop,manufacture and market a wide range of products that include stents, embolicprotection devices, thrombectomy devices, balloon angioplasty catheters,foreign object retrieval devices, guidewires, embolic coils, liquid embolics,microcatheters and occlusion balloon systems. We market our products in theUnited States, Europe, Canada and Japan through a direct sales force, andthrough distributors in certain other international markets.

 

**2.**                 Basis ofPresentation

** **

The accompanying unaudited consolidated financialstatements have been prepared by us in accordance with accounting principlesgenerally accepted in the United States of America (U.S.) for interim financialinformation and pursuant to the instructions to Form 10-Q andArticle 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of normal, recurringadjustments) considered necessary for a fair presentation have been included. Theresults of operations for any interim period may not be indicative of resultsfor the full year. These unaudited consolidated financial statements and notesshould be read in conjunction with the audited consolidated financialstatements and the notes thereto included in our annual report on Form 10-K forthe year ended December 31, 2005.

 

We were formed as ev3 LLC in September 2003 tohold the ownership interests of two companies: ev3 Endovascular, Inc. (“Endovascular”)and Micro Investment, LLC (“MII”), a holding company that owned a controllinginterest in Micro Therapeutics, Inc. (“MTI”) at the time of formation. At thetime of ev3 LLC’s formation, MTI was a publicly traded operating company. ev3LLC’s majority equity holder, Warburg, Pincus Equity Partners, L.P. and certainof its affiliates (“Warburg Pincus”), owned a majority, controlling interest inboth Endovascular and MII at the time of formation. In accordance withFinancial Accounting Standards Board Statement (“SFAS”) 141, *Business Combinations* and FinancialTechnical Bulletin (“FTB”) 85-5, *Issuesrelated to Accounting for Business Combinations*, ev3 LLC accountedfor the transaction as a combination of entities under common control. Thecombination was accounted for on a historical cost basis as the ownershipinterests in the combining companies were substantially the same before andafter the transaction. On January 28, 2005, we were formed as a subsidiaryof ev3 LLC. Immediately prior to the consummation of our initial publicoffering on June 21, 2005, ev3 LLC was merged with and into us, and webecame the holding company for all of ev3 LLC’s subsidiaries. Theseconsolidated financial statements present the combined operations of ev3 LLCfor the period from September 1, 2003 until the merger on June 21, 2005,and our consolidated operations thereafter.

 

Prior to the consummation of our initial publicoffering on June 21, 2005, we amended and restated our 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 our initial public offering,we completed a one-for-six reverse stock split of our outstanding common stock.All share and per share amounts for all periods presented in these consolidatedfinancial statements reflect this split.

 

On May 26, 2005, Warburg Pincus and The VerticalGroup, L.P. and certain of its affiliates (“Vertical”) contributed shares ofMTI’s common stock to ev3 LLC in exchange for common membership units. Inaccordance with SFAS 141, the contribution of the shares by Warburg Pincushas been accounted for as a transfer of assets between entities under commoncontrol, resulting in the retention of historical based accounting. Theseconsolidated financial statements give effect to the contribution of MTI sharesowned by Warburg Pincus as though such contribution occurred in 2003 and 2004when Warburg Pincus acquired its interest in MTI. The contribution of the MTIshares by Vertical has been accounted for under the purchase method ofaccounting on the contribution date.

 

4

----

 

At April 3, 2005 and December 31, 2005, there wasa minority interest of 34% and 30%, respectively, in MTI. As described in Note5, on January 6, 2006, we acquired the outstanding shares of MTI that wedid not already own through a merger of MII with and into MTI. MTI was thesurviving entity and, as a result of this merger, became our wholly ownedsubsidiary. In addition, as a result of this merger, MTI is now known as ev3Neurovascular. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

On January 1, 2006 weadopted the provisions of Statement of Financial Accounting Standards No. 151,"Inventory Costs an amendment of ARB No. 43, Chapter 4". ThisStatement amends the guidance in ARB No. 43, Chapter 4, "InventoryPricing," to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). During thequarter we began production of a new product line. We incurred abnormal scraprelated to this new product line of approximately $300 thousand which wasrequired to be charged to expense in the current period and is included in ourreported cost of goods sold.

 

We operate on a manufacturing calendar with our fiscalyear ending on December 31. Each quarter is 13 weeks, consisting of onefive-week and two four-week periods. Accordingly, the first fiscal quarters of2006 and 2005 ended on April 2 and April 3, respectively.

 

**3.**                 Stock-BasedCompensation

** **

We have several stock-based compensation plans underwhich stock options and other equity incentive awards have been granted. Underthe ev3 Inc. Amended and Restated 2005 Incentive Stock Plan, eligibleemployees, outside directors and consultants may be awarded options, stockgrants, stock units or stock appreciation rights. The terms and conditions ofan option, stock grant, stock unit or stock appreciation right (including anyvesting or forfeiture conditions) are set forth in the certificate evidencingthe grant. Subject to adjustment as provided in the plan, 2,000,000 shares ofour common stock are available for issuance under the plan. Our board ofdirectors, upon recommendation of the compensation committee and subject toapproval by our stockholders, approved an amendment to the plan to increase thenumber of shares of our common stock available for issuance under the plan by4,000,000 shares to a total of 6,000,000 shares. During the three months endedApril 2, 2006, a restricted stock grant of 5,000 shares and options to purchasean aggregate of 761,664 shares of our common stock were granted under the plan,including options to purchase an aggregate of 736,000 shares that were grantedsubject to approval by our stockholders of an amendment to the plan to increasethe number of shares available for issuance under the plan. Our accounting forthese awards was based upon the expectation that shareholder approval was assured.

 

Options, other than those granted to outsideconsultants, generally vest over a four-year period and expire within a periodof not more than ten years from the date of grant. Vested options expire ninetydays after termination of employment. Options granted to outside consultantsgenerally vest over the term of their consulting contract. The exercise priceper share for each option was set by the Board at the time of grant, providedthat the exercise price per share is not less than the fair market value pershare on the grant date.

 

Upon consummation of our initial public offering, theev3 LLC 2003 Incentive Plan was terminated with respect to options availablefor grant that were not granted prior to the offering. Prior to our January 6,2006 acquisition of the remaining outstanding shares of MTI that we did notalready own, MTI had a 1993 Incentive Stock Option, Nonqualified Stock Optionand Restricted Stock Purchase Plan and a 1996 Stock Incentive Plan. As a resultof the merger of MII with and into MTI, the outstanding options issued underthese MTI plans were converted into options to purchase an aggregate of2,449,905 shares of our common stock. MTI also had an Employee Stock PurchasePlan, which was terminated effective December 31, 2005 (See Note 5).

 

In addition to our 2005 Incentive Stock Plan, ourboard of directors, upon recommendation of the compensation committee andsubject to approval by our stockholders, approved the ev3 Inc. Employee StockPurchase Plan (“ESPP”). The maximum number of shares of our common stockavailable for issuance under the ESPP is 750,000 shares, subject to adjustmentas provided in the ESPP. The ESPP provides for six-month offering periodsbeginning on January 1 and July 1 of each year; provided, however, that thecompensation committee of the board of directors may decide in its solediscretion when to commence the first offering period so long as such offeringperiod is commenced within 12 months of the date the ESPP was first approved bythe board of directors.  The purchase price of the shares will be 85% ofthe lower of the fair market value of our common stock at the beginning or endof the offering period. This discount may not exceed the maximum discount ratepermitted for plans of this type under Section 423 of the Internal RevenueCode.   We expect the ESPP to becompensatory for financial reporting purposes.

 

On January 1, 2006, we adopted the provisions ofStatement of Financial Accounting Standards No. 123(R), “Share-Based Payment”(SFAS 123(R)) using the modified prospective method. SFAS 123(R) requirescompanies to 

 

5

----

 

measure and recognize the cost of employee servicesreceived in exchange for awards of equity instruments based on the grant datefair value of those awards. Compensation cost under SFAS 123(R) is recognizedratably using the straight-line attribution method over the expected vesting period.In addition, pursuant to SFAS 123(R), we are required to estimate the amount ofexpected forfeitures when calculating the compensation costs, instead ofaccounting for forfeitures as incurred, which was our previous method. As ofJanuary 1, 2006, the cumulative effect of adopting the estimated forfeituremethod was not material. Prior periods are not restated under this transitionmethod. Options previously awarded and classified as equity instruments continueto maintain their equity classification under FAS 123(R).

 

Prior to January 1, 2006 and since the beginning of2003, we accounted for share-based awards under the recognition provisions ofSFAS 123, Accounting for Stock-Based Compensation using the modifiedprospective method of adoption described in SFAS 148. We used the minimumvalue pricing model for measuring the fair value of our options granted throughthe first quarter 2005, which does not take into consideration volatility. Inaccordance with SFAS 123, subsequent to April 5, 2005, the date ofour initial filing of the registration statement relating to our initial publicoffering with the Securities and Exchange Commission, we used the Black-Scholesmethod, including an estimated volatility assumption, to estimate the fairvalue of all option grants. Expense previously recognized related to optionsthat were cancelled or forfeited prior to vesting was reversed in the period ofthe cancellation or forfeiture.

 

The fair value of options are estimated at the date ofgrant using the Black-Scholes option pricing model with the assumptions listedbelow. Risk free interest rate is based on U.S. Treasury rates appropriate forthe expected term. Expected volatility and forfeiture rates are based onhistorical factors related to our common stock since our June 2005 initialpublic offering. Dividend yield is zero as we do not expect to declare anydividends in the foreseeable future. The expected term is based on weightedaverage time between grant and employee exercise. The fair value of stockgranted to employees is based upon the closing market value of our common stockon the date of grant.

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005**      | ** ** | **April 2, 2005** | ** ** |
| ** **               | ** ** | **ev3 Inc.**                | ** ** | **ev3 Inc.**                | ** ** | **MTI** | ** ** |
| Risk free interest  rate |       | 4.3                              | %          | 3.7                              | %          | 4.0 | % |
| Forfeiture  rate         |       | 4.5                              | %          | —                           |       | — |   |
| Expected  dividend yield |       | 0.0                              | %          | 0.0                              | %          | 0.0 | % |
| Expected  volatility     |       | 50.0                             | %          | —                           |       | 58.4 | % |
| Expected  option term    |       | 4 years                          |       | 5 years                          |       | 4 years |   |

 

In November 2005, the FASB issued FASB Staff Position No. 123(R)-3 (FSP123(R)-3), “Transition Election Related to Accounting for the Tax Effects ofShare-Based Payment Awards”. FSP 123(R)-3 provides an elective alternativetransition method for calculating the pool of excess tax benefits available toabsorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R). Companiesmay take up to one year from the effective date of FSP 123(R)-3 to evaluate theavailable transition alternatives and make a one-time election as to whichmethod to adopt. We are currently in the process of evaluating the alternativemethods.

 

In accordance with the provisions of SFAS 123(R)and Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instrumentsthat are Issued to Other than Employees for Acquiring, or in Conjunction withSelling, Goods or Services”, we account for non-employee equity based awards,in which goods or services are the consideration received for the equityinstruments issued, at their fair value.

 

6

----

 

As of April 2, 2006, the total compensation cost fornonvested awards not yet recognized in our statements of income was $16,096,net of estimated forfeitures. This amount is expected to be recognized over aweighted average period of 2.8 years.

 

*Asummary of activity for all plans during the three months ended April 2, 2006 isas follows:*

 
| ** **                                                      | ** ** | **Units/Shares  Outstanding** | ** ** | **Weighted-  Average  Exercise Price Per  Unit/Share** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------------------|------------|
| Balance at  January 1, 2006                                |       | 3,823,309                     |       | $                                                                | 11.41      |   |
| MTI options  converted to ev3 options as a result of the merger |       | 2,449,905                     |       | $                                                                | 9.75       |   |
| Granted:                                                        |       |                          |       |                                                             |       |
| Restricted  stock                                               |       | 5,000                         |       | —                                                           |       |
| Exercise  price equal to market price at date of grant(1)       |       | 761,664                       |       | $                                                                | 16.18      |   |
| Exercised                                                       |       | (135,818                      | )          | $                                                                | 8.71       |   |
| Cancelled                                                       |       | (313,774                      | )          | $                                                                | 11.95      |   |
|                                                            |       |                          |       |                                                             |       |   |
| Balance at  April 2, 2006                                       |       | 6,590,286                     |       | $                                                                | 11.45      |   |
|                                                            |       |                          |       |                                                             |       |
| Options  exercisable at April 2, 2006                           |       | 2,739,238                     |       | $                                                                | 9.45       |   |

 

----

(1)             Theweighted average fair value for options granted at market was $7.05.

 

As of April 2, 2006, we have 190,000 shares ofrestricted stock outstanding. The value of these shares of restricted stock wasmeasured at the closing market price of our stock on the grant date. Theunamortized compensation expense for these awards was $2,608 as of April 2,2006 which will be recognized over the remaining vesting period ofapproximately 3.8 years.

 

The intrinsic value of a stock award is the amount bywhich the fair value of the underlying stock exceeds the exercise price of theaward. The total intrinsic value of options exercised was $1,050 during thequarter ended April 2, 2006 and $432 during the quarter ended April 3, 2005. Thetotal intrinsic value of options vested and expected to vest as of April 2,2006, was $39,972.

 

*Foroptions outstanding and exercisable at April 2, 2006, the exercise priceranges and average remaining lives were as follows:*

 
| ** **                                       | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                     | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **Exercise Price Per Unit/Share** | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Per Unit/Share  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise Price  Per Unit/Share** | ** ** |
| $0.36-$8.81                                      |       | 1,410,597                    |       | $                                                                | 6.86       |   | 7.6 years |   | 831,440 |   | $ | 6.29 |   |
| $8.82                                            |       | 1,664,708                    |       | $                                                                | 8.82       |   | 7.7 years |   | 1,035,945 |   | $ | 8.82 |   |
| $8.94-$14.00                                     |       | 2,218,389                    |       | $                                                                | 13.31      |   | 8.3 years |   | 523,900 |   | $ | 11.83 |   |
| $14.30-$17.32                                    |       | 940,711                      |       | $                                                                | 16.11      |   | 8.7 years |   | 182,072 |   | $ | 15.84 |   |
| $18.11-$229.02                                   |       | 165,881                      |       | $                                                                | 25.10      |   | 2.7 years |   | 165,881 |   | $ | 25.10 |   |
|                                             |       | 6,400,286                    |       | $                                                                | 11.45      |   | 7.9 years |   | 2,739,238 |   | $ | 10.10 |   |

 

During 2000 and 2001, Warburg Pincus and certain ofour employees and directors entered into loan agreements in order for certainemployees and directors to buy ownership interests in us. These outstandingloans are considered to be a part of a stock compensation arrangement.Modifications are measured for compensation expense. Additional compensationexpense, if any, is recognized over the remaining life of the loan. The totaloutstanding principal 

 

7

----

 

balance and accrued interest on the notes held by WarburgPincus and issued by certain of our employees and directors, at April 2, 2006and December 31, 2005 was $5,295 and $5,244 respectively.

 

**4.**                 Liquidityand Capital Resources

 

Since inception, we have generated significantoperating losses. Historically, our liquidity needs have been met through aseries of preferred investments and by demand notes payable issued by WarburgPincus and Vertical. On June 21, 2005, we completed an initial publicoffering in which we sold 11,765,000 shares of common stock at $14.00 per sharefor net cash proceeds of $152,713, net of underwriting discounts and otheroffering costs. Immediately prior to the consummation of the offering, ev3 LLCmerged with and into ev3 Inc. and 24,040,718 Class A preferred membershipunits, 41,077,336 Class B preferred membership units, and 18,799,962common membership units of ev3 LLC were converted into 83,918,016 shares ofcommon stock of ev3 Inc. (on a pre-split basis). Immediately thereafter, wecompleted a one-for-six reverse stock split whereby the 83,918,016 shares ofcommon stock were converted into 13,986,350 shares of common stock. Prior tothe consummation of the offering, and subsequent to the reverse stock split, wealso issued 21,964,815 and 1,194,489 shares of common stock to Warburg Pincusand Vertical, respectively, in exchange for their contribution of $324,230aggregate principal amount of demand notes and accrued and unpaid interestthereon. The remaining balance of the accrued and unpaid interest on the demandnotes, totaling $36,475, was repaid using proceeds from the offering. OnJuly 20, 2005, we sold an additional 205,800 shares of common stockpursuant to the over-allotment option granted to the underwriters in connectionwith the initial public offering. Our net proceeds from this sale totaled$2,233, after deducting underwriting discounts and other offering expenses. Thetotal net cash proceeds from our initial public offering were $154,946.

 

Our future liquidity and capital requirements will beinfluenced by numerous factors, including clinical research and productdevelopment programs, working capital to support our sales growth, receipt ofand time required to obtain regulatory clearances and approvals, sales andmarketing programs and the acceptance of our products in the marketplace. Webelieve that current resources are sufficient to cover our liquidityrequirements through at least the next twelve months. However, there is noassurance that additional funding will not be needed. Further, if additionalfunding were needed, there is no assurance that such funding will be availableto us or our subsidiaries on acceptable terms, or at all. If we requireadditional working capital but are not able to raise additional funds, we maybe required to significantly curtail or cease ongoing operations.

 

*The following summarizes the changes in stockholders’ equitysince December 31, 2005:*

 
| ** **                                            | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**      | ** ** | **Total  Members and  Stockholders’** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|---------------------------------------|------------|----------------------|------------|-------------------------------------------------|------------|
| ** **                                            | ** ** | **Shares**            | ** ** | **Amount**                   | ** ** | **Capital**                           | ** ** | **Income Loss** | ** ** | **Deficit**                                     | ** ** | **Equity** | ** ** |
| **Balance December 31, 2005**          |       | **49,350,647**        | ** ** | **$**                        | **493**    | ** **                            | **$**      | **807,032**          | ** ** | **$**                                           | **137**    | ** ** | **$** | **(562,207)** | ** ** | **$** | **245,455** | ** ** |
| Compensation  expense on options and restricted stock |       | —                |       | —                       |       | 1,794                                 |       | —               |       | —                                          |       | 1,794 |   |
| Exercise of  options                                  |       | 176,876               |       | 2                            |       | 1,183                                 |       | —               |       | —                                          |       | 1,185 |   |
| MTI  acquisition                                      |       | 6,997,354             |       | 70                           |       | 95,368                                |       | —               |       | —                                          |       | 95,438 |   |
| Comprehensive  loss:                                  |       |                  |       |                         |       |                                  |       |                 |       |                                            |       |   |   |
| Net loss                                              |       |                  |       |                         |       |                                  |       | —               |       | (24,501                                         | )          | (24,501 | ) |
| Cumulative  translation adjustment                    |       |                  |       |                         |       |                                  |       | 92                   |       | —                                          |       | 92 |   |
| Comprehensive  loss                                   |       | —                |       | —                       |       | —                                |       | 92                   |       | (24,501                                         | )          | (24,409 | ) |
| **Balance  April 2, 2006**                            | ** ** | **56,524,877**        | ** ** | **$**                        | **565**    | ** **                            | **$**      | **905,377**          | ** ** | **$**                                           | **229**    | ** ** | **$** | **(586,708** | **)** | **$** | **319,463** | ** ** |

 

**5.**                 MTI Step Acquisition

 

On January 6, 2006, we completed the acquisitionof the outstanding shares of MTI that we did not already own through the mergerof MII with and into MTI, with MTI continuing as the surviving corporation anda wholly owned subsidiary of ev3 Inc. As a result of the merger, each share ofcommon stock of MTI outstanding at the 

 

8

----

 

effective time of the merger was automaticallyconverted into the right to receive 0.476289 of a share of our common stock(the “Exchange Ratio”) and cash in lieu of any fractional share of our commonstock. We issued approximately 7,000,000 new shares of our common stock to MTI’spublic stockholders in the merger. Fair value of the shares issued was measuredas the average closing price per share of our stock on the NASDAQ NationalMarket System for the five day trading period centered around the date that theterms of the acquisition were agreed to and announced. In addition, eachoutstanding option to purchase shares of MTI common stock was converted into anoption to purchase shares of our common stock on the same terms and conditions(including vesting) as were applicable under such MTI option. The exerciseprice and number of shares for which each such MTI option is (or will become)exercisable was adjusted based on the Exchange Ratio. The fair value of the replacementstock options was estimated at the closing date. The unvested portion of thereplacement stock options will be recognized as compensation expense over theremaining service period.

 

The investment was accounted for using the stepacquisition 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. The effects of the acquisition donot materially change our results of operations. Therefore,  pro-forma disclosures are not included.

 

*Thefollowing table presents the purchase price for the acquisition on January 6,2006:*

 
| ** **                                         | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| Fair value  of shares/options issued               |       | $        | 95,438     |   |
| Interest  acquired in historical book value of MTI |       | (12,850  | )          |
| Excess  purchase price over historical book values |       | $        | 82,588     |   |

 

*Thefollowing summarizes the allocation of the excess purchase price overhistorical book values arising from the acquisition:*

 
| ** **                                    | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|
| Inventory                                     |       | $        | 668        |   |
| Developed  technology                         |       | 15,548   |       |
| Customer  relationships                       |       | 9,964    |       |
| Trademarks  and tradenames                    |       | 2,029    |       |
| Acquired  in-process research and development |       | 1,787    |       |
| Goodwill                                      |       | 54,704   |       |
| Accrued  liabilities                          |       | (2,112   | )          |
| Total                                         |       | $        | 82,588     |   |

 

The weighted average life of the acquired intangibles,excluding goodwill was seven years. The acquired in-process research anddevelopment charge was estimated considering an appraisal and represents theestimated fair value of the in-process projects at the date of acquisition ofthe MTI shares. As of the acquisition date, the in-process projects had not yetreached technological feasibility and had no alternative use. The primary basisfor determining technological feasibility of these projects is obtainingregulatory approval to market the products. Accordingly, the value attributableto these projects, which had yet to obtain regulatory approval, was expensed inconjunction with the acquisition. If the projects are not successful, orcompleted in a timely manner, we may not realize the financial benefitsexpected from these projects.

 

The income approach was used to determine the fairvalue of the acquired in-process research and development. This approach establishesfair value by estimating the after-tax cash flows attributable to anyin-process project over its useful life and then discounting these after-taxcash flows back to the present value. The costs to complete each project werebased on estimated direct project expenses as well as the remaining labor hoursand related overhead costs. In arriving at the value of acquired in-processresearch and development projects, we considered the project’s stage ofcompletion, the complexity of the work to be completed, the costs alreadyincurred, the remaining costs to complete the project, the contribution of coretechnologies, the expected introduction date and the estimated useful life ofthe technology. The discount rate used to arrive at the present value of acquiredin-process research and 

 

9

----

 

development as of the acquisition date was based onthe time value of money and medical technology investment risk factors. Thediscount rate used was approximately 14%. We believe that the estimatedacquired in-process research and development amount determined represents thefair value at the date of acquisition and does not exceed the amount a thirdparty would pay for the project.

 

**6.**                 Short-Term Investments

** **

Short-term investments consist of debt securities ofcorporations, which have investment grade credit ratings. The debt securitiesare classified and accounted for as available-for-sale and are reported at fairvalue with unrealized gains and losses excluded from earnings and reported inother comprehensive income. Management determines the appropriateclassification of its investments in securities at the time of purchase andreevaluates such determination at each balance sheet date. The short-terminvestments consist of floating rate taxable municipal bonds with maturitiesfrom 2019 to 2033. We have the option to put the bonds to the remarketing agentwho is obligated to repurchase the bonds at par. As of April 2, 2006, our costapproximated fair value related to these investments.

 

**7.**                 Inventories

** **

*Inventory consists of the following:*

 
| ** **         | ** ** | **April 2,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw  materials     |       | $                       | 5,978      |                        | $          | 5,823 |   |
| Work  in-progress  |       | 1,674                   |       | 1,944                       |       |
| Finished  goods    |       | 30,039                  |       | 29,195                      |       |
|               |       | 37,691                  |       | 36,962                      |       |
| Inventory  reserve |       | (3,612                  | )          | (3,975                      | )          |
| Inventory,  net    |       | $                       | 34,079     |                        | $          | 32,987 |   |

 

10

----

 

**8.**                 Goodwill andOther Intangible Assets

 

*The changes in the carrying amountof goodwill by operating segment for the three months ended April 2, 2006 wereas follows:*

 
| ** **                                           | ** ** | **Cardio  Peripheral** | ** ** | **Neurovascular** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------|------------|
| Balance as  of January 1, 2006                       |       | $                      | 71,307     |              | $          | 23,149    |       | $ | 94,456 |   |
| Goodwill  related to acquisition of MTI common stock |       | —                 |       | 54,704            |       | 54,704    |       |
| Balance as  of April 2, 2006                         |       | $                      | 71,307     |              | $          | 77,853    |       | $ | 149,160 |   |

 

*Other intangible assets consist ofthe following:*

 
| ** **                 | ** ** | **Weighted**                                   | ** ** | **April 2, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **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                                            |       | $                           | 8,531      |                            | $          | (3,413 | ) | $ | 5,118 |   | $ | 8,390 |   | $ | (3,300 | ) | $ | 5,090 |   |
| Developed  technology      |       | 6.0                                            |       | 63,616                      |       | (32,554                         | )          | 31,062 |   | 48,068 |   | (29,951 | ) | 18,117 |   |
| Trademarks  and tradenames |       | 7.0                                            |       | 5,122                       |       | (1,949                          | )          | 3,173 |   | 3,093 |   | (1,721 | ) | 1,372 |   |
| Customer  relationships    |       | 5.0                                            |       | 16,094                      |       | (5,756                          | )          | 10,338 |   | 6,131 |   | (4,480 | ) | 1,651 |   |
| Other  intangible assets   |       |                                           |       | $                           | 93,363     |                            | $          | (43,672 | ) | $ | 49,691 |   | $ | 65,682 |   | $ | (39,452 | ) | $ | 26,230 |   |

 

Intangible assets are amortized using methods whichapproximate the benefit provided by the utilization of the assets. Patents andlicenses, developed technology and trademarks and tradenames are amortized on astraight line basis. Customer relationships are amortized using acceleratedmethods. We continually evaluate the amortization period and carrying basis ofintangible assets to determine whether events and circumstances warrant arevised estimated useful life or reduction in value.

 

Total amortization of other intangible assets was $4,255and $2,655 for the three months ended April 2, 2006 and April 3, 2005,respectively. The estimated amortization expense (inclusive of amortizationexpense already recorded for the three months ended April 2, 2006) for thefive years ending December 31 is as follows:

 
| 2006 |   | $      | 16,538 |   |
|------|--------|--------|--------|--------|
| 2007 |   | 10,901 |   |
| 2008 |   | 7,327  |   |
| 2009 |   | 4,606  |   |
| 2010 |   | 3,471  |   |

 

**9.**                 Investments

** **

We had a licensing agreement and an approximate 14%interest in Genyx Medical, Inc. (“Genyx”). The carrying value of ourinvestment in Genyx was fully written off and reduced to $0 as ofDecember 31, 2004, and we had no obligation to fund Genyx’s operations. InJanuary 2005, we sold our interest in Genyx and recorded a gain of $3,733.

 

**10.**          AccruedLiabilities

** **

*Accrued liabilities consist of thefollowing:*

 
| ** **                     | ** ** | **April 2, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Accrued  professional services |       | $                           | 5,610      |                            | $          | 1,043 |   |
| Accrued  clinical studies      |       | 238                         |       | 3,633                           |       |
| Office  closure                |       | 380                         |       | 391                             |       |
| Accrued  other                 |       | 5,960                       |       | 6,276                           |       |
| Total  accrued liabilities     |       | $                           | 12,188     |                            | $          | 11,343 |   |

 

11

----

 

**11.**          Interest (Income)Expense

** **

*Interest (income) expense consistsof the following:   *

 
| ** **                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** |
| Interest  expense                     |       | $                                | 34         |   | $ | 5,845 |   |
| Interest  (income)                    |       | (733                             | )          | (137 | ) |
| Total  interest (income) expense, net |       | $                                | (699       | ) | $ | 5,708 |   |

 

**12.**          Commitmentsand Contingencies

 

*Letters of Credit*

 

As of April 2, 2006, we had $3,344 of outstandingletters of credit. These outstanding commitments are fully collateralized byrestricted cash.

 

*Contingencies*

 

We are from time to time subject to, and are presentlyinvolved in, litigation or other legal proceedings.

 

In September 2000, Dendron, which was acquired byMicro Therapeutics, Inc. in 2002, was named as the defendant in three patentinfringement lawsuits brought by the Regents of the University of California,as the plaintiff, in the District Court (Landgericht) in Dusseldorf, Germany. Thecomplaints requested a judgment that Dendron’s EDC I coil device infringedthree European patents held by the plaintiff and asked for relief in the formof an injunction that would prevent Dendron from producing and selling thedevices, as well as an award of damages caused by Dendron’s allegedinfringement, and other costs, disbursements and attorneys’ fees. In August2001, the court issued a written decision that EDC I coil devices did infringethe plaintiff’s patents, enjoined Dendron from producing and selling thedevices, and requested that Dendron disclose the individual products’ costs asthe basis for awarding damages. In September 2001, Dendron appealed thedecision. In addition, Dendron instituted challenges to the validity of each ofthese patents by filing opposition proceedings with the European Patent Office,or EPO, against one of the patents (MTI joined Dendron in this action inconnection with its acquisition of Dendron), and by filing nullity proceedingswith the German Federal Patents Court against the German component of the othertwo patents. The opposition proceedings with the EPO on the one patent arecomplete, and the EPO has rejected the opposition and has upheld the validityof the one patent. Dendron retains the right to file a nullity action inGermany against the patent. All three Appeal proceedings are currently stayedon the basis of the validity challenges brought by Dendron.

 

On July 4, 2001, the University of California filedanother suit against Dendron alleging that the EDC I coil device infringedanother European patent held by the plaintiff. The complaint was filed in theDistrict Court of Dusseldorf, Germany seeking additional monetary andinjunctive relief. In April 2002, the court found that EDC I coil devices didinfringe the plaintiff’s patent. The patent involved is the same patent thatwas involved in the case before the English Patents Court discussed below andthat was ruled by a Dutch court to be invalid, also as discussed below. Theopposition proceedings on the patent are complete, and the EPO has rejected theopposition and has upheld the validity of the patent. Dendron has now filed adomestic German nullity action against that patent. The infringement case isunder appeal. The appeal has been stayed pending the outcome of the nullityaction filed against the patent.

 

An accrual for the matters discussed above wasincluded in the balance sheet of Dendron as of the date of its acquisition by MTI.As of April 2, 2006, approximately $800 was 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 October2002 acquisition of Dendron.

 

Concurrent with MTI’s acquisition of Dendron, MTIinitiated a series of legal actions related to our Sapphire coils in theNetherlands and the United Kingdom, which included a cross-border action thatwas heard by a Dutch court, as 

 

12

----

 

further described below. The primary purpose of theseactions was to assert both invalidity and non-infringement by MTI of certain patentsheld by others. The range of patents at issue are held by the Regents of theUniversity of California, with Boston Scientific Corporation subsidiaries namedas exclusive licensees, collectively referred to as the “patent holders,”related to detachable coils and certain delivery catheters.

 

In October 2003, the Dutch court ruled the threepatents at issue related to detachable coils are valid and that our Sapphirecoils do infringe such patents. The Dutch court also ruled that the patentholders’ patent at issue related to the delivery catheter was invalid. Pursuantto the court’s ruling, we have been enjoined from engaging in infringingactivities related to our Sapphire coils in most countries within the EuropeanUnion, and may be liable for then-unspecified monetary damages for ouractivities since September 27, 2002. In February 2005, we received an initialclaim from the patent holders with respect to monetary damages, amounting to€3.6 million, or approximately $4,300 as of April 2, 2006, with which wedisagree. Court hearings will be held regarding these claims. We have filed anappeal with the Dutch court, and believe that since the date of injunction ineach separate country we are in compliance with the Dutch court’s injunctionand we intend to continue such compliance. Because we believe that we havevalid legal grounds for appeal, we have determined that a loss is not probableat this time as defined by SFAS 5, Accounting for Contingencies. However, therecan be no assurance that the ultimate resolution of this matter will not resultin a material adverse effect on our business, financial condition or results ofoperations.

 

In January 2003, we initiated a legal action in theEnglish Patents Court seeking a declaration that a patent held by the patentholders related to delivery catheters was invalid, and that our products didnot infringe this patent. The patent in question was the U.K. designation ofthe same patent that was found by the Dutch court in October 2003 to beinvalid, as discussed above. The patent holders counterclaimed for allegedinfringement by us. In February 2005, the court approved an interim settlementbetween the parties under which the patent holders were required to surrendersuch patent to the U.K. Comptroller of Patents, and to pay our costs associatedwith the legal action, including interest. As a result, the patent wassurrendered and we received interim payments from the patent holdersaggregating £500 thousand (equivalent to approximately $900 based on the datesof receipt), which we recorded as a reduction of litigation expense uponreceipt of such funds during the first quarter of 2005. The parties intend tocontinue discussions regarding payment by the patent holders of the remainingcosts incurred by us in such litigation and a court hearing on these costs isexpected in June 2006. As a result of the interim settlement, we anticipatethat we will no longer be involved in litigation on this matter in the UnitedKingdom, although no assurance can be given that no other litigation involvingus may arise in the United Kingdom.

 

In the United States, concurrent with the FDA’smarketing clearance of our Sapphire line of embolic coils received in July2003, we, through our subsidiary 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 by usand invalidity of a range of patents held by the patent holders related todetachable coils and certain delivery catheters. In October 2003, the courtdismissed our actions for procedural reasons without prejudice and withoutdecision as to the merits of the parties’ positions. In December 2003, theUniversity of California filed an action against us in the United StatesDistrict Court for the Northern District of California alleging infringement byus with respect to a range of patents held by the University of Californiarelated to detachable coils and certain delivery systems. We filed acounterclaim against the University of California asserting non-infringement byus, invalidity of the patents and inequitable conduct in the procurement ofcertain patents. In addition, we 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. Cross-motions for summary judgment onour inequitable conduct claim have been denied by the court. A trial date hasnot been set. The court has set a case management conference for May 22, 2006to address further scheduling in the case. A request for reexamination of threeof the patents at issue in the litigation was made by a third party that is nota party to the litigation and was granted by the U.S. Patent and TrademarkOffice, or PTO. The PTO has subsequently issued a Notice of Intent to Issue aReexamination Certificate allowing the claims of two of the patents in thelitigation to issue over certain prior art. As to the third patent inreexamination, the PTO has issued an initial rejection of most of the claims inthat patent. The University of California also is attempting to correct itsprior claim in that patent, as well as three other patents involved in thelitigation, by filing applications for reissue in the PTO. We are in theprocess of evaluating to determine what, if any, effect these actions will haveon the litigation. Because these matters are in early stages, we cannotestimate the possible loss or range of loss, if any, associated with theirresolution. However, there can be no assurance that the ultimate resolution ofthese matters will not result in a material adverse effect on our business,financial condition or results of operations.

 

13

----

 

In March 2005, Medtronic, Inc. contacted us to expressits view that our Protégé stents infringe on one or more of its patents. Weinformed Medtronic that we disagreed with Medtronic’s assertions, andsubsequently had several discussions with Medtronic. No lawsuit with respect tothis matter has been filed.

 

On March 30, 2005, we were served with a complaint byBoston Scientific Corporation and one of its affiliates which claims that someof our products, including our SpideRX Embolic Protection Device, infringecertain of Boston Scientific’s patents. This action was brought in the UnitedStates District Court for the District of Minnesota. We have answered thecomplaint and now both parties are seeking to introduce new claims into thecase. Boston Scientific is seeking to add a claim for misappropriation of tradesecrets, and we are seeking to add counterclaims for patent infringement of twoof our own patents. We intend to vigorously defend this action. Because thesematters are in early stages, we 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 our business, financial condition or results ofoperations.

 

The acquisition agreement relating to our acquisitionof Appriva Medical, Inc. contains four milestones to which payments relate. Thefirst milestone was required by its terms to be achieved by January 1, 2005 inorder to trigger a payment equal to $50,000. We have determined that the firstmilestone was not achieved by January 1, 2005 and that the first milestone isnot payable. On May 20, 2005, Michael Lesh, as an individual seller of Apprivastock and purporting to represent certain other sellers of Appriva stock, fileda complaint in the Superior Court of the State of Delaware with individuallyspecified damages aggregating $70,000 and other unspecified damages for severalallegations, including that we, along with other defendants, breached the acquisitionagreement and an implied covenant of good faith and fair dealing by willfullyfailing to take the steps necessary to meet the first milestone under theagreement, and thereby also failing to meet certain other milestones, andfurther that one milestone was actually met. The complaint also alleges fraud,negligent misrepresentation and violation of state securities laws inconnection with the negotiation of the acquisition agreement. We believe theseallegations are without merit and intend to vigorously defend this action. Wefiled a motion to dismiss the complaint. A hearing was held on this motion onJanuary 10, 2006. The court took the motion under advisement, and has notissued a ruling. The parties have not engaged in any discovery.

 

On or about November 21, 2005, a second lawsuit wasfiled in Delaware Superior Court relating to the acquisition of ApprivaMedical, Inc. The named plaintiff is Appriva Shareholder Litigation Company,LLC, which according to the complaint was formed for the purpose of pursuingclaims against us. The complaint alleges that Erik van der Burg and threeunidentified institutional investors have assigned their claims as formershareholders of Appriva to Appriva Shareholder Litigation Company, LLC. Thecomplaint alleges specified damages in the form of the second milestone payment($25,000), which is claimed to be due and payable and further allegesunspecified damages to be proven at trial. The complaint alleges the followingclaims:  misrepresentation, breach ofcontract, breach of the implied covenant of good faith and fair dealing anddeclaratory relief. We believe these allegations and claims are without meritand intend to vigorously defend this action. We have filed a motion to dismissthe complaint, which is scheduled for a hearing in May 2006. The plaintiff hasserved us an initial set of written discovery, and we filed a motion to staydiscovery which motion has been granted, pending the resolution of our motionto dismiss.

 

Because both of these Appriva acquisition relatedmatters are in early stages, we 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 our business, financial condition or results ofoperations.

 

On October 11, 2005, a purported stockholder classaction lawsuit purportedly on behalf of MTI’s minority shareholders was filedin the Delaware Court of Chancery against MTI, MTI’s directors and uschallenging our previously announced exchange offer with MTI. The complaintalleged the then-proposed transaction constituted a breach of defendants’fiduciary duties. The complaint sought an injunction preventing the completionof the transaction with MTI or, if the transaction were to be completed,rescission of the transaction or rescissory damages, unspecified damages, costsand attorneys’ fees and expenses. On January 6, 2006, we completed thetransaction with MTI. We believe this lawsuit is without merit and plan todefend it vigorously. However, there can be no assurance that the ultimateresolution of this matter will not result in a material adverse effect on ourbusiness, financial condition or results of operations.

 

14

----

 

**13.Segment and Geographic Information**

** **

We report and manage our operations in two reportablebusiness segments based on similarities in the products sold, customer base anddistribution system. The cardio peripheral operating segment includescardiovascular products which are used to treat coronary artery disease, atrialfibrillation and other disorders in heart and peripheral vascular productswhich are used to treat vascular disease in legs, kidney (or renal), neck (or carotid),and generally all vascular diseases other than in the brain or the heart. Theneurovascular operating segment includes products that are used to treatvascular disease and disorders in the brain, including aneurysms andarterial-venous malformations. Management measures segment profitability on thebasis of gross profit calculated as net sales less cost of goods sold excludingamortization of intangible assets. Other operating expenses are not allocatedto individual operating segments for internal decision making activities.

 

* The following is segmentinformation:*

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **April 2,**                | ** ** | **April 3,** | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Net  sales**                            |       |                             |       |   |   |
| **Cardio  Peripheral:**                   |       |                             |       |   |   |
| Stents                                    |       | $                                | 13,046     |   | $ | 7,098 |   |
| Thrombectomy and  embolic protection |       | 4,037                            |       | 3,238 |   |
| Procedural  support and other        |       | 8,249                            |       | 6,505 |   |
| Total Cardio  Peripheral                  |       | $                                | 25,332     |   | $ | 16,841 |   |
|                                      |       |                             |       |   |   |   |   |
| **Neurovascular**                         |       |                             |       |   |   |
| Embolic  products                         |       | 7,383                            |       | 3,978 |   |
| Neuro  access and delivery products  |       | 9,522                            |       | 6,863 |   |
| Total  Neurovascular                      |       | $                                | 16,905     |   | $ | 10,841 |   |
| Total net  sales                          |       | $                                | 42,237     |   | $ | 27,682 |   |
| ** **                                |       |                             |       |   |   |
| **Gross  profit**                         |       |                             |       |   |   |
| Cardio  Peripheral                        |       | $                                | 12,927     |   | $ | 8,687 |   |
| Neurovascular                             |       | 12,822                           |       | 6,886 |   |
| Total                                     |       | $                                | 25,749     |   | $ | 15,573 |   |
|                                      |       |                             |       |   |   |
| **Total  assets**                         |       |                             |       |   |   |
| Cardio  Peripheral                        |       | $                                | 213,089    |   | $ | 176,453 |   |
| Neurovascular                             |       | 139,809                          |       | 64,540 |   |
| Total                                     |       | $                                | 352,898    |   | $ | 240,993 |   |
| Gross profit                              |       | $                                | 25,749     |   | $ | 15,573 |   |
| Operating  expense                        |       | 50,834                           |       | 44,894 |   |
| Loss from  operations                     |       | $                                | (25,085    | ) | $ | (29,321 | ) |

 

15

----

 

*The following table presents netsales and long-lived assets by geographic area for the quarters ended April 2,2006 and April 3, 2005:*

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **April 2,**                | ** ** | **April 3,** | ** ** |
| **Geographic Data** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Net  Sales**           |       |                             |       |   |   |
| United  States           |       | $                                | 24,774     |   | $ | 14,121 |   |
| International            |       | 17,463                           |       | 13,561 |   |
| Total net  sales         |       | $                                | 42,237     |   | $ | 27,682 |   |
| **Long-lived  Assets**   |       |                             |       |   |   |
| United  States           |       | $                                | 18,537     |   | $ | 10,344 |   |
| International            |       | 634                              |       | 935 |   |
| Total  long-lived assets |       | $                                | 19,171     |   | $ | 11,279 |   |

 

**14.**          Net Loss PerShare

 

The following outstanding convertible preferred units,convertible demand notes, and options were excluded from the computation ofdiluted net loss per share as they had an antidilutive effect. 

 
| ** **                                                                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                  | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** |
| Convertible  preferred stock class A (assuming conversion using the contractual conversion ratio to common units) |       | —                           |       | 24,040,718 |   |
| Convertible  preferred stock class B (assuming conversion using the contractual conversion ratio to common units) |       | —                           |       | 41,077,336 |   |
| Convertible  demand notes (assuming conversion at stated value into common units)                                      |       | —                           |       | 99,542,978 |   |
| Options                                                                                                                     |       | 6,400,286                        |       | 2,044,439 |   |
|                                                                                                                        |       | 6,400,286                        |       | 166,705,471 |   |

 

16

----

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

 

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessour results of operations and financial condition. Statements that are nothistorical are forward-looking and involve risks and uncertainties discussedunder the heading “Forward-Looking Statements” below. The following discussionof our results of operations and financial condition should be read inconjunction with our consolidated financial statements and related notesthereto included elsewhere in this report.

 

**Overview**

 

Weare a global medical device company focused on catheter-based, or endovascular,technologies for the minimally invasive treatment of vascular diseases anddisorders. Our broad product portfolio is focused on applications in each ofthe three sub-markets of the endovascular device market: peripheral vascular,cardiovascular and neurovascular. We sell over 100 products consisting of over1,000 SKUs in these markets. From 2000 to 2002, our investor group acquiredcertain of the assets in our cardio peripheral division to build the foundationof our current peripheral and cardiovascular product portfolios. During thisperiod, our investor group also purchased certain neurovascular assets toexpand our neurovascular product portfolio and, through a series ofinvestments, obtained a controlling investment in MicroTherapeutics, Inc., or MTI. MTI was previously our majority ownedsubsidiary, with the remaining shares being publicly held. InJanuary 2006, we acquired the remaining shares of MTI’s common stock notowned by us, as a result of which MTI became our wholly owned subsidiary. Wehave dedicated significant capital and management effort to advance ouracquired technologies and broaden our product lines in order to execute ourstrategies.

 

Webelieve the overall market for endovascular devices will grow as the demand forminimally invasive treatment of vascular diseases and disorders continues toincrease. We intend to capitalize on this market opportunity by the continuedintroduction of new products. We expect to originate these new productsprimarily through our internal research and development and clinical efforts,but we may supplement them with acquisitions or other external collaborations.Additionally, our growth has been, and will continue to be, impacted by ourexpansion into new geographic markets and the expansion of our direct salesorganization in existing geographic markets.

 

Wereport and manage our operations in two reportable business segments based onsimilarities in the products sold, customer base and distribution system. Ourcardio peripheral segment contains products that are used in bothcardiovascular and peripheral vascular procedures by cardiologists,radiologists and vascular surgeons. Our neurovascular segment contains productsthat are used primarily by neuro-radiologists and neurosurgeons. Our salesactivities and operations are aligned closely with our business segments. Wegenerally have dedicated cardio peripheral sales teams in the United States andEurope that target customers who often perform procedures in both anatomicareas (cardiovascular and peripheral vascular). We generally have separate,dedicated neurovascular sales teams in the United States and Europe that arespecifically focused on this customer base.

 

Wehave corporate infrastructure and direct sales capabilities in the UnitedStates, Canada, Europe and Japan and have established distributionrelationships in other large international markets. Our corporate headquartersand our manufacturing, research and development, and U.S. sales operations forour peripheral vascular and cardiovascular product lines are located inPlymouth, Minnesota. Our manufacturing, research and development, and U.S.sales operations for our neurovascular product lines are located in Irvine,California. Outside of the United States, our primary offices are in Paris,France and Tokyo, Japan. During the three months ended April 2, 2006,approximately 41.3% of our net sales were generated outside of the UnitedStates, as a result of which we are sensitive to risks related to fluctuationin exchange rates and other risks associated with international operations,which could affect our business results. Unfavorable currency exchange ratechanges reduced our net sales for the three months ended April 2, 2006 by $1.2million.

 

Sinceour inception, we have focused on building our U.S. and international directsales and marketing infrastructure that includes a worldwide sales force ofapproximately 210 representatives as of April 2, 2006 in the United States,Canada, Europe and Japan. Our direct sales representatives accounted for approximately89% of our net sales during the three months ended April 2, 2006, with thebalance generated by independent distributors. In order to drive sales growth,we have invested heavily throughout our history in new product development,clinical trials to

 

17

----

 

obtainregulatory approvals and the expansion of our global distribution system. As aresult, our costs and expenses have significantly exceeded our net sales,resulting in an accumulated deficit of $586.7 million at April 2, 2006.Consequently, we have financed our operations through debt and equityofferings. We expect to continue to generate operating losses for at least thenext twelve months.

 

Ourcash, cash equivalents and short-term investments available to fund our currentoperations were $56.0 million at April 2, 2006. We completed an initial publicoffering of our common stock on June 21, 2005 in which we sold 11,765,000shares of our common stock at $14.00 per share, resulting in net proceeds to usof approximately $152.7 million, after deducting underwriting discounts andcommissions and offering expenses. We used $36.5 million of these net proceedsto repay a portion of the accrued and unpaid interest on certain demand notesheld by Warburg, Pincus Equity Partners, L.P. and certain of its affiliates,which we refer to collectively as Warburg Pincus, and The Vertical Group L.P.and certain of its affiliates, which we refer to collectively as Vertical. Inaddition, on July 20, 2005, we sold 205,800 shares of common stockpursuant to an over-allotment option granted to the underwriters which resultedin net proceeds to us of $2.2 million, after deducting underwriting discountsand commissions and offering expenses. We invested the remaining portion of thenet proceeds in short-term, investment-grade, interest bearing securities. Wehave used these funds for general corporate purposes since our initial publicoffering, and expect to continue to do so. We expect our cash balances todecrease as we continue to use cash to fund our operations. We do not have anydebt for borrowed money. We believe our cash, cash equivalents and short-terminvestments will be sufficient to meet our liquidity requirements through atleast the next twelve months.

 

Wewere formed on January 28, 2005 as a subsidiary of ev3 LLC.  Immediately prior to the consummation of ourinitial public offering on June 21, 2005, ev3 LLC was merged with and into usand we completed a one-for-six reverse stock split of our outstanding commonstock.  For additional informationregarding our formation and the related transactions, see Note 2 to ourconsolidated financial statements including elsewhere in this report.  All share and per share amounts for allperiods presented in this report reflect the reverse stock split of our commonstock.

 

18

----

 

**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** | ** ** | **Percent**       | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                            | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** | **Change** | ** ** |
| **Results of Operations:**                                            | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                      | 42,237     |              | $          | 27,682 |   | 52.6 | % |
| Operating  expenses:                                                  |       |                   |       |              |       |   |   |
| Cost of  goods sold (a)                                               |       | 16,488                 |       | 12,109            |       | 36.2 | % |
| Sales,  general and administrative (a)                                |       | 37,861                 |       | 31,860            |       | 18.8 | % |
| Research and  development (a)                                         |       | 6,774                  |       | 10,326            |       | (34.4 | )% |
| Amortization  of intangible assets                                    |       | 4,243                  |       | 2,655             |       | 59.8 | % |
| Loss on sale  of assets, net                                          |       | 170                    |       | 53                |       | NM |   |
| Acquired  in-process research and development                         |       | 1,786                  |       | —            |       | NM |   |
| Total  operating expenses                                             |       | 67,322                 |       | 57,003            |       | 18.1 | % |
| Loss from operations                                                  |       | (25,085                | )          | (29,321           | )          | (14.4 | )% |
| Other (income) expense:                                               |       |                   |       |              |       |   |   |
| Gain on sale  of investments, net                                     |       | —                 |       | (3,733            | )          | NM |   |
| Interest  (income) expense, net                                       |       | (699                   | )          | 5,708             |       | (112.2 | )% |
| Minority  interest in loss of subsidiary                              |       | —                 |       | (21               | )          | NM |   |
| Other  (income) expense, net                                          |       | (54                    | )          | 1,092             |       | (104.9 | )% |
| Loss before income taxes                                              |       | (24,332                | )          | (32,367           | )          | (24.8 | )% |
| Income tax expense                                                    |       | 169                    |       | 2                 |       | NM |   |
| Net loss                                                              |       | (24,501                | )          | (32,369           | )          | (24.3 | )% |
| Accretion of  preferred membership units to redemption value (b) |       | —                 |       | 6,426             |       | NM |   |
| Net loss  attributable to common share/unit holders                   |       | $                      | (24,501    | )                 | $          | (38,795 | ) | (36.8 | )% |
| Net loss per  common share/unit (basic and diluted)                   |       | $                      | (0.44      | )                 | $          | (14.84 | ) |   |   |
|                                                                  |       |                   |       |              |       |   |   |   |   |
| Weighted  average shares/units outstanding                            |       |                   | 55,944,925 |              |       | 2,613,823 |   |   |   |

 

 

(a)   Includesstock-based compensation charges of:

 
| Cost of  goods sold                |   | $     | 214    |   | $      | 112 |   |
|------------------------------------|--------|-------|--------|--------|--------|-----|--------|
| Sales,  general and administrative |   | 1,366 |   | 454    |   |
| Research and  development          |   | 214   |   | 245    |   |
|                               |   | $     | 1,794  |   | $      | 811 |   |

 

(b)   The accretion of preferred membership units to redemption valuepresented above is based on the rights to which the Class A andClass 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. SeeNote 2 to our consolidated financial statements included elsewhere in thisreport. As a result, no further accretion related to these preferred units willbe recorded.

 

19

----

 

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** | ** ** | **Percent**       | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                           | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** | **Change** | ** ** |
| **NET SALES BY SEGMENT:**            | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Cardio Peripheral**                |       |                   |       |              |       |   |   |   |   |
| Stents                               |       | $                      | 13,046     |              | $          | 7,098 |   | 83.8 | % |
| Thrombectomy  and embolic protection |       | 4,037                  |       | 3,238             |       | 24.7 | % |
| Procedural  support                  |       | 8,249                  |       | 6,505             |       | 26.8 | % |
| Total Cardio  Peripheral             |       | $                      | 25,332     |              | $          | 16,841 |   | 50.4 | % |
| **Neurovascular:**                   |       |                   |       |              |       |   |   |
| Embolic  products                    |       | 7,383                  |       | 3,978             |       | 85.6 | % |
| Neuro access  and delivery products  |       | 9,522                  |       | 6,863             |       | 38.7 | % |
| Total  Neurovascular                 |       | $                      | 16,905     |              | $          | 10,841 |   | 55.9 | % |
|                                 |       |                   |       |              |       |   |   |
| Total  Neurovascular                 |       | $                      | 42,237     |              | $          | 27,682 |   | 52.6 | % |
|                                      |            |                        |            |                   |            |  |  |  |  |  |  |

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Percent**       | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                      | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** | **Change** | ** ** |
| **NET SALES BY GEOGRAPHY:**     | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
| United States                   |       | $                      | 24,774     |              | $          | 14,121 |   | 75.4 | % |
| International                   |       |                   |       |              |       |   |   |
| Before  foreign exchange impact |       | 18,638                 |       | 13,561            |       | 37.4 | % |
| Foreign  exchange impact        |       | (1,175                 | )          | —            |       | — |   |
| Total                           |       | 17,463                 |       | 13,561            |       | 28.8 | % |
| Total                           |       | $                      | 42,237     |              | $          | 27,682 |   | 52.6 | % |

 

***Comparison of the Three Months EndedApril 2, 2006 to the Three Months Ended April 3, 2005***

 

*Net sales*. Net sales increased 52.6% to $42.2 million in the three months endedApril 2, 2006 compared to $27.7 million in the three months endedApril 3, 2005, primarily as a result of continued improvements in salesforce productivity and increased market penetration of products introducedduring the past 18 months. We introduced two new products in the first quarter2006 and we expect to introduce additional new products during the remainder ofthe year.

 

*Net sales of cardio peripheral products*. Net sales of cardio peripheral productsincreased 50.4% to $25.3 million in the three months ended April 2, 2006compared to $16.8 million in the three months ended April 3, 2005. This salesgrowth was primarily the result of sales growth in our stent products and salesof our PTA balloon catheters in the United States. Net sales in our stentproduct line increased 83.8% to $13.1 million in the three months ended April2, 2006 compared to $7.1 million in the three months ended April 3, 2005. Thisincrease is attributable to increased market penetration of the Protégé, Primusand ParaMount Mini families of stents, partially offset by sales declines inolder generation products. Net sales of our thrombectomy and embolic protectiondevices increased 24.7%, or $799 thousand, in the three months ended April 2,2006 compared to the same period in 2005, largely due to increased marketpenetration of the SpideRX internationally and the launch of SpideRX in theUnited States, partially offset by sales declines in older generation products.Net sales of our procedural support and other products increased 26.8% to $8.2million in the three months ended April 2, 2006 compared to $6.5 million in thethree months ended April 3, 2005, largely due to the increased marketpenetration of PTA balloon catheters in the United States. We expect cardioperipheral net sales to increase during the remainder of 2006 as a result ofintroducing several new products during the year and continued marketpenetration from our existing products.

 

*Net sales of neurovascular products*. Net sales of our neurovascular productsincreased 55.9% to $16.9 million in the three months ended April 2, 2006compared to $10.8 million in the three months ended April 3, 2005, primarily asa result of increased penetration of existing products and growth in virtuallyall of our neurovascular access and delivery products. Net sales of our embolicproducts increased 85.6%, or $3.4 million, to $7.4 million in the three

 

20

----

 

monthsended April 2, 2006 compared to the same period in 2005, primarily due toincreased market penetration of our Nexus coil and Onyx Liquid Embolic Systemfor the treatment of brain arterial-venous malformations. Sales of our neuroaccess and delivery products increased $2.7 million to $9.5 million in thethree months ended April 2, 2006 compared to the same period in 2005, largelyas a result of volume increases across multiple product lines, including theEchelon microcatheters, the Marathon microcatheter and the HyperForm andHyperGlide occlusion balloon systems.

 

*Net sales by geography*. Net sales in the United States increased75.4% to $24.8 million in the three months ended April 2, 2006 compared to$14.1 million in the three months ended April 3, 2005. International net salesincreased 28.8% to $17.4 million in the three months ended April 2, 2006compared to $13.6 million in the three months ended April 3, 2005 and represented41.3% and 48.9% of company-wide sales during the three months ended April 2,2006 and April 3, 2005, respectively. Our international net sales in the threemonths ended April 2, 2006 includes an unfavorable currency impact ofapproximately $1.2 million principally resulting from the performance of theEuro against the U.S. dollar during the quarter.

 

*Cost of goods sold*. Cost of goods sold increased 36.2% to $16.5 million in the threemonths ended April 2, 2006 compared to $12.1 million in the three months endedApril 3, 2005 as a result of increased sales as discussed above. As apercentage of net sales, cost of goods sold decreased to 39.0% of net sales inthe three months ended April 2, 2006 compared to 43.7% of net sales in thethree months ended April 3, 2005. This decrease was primarily attributable toour continued growth in sales volume. In our cardio peripheral segment, cost ofgoods sold as a percent of net sales increased to 49.0% in the three monthsended April 2, 2006 compared to 48.4% in the three months ended April 3, 2005primarily attributable to start-up costs related to the introduction of newproducts. In our neurovascular segment, cost of goods sold as a percent ofsales decreased to 24.2% in the three months ended April 2, 2006 compared to36.5% in the three months ended April 3, 2005 due to the recent consolidationof our neurovascular manufacturing operations into our Irvine, Californiafacility, increased production volume and ongoing cost savings programs. Weexpect cost of goods sold as a percentage of net sales to decline during 2006due to higher volume in our manufacturing facilities and efficiencyimprovements from manufacturing initiatives.

 

*Sales, general and administrative expense.*Sales, general and administrative expenses increased 18.8% to $37.9 million inthe three months ended April 2, 2006 compared to $31.9 million in the threemonths ended April 3, 2005.  The increasewas partially due to $4.4 million of charges incurred during the currentquarter related to litigation and business development activities.  This represents a level of expense higherthan our historical run rates.  Alsocontributing to the increase were higher selling expenses related to newproduct introductions and a $983 thousand increase in non-cash stock-basedcompensation costs.  We expect sales,general and administrative expenses, excluding litigation and businessdevelopment related charges, for each of the remaining quarters of 2006 toremain consistent or to decline slightly as compared to first quarter 2006.

 

*Research and development*. Research and development expense decreased34.4% to $6.8 million in the three months ended April 2, 2006 compared to $10.3million in the three months ended April 3, 2005. This reduction was due to a$3.4 million decrease in clinical study expenses related to the completionof certain clinical trials in 2005, which was partially offset by increasedspending on certain internal product development efforts. We expect researchand development expense for each of the remaining quarters of 2006 to remainconsistent as compared to first quarter 2006.

 

*Amortization of intangible assets*. Amortization of intangible assets increased59.8% to $4.2 million in the three months ended April 2, 2006 compared to $2.7million in the three months ended April 3, 2005 primarily due to increases inintangible assets recorded as part of the May 2005 contribution of MTI sharesand due to our acquisition of the remaining minority shares of MTI in January2006.

 

*Acquired in-process research and development*. During the three months ended April 2,2006, we incurred a charge of $1.8 million for acquired in-process research anddevelopment as a result of our acquisition of the outstanding shares of MTIthat we did not already own. We did not incur charges for acquired in-processresearch and development during the three months ended April 3, 2005.

 

*Gain on sale of investments, net*. Gain on sale of investments, net was $3.7million in the three months ended April 3, 2005 related to a milestone paymentreceived from the sale of our investment in Genyx Medical, Inc. to a thirdparty.

 

21

----

 

*Interest (income) expense, net*. Net interest income, was $699 thousand inthe three months ended April 2, 2006 compared to net interest expense of$5.7 million in the three months ended April 3, 2005. A portion ofthe proceeds from our initial public offering in June 2005 were invested inshort-term, investment-grade, interest-bearing securities. We also used a portionof the proceeds to reduce our financing balance to zero resulting in thereduction of interest expense.

 

*Other (income) expense, net*. Other income was $54 thousand in the threemonths ended April 2, 2006 compared to other expense of $1.1 million in thethree months ended April 3, 2005. The other (income) expense in the threemonths ended April 2, 2006 and April 3, 2005 was primarily due to foreignexchange gains and losses.

 

*Income tax expense*. We incurred modest levels of income tax in the three months ended April2, 2006 and April 3, 2005 related to certain European sales offices. Werecorded no provision for U.S. income taxes in the three months endedApril 2, 2006 or April 3, 2005 due to our history of operatinglosses.

 

*Accretion of preferred membership units to redemption value*. Accretion of preferred membership units toredemption value was recorded up to the date of our initial public offering inJune 2005 at which time all preferred units were converted into common shares.

 

**Liquidity and Capital Resources**

** **
| **Balance Sheet Data** | ** ** | **April 2,  2006**      | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Cash and cash equivalents        |       | $                       | 37,365     |                   | $          | 69,592 |   |
| Short-term investments           |       | 18,650                  |       | 12,000                 |       |
| Total current assets             |       | 128,287                 |       | 151,675                |       |
| Total assets                     |       | 352,898                 |       | 296,828                |       |
| Total current liabilities        |       | 32,694                  |       | 37,671                 |       |
| Total liabilities                |       | 33,435                  |       | 38,523                 |       |
| Total stockholders’ equity  |       | 319,463                 |       | 245,455                |       |
|                                  |            |                         |            |                        |            |  |  |

 

*Cash, cash equivalents and short-term investments.*Our cash, cash equivalents and short-terminvestments available to fund current operations totaled approximately $56.0million at April 2, 2006. We expect our cash balances 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-term investmentswill be sufficient to meet our liquidity requirements through at least the next12 months.

 

*Financing history.*We have generated significant operating losses since our inception.These operating losses, including cumulative non-cash charges for acquiredin-process research and development of $128.7 million, have resulted in anaccumulated deficit of $586.7 million as of April 2, 2006. We completed aninitial public offering of our common stock on June 21, 2005 in which wesold 11,765,000 shares of our common stock at $14.00 per share, resulting innet proceeds to us of approximately $152.7 million, after deductingunderwriting discounts and commissions and offering expenses. We used $36.5million of these net proceeds to repay a portion of the accrued and unpaidinterest on certain demand notes held by Warburg Pincus and Vertical. Inaddition, on July 20, 2005, we sold 205,800 shares of common stockpursuant to an over-allotment option granted to the underwriters which resultedin net proceeds to us of $2.2 million, after deducting underwriting discountsand commissions and offering expenses. We invested the remaining portion of thenet proceeds in short-term, investment-grade, interest-bearing securities. Wehave used these funds for general corporate purposes since our initial publicoffering and expect to continue to do so.

 

*Operating activities.*Cash used in operations during the threemonths ended April 2, 2006 was $23.5 million, reflecting primarily our net lossand increased working capital requirements during the period. These uses ofcash were partially offset by non-cash charges for depreciation andamortization, acquired in-process research and development and stock-basedcompensation expense. We expect that operations will continue to use cashduring the remainder of 2006.

 

22

----

 

*Investing activities.*Cash used in investing activities during thethree months ended April 2, 2006 was $10.0 million primarily due to thepurchase of $6.7 million of short-term investments and the purchase of $2.7million of property and equipment. Historically, our capital expenditures haveconsisted of purchased manufacturing equipment, research and testing equipment,computer systems and office furniture and equipment. We expect to continue tomake investments in property and equipment and to incur an additional $9.0million in capital expenditures during the balance of 2006.

 

*Financing activities.*Cash provided by financing activities was$1.2 million during the three months ended April 2, 2006, generated primarilyfrom proceeds of stock option exercises offset by payments on capital leaseobligations.

 

*Contractual cash obligations.*Our contractual cash obligations as ofDecember 31, 2005 are set forth in our annual report onForm 10-K for the year ended December 31, 2005. There have been nomaterial changes in our contractual cash obligations and commercial commitmentssince December 31, 2005.

 

*Other liquidity information.*The acquisition agreements relating to ourpurchase of MitraLife, Appriva Medical, Inc. and Dendron GmbH require usto make additional payments to the sellers of these businesses if certainmilestones related to regulatory steps in the product commercialization processare achieved. The potential milestone payments total $25.0 million, $175.0million and $15.0 million with respect to the MitraLife, Appriva and Dendronacquisitions, respectively, during the period of 2003 to 2009. We do notbelieve it is likely that we will have obligations with respect to theMitraLife milestones in the future. We have determined that the first milestonewith respect to the Appriva agreement was not achieved by the January 1,2005 milestone date and that the first milestone is not payable. OnSeptember 27, 2005, we announced that we had decided to discontinue thedevelopment and commercialization of our PLAATO device, which is the technologywe acquired in the Appriva transaction. Although we recently had obtainedconditional approval from the FDA for an IDE clinical trial for the PLAATOdevice, we determined that, due to the time, cost and risk of enrollment, thetrial design ultimately mandated by the FDA was not commercially feasible forus at such time. We continue to keep all of our options open with regard to thefuture of the PLAATO technology, which may include a sale or licensing of thetechnology to third parties. Under the terms of the stock purchase agreement weentered into in connection with our acquisition of Dendron, we may be requiredto make additional payments which are contingent upon Dendron productsachieving certain revenue targets between 2003 and 2008. In 2003, the $4.0million revenue target for sales of Dendron products during 2003 was met.Accordingly, an additional payment to the former Dendron stockholders of $3.75million was made in 2004. In 2004, the $5.0 million revenue target for sales ofDendron products during 2004 was met. Accordingly, a payment to the formerDendron stockholders of $3.75 million was accrued in 2004 and was paid during thesecond quarter of 2005. We may be required to make a final payment of $7.5million, which is contingent upon Dendron products achieving annual revenues of$25 million in any year during the period between 2003 and 2008. Any such finalpayment would be due in the year following the year of target achievement.

 

Ourfuture liquidity and capital requirements will be influenced by numerousfactors, including extent and duration of future operating losses, the leveland timing of future sales and expenditures, the results and scope of ongoingresearch and product development programs, working capital to support our salesgrowth, receipt of and time required to obtain regulatory clearances andapprovals, sales and marketing programs, continuing acceptance of our productsin the marketplace competing technologies, market and regulatory developments,and the future course of intellectual property litigation. We believe that theresources generated from our initial public offering are sufficient to meet ourliquidity requirements through at least the next 12 months; however, if werequire additional working capital, but are not able to raise additional funds,we may be required to significantly curtail or cease ongoing operations. In theevent that we require additional working capital to fund future operations andany future acquisitions, we may negotiate a financing arrangement with anindependent institutional lender, sell notes to public or private investors orsell additional shares of stock or other equity securities. 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 ourcurrent stockholders. If we require additional working capital, but are not ableto raise additional funds, we may be required to significantly curtail or ceaseongoing operations. From time to time, we may also sell a given technology orintellectual property having a development timeline or development cost that isinconsistent with our investment horizon or which does not adequatelycomplement our existing product portfolio. . See Note 4 and Note 12 to ourconsolidated financial statements included elsewhere in this report.

 

23

----

 

**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 audited consolidated financialstatements included in our annual report on Form 10-K for the year endedDecember 31, 2005. The preparation of our consolidated financial statements inconformity with U.S. GAAP requires us to make estimates and assumptions thataffect the amounts reported in our consolidated financial statements andaccompanying notes. Our estimates and assumptions, including those related tobad debts, inventories, intangible assets, sales returns and discounts, andincome 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 inaccounting estimates are reasonably likely to occur from period to period. Bothof these factors 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 registered public accounting firm.The judgments about those financial estimates are based on informationavailable as of the date of our consolidated financial statements. Those financialestimates include:

 

***Revenue Recognition***

 

Werecognize revenue in accordance with SEC Staff Accounting BulletinNo. 101, Revenue Recognition in Financial Statements, which requires thatfour basic criteria must be met before sales can be recognized: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the price is fixed or determinable and(4) collectibility is reasonably assured. These criteria are met at thetime of shipment when risk of loss and title passes to the customer ordistributor, unless a consignment arrangement exists. Sales from consignmentarrangements are recognized upon written acknowledgement that the product hasbeen used by the customer indicating that a sale is complete. Our terms of salefor regular sales are typically FOB shipping point, net 30 days. Regular salesinclude orders from customers for replacement of customer stock, replenishmentof customer consignment product, orders for a scheduled case/surgery andstocking 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 by geography and is recorded as a reductionof sales for the period in which the related sales occurred. Historically, ourreturn experience has been low with return rates approximating 3.5% of our netsales.

 

***Stock-Based Compensation***

 

Wecurrently use the Black-Scholes option pricing model to determine the fair valueof stock options and other equity incentive awards.  The determination of the fair value ofstock-based compensation awards on the date of grant using an option-pricingmodel is affected by our stock price, as well as assumptions regarding a numberof complex and subjective variables, which include the expected life of theaward, the expected stock price volatility over the expected life of theawards, expected dividend yield, risk-free interest rate and the forfeiturerate.

 

Weestimate the expected term of options based upon our historicalexperience.  We estimated expected stockprice volatility based upon historical volatility of our common stock.  The risk-free interest rate was determinedusing U.S. Treasury rates appropriate for the expected term.  Dividend yield is estimated to be zero as wehave never paid dividends and have no plans of doing so in the future.

 

Weestimate forfeitures at the time of grant and revise those estimates insubsequent periods if actual forfeitures differ from those estimates.  We use historical data to estimateforfeitures and record stock-based compensation expense only for those awardsthat are expected to vest.  Allstockbased compensation is amortized on a straight-line basis over theirrespective requisite service periods, which are generally the vesting periods.

 

Iffactors change and we employ different assumptions for estimating stock-basedcompensation expense in future periods, the future periods may differsignificantly from what we have recorded in the current period and couldmaterially affect our results of operations. It may also result in a lack of comparability with other companies thatuse different models, methods and assumptions.

 

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable, characteristics not present in our option grants.  Existing valuation models, including theBlack-Scholes and lattice binominal models, may not provide reliable measuresof the fair values of our stock-based compensation.  Consequently, there is a risk that ourestimates of the fair values of our stock-based compensation awards on thegrant dates may bear little resemblance to the actual values realized upon theexercise, expiration, early termination or forfeiture of those stock-basedawards in the future.  Certainstock-based payments, such as employee stock options, may expire worthless orotherwise result in zero intrinsic value as compared to the fair valuesoriginally estimated on the grant date and reported in our financialstatements.  Alternatively, value may berealized from these instruments that is significantly higher than the fairvalues originally estimated on the grant date and reported in our financialstatements.  There is not currently amarket-based mechanism or other practical application to verify the reliabilityand accuracy of the estimates stemming from these valuation models.

 

24

----

 

Theguidance in SFAS 123(R) and SAB 107 is relatively new.  The application of these principles may besubject to further interpretation and refinement over time.  See Note 3 to our consolidated financialstatements for further information regarding our SFAS 123(R) disclosures.

 

***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. We maintain alarge customer base that mitigates the risk of concentration with one customer.However, if the overall condition of the health care industry were todeteriorate, resulting in an impairment of our customers’ ability to makepayments, significant additional allowances could be required.

 

Ouraccounts receivable balance was $30.9 million and $28.5 million, net ofaccounts receivable allowances, comprised of both allowances for doubtfulaccounts and sales returns, of $3.7 million and $3.6 million at April 2,2006 and December 31, 2005, respectively.

 

***Excess and Obsolete Inventory***

 

Wecalculate an inventory reserve for estimated obsolescence or excess inventorybased on historical turnover and assumptions about future demand for ourproducts and market conditions. Our industry is characterized by regular newproduct development, and as such, our inventory is at risk of obsolescencefollowing the introduction and development of new or enhanced products. Ourestimate and assumptions for excess and obsolete inventory are reviewed andupdated on a quarterly basis. The estimates we use for demand are also used fornear-term capacity planning and inventory purchasing and are consistent withour sales forecasts. Future product introductions and related inventories mayrequire additional reserves based upon changes in market demand or introductionof competing 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 $4.0 million at April 2,2006 and December 31, 2005, respectively.

 

***Valuation of Acquired In-ProcessResearch 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, other identifiableintangible assets, tangible net assets and goodwill as required by U.S. GAAP.In-process research and development is defined as the value assigned to thoseprojects 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 over time.During the three months ended April 2, 2006, we recorded an in-process researchand development charge of $1.8 million related to the acquisition of theremaining minority interest in MTI.

 

Theincome approach was used to determine the fair values of the acquiredin-process research and development. This approach establishes fair value byestimating the after-tax cash flows attributable to the in-process project overits useful life and then discounting these after-tax cash flows back to thepresent value. Revenue estimates were based on relative market size, expectedmarket growth rates and market share penetration. Gross margin estimates werebased on the estimated cost of the product at the time of introduction andhistorical gross margins for similar products offered by us or by competitorsin the marketplace. The estimated selling, general and administrative expenseswere based on historical operating expenses of the acquired company as well aslong-term expense levels based on industry comparables. The costs to completeeach project were based on estimated direct project expenses as well as the remaininglabor hours and related overhead costs. In arriving at the value of acquiredin-process research and development projects, we considered the project’s stageof completion, the complexity of the work to be completed, the costs alreadyincurred, the remaining costs to complete the project, the contribution of coretechnologies, the expected introduction date and the estimated useful life ofthe technology. The discount rate used to arrive at the present value ofacquired in-process research and development as of the acquisition date wasbased on the time value of money and medical technology investment riskfactors. We believe that the estimated acquired in-process research anddevelopment amounts determined represent the fair value at the date of acquisitionand do not 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 in-process research and development, of the acquiredbusinesses. Goodwill is tested for impairment annually, or more frequently ifchanges in circumstance or the occurrence of events suggest an impairmentexists. The test for impairment requires us to make several estimates aboutfair value, most of which are based on projected future cash flows. Ourestimates associated with the goodwill impairment tests are considered criticaldue to the amount of goodwill recorded on our consolidated balance sheets andthe judgment required in determining fair value amounts, including projectedfuture cash flows. Goodwill was $149.2 million at April 2, 2006 and $94.5million at December 31, 2005.

 

25

----

 

Otherintangible assets consist primarily of purchased developed technology, patents,customer relationships and trademarks and are amortized over their estimateduseful lives, ranging from 5 to 10 years. We review these intangible assets forimpairment annually during our fourth fiscal quarter or as changes incircumstance or the occurrence of events suggest the remaining value may not berecoverable. Other intangible assets, net of accumulated amortization, were$49.7 million and $26.2 million at April 2, 2006 and December 31, 2005,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***

 

Aspart of the process of preparing our consolidated financial statements, we arerequired to determine our income taxes in each of the jurisdictions in which weoperate. This process involves estimating our actual current tax expensetogether with assessing temporary differences resulting from recognition ofitems for income tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included on our consolidatedbalance sheets. We must then assess the likelihood that our deferred tax assetswill be recovered from future taxable income and, to the extent we believe thatrecovery is not likely, we must establish a valuation allowance. To the extentwe establish a valuation allowance or increase this allowance in a period, wemust reflect this increase as an expense within the tax provision in ourconsolidated statement 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. We have recorded a full valuation allowance on our net deferredtax asset as of April 2, 2006.

 

**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 yearas a result of the European holiday schedule during the summer months.

 

**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements, as defined by therules and regulations of the SEC, that have or are reasonably likely tohave a material effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources. As a result, we are not materially exposed toany financing, liquidity, market or credit risk that could arise if we hadengaged in these arrangements.

 

**Recent Accounting Pronouncement**

 

OnJanuary 1, 2006, we adopted the provisions of Statement of FinancialAccounting Standards No. 123(R), “Share-Based Payment” (SFAS 123(R)) using themodified prospective method. SFAS 123(R) requires companies to measure andrecognize the cost of employee services received in exchange for awards ofequity instruments based on the grant date fair value of those awards. Compensationcost under SFAS 123(R) is recognized ratably using the straight-lineattribution method over the expected vesting period. In addition, pursuant toSFAS 123(R), we are required to estimate the amount of expected forfeitureswhen calculating the compensation costs, instead of accounting for forfeituresas incurred, which was our previous method. As of January 1, 2006, thecumulative effect of adopting the estimated forfeiture method was not materialand therefore was not recorded in the statement of operations. Prior periodsare not restated under this transition method. Options previously awarded andclassified as equity continue to maintain their equity classification and therehas been no reclassification of awards in our consolidated balance sheet.

 

Priorto January 1, 2006 and since the beginning of 2003, we accounted forshare-based awards under the recognition provisions of SFAS 123,Accounting for Stock-Based Compensation using the modified prospective methodof adoption described in SFAS 148. We used the minimum value pricing modelfor measuring the fair value

 

26

----

 

ofour options granted through the first quarter 2005, which does not take intoconsideration volatility. In accordance with SFAS 123, subsequent toApril 5, 2005, the date of our initial filing of the registrationstatement relating to our initial public offering with the Securities andExchange Commission, we used the Black-Scholes method, including an estimatedvolatility assumption, to estimate the fair value of all option grants. Expensepreviously recognized related to options that were cancelled or forfeited priorto vesting was reversed in the period of the cancellation or forfeiture.

 

InNovember 2005, the FASB issued FASB Staff Position No. 123(R)-3 (FSP 123(R)-3),“Transition Election Related to Accounting for the Tax Effects of Share-BasedPayment Awards”. FSP 123(R)-3 provides an elective alternative transitionmethod for calculating the pool of excess tax benefits available to absorb taxdeficiencies recognized subsequent to the adoption of SFAS 123(R). Companiesmay take up to one year from the effective date of FSP 123(R)-3 to evaluate theavailable transition alternatives and make a one-time election as to whichmethod to adopt. We are currently in the process of evaluating the alternativemethods.

 

**Forward-Looking Statements**

 

Thisquarterly report on Form 10-Q contains not only historical information, butalso forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934and are subject to the safe harbor created by those sections. In addition, weor others on our behalf may make forward-looking statements from time to timein oral presentations, including telephone conferences and/or web casts open tothe public, in press releases or reports, on our Internet web site orotherwise. All statements other than statements of historical facts included inthis report or expressed by us orally from time to time that addressactivities, events or developments that we expect, believe or anticipate willor may occur in the future are forward-looking statements including, inparticular, the statements about our plans, objectives, strategies, the outcomeof contingencies such as legal proceedings, and prospects regarding, amongother things, our financial condition, results of operations and business. Wehave identified some of these forward-looking statements in this report withwords like “believe,” “may,” “could,” “would,” “might,” “forecast,” “possible,”“potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,”“anticipate,” “estimate,” “approximate” or “continue” or the negative of thesewords or other words and terms of similar meaning. These forward-lookingstatements may be contained in the notes to our consolidated financialstatements and elsewhere in this report, including under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-lookingstatements are based on current expectations about future events affecting usand are subject to uncertainties and factors that affect all businessesoperating in a global market as well as matters specific to us. Theseuncertainties and factors are difficult to predict and many of them are beyondour control. The following are some of the uncertainties and factors known tous that could cause our actual results to differ materially from what we haveanticipated in our forward-looking statements:

 

•      Lack of market acceptance of new products;

 

•      Failure to develop innovative and successfulnew products and technologies;

 

•      Delays in product introduction;

 

•      Loss of customers;

 

•      Exposure to assertions of intellectualproperty claims and failure to protect our intellectual property;

 

•      Disruption in our ability to manufacture ourproducts or the ability of our key suppliers to provide us products orcomponents or raw materials for products resulting in our inability to supplymarket demand for our products;

 

•      Disruption in the supply of products ofInvatec S.r.l. that we distribute or our relationship with Invatec;

 

•      Increases in prices for raw materials;

 

•      Failure to retain senior management orreplace lost senior management;

 

•      Incurrence of additional debt, contingentliabilities and expenses in connection with future acquisitions;

 

27

----

 

•      Failure to integrate effectively newlyacquired operations;

 

•      Absence of expected returns from the amountof intangible assets we have recorded;

 

•      Failure to obtain additional capital whenneeded or on acceptable terms;

 

•      Failure of our customers or patients toobtain third party reimbursement for their purchases of our products;

 

•      Failure to comply with applicable laws andregulations and to obtain and maintain required regulatory approvals for ourproducts in a cost-effective manner or at all;

 

•      Risks inherent in operating internationallyand selling and shipping our products and purchasing our products andcomponents internationally;

 

•      Fluctuations in foreign currency exchangerates and interest rates;

 

•      Vertical integration by our customers of theproduction of our products into their manufacturing process;

 

•      Inability to meet performance enhancementobjectives, including efficiency and cost reduction strategies;

 

•      Obligation to make significant milestonepayments not currently reflected in our financial statements;

 

•      Reliance on independent sales distributorsand sales associates to market and sell our products in certain foreigncountries;

 

•      Failure of our business strategy, whichrelies on assumptions about the market for our products;

 

•      Dependence upon a few of our products togenerate a large portion of our net sales and exposure if drug-eluting stentsbecome a dominant therapy in the peripheral vascular stent market and we arenot able to develop or acquire a drug-eluting stent to market and sell;

 

•      Exposure to product liability claims;

 

•      Highly competitive nature of the markets inwhich we sell our products and the introduction of competing products;

 

•      Reliance on our management informationsystems for inventory management, distribution and other functions and tomaintain our research and development and clinical data;

 

•      Conflicts of interests due to our ownershipstructure;

 

•      Ineffectiveness of our internal controls;

 

•      Employee slowdowns, strikes or similaractions;

 

•      Effects of litigation, including threatenedor pending litigation, on matters relating to patent infringement, employment,and commercial disputes;

 

•      Adverse changes in applicable laws orregulations;

 

•      Changes in generally accepted accountingprinciples; or

 

•      Conditions and changes in medical deviceindustry or in general economic and business conditions.

 

Formore information regarding these and other uncertainties and factors that couldcause our actual results to differ materially from what we have anticipated inour forward-looking statements or otherwise could materially adversely affectour business, financial condition or operating results, see our annual reporton Form 10-K for the fiscal year ended December 31, 2005 under the heading “PartI – Item 1A. Risk Factors” on pages 36 through 57 of such report.

 

Allforward-looking statements included in this report are expressly qualified intheir entirety by the foregoing cautionary statements. We wish to cautionreaders not to place undue reliance on any forward-looking statement thatspeaks only as of the date made and to recognize that forward-looking statementsare predictions 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 uncertainties and factorsdescribed above, as well

 

28

----

 

asothers that we may consider immaterial or do not anticipate at this time.Although we believe that the expectations reflected in our forward-lookingstatements are reasonable, we do not know whether our expectations will provecorrect. Our expectations reflected in our forward-looking statements can beaffected by inaccurate assumptions we might make or by known or unknownuncertainties and factors, including those described above. The risks and uncertaintiesdescribed above are not exclusive and further information concerning us and ourbusiness, including factors that potentially could materially affect ourfinancial results or condition, may emerge from time to time. We assume noobligation to update, amend or clarify forward-looking statements to reflectactual results or changes in factors or assumptions affecting suchforward-looking statements. We advise you, however, to consult any furtherdisclosures we make on related subjects in our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K we file with orfurnish to the Securities and Exchange Commission.

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare exposed to various market risks, which are potential losses arising fromadverse changes in market rates and prices, such as interest rates and foreignexchange fluctuations. We do not enter into derivatives or other financialinstruments for trading or speculative purposes.

 

***Interest Rate Risk***

 

Wecurrently have little exposure to a change in interest rates. Our borrowings todate have all been at a fixed rate of interest. We have no variable rate debtor lease obligations.

 

***Foreign Currency Exchange Rate Risk***

 

Fluctuationsin the rate of exchange between the U.S. dollar and foreign currencies couldadversely affect our financial results. In the three months ended April 2,2006, approximately 32.1% of our net sales were denominated in foreigncurrencies. We expect that foreign currencies will continue to represent asimilarly significant percentage of our net sales in the future. Selling,marketing and administrative costs related to these sales are largelydenominated in the same respective currency, thereby limiting our transactionrisk exposure. However, for sales not denominated in U.S. dollars, if there isan increase in the rate at which a foreign currency is exchanged for U.S.dollars, it will require more of the foreign currency to equal a specifiedamount of U.S. dollars than before the rate increase. In such cases and if weprice our products in the foreign currency, we will receive less in U.S.dollars than we did before the rate increase went into effect. If we price ourproducts in U.S. dollars and competitors price their products in localcurrency, an increase in the relative strength of the U.S. dollar could resultin our price not being competitive in a market where business is transacted inthe local currency.

 

Approximately72.4% of our net sales denominated in foreign currencies in the three monthsended April 2, 2006 were derived from European Union countries and weredenominated in the Euro. Additionally, we have significant intercompanyreceivables from our foreign subsidiaries, which are denominated in foreign currencies,principally the Euro and the Yen. Our principal exchange rate risks thereforeexist between the U.S. dollar and the Euro and between the U.S. dollar and theYen. Fluctuations from the beginning to the end of any given reporting periodresult in the remeasurement of our foreign currency-denominated receivables andpayables, generating currency transaction gains or losses that impact ournon-operating income/expense levels in the respective period and are reportedin other (income) expense, net in our consolidated financial statements. Werecorded a $54 thousand foreign currency transaction gain and $1.2 millionforeign currency transaction loss in the three months ended April 2, 2006 andApril 3, 2005, respectively, related to the translation of our foreigndenominated net receivables into U.S. dollars. We do not currently hedge ourexposure to foreign currency exchange rate fluctuations. We may, however, hedgesuch exposure to foreign currency exchange rates in the future.

 

29

----

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended) that are designed to reasonably ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, we recognizethat any controls and procedures, no matter how well designed and operated canprovide only reasonable assurance of achieving the desired control objectivesand we necessarily are required to apply our judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Ourmanagement evaluated, with the participation of our Chief Executive Officer andChief Financial Officer, the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered in thisquarterly report onForm 10-Q. Based on this evaluation and because of the material weaknessrelated to our controls over the preparation, review and presentation anddisclosure of our consolidated statements of cash flows as described below, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were not effective as of the end of theperiod covered in this quarterly report on Form 10-Q. To address thematerial weakness described below, we have expanded our disclosure controls andprocedures to include additional analysis and other procedures over thepreparation of the financial statements included in this report. Accordingly,our management has concluded that the financial statements included in thisreport fairly present in all material respects our financial position, resultsof operations and cash flows for the periods presented in conformity withgenerally accepted accounting principles.

 

**Changes in Internal Control Over Financial Reporting**

 

Amaterial weakness is a control deficiency or a combination of controldeficiencies that results in more than a remote likelihood that a materialmisstatement of the annual or interim consolidated financial statements willnot be prevented or detected. Our management concluded that as ofDecember 31, 2005 we did not maintain effective controls over thepreparation, review and presentation and disclosure of our consolidatedstatements of cash flows. Specifically, we incorrectly reported an interestpayment on demand notes payable as a financing cash out-flow instead of anoperating cash out-flow, in accordance with generally accepted accountingprinciples. This control deficiency resulted in the restatement of ourconsolidated financial statements for the quarters ended July 3, 2005 andOctober 2, 2005. Additionally, this control deficiency could result in amisstatement of the presentation and disclosure of our operating and financingcash flows in our consolidated financial statements that would result in amaterial misstatement in our annual or interim consolidated financialstatements that would not be prevented or detected. Accordingly, managementdetermined that this control deficiency constituted a material weakness in ourinternal control over financial reporting.

 

Exceptas described above, there was no change in our internal control over financialreporting that occurred during our quarter ended April 2, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**Plan for Remediation of Material Weakness**

 

Managementhas taken steps to remediate the material weakness in our internal control overfinancial reporting relating to the presentation of our cash flows. These stepsinclude a thorough review of the classification requirements of each componentline item and the individual elements that comprise each line item of thestatement of cash flows in accordance with generally accepted accountingprinciples. Management believes the additional control procedures as designedwill fully remediate the material weakness. However, we will need a period oftime over which to demonstrate that these controls are functioningappropriately and to conclude that we have adequately remediated the materialweakness.

 

30

----

 

**PART II -OTHER INFORMATION**

 

**ITEM 1.                  LEGALPROCEEDINGS**

 

Adescription of our legal proceedings in Note 12 of our consolidated financialstatements included within this report is incorporated herein by reference.

 

**ITEM 1A.****      ****RISK FACTORS**

 

Weare affected by risks specific to us as well as factors that affect allbusinesses operating in a global market. The significant factors known to usthat could materially adversely affect our business, financial condition oroperating results are described in our annual report on Form 10-K for thefiscal year ended December 31, 2005 under the heading “Part I – Item 1A. RiskFactors.” There has been no material change in those risk factors.

 

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

 

**Recent Sales of Unregistered Equity Securities**

 

Duringthe three months ended April 2, 2006, we did not issue any shares of our commonstock or other equity securities of ours that were not registered under theSecurities Act of 1933, as amended.

 

**Use of Proceeds**

 

OnJune 15, 2005, our registration statement on Form S-1(Registration No. 333-123851) was declared effective. Our initial publicoffering resulted in gross proceeds to us of $167.6 million. Expenses relatedto the initial public offering were as follows: approximately $8.4 million forunderwriting discounts and commissions and approximately $4.2 million for otherexpenses, for total expenses of approximately $12.6 million. None of theoffering expenses resulted in direct or indirect payments to any of ourdirectors, officers or their associates, to persons owning 10% or more of ourcommon stock or to any of our affiliates. All of the offering expenses werepaid to others.

 

Afterdeduction of offering expenses, we received net proceeds of approximately$154.9 million in our initial public offering, including shares sold by uspursuant to the underwriters’ over-allotment option. As of April 2, 2006, theproceeds from our initial public offering and available cash were used asfollows: $36.5 million of the net proceeds were used to repay a portion of theaccrued and unpaid interest on the demand notes, $72.6 million for generalcorporate purposes and the remaining net proceeds were invested in short-term,investment-grade, interest bearing securities. We cannot predict whether the proceedswill yield a favorable return. Other than $36.5 million of the net proceedsused to repay a portion of the accrued and unpaid interest on demand notes heldby Warburg Pincus, which is our majority stockholder, and Vertical Group, whichis one of our stockholders, none of the net proceeds from our initial publicoffering have resulted in direct or indirect payments to directors, officers ortheir associates, to persons who owned 10% or more of our common stock or toany of our affiliates.

 

Weexpect to use the remaining $45.8 million in net proceeds from our initialpublic offering for general corporate purposes. Our management has broaddiscretion as to the use of the net proceeds. We may use a portion of the netproceeds for the acquisition of, or investment in, technologies or productsthat complement our business. As required by Securities and Exchange Commissionregulations, we will provide further detail on our use of the net proceeds fromour initial public offering in future periodic reports.

 

**Issuer Purchases of Equity Securities**

 

Wedid not purchase any shares of our common stock or other equity securities ofours registered pursuant to Section 12 of the Securities Exchange Act of 1934,as amended, during the three months ended April 2, 2006. Our Board of Directorshas not authorized any repurchase plan or program for purchase of our shares ofcommon stock or other equity securities on the open market or otherwise, otherthan in connection with the cashless exercise of

 

31

----

 

outstandingstock options and the surrender of shares of stock upon the vesting ofrestricted stock grants to satisfy any required withholding oremployment-related tax obligations.

 

**ITEM 3.                  DEFAULTSUPON SENIOR SECURITIES**

 

Notapplicable.

 

**ITEM 4.                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Notapplicable.

 

**ITEM 5.                  OTHERINFORMATION**

 

Notapplicable.

 

**ITEM 6.                  EXHIBITS**

 

Thefollowing exhibits are being filed or furnished with this quarterly report onForm 10-Q:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                  |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | ev3  Inc. Executive Performance Incentive Plan (Incorporated by reference to  Exhibit 10.25 to ev3’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2005 (File No. 000-51348)                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                             |
| 10.2            |       | Form  of Stock Grant Notice under ev3 Inc. Amended and Restated 2005 Incentive  Stock Plan applicable to French Participants (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 January 31, 2006 (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)                                                                                                                                        |

 

32

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, hereuntoduly authorized.

 
| May  9, 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) |

 

33

----

 

**ev3 Inc.QUARTERLY REPORT ON FORM 10-Q**

**EXHIBITINDEX**

** **
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                | ** ** | **Method of Filing**                                                                                                                                                              |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | ev3  Inc. Executive Performance Incentive Plan                                                                                                                                 |       | Incorporated  by reference to Exhibit 10.25 to ev3’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2005(File No. 000-51348)                             |
| 10.2            |       | Form  of Stock Grant Notice under ev3 Inc. Amended and Restated 2005 Incentive  Stock Plan applicable to French Participants                                                   |       | 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 January 31, 2006(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)                                   |       | 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)                                   |       | 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)      |       | 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) |       | Furnished  herewith                                                                                                                                                               |

 

34

----