**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(Mark one)**

**x**                              ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the fiscal yearended December 31, 2006**

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

**For the transitionperiod from                                 to                                     .**

**Commission file number 000-51348**

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**ev3 Inc.**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                    |   | **32-0138874**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |
| **9600 54th Avenue North,  Suite 100**                     |   | ** **                           |
| **Plymouth, Minnesota**                                         |   | **55442**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |

 

**(763) 398-7000**

(Registrant’s telephone number, including area code)

Securities registered pursuant to section12(b) of the Act:

**Common Stock, parvalue $0.01 per share**

Securities registered pursuant to section12(g) of the Act: **None**

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. YES o   NO x

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. YES o   NO x

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES x   NO o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by check mark whether registrant is a shellcompany (as defined in Rule 12b-2 of the Act). YES o   NO x

Theaggregate market value of the registrant’s common stock, excluding outstandingshares beneficially owned by affiliates, computed by reference to the closingsale price at which the common stock was last sold as of June 30, 2006(the last business day of the registrant’s second quarter) as reported by theNASDAQ Global Select Market, was $230,371,090.

As of March 1, 2007, 58,174,280 shares of commonstock of the registrant were outstanding.

 

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**TABLEOF CONTENTS**
|               | ** ** | ** **                                                                                                                     | ** ** | **Page** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |                                                                                                                           |       |     |       |   |   |
| Item 1.       |       | Business                                                                                                                       |       |     | 1          |   |   |
| Item  1A.     |       | Risk  Factors                                                                                                                  |       |     | 25         |   |   |
| Item 1B.      |       | Unresolved Staff Comments                                                                                                      |       |     | 47         |   |   |
| Item 2.       |       | Properties                                                                                                                     |       |     | 47         |   |   |
| Item  3.      |       | Legal  Proceedings                                                                                                             |       |     | 47         |   |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                            |       |     | 50         |   |   |
| PART II  |       |                                                                                                                           |       |     |       |   |   |
| Item 5.       |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities             |       |     | 51         |   |   |
| Item  6.      |       | Selected  Financial Data                                                                                                       |       |     | 54         |   |   |
| Item 7.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operation       |       |     | 55         |   |   |
| Item 7A.      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                    |       |     | 74         |   |   |
| Item 8.       |       | Financial Statements and Supplementary Data                                                                                    |       |     | 76         |   |   |
| Item 9.       |       | Changes In and Disagreements With Accountants on  Accounting and Financial Disclosure                 |       |     | 77         |   |   |
| Item 9A.      |       | Controls and Procedures                                                                                                        |       |     | 77         |   |   |
| Item  9B.     |       | Other  Information                                                                                                             |       |     | 77         |   |   |
| PART III |       |                                                                                                                           |       |     |       |   |   |
| Item 10.      |       | Directors and Executive Officers of the Registrant                                                                             |       |     | 78         |   |   |
| Item 11.      |       | Executive Compensation                                                                                                         |       |     | 83         |   |   |
| Item 12.      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                 |       |     | 116        |   |   |
| Item 13.      |       | Certain Relationships and Related Transactions                                                                                 |       |     | 119        |   |   |
| Item 14.      |       | Principal Accountant Fees and Services                                                                                         |       |     | 124        |   |   |
| PART IV  |       |                                                                                                                           |       |     |       |   |   |
| Item 15.      |       | Exhibits, Financial Statement Schedules                                                                                        |       |     | 127        |   |   |

 

*This annual report on Form 10-K containsnot only historical information, but also forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, which aresubject to the safe harbor created by those sections. We refer you to theinformation under the heading “Part I. Item 1. Business—Forward-LookingStatements.”*

*As used in this report, references to “ev3,” the“company,” “we,” “our” or “us,” unless the context otherwise requires, refer toev3 Inc. and its subsidiaries, including without limitation MicroTherapeutics, Inc., which became a wholly owned subsidiary of ev3 Inc. inJanuary 2006. Prior to such time, Micro Therapeutics, Inc. was a majorityowned subsidiary of ev3 Inc.*

*We own or have rights tovarious trademarks, trade names or service marks, including the following:*PROTEGE®, EVERFLEXTM, PARAMOUNTTM MINI, PRIMUSTM, SPIDERX®, SPIDERFXTM, X-SIZER®,HELIXTM, CLOTBUSTER®, GOOSENECKTM MICRO SNARE, NITREX®, NEXUSTM, ONYX®, MORPHEUSTM,SOLOTM, ECHELONTM, ULTRAFLOWTM, MARATHONTM, HYPERFORMTM, HYPERGLIDETM and MIRAGETM.The trademarks SAILORTM Plus, SUBMARINE®Plus, ADMIRAL EXTREMETM, AMPHIRION® Deep PTA catheters, the DIVERTM CE THROMBUS ASPIRATION CATHETER, ROCKHAWK Device and ACCULINK Stent referred to in this Annual Report on Form 10-K are theregistered trademarks of others.

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**PART I**

**ITEM 1**                   BUSINESS

**Company Overview**

We are a leading global medical device company focusedon catheter-based technologies for the endovascular treatment of vasculardiseases and disorders. Our namesignifies our commitment to, and engagement in, the peripheral vascular,neurovascular and cardiovascular markets and the physician specialties thatserve them. Our broad product portfolio is focused on applications that weestimate represent an addressable worldwide endovascular market opportunity ofapproximately $3.2 billion in 2005****andup to $7.0 billion by the end of 2010.

We sell over 100 products consisting of over 1,000SKUs in more than 60 countries through a direct sales force in the UnitedStates, Canada, Europe and other countries and distributors in selected otherinternational markets. As of December 31, 2006, our direct salesorganization consisted of approximately 215****salesprofessionals. Our customers include a broad cross-section of physicians,including radiologists, neuroradiologists, vascular surgeons, neuro surgeons,other endovascular specialists and cardiologists.

We are focused onemerging and under-innovated opportunities in the endovascular device market, astrategy that we believe is uncommon in the medical device industry. This uniqueapproach allows us to compete effectively with smaller companies that havenarrow product lines and lack an international sales force and infrastructure,yet also compete with larger companies that do not have our focus and agility.We believe that the peripheral vascular and neurovascular markets, whencompared to the cardiovascular market, have higher growth potential with fewerentrenched competitors.  The competitivestrengths that have been responsible for our past success and the strategiesthat we believe will drive our future growth include:

·       targetingunder-innovated and emerging markets;

·       leveragingour products across major endovascular sub-markets;

·       investingin clinical research to demonstrate the benefits of our products;

·       expandingour business through product innovation and strategic acquisitions;

·       enhancingour global organization and presence; and

·       leadingour business by an experienced management team.

We have organized our company into two businesssegments: cardio peripheral and neurovascular. We manage our business andreport our operations internally and externally on this basis. Our cardioperipheral segment includes products that are used primarily in peripheralvascular procedures and in targeted cardiovascular procedures by radiologists,vascular surgeons and cardiologists. Our neurovascular segment containsproducts that are used primarily by neuroradiologists and neuro surgeons.During fiscal 2006 and fiscal 2005, these segments generated net sales of$202.4 million and $133.7 million, respectively.

Thefollowing represents net sales (in thousands) by our two business segments aswell as by geography during the periods indicated:

| ** **                              | ** ** | **For the Year Ended  December 31,** | ** ** | **Percent** | ** ** | **For the Year Ended  December 31,** | ** ** | **Percent** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|----------------------------------------------------------|------------|-------------|------------|
| **Net Sales by Segment** | ** ** | ** **                                               | ** ** | **2006**    | ** ** | **2005**                                                 | ** ** | **Change**  | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
| Cardio Peripheral                       |       | $                                                        | 121,104    |        | $          | 79,881                                                   |       |        | 51.6       | % |   | $ | 79,881 |   | $ | 52,942 |   |   | 50.9 | % |   |
| Neurovascular                           |       | 81,334                                                   |       | 53,815      |       |                                                     | 51.1       | %           |       | 53,815 |   | 33,392 |   |   | 61.2 | % |   |
| Total                                   |       | $                                                        | 202,438    |        | $          | 133,696                                                  |       |        | 51.4       | % |   | $ | 133,696 |   | $ | 86,334 |   |   | 54.9 | % |   |
|                                         |            |                                                          |            |             |            |                                                          |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                | ** ** | **For the Year Ended  December 31,** | ** ** | **Percent** | ** ** | **For the Year Ended  December 31,** | ** ** | **Percent** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|----------------------------------------------------------|------------|-------------|------------|
| **Net Sales by Geography** | ** ** | ** **                                               | ** ** | **2006**    | ** ** | **2005**                                                 | ** ** | **Change**  | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
| United States                             |       | $                                                        | 121,180    |        | $          | 71,848                                                   |       |        | 68.7       | % |   | $ | 71,848 |   | $ | 42,791 |   |   | 67.9 | % |   |
| International                             |       | 81,258                                                   |       | 61,848      |       |                                                     | 31.4       | %           |       | 61,848 |   | 43,543 |   |   | 42.0 | % |   |
| Total                                     |       | $                                                        | 202,438    |        | $          | 133,696                                                  |       |        | 51.4       | % |   | $ | 133,696 |   | $ | 86,334 |   |   | 54.9 | % |   |
|                                           |            |                                                          |            |             |            |                                                          |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For additional financialinformation regarding each of our segments and our foreign operations, see Note18 to our consolidated financial statements.

**The EndovascularMarket**

Vascular disease can involve either an artery or avein, and is generally manifested as an occlusion or rupture of a blood vessel.We estimate that vascular disease affects nearly 92 million people in the UnitedStates and more than one billion people worldwide, and is the leading cause ofdeath in the world. It may occur in any part of the body, and is a progressive,pathological condition that leads most often to blood vessel narrowing andobstruction, but can also lead to blood vessel wall weakening and rupture.Vascular disease can occur in the blood vessels of every organ and anatomicarea of the body, and can cause a range of conditions including pain,functional impairment and death.

When the treatmentfor vascular disease is performed from within a vessel, it is referred to as anendovascular procedure. Endovascular procedures are a relatively new,less-invasive means of treating the two major problems that can develop withinblood vessels: an aneurysm, or ballooning out of the vessel wall, and anocclusion, or stenosis, where the vessel is narrowed or blocked. Endovascularprocedures are performed by accessing an easily accessible artery to reach theaneurysm or occlusion and do not require general anesthesia. During mostendovascular procedures, a catheter is placed into the femoral artery in thegroin. X-ray imaging or fluoroscopy is used to help the physician advance thecatheter to the area to be treated. Endovascular procedures are less invasive andrequire a smaller incision than conventional, open surgery and we believe havea number of distinct benefits over surgery, including:

·       theuse of local or regional anesthesia instead of general anesthesia;

·       reducedpatient discomfort and shorter recovery times;

·       thereduced need for blood products and transfusions;

·       shorterhospital stays for recovery;

·       lowerrisks of  patient complications relatedto procedures; and

·       potentiallylower costs.

In 2006, we believe that there were more than 12,000interventional radiologists, neuroradiologists, vascular surgeons, neurosurgeons, and cardiologists in the United States who were trained inendovascular techniques.

The endovasculardevice markets which we serve are conventionally divided into three specialtiesbased on anatomic location:

·       **Peripheral vascular** market includesproducts used to treat arterial and venous disease in the legs, kidney, neckand any other vascular anatomy other than that in the brain or the heart.According to the American Heart Association (AHA), more than 8 million peoplein the United States have peripheral vascular disease. We estimate that morethan 100 million people worldwide are affected by this condition.

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·       **Neurovascular** market includes products usedto treat vascular disease and disorders in the brain, including arterio-venousmalformations, or AVMs, and strokes caused by either vascular occlusion(ischemic) or rupture (hemorrhagic). The World Health Organization (WHO)estimates that there are approximately 15 million cases of stroke worldwideeach year. Of these, the WHO estimates that 5 million people die from thestroke and an additional 5 million are left with a permanent disability.

·       **Cardiovascular** market includes products used to treat coronaryartery disease, atrial fibrillation and other disorders in the heart andadjacent vessels. The AHA estimates that 79 million people in the United Stateshave cardiovascular disease. We estimate that more than 850 million peopleworldwide are affected by cardiovascular disease.

**Our CardioPeripheral Markets**

Our primary focus is developing and commercializingproducts for selected peripheral vascular markets. Some of these products mayalso be used in certain cardiovascular markets. We refer to the combination ofthese selected opportunities as our cardio peripheral markets.

Peripheral vascular disease is characterized by thenarrowing or total occlusion of blood vessels outside of the heart or brain andcan cause conditions including pain, loss of function and death. Mortality fromperipheral vascular disease can occur as a result of stroke, kidney failure ordiabetes related vascular complications. We believe that there are a largenumber of patients with peripheral vascular disease that are either untreatedor inadequately treated.  According tothe AHA, only 2 million of the estimated 8 million Americans with peripheralvascular disease receive treatment. We believe peripheral vascular diseaseaccounts for 82% of all amputations in the United States. It is estimated thatthere are over 135,000 lower extremity amputations each year in the UnitedStates alone, many of which we believe could be treated with endovascularprocedures.

Peripheral vascular disease is treated withmedication, minimally invasive endovascular procedures, surgery or acombination of these therapies. Minimally invasive endovascular proceduresconsist primarily of angioplasty and stenting. Angioplasty is a non-surgicalprocedure in which narrowed or blocked arteries are re-opened by placing acatheter with a deflated balloon on the tip into the narrowed artery. Theballoon is then inflated to compress the plaque and to stretch the artery wall,thereby enlarging, or dilating, the opening of the vessel and restoring bloodflow. Stents, which are tubular mesh devices typically consisting ofinterconnected metal struts, are then inserted inside the artery to act asscaffolding in order to hold the vessel open. We estimate that in 2006 over 1.2million endovascular procedures to treat peripheral vascular disease wereperformed worldwide.

The carotid arteries are one of the most common sitesof peripheral vascular disease, affecting an estimated 1.5 million people inthe United States alone. Carotid arteries are located on each side of the neckand provide the primary blood supply to the brain. In carotid artery disease,plaque accumulates in the artery walls, narrowing the artery and disrupting theblood supply. This disruption in blood supply, together with plaque debrisbreaking off the artery walls and traveling to the brain, are the primarycauses of stroke. The therapy required to treat carotid artery disease dependson the degree of stenosis, or artery narrowing. Patients with moderate stenosisare typically treated with drugs to keep blood from clotting. However, patientswith highly narrowed arteries typically undergo a surgical procedure known as acarotid endarterectomy. In this procedure, a surgeon accesses the blockedcarotid artery though an incision in the neck, and then surgically removes theplaque. It is estimated that 160,000 patients each year in the United Statesundergo a carotid endarterectomy, which typically requires hospitalization forone to two days. We believe that there are over 1.3 million patients withperipheral vascular disease in the United States that are undiagnosed or notamenable to surgery. Endovascular techniques using stents and embolicprotection systems, which protect against plaque and debris from travelingdownstream, blocking off the vessel and 

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disrupting blood flow,have been developed and are in an early stage of adoption. The use of a stentwith an embolic protection system avoids open surgery and we believe willincrease the number of patients being treated. We estimate that the worldwidemarket for endovascular products for the treatment of carotid arterydisease was $180 million in 2005, and will grow to approximately $623million by 2010. With the increasing adoption of recently approvedproducts and the potential broadening of reimbursement for endovasculartreatment of carotid artery disease, we estimate that in 2007the worldwide market for endovascular products for the treatmentof carotid artery disease will be approximately $250 million.

In 2005, the Centers for Medicare and MedicaidServices, or CMS, expanded coverage of percutaneous transluminal angioplasty,or PTA, of the carotid artery concurrent with stent placement outside of trialsettings for patients who are at high risk for carotid endarterectomy incertain circumstances. Coverage is limited to procedures at CMS approvedfacilities performed using FDA approved carotid artery stenting, or CAS,systems and embolic protection devices, which has limited the CAS near-termmarket potential. As of February 1, 2007, there were just over 1,000 CMSapproved hospitals in the United States.

Occlusive disease of the iliac arteries, the mainvessels descending through the pelvis, is a peripheral vascular disease thataffects the flow of blood to the legs. Patients with this condition oftenexperience leg pain and numbness or tingling. Restoring the flow of blood inthese occluded vessels is essential to maintaining leg function and avoidingcomplications such as gangrene, which in severe cases can lead to amputation.We estimate the worldwide market for products for the endovascular treatment ofiliac disease will grow from $490 million in 2005 to almost $800 million by2010.

Another type of peripheral vascular disease involvesthe superficial-femoral artery, or SFA. The SFA extends from the iliac arteriesdown the leg to the knee. We estimate that the market for endovascular productstreating SFA disease will grow from just under $500 million in 2005 to nearly$1 billion by 2010.

While vascular disease is most common in the arterialside (oxygen carrying vessels), it can also occur on the venous side whereveins carry blood back to the heart and lungs. Peripheral venous disease is ageneral term for damage, defects or blockages in the peripheral veins. Likeperipheral artery disease, it can occur almost anywhere in the body but is mostoften found in the arms and legs. The most common form of peripheral venousdisease is the formation of blood clots that block the flow of blood in thevessel. Clots that occur in veins close to the surface of the skin are referredto as superficial venous thrombophlebitis, while clotting of veins deep withinthe body are called deep vein thrombosis. Treatment options for blood clots inthe veins are similar to those used to treat clots in arteries.

Cardiovascular disease isa progressive condition that leads to the obstruction of the blood vesselsproviding blood flow to the heart muscle and can lead to heart attack. The AHAestimates that 1.2 million Americans have new or recurrent heart attacks eachyear. While there are a number of therapies for cardio vascular disease, wefocus on opportunities in thrombus management. Despite the effective outcomeswith angioplasty and stenting, there are clinical conditions, such as saphenousvein grafts and acute coronary syndrome, in which the management of plaque andthrombus is considered beneficial to improve long-term clinical outcomes. Thisis partially due to the characteristics of the plaque and debris that candevelop in these grafts, as they may be at high risk of dislodgement orembolization, potentially blocking blood flow and damaging distal tissue. Whenused as part of an endovascular procedure, embolic protection devices andcoronary thrombectomy technologies can help reduce this risk.

**Our CardioPeripheral Vascular Product Portfolio**

Our cardio peripheralproduct portfolio includes products for peripheral vascular procedures which,in some instances, may also be used for selected cardiovascular procedures. Ourstrategy is to provide a broad portfolio of products for the peripheralvascular market that includes devices used in frequently 

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performedprocedures and also innovative devices for use in emerging therapies. Weopportunistically pursue selected cardiovascular markets where some of theseproducts can be used by our cardiologist customers. We do not compete incardiovascular markets in which several large companies are firmly entrenched,such as coronary stents. The increase in the breadth of our portfolio of cardioperipheral devices has significantly expanded our participation in theperipheral markets over the last couple of years. At the end of 2005, weoffered products that competed in approximately 60% of what we estimate to be a$2.5 billion total market for peripheral vascular products, as compared withthe beginning of 2003 when we offered products that participated inapproximately 10% of what we estimate to be a $2.0 billion market.

***Stents***

Peripheral stents are used in various locations in thebody, including the biliary duct, which transports bile from the liver and gallbladder to the small intestines; renal arteries, which transport blood from theaorta to the kidneys; iliac, femoral and popliteal arteries, which are majorarteries in the legs; subclavian arteries, which are major vessels of the upperbody, originating at the aortic arch; and carotid arteries. We believe that ourportfolio of self-expanding and balloon expandable stents is differentiated fromour competitors’ offerings due to their fracture resistance, radiopacity(visibility under fluoroscopy), placement accuracy, deliverability and strongclinical performance.

*Protégéand EverFlex Stents.**  *Ourself-expanding stent portfolio includes the Protégé Self-Expanding Stent, a“shape memory” Nitinol stent that expands to a predetermined diameter upondeployment. Nitinol is a highly flexible metal with shape retention and fatigueresistance properties. We offer a number of sizes of Protégé stents, as well asa tapered configuration for use in the carotid arteries. We also manufactureand sell our EverFlex stent, a unique, self-expanding Nitinol coil stent thathas enhanced flexibility and resistance to fractures, which we believe providessuperior performance in vessels that are subjected to repeated flexing andbending. Although not indicative of clinical performance, our internal benchtesting has provided us with data suggesting that our EverFlex stent may be upto five to ten times more durable than stents offered by our competitors. Weoffer our customers a two-year guarantee, subject to certain conditions, thatour EverFlex stent will remain fracture-free.

*ParaMountMini and PRIMUS Balloon Expandable Stents.*   Ourballoon expandable stent portfolio includes stents that incorporate embeddedtantalum markers to provide superior visualization under fluoroscopy, allowingthe physician to quickly confirm the correct placement. The inclusion ofmarkers is a unique feature in the balloon expandable stent market. Our balloonexpandable stents demonstrate minimal movement upon deployment, a technicaladvantage designed to improve accuracy of placement in the blood vessel.

We are currentlydeveloping a number of new products to increase our market penetration withinthe global peripheral stent market. Our stent product development pipeline isintended to increase the breadth of our offering by adding new lengths,diameters and catheter shaft line extensions, as well as to introduce new stentdesigns and platforms.

***Embolic Protection Products***

During peripheral vascular and cardiovascularprocedures, plaque and debris may dislodge or embolize, potentially blockingblood flow and damaging distal tissue. Embolic protection devices are intendedto trap plaque and debris from traveling downstream, blocking off the vesseland disrupting blood flow.

*SpideRXand SpiderFX Embolic Protection Devices.*   TheSpideRX family of embolic protection devices are low-profile devices featuringa unique braided Nitinol embolic filter compatible with most guidewires on themarket. Filter-based embolic protection devices allow blood to continue flowingin the artery while the filter traps the debris, minimizing downstream tissuedamage and improving clinical 

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outcomes. We believe thatthe SpideRX family has a significant competitive advantage because it permitsphysicians to use their guidewire of choice. The SpideRX is used duringperipheral vascular and cardiovascular procedures in which embolic material isa risk.

The SpiderFX is our nextgeneration embolic protection device. Approved for use in both the saphenousvein graft, or SVG, and carotid procedures, the SpiderFX has severalenhancements, including improved visualization, use with both over the wire andrapid exchange interventional devices and enhanced trackability and flexibilitycharacteristics.

***Carotid Stenting Solutions***

Carotid artery stenting represents an emergingminimally invasive treatment option for carotid artery disease, and we believeit has the opportunity to become a significant alternative to carotidendarterectomy. The carotid stenting market is just beginning to develop in theUnited States, with the first system having received FDA approval in 2004.

Our carotid stenting product offering (Protégé RXstraight and tapered stents used with our embolic protection devices) areavailable in the United States, Europe and certain other countries. In supportof our FDA pre-market approval submission, we conducted the CREATE pivotalclinical trial, which was designed to evaluate the use of our carotid stentingtechnology in patients who are high-risk candidates for carotid endarterectomy.In February 2006, we received FDA 510(k) clearance of our SpideRXembolic protection device for use in carotid artery stenting in conjunctionwith the Guidant RX ACCULINK stent.

***Thrombectomy Products***

Thrombectomy devices are designed to remove bloodclots, or thrombus, in order to re-establish blood flow or to prevent a clotfrom breaking up and blocking smaller downstream vessels. We offer thrombectomytools for peripheral vascular and cardiovascular procedures that meet a broadspectrum of physician needs, including the mechanical removal of thrombus andthe delivery of peripheral blood clot therapies designed to help dissolve theclot.

*X-SizerThrombectomy Catheter System.*   The X-Sizer Systemis a self-contained thrombus removal system that uses a rotating cutter containedwithin the tip of an aspiration catheter to shear, capture and remove thrombus.A battery powers the rotating cutter, and aspiration is provided by adisposable vacuum system. We believe that the X-Sizer System offers superiorfunctional characteristics due to its self-contained disposable design,eliminating the need for capital equipment or a temporary pacing catheter. Inthe United States, the X-Sizer is cleared for use in the mechanical removal ofthrombus from hemodialysis grafts, which are used to facilitate access to thebloodstream in order to enable treatment to filter toxins from the bloodstreamin patients with kidney failure. Outside of the United States, the X-SizerSystem is approved for use in patients with thrombus in native coronaryarteries and saphenous vein bypass grafts.

*HelixClot Buster Thrombectomy Device.*   The Helixsystem is a mechanical thrombectomy device that macerates thrombus intomicroscopic particles with little or no interaction with the vessel or graftwall. Maceration of the thrombus is achieved through the use of an enclosed,rapidly rotating compressed-air blade that creates a flow of fluid through sideholes in the catheter.

*DiverC.E. Thrombectomy Device.*   In July 2005, wereceived FDA 510(k) clearance and launched the Diver C.E. ThrombusAspiration Catheter in the United States, which we distribute pursuant to ourdistribution agreement with Invatec.

We intend to developnext-generation thrombus and debris removal products for the peripheralvascular market.

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***Procedural Support Products***

As part of our cardio peripheral vascular marketstrategy, we market and sell a number of products to be used in conjunctionwith our other portfolio products.

*TheGoose Neck Microsnare.*   Foreign objects can beretrieved from the vascular system by using snares and other devices. Examplesof foreign objects that require retrieval include broken catheter or guidewiretips, as well as stents that are dislodged from their delivery system andcarried downstream. Our Goose Neck Microsnare incorporates a radiopaque(visible under fluoroscopy) loop mounted at the tip of a guidewire. The loop isdeployed and retrieved through a catheter. We believe that our snares areunique because the loop remains positioned at a 90 degree angle relative to thewire. This increases the ability of the loop to encircle the foreign object,thereby improving the rate of success of retrieval.

*NitrexGuidewires.*   Guidewires are threaded throughvessels as a first step in most endovascular procedures. Balloon and stentcatheters are advanced over guidewires to the target treatment area. For thisreason, they are an indispensable component in the catheterization laboratory.The Nitrex product line is characterized by both flexibility and kinkresistance that is particularly useful when negotiating tortuous vascularanatomy. It is a versatile product line that is used in a broad range ofendovascular procedures.

*Balloon AngioplastyCatheters.*   We offer a broad portfolio ofperipheral vascular balloon angioplasty catheters, which we currently purchasefrom Invatec pursuant to our distribution agreement. These include the AdmiralExtreme, Sailor Plus and Submarine Plus and Amphirion Deep, which come in anumber of lengths and sizes and are used in a variety of procedures. In theUnited States, these balloon catheters are cleared for non-coronary dilatationof the vascular anatomy excluding the carotid arteries.

**Our NeurovascularMarkets**

According to the American Stroke Association, thereare approximately 700,000 strokes annually in the United States, making strokethe third leading cause of death and the leading cause of long-term disability.Strokes consist of either blockages (ischemic stroke) or ruptures (hemorrhagicstroke) of vessels within or leading to the brain. Acute ischemic strokeaffects approximately 615,000 patients annually while hemorrhagic stroke is aless common disorder, affecting approximately 85,000 patients per year in the UnitedStates. Current interventional therapies serve primarily the hemorrhagic strokemarket while technologies in development are focused on the larger andunderserved ischemic stroke market. Two causes of hemorrhagic stroke areruptures of cerebral aneurysms and arterio-venous malformations, or AVMs.

Ischemic stroke occurs when an artery to the brain isblocked. If left untreated for more than a few minutes, brain cells may die dueto the lack of blood flow. Ischemic strokes can be caused by several differentkinds of disease, with the most common being a narrowing of the arteries causedby atherosclerosis or gradual cholesterol deposits. If arteries become toonarrow, clots may form. There are two different types of ischemic stroke:thrombotic and embolic. A thrombotic stroke occurs when arteries in the brainbecome blocked by the formation of a clot within the brain. Embolic strokes arethe result of a clot forming in another part of the body, such as the heart orcarotid artery and then traveling to the brain where it lodges and blocks bloodflow.

An aneurysm is a balloon-shaped structure, which formsat a weak point in a vessel wall and fills with blood. Aneurysms typically growover time and, due to pressure placed on the wall of the aneurysm, are prone torupture. Ruptured aneurysms typically result in death due to massiveintracranial bleeding. While an estimated 21,000 hemorrhagic stroke deaths inthe United States in 2006 were caused by ruptured cerebral aneurysms, autopsystudies have suggested that unruptured aneurysms may exist in approximately 2%to 5% of the general population in the United States. We believe that with thedevelopment of new diagnostic and interventional technologies, the pool ofpatients that may benefit from intervention will 

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continue to expand toinclude increasing numbers of those with unruptured aneurysms discovered inconjunction with other examinations.

In an AVM, the flow of blood between arteries andveins, which normally occurs through very small capillary vessels, is shortcutby the development of a network of larger vessels connecting the arteries andveins directly. The higher blood pressure flowing directly to the veins makesthese vessels highly prone to rupture. We estimate that approximately 17,000AVM cases were diagnosed worldwide in 2006.

Driven by rapid advances in device technology andresults from the International Subarachnoid Aneurysm Trial (ISAT), the resultsof which were published in *The Lancet*in October 2002, the treatment of both aneurysms and AVMs has beenshifting from open surgical techniques to minimally invasive, endovasculartechniques. While this market transition has been more rapid in geographiesoutside of the United States, we estimate that approximately 25 to 40% ofaneurysm interventions in the United States now are performed usingendovascular techniques.

The primary endovascularprocedure for treating both aneurysms and AVMs uses a repair technique calledembolization, the objective of which is to induce a blood clot, or thrombus, inthe diseased vasculature. The purpose of the thrombus is to limit blood flowthrough the diseased vascular anatomy, thereby reducing blood pressure to aruptured area or the likelihood of rupture in an unruptured area. Theendovascular embolization of cerebral aneurysms usually involves the deploymentof small coils composed of metal or a combination of metal and polymer. Theendovascular embolization of AVMs usually involves the deployment of a liquidpolymer or very small polymer particles. We estimate that the worldwide marketfor liquid embolic products for the treatment of AVMs was $27 million in 2005,and will grow to approximately $52 million by 2010.

**Our NeurovascularProduct Portfolio**

***Embolic Coils***

We believe that embolic coils represent one of thelargest categories of products in the neurovascular device market and are usedin approximately 60,000 procedures worldwide each year. We estimate that theworldwide market for coil products for the treatment of cerebralaneurysms was $253 million in 2005, and will grow to approximately $570million by 2010. Embolic coils are used in virtually all endovasculartreatments of aneurysms and a small number of AVMs. Our embolic coilproducts are delivered using a combination of our minimally invasiveguidewires, microcatheters and balloons. During an aneurysm procedure, smallcoils attached to a wire are passed through a delivery catheter and into theaneurysm space. The coil is then detached from the delivery wire, the wire isremoved and the next coil is advanced through the catheter. This process isrepeated until approximately 35 to 45% of the volume of the aneurysm is filledwith coils.

*NXT.  **We introduced our NXT line ofdetachable coils in the United States and Europe in 2004. The NXT familyincludes framing, filling and finishing coils and are sold in a wide range ofshapes and configurations. Many of the NXT products incorporate the use of Nitinoltechnology, resulting in less stretching for more confident positioning andbetter resistance to compaction, while its enhanced shape memory provides amore supportive basket and optimal bridging of the neck of the aneurysm.*

*NexusEmbolic Coils.**  *Weintroduced our Nexus line of coils in the United States and Europe in September 2005.The Nexus line consists of framing, filling and finishing coil offerings,allowing physicians to treat a wide range of aneurysm shapes and sizes. AllNexus coils incorporate a Nitinol filament, which offers improved shaperetention and increased resistance to coil compaction. Nexus also incorporatesa bioactive microfilament technology to enhance aneurysm healing.

In October 2006, we launched the Nexus Morpheus,our latest addition to the Nexus family. The Morpheus is a three-dimensionalsoft and conformable coil that does not sacrifice the compaction 

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resistance inherent withthe nitinol core. Morpheus is sold in the United States and internationally,excluding Japan.

We are expanding our lineof neurovascular embolic coils. Our next generation coil, Gamma, is indevelopment, and includes a new, faster, safer and more effective detachmentsystem.

***Liquid Embolics***

We estimate that liquid embolics are used inapproximately 16,000 worldwide neurovascular procedures each year, includingthe majority of AVM and some aneurysm procedures. The most widely usedembolization technique for AVMs involves the injection of acrylic-based glue.We believe, however, that glues have multiple drawbacks including the lack ofcontrolled delivery and extreme adhesion to all surfaces, including that of thedelivery catheter. Glue solidifies upon contact with blood which reducesphysician control during filling and necessitates very rapid withdrawal of thedelivery catheter in order to avoid it being permanently glued in place. Webelieve our Onyx Liquid Embolic System is the solution.

*Onyx Liquid EmbolicSystem.*   Onyx is our proprietary biocompatiblecopolymer which is delivered, in liquid form, through proprietarymicrocatheters to blood vessels in the brain, where it fills a vascular defectand transforms into a solid polymer cast. Onyx offers a unique form, fill andseal approach to the interventional treatment of aneurysms and AVMs associatedwith hemorrhagic stroke. Because Onyx is non-adhesive, and solidifies over afew minutes’ time, the injection and filling of the vascular defect can takeplace in a very controlled manner. When the vascular defect is completelyfilled with the Onyx polymer cast, the delivery catheter is removed. We believeour randomized clinical trial revealed that Onyx was at least as effective asacrylic-based glue in filling aneurysms, had a better percentage reduction inAVMs and resulted in the use of fewer coils.

***Neuro Stents***

Stenting is of increasingimportance in the aneurysm and ischemic stroke markets. We are developing theSolo platform, a self-expanding Nitinol stent, for use with intracranialstenotic disease where vessels within the brain become narrowed and to protectagainst the migration of coils used to treat aneurysms. We expect that the Soloproducts will be fully retrievable and detachable, allowing for more precise placementand will have optimized radial force for aneurysm neck coverage and coilretention. We anticipate launching the Solo products internationally in 2007.We are also currently in the process of developing technologies to addressthree areas of ischemic and occlusive diseases: stents for aneurysms andstenotic disease; balloons for vasospasms and stenotic disease; and clotretrieval for acute stroke. We estimate that the worldwide market for stentproducts for the treatment of aneurysm and ischemic stroke was $74million in 2005, and will grow to approximately $240 million by 2010.

***Microcatheters***

We market a line of products that are intended toallow access to, and treatment in, difficult-to-reach anatomical locations suchas the remote vessels in the brain or other challenging vascular structures. Inaddition to their use with our embolic coils and liquid embolics, theseproducts are compatible with, and are often used with, competitors’ products.We estimate that the worldwide market for access and delivery products forthe treatment of neurovascular disease was $159 million in 2005, and willgrow to approximately $284 million by 2010.

*Echelonand Pre-shaped Echelon Microcatheters.*   Our mostrecently introduced microcatheter is the Echelon. Using a unique blend ofmaterials and construction, the Echelon provides what we believe to be one ofthe largest inner channels in its class while still enabling the physician toaccess difficult anatomy and deliver a wide range of coils. The pre-shapedEchelon catheter represents a key line extension for our 

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Echelon family ofproducts, and offers improved navigation, deliverability and stability. Thepre-shaped Echelon catheters were introduced in the United States and Europe inthe first quarter of 2005.

*UltraFlow and MarathonFlow-Directed Microcatheters.*   Launched in 2002,the UltraFlow Flow-Directed Microcatheter is specifically designed to enableaccess to distal locations and to allow super-selective vessel positioning. TheMarathon is an improved flow-directed microcatheter that contains both aNitinol braid and a stainless steel helical wire, which improves navigabilitywhile retaining pushability and tip softness. We believe that both theUltraFlow and Marathon microcatheters provide excellent trackability over a wire.

***Occlusion Balloon Systems***

*HyperForm andHyperGlide Occlusion Balloon Systems.*   Our HyperForm andHyperGlide Occlusion Balloon families are highly flexible balloons designed foruse in blood vessels where temporary occlusion is desired. They are useful incontrolling blood flow, and are capable of accessing small diameter vessels andvessels that have many twists and turns. Accordingly, they may be used tocontrol blood flow to remote sites to allow for embolization treatment ofvascular abnormalities such as aneurysms.

***Guidewires***

*Mirage HydrophilicGuidewire.*   Our portfolio of neurovascularguidewires includes the Mirage Hydrophilic Guidewire. This guidewire isdesigned for precise torque control and is compatible with several sizes offlow-directed and over-the-wire microcatheters. It assists the physician inmicrocatheter navigation and remote vessel access while providing a flexibleand shapeable tip.

**Sales, Marketingand Distribution**

***Structure and Strategy***

We have dedicated substantial resources to establish adirect sales capability in the United States, Canada, Europe and other countriesas well as establishing distribution networks in selected internationalmarkets. We believe our global presence enables us to embrace and capitalize onthe growing market for endovascular devices that exists outside of the UnitedStates. In addition, our global strategy allows us to commercializetechnologies internationally while pursuing regulatory approval in the UnitedStates, increasing near-term sales and helping us refine our commercializationstrategies in anticipation of product launches in the United States. As of December 31,2006, our sales and marketing infrastructure included approximately 248professionals which consisted of approximately 215 sales professionals in theUnited States, Canada, Europe and other countries. Individuals in our salesorganization generally have substantial medical device experience and areresponsible for marketing our products directly to a variety of specialistsengaged in endovascular therapies. These direct sales representatives provided87% of our net sales in both fiscal 2006 and fiscal 2005, with the balancegenerated by independent distributors who represent us internationally.

As of December 31, 2006, our global endovascularmarketing team was comprised of approximately 33****individualscovering product management, corporate communications and education andtraining.

We devote significantresources to training and educating physicians in the use and benefits of ourproducts. In the United States, we instruct our employees, including our salesprofessionals, not to discuss the use of our products outside of theFDA-approved indication. If unsolicited questions are posed by physicians, weinform them of the approved use of our products. Although we do not market ourproducts for off-label uses, physicians may choose to use our products as theysee fit, including outside of the FDA-approved applications. For example,although our stent products are approved in the United States for use in thebiliary duct, as are most competing peripheral stent systems in the UnitedStates, some physicians 

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chooseto use the stents in peripheral vessels. If the FDA concludes that we promoteour device for such off-label uses or that our promotional activities otherwisefail to comply with the FDA’s regulations or guidelines, we may be subject towarning letters from, or other enforcement action by, the FDA.

***United States***

As of December 31,2006, we had approximately 117 sales professionals selling our products in theUnited States, many of whom have previous experience in the medical deviceindustry.

***Europe and Canada***

Our direct selling organization in Europe has apresence in Austria, Belgium, Denmark, Finland, France, Germany, Italy,Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland and the UnitedKingdom. As of December 31, 2006, our European sales team had 87 salesprofessionals, managers and support staff, including 32 selling our peripheralvascular and cardiovascular products, 19 selling our neurovascular products andnine selling both.

We also sell our productsin Canada through a five person direct sales force as of December 31,2006.

***Other International***

In the major markets of Asia Pacific, Latin America,Eastern Europe and the Middle East, we sell our products through distributors.In addition to sales, these distributors are involved in product launchplanning, education and training, physician support and clinical trialmanagement. Through dedicated distributors and eight sales professionals as of December 31,2006, we have a sales presence in all major international markets, includingAustralia, Brazil, Argentina and China.

In 2003, we launcheddirect operations in Japan, including a direct sales force. On September 26,2006, we established a distribution arrangement with Medtronic InternationalTrading Inc. - Japan Branch, a subsidiary of Medtronic, Inc., pursuant towhich Medtronic now distributes all of our products in Japan. We believe thisarrangement will allow us to leverage Medtronic’s market presence and brandrecognition in Japan to introduce our products to a wider group of customers.As a result of this arrangement, we ceased our direct sales operations inJapan, but will continue to remain focused on securing the necessary regulatoryapprovals, which we will own, for introduction of additional new products intoJapan.

***Other Distribution Arrangements***

In January 2007, we entered into an agreementwith FoxHollow Technologies, Inc. to conduct a joint clinical study ofFoxHollow’s calcium cutting device (the RockHawk) used with our SpideRX embolicprotection device to seek approval for the treatment of calcified lesions inperipheral artery disease. As part of this agreement, FoxHollow, subject toregulatory approval and certain limitations, will have the exclusive right tomarket the two devices together in the United States.

In February 2007, weexecuted a distribution agreement with Invatec Technology Center GmbHappointing us as a non-exclusive distributor of certain of Invatec’s productsin the United States and Puerto Rico. The distribution agreement replaces anexisting distribution agreement with Invatec S.r.l. originally dated June 24,2004. This new arrangement continues to provide us with a broad portfolio ofcommercially competitive products that complement our existing portfolio.Invatec manufactures and markets a broad line of endovascular products for theperipheral vascular and cardiovascular markets. We will continue to distributecertain Invatec products from the former distribution agreement under the newdistribution agreement. These products include the Sailor Plus, Submarine Plus,Admiral Extreme, and Amphirion Deep PTA catheters and the Diver CE ThrombusAspiration Catheter. The term of the distribution agreement extends until December 31,2008. Under the distribution agreement, we are 

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permittedto continue to sell our inventory of Invatec products for a period of up to sixmonths after the termination of the distribution agreement.

**Manufacturing**

We currently have amanufacturing facility located in Plymouth, Minnesota, at which we manufacturemost of our cardio peripheral products, and a manufacturing facility located inIrvine, California, at which we manufacture most of our neurovascular products.We manufacture our products at facilities in a controlled environment and haveimplemented quality control systems as part of our manufacturing processes. Webelieve we are in material compliance with FDA Quality System Regulations formedical devices, with ISO 9001 quality standards and applicable medical devicedirectives promulgated by the European Union and Canada and ISO/EN 13485, whichfacilitates entry of our products into the European Union and Canada. The FDAand European Union competent authorities have recently inspected ourmanufacturing facilities and found no significant issues. We rely onindependent manufacturers for certain product components and processes.

At the end of 2005 andduring the first few months of 2006, we relocated our corporate offices to aseparate facility in Plymouth, Minnesota. The relocation of our support staffallowed for an expansion of our manufacturing space in Plymouth. We have usedthe additional square footage to expand our capacity in order to meet theadditional demand for our stent and embolic protection product lines. Alsoduring 2006, to increase our neurovascular production capabilities, werelocated our Irvine, California manufacturing facility to a larger, 96,400square feet facility in Irvine. On an ongoing basis, to improve yields andcycle times, we are investing in developing internal capabilities and applyinglean manufacturing concepts at both facilities.

**Research & Development**

Our research efforts aredirected towards the development of new endovascular products that expand thetherapeutic alternatives available to physicians or improvements to andextensions of our existing product offerings.

As of December 31,2006, our research and development staff consisted of approximately 60full-time engineers and technicians, most of whom have substantial experiencein medical device development. Approximately 36 individuals are based inPlymouth, Minnesota and are primarily focused on peripheral technologies and 24individuals are based in Irvine, California and are focused primarily onneurovascular technologies. Our product development process incorporates teamsorganized around each of our core technologies, with each team havingrepresentatives from research and development, marketing, regulatory, quality,clinical affairs and manufacturing. Consultants are used when additionalspecialized expertise is required.

Ourresearch and development team has a demonstrated record of new productinitiatives and significant product improvements. Specific product improvementinitiatives have included:

·                    broadeningacquired technologies in order to address a larger share of the target markets;

·                    incorporatingimportant features which we believe appeal to the physicians who use ourproducts; and

·                    leveragingcore technologies to develop new product platforms and enter new markets.

Due to our completion ofseveral clinical trials in 2005, our research and development expendituresdeclined to $26.7 million in 2006, compared with $39.3 million and $38.9million in 2005 and 2004, respectively. Our research and development costsinclude traditional research and development expenses as well as the cost ofour clinical trials.

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**Clinical Studies**

We support many of our new product initiatives withclinical studies in order to obtain regulatory approval and provide certainmarketing data. As of December 31, 2006, our clinical and regulatoryinfrastructure included approximately 35 individuals focused on developing thenecessary clinical data to achieve regulatory clearance and expandedindications for our existing and emerging products around the world. We intendto increase our expenditures on clinical trials in 2007 as part of the naturalmigration of our products from development to the clinical validation phase. In2007, our clinical trials include a focus on product applications for thecarotid artery, the SFA and below the knee.

The goal of a clinical trial is to meet the primaryendpoint, which measures the clinical effectiveness and/or safety of a deviceand is the basis for FDA approval. Primary endpoints for clinical trials areselected based on the intended benefit of the medical device. Although clinicaltrial endpoints are measurements at an individual patient level, the resultsare extrapolated to an entire population of patients based on clinicalsimilarities to patients in the clinical trials.

We continually evaluate the potential financialbenefits and costs of our clinical trials and the products being evaluated inthem. If we determine that the costs associated with attaining regulatoryapproval of a product exceed the potential financial benefits of that productor if the projected development timeline is inconsistent with our investmenthorizon, we may choose to stop a clinical trial and/or the development of aproduct.

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Thefollowing tables summarize our key current and planned clinical trials.

**Carotid ClinicalTrials:**
| Trial                                      | ** ** | ** **                                                                                | ** ** | **Product**                                                                                                            | ** ** | **Study Design**                         | ** ** | **Status** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------|
| PROCAR Carotid Study  (Europe)             |       | Protégé GPS stent                                                               |       | Prospective, multi-center  single-arm study                                                                            |       | Enrollment and follow-up  completed      |
|                                       |       |                                                                                      |       | Primary endpoint  of major adverse neurological events at 30 days in patients at high risk for  carotid endarterectomy |       | Met primary  endpoint                    |
| CREATE Carotid  Pivotal Trial (U.S.)       |       | Protégé GPS Stent  with an ev3 Embolic Protection Device                        |       | Prospective,  multi-center single-arm non-inferiority study                                                            |       | Enrollment  completed; follow-up ongoing |
|                                       |       |                                                                                      |       | Primary endpoint  of major adverse cardiovascular and cerebral event rate                                              |       | Met primary  endpoint                    |
| CREATE Carotid  Pivotal-SpideRX Arm (U.S.) |       | SpideRX Embolic  Protection Device, with commercially available Guidant RX ACCULINK Stent |       | Prospective,  multi-center single-arm study, added to CREATE Pivotal study, to confirm  safety and effectiveness       |       | Enrollment and  follow-up completed      |
|                                       |       |                                                                                      |       | Primary endpoint  of 30 day major adverse cardiovascular cerebral event                                                |       | Met primary  endpoint                    |
| CREATE PAS (U.S)                           |       | Protégé GPS Stent with  an ev3 Embolic Protection Device                        |       | Prospective,  multi-center single-arm confirmatory post-approval study                                                 |       | Initiating  enrollment in 2007           |
|                                       |       |                                                                                      |       | Primary endpoint  of major adverse cardiovascular and cerebral event rate in broad use at  investigative centers       |       |                                     |

 

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**Embolic ProtectionClinical Trials:**
| Trial                                     | ** ** | ** **                                                        | ** ** | **Product**                                                                                                                                                                                                        | ** ** | **Study Design**                                                                                                 | ** ** | **Status** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|
| SIMPLE Cardio  (Europe)                   |       | Spider Embolic Protection  Device                                 |       | Prospective,  multi-center, single-arm trial to evaluate safety and performance of device  when used in patients undergoing saphenous vein graft procedures with  percutaneous transcatheter angioplasty catheters |       | Enrollment and follow-up  completed  Results established a 30-day major adverse cardiovascular event rate of  4% |
|                                      |       |                                                              |       | Primary endpoint  of major adverse cardiovascular event within 30 days post-procedure                                                                                                                              |       |                                                                                                             |
| SPIDER SVG Trial Cardio (U.S. and Canada) |       | SPIDER and SpideRX  Embolic Protection Device                     |       | Prospective,  multi-center, randomized, non-inferiority trial comparing SPIDER and SpideRX  to commercially available embolic protection devices during percutaneous  saphenous vein graft procedures              |       | Enrollment and  follow-up completed  Met primary endpoint                                                        |
|                                      |       |                                                              |       | Primary endpoint  of major adverse cardiovascular event within 30 days post-procedure                                                                                                                              |       |                                                                                                             |
| SpiderFX RockHawk  Trial (US)             |       | SpiderFX Embolic  Protection Device and FoxHollow RockHawk Device |       | In development                                                                                                                                                                                                     |       | Enrollment anticipated to  begin Q3 2007                                                                         |

 

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**Peripheral StentClinical Trials:**
| Trial                               | ** ** | ** **                                      | ** ** | **Product**                                                                                                                                                                           | ** ** | **Study Design**                         | ** ** | **Status** |
|-------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------|
| Iliac Trial (U.S.)                  |       | Everflex stent and  Protégé GPS stent |       | In development                                                                                                                                                                        |       | Enrollment anticipated  to begin Q4 2007 |
| DURABILITY (Europe)                 |       | EverFlexTM Stent                            |       | Prospective,  multicenter, non-randomized study to evaluate the long-term (12 month)  patency of the EverFlex stent in SFA lesions                                                    |       | Enrollment and  follow-up continuing.    |
| DURABILITY II (U.S.)                |       | EverFlexTM Stent                            |       | Prospective,  multicenter, non-randomized study to evaluate the safety and effectiveness of  the primary stenting compared to PTA performance goals for the treatment of  SFA lesions |       | Initiating  enrollment Q2 2007           |
|                                |       |                                            |       | Primary safety  endpoint of 30-day major adverse event                                                                                                                                |       |                                     |
|                                |       |                                            |       | Primary effectiveness  endpoint of 12 month patency by duplex                                                                                                                         |       |                                     |
| **Neuro  Clinical Trials:**         |       |                                            |       |                                                                                                                                                                                  |       |                                     |
| Solo Stent  Aneurysm Trial (Europe) |       | Solo Stent                                      |       | In development                                                                                                                                                                        |       | Enrollment anticipated  to begin Q4 2007 |

 

**GovernmentRegulation**

***United States***

Our products areregulated in the United States as medical devices by the FDA and otherregulatory bodies.  FDA regulationsgovern, among other things, the following activities that we perform:

·       productdesign, development and manufacture;

·       conductof clinical trials;

·       productsafety, testing, labeling and storage;

·       submissionto FDA for pre-marketing clearance or approval;

·       recordkeeping procedures;

·       productmarketing, sales and distribution; and

·       post-marketingsurveillance, reporting of deaths or serious injuries and medical devicereporting.

Unless an exemption applies, each medical device wewish to commercially distribute in the United States will require either prior510(k) clearance or prior pre-market approval from the FDA. The FDA 

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classifies medical devicesinto one of three classes, depending on the degree of risk associated with eachmedical device and the extent of controls that are needed to ensure safety andeffectiveness. Devices deemed to pose the least risk are placed in class I. Intermediaterisk devices are placed in class II, which, in most instances, requires themanufacturer to submit to the FDA a pre-market notification requestingauthorization for commercial distribution, known as “510(k) clearance.”  A 510(k) clearance is provided when thedevice is deemed “substantially equivalent” to a predicate device, i.e. onethat was previously approved by the FDA. Class II 510(k) devices maysubject the device to special controls such as performance standards, guidancedocuments specific to the device or post-market surveillance. Most class Iand some low-risk class II devices are exempted from this 510(k) requirement.Class III devices are deemed by the FDA to pose the greatest risk, such aslife-sustaining, life-supporting or implantable devices, or devices deemed to benot substantially equivalent to previously cleared 510(k) devices. Ingeneral, a class III device cannot be marketed in the United States unless theFDA approves the device after submission of a pre-market approval application.

*510(k) ClearancePathway.*   When we are required to obtain 510(k) clearancefor devices that we wish to market, we must submit a pre-market notification tothe FDA demonstrating that the device is substantially equivalent to apreviously cleared 510(k) device or a device that was in commercialdistribution before May 28, 1976 (or to a pre-1976 class III devicefor which the FDA has not yet called for the submission of pre-market approvalapplications). In essence, the basic safety and effectiveness of the predicatedevice supports clearance of the new product. The 510(k) applicant is onlyrequired to demonstrate substantial equivalence to the predicate device. TheFDA attempts to respond to a 510(k) pre-market notification within 90 daysof submission of the notification, but the response may be a request foradditional information or data, sometimes including clinical data. As apractical matter, pre-market clearance can take significantly longer than 90days, including up to one year or more.

After a device receives 510(k) clearance for aspecific intended use, any modification that could significantly affect itssafety or effectiveness, or that would constitute a major change in itsintended use, design or manufacture, will require a new 510(k) clearanceor could require pre-market approval. In addition, new “claims” not found inthe cleared labeling for the device can be deemed a new intended use and cantrigger the requirement for a new 510(k). The FDA requires each manufacturer tomake its own determination whether a change requires a new 510(k), but the FDAcan review and can disagree with a manufacturer’s determination. If the FDAdisagrees with a manufacturer’s determination that a new clearance or approvalis not required for a particular modification, the FDA can require the manufacturerto cease marketing and/or recall the modified device until 510(k) clearanceor pre-market approval is obtained. Also, in these circumstances, themanufacturer may be subject to significant regulatory fines or penalties.

*Pre-marketApproval Pathway.*   A pre-market approval, or PMA,application must be submitted if the device cannot be cleared through the 510(k) process.The PMA process is much more demanding than the 510(k) pre-marketnotification process. A PMA application must be supported by extensive data andinformation including, but not limited to, technical, pre-clinical, clinical,manufacturing and labeling, to establish to the FDA’s satisfaction the safetyand effectiveness of the device.

If the FDA determines that a PMA application iscomplete, the FDA can accept the application and begins an in-depth review ofthe submitted information. The FDA, by statute and regulation, has 180 days toreview an accepted PMA application, although the review generally occurs over asignificantly longer period of time, and can take up to several years. Duringthis review period, the FDA may request additional information or clarificationof information already provided. Also during the review period, an advisorypanel of experts from outside the FDA may be convened to review and evaluatethe application and provide recommendations to the FDA as to the approvabilityof the device. In addition, the FDA will conduct a preapproval inspection ofthe manufacturing facility to ensure compliance with the Quality SystemRegulations. New PMA applications or supplemental PMA applications are requiredfor 

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significant modificationsto the manufacturing process, labeling, use and design of a device that isapproved through the PMA process. PMA supplements often require submission ofthe same type of information as a pre-market approval, except that thesupplement is limited to information needed to support any changes from thedevice covered by the original PMA application, and may not require asextensive clinical data or the convening of an advisory panel. We cannot besure our products will be approved in a timely fashion, if at all.

*ClinicalTrials.*   A clinical trial is almost alwaysrequired to support a PMA application. Historically, clinical trials wereinfrequently required for a 510(k) clearance. Today, information fromclinical trials is increasingly required to support FDA clearance.  Clinical trials for a “significant risk”device require submission of an application for an investigational deviceexemption, or IDE, to the FDA. The IDE application must be supported byappropriate data, such as animal and laboratory testing results, showing thatit is safe to test the device in humans and that the testing protocol isscientifically sound. Clinical trials for a significant risk device may beginonce the application is approved by the FDA and the Institutional Review Board,or IRB, overseeing the clinical trial. If the product is deemed a “non-significantrisk” device under FDA regulations, only the abbreviated IDE requirements apply.Clinical trials must be monitored by the study sponsor and are subject toextensive record keeping and reporting requirements and abbreviated IDE regulationsapply. Clinical trials must be conducted under the oversight of an IRB at therelevant clinical trials site and in accordance with applicable regulations andpolicies including, but not limited to, the FDA’s good clinical practice, orGCP, requirements.

For the protection of human subjects in a clinicaltrial, the FDA and IRB require patients to be informed of both the benefits andrisks of the investigational device and the treatment and/or procedure. This iscalled “informed consent” and the subject must sign a written document statingthat he or she understands the risks and consent to be involved in the trial. Inaddition, study subjects are protected by the Health Insurance Portability andAccountability Act of 1996, or HIPAA. The study subject is asked to provideauthorization to the clinical trial site and manufacturer so they can use certainpersonally identifiable health information about the patient from the clinicaltrial for use in seeking FDA approval and any other specified uses outlined inthe HIPAA authorization.

The study sponsor, the FDA or the IRB at each site atwhich a clinical trial is being performed may suspend a clinical trial at anytime for various reasons, including a belief that the risks to study subjectsoutweigh the anticipated benefits. The FDA may inspect a clinical investigationand, if it determines that the study sponsor failed to comply with the FDAregulations governing clinical investigations, it may issue a warning letter toor take other enforcement action against the study sponsor, the clinicalinvestigation site or the principal investigator. There is always a risk thatthe results of clinical testing may not be sufficient to obtain approval of theproduct.

*DeNovo Pathway.**  *There isanother pathway that may be used to market a medical device. This is called the“de novo” clearance which was established by the Food and Drug AdministrationAct of 1997, known as “FDAMA”. The de novo pathway is for products that do notqualify for 510(k) clearance because there is no predicate upon which toclaim substantial equivalence. If the FDA, after reviewing a 510(k) application,sends a “not substantially equivalent” or “NSE” letter to a manufacturer, thatmanufacturer can request a de novo clearance. This is done by making therequest in writing within 30 days of receipt of the NSE letter. The FDA thenhas 60 days to review the 510(k) application de novo and decide whether toclear the product. If the product is cleared via this pathway, the Agencypublishes the clearance in the Federal Register and the cleared productreceives a 510(k) and becomes a predicate for future products. If theproduct fails to be cleared by this pathway, it can only be approved via thePMA pathway.

*Humanitarian DeviceExemptions.*   A Humanitarian Device Exemption, orHDE, authorizes the marketing of a humanitarian use device for a limitedpatient population. An HDE designation is based on 

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the FDA’sdetermination that a device is intended for the treatment and diagnosis of adisease or condition that affects fewer than 4,000 individuals in the UnitedStates per year. Once an HDE designation has been obtained, an applicant mayseek marketing approval under an HDE. While the HDE application is similar to apre-market approval application and requires a demonstration of safety, unlikea pre-market approval application, an HDE does not require a demonstration ofeffectiveness. Certain limitations apply to the sale and use of devices underan HDE.

*Post-MarketingRequirements.*   After a device is approved formarketing, numerous regulatory requirements apply, including:

·       QualitySystem Regulations, which require manufacturers to follow design, testing,control, documentation and other quality assurance procedures during the manufacturingprocess;

·       labeling,advertising and promotion regulations, which govern product labels andlabeling, prohibit the promotion of products for unapproved or “off-label” usesand impose other restrictions on labeling and promotional activities;

·       medicaldevice reporting regulations, which require that manufacturers report to theFDA if their device may have caused or contributed to a death or serious injuryor malfunctioned in a way that would likely cause or contribute to a death orserious injury if it were to recur; and

·       noticesof correction or removal, and recall regulations.

The advertising andpromotion of “restricted” devices, i.e. those requiring a prescription, areregulated by the FDA. The advertising and promotion of all other devices areregulated by the Federal Trade Commission, or FTC, and by state regulatory andenforcement authorities. But the FDA often asserts itself in those situationsas well because it has continuing authority over the labeling of a product thatcan be affected by the way it is advertised. Recently, some promotionalactivities for FDA-regulated products have been the subject of enforcementactions brought under health care reimbursement laws and consumer protectionstatutes. In addition, under the federal Lanham Act, competitors and others caninitiate litigation relating to advertising claims.

Wehave registered with the FDA as a medical device manufacturer. Compliance withregulatory requirements is tested through periodic, pre-scheduled orunannounced “for cause” facility inspections by the FDA and these inspectionsmay include the manufacturing facilities of our subcontractors. “For cause”inspections are generally conducted when FDA suspects the manufacturer is inserious violations of current Good Manufacturing Practice regulations that havenot been remedied. Failure to comply with applicable regulatory requirementscan result in enforcement action by the FDA, which may include any of thefollowing sanctions:

·       warningletters, fines, injunctions, and civil penalties;

·       repair,replacement, refund, recall or seizure of our products;

·       operatingrestrictions, partial suspension or total shutdown of production;

·       refusinga request for 510(k) clearance or pre-market approval of new products;

·       withdrawing510(k) clearance or pre-market approvals that are already granted; and

·       criminal prosecution.

***International***

Weconduct sales and marketing activities in various foreign countries. Mostmajor markets have different levels of regulatory requirements for medical devices.Modifications to the approved products require a new regulatory submission inall major markets. The regulatory requirements, and the review times, varysignificantly from country to country. Our products can also be marketed inseveral other 

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countries that haveminimal requirements for medical devices. Frequently, we obtain regulatory approval formedical devices in foreign countries first because their regulatory approval isfaster and simpler than the FDA. However, as a general matter, foreign regulatoryrequirements are becoming increasingly stringent.

In the European Union, a single regulatory approvalprocess has been created, under the European Medical Devices Directive, andapproval is represented by the “CE Mark”. In the EU, the EC uses third partiescalled “notified bodies,” to review products for approval. They are private,independent third parties certified by the “competent authorities” (orcountries) to review and approve medical device applications and grant the CEMark in the EU. The competent authorities designate and accredit and otherwiseoversee the notified bodies they accredit. To obtain a CE Mark in the EuropeanUnion, defined products must meet minimum standards of safety and quality andthen comply with one or more of a selection of conformity routes. The EuropeanCommunity has regulations similar to that of the FDA for the advertising andpromotion of medical devices, clinical investigations, and adverse events. Certificationof our quality system for product distribution in the European Union isperformed by Société Générale de Surveillance, located in the United Kingdom.

In Japan, medical devices must be approved prior toimportation and commercial sale by the Ministry of Health, Labor and Welfare,or MHLW. Manufacturers of medical devices outside of Japan that do not operatethrough a Japanese entity are required to use a contractually bound in-countrycaretaker to submit an application for device approval to the MHLW. The MHLWevaluates each device for safety and efficacy. As part of the approval process,the MHLW may require that the product be tested in Japanese laboratories. Theapproval process ranges in length and certain medical devices may require alonger review period for approval. Once approved, the manufacturer may importthe device into Japan for sale by the manufacturer’s contractually boundoffice, importer or distributor. After a device is approved for importation andcommercial sale in Japan, the MHLW continues to monitor sales of approvedproducts for compliance with labeling regulations, which prohibit promotion ofdevices for unapproved uses, and reporting regulations, which require reportingof product malfunctions, including serious injury or death caused by anyapproved device.

In addition to MHLW oversight, the regulation ofmedical devices in Japan is also governed by the Japanese PharmaceuticalAffairs Law, or PAL. PAL was substantially revised in July 2002, and thenew provisions were implemented in stages through April 2005. The revisedlaw changes class categorizations of medical devices in relation to risk,introduces a third-party certification system, strengthens safetycountermeasures for biologically derived products and reinforces safetycountermeasures at the time of resale or rental. Review times for our deviceapplications under the new PAL range from one year if clinical data is notrequired to up to two years if clinical data is required. These review timesare expected to be reduced to six months and one year, respectively, asperformance standards are released for various product categories.

You should read theinformation set forth under “Item 1A. Risk Factors—Our products and productdevelopment and marketing activities are subject to extensive regulation withwhich we may not be able to obtain required regulatory approvals for ourproducts in a cost-effective manner or at all, which could adversely affect ourbusiness and results of operations.”

***Fraud and Abuse Laws***

A variety of federal and state laws apply to the sale,marketing and promotion of medical devices that are paid for, directly orindirectly, by federal or state health care programs, such as Medicare,Medicaid and TRICARE. The restrictions imposed by these laws are in addition tothose imposed by the FDA, FTC and corresponding state agencies. Some of theselaws significantly restrict or prohibit certain types of sales, marketing andpromotional activities by medical device manufacturers. Violation of these lawscan result 

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in significant criminal,civil, and administrative penalties, including imprisonment of individuals,fines and penalties and exclusion or debarment from federal and state healthcare and other programs.

The principal federal lawsinclude: (1) the Anti-Kickback Statute, which prohibits offers to pay orreceive remuneration of any kind for the purpose of inducing or rewardingreferrals of items of services reimbursable by a Federal healthcare program; (2) theFalse Claims Act, which prohibits the submission of false or otherwise improperclaims for payment to a federally-funded health care program; (3) theStark law, which prohibits physicians from referring Medicare or Medicaidpatients to an entity for the provision of certain designated health servicesif the physician (or a member of the physician’s immediate family) has afinancial relationship with that entity, and (4) HIPAA, which prohibitsknowingly and willfully executing a scheme to defraud any health care benefitprogram, including private payors, and falsifying, concealing or covering up amaterial fact or making any materially false, fictitious or fraudulentstatement in connection with the delivery of or payment for health carebenefits, items or services.

***Privacy and Security***

HIPAA requires certain “covered entities” to complywith established standards regarding the privacy and security of protectedhealth information (“PHI”) and to use standardized code sets when conductingcertain electronic transactions. HIPAA further requires that covered entitiesenter into agreements meeting certain regulatory requirements with their “businessassociates”, which effectively obligate the business associates to safeguardthe covered entity’s protected health information against improper use anddisclosure. While not directly regulated by HIPAA, a business associate mayface significant contractual liability pursuant to such an agreement if thebusiness associate breaches the agreement or causes the covered entity to failto comply with HIPAA. The company often has possession of PHI in situationssuch as where clinical studies are conducted or sales representatives are askedby a surgeon to be in a surgical suite to provide technical advice on a deviceduring surgery. HIPAA does not require a business associate agreement to besigned in these circumstances. In the course of our business operations, we maybecome the business associate of one or more covered entities. Accordingly, wemay incur compliance related costs in meeting HIPAA-related obligations underbusiness associates agreements to which we become a party.

The European Union has itsown privacy standards to which we are subject. Recognizing that our businesscontinues to expand internationally, we intend to review our compliance with thesestandards and update or enhance our procedures and practices.

***Third Party Reimbursement***

In the United States, as well as in foreign countries,government-funded or private insurance programs, commonly known as third-partypayors, pay the cost of a significant portion of a patient’s medical expenses.A uniform policy of reimbursement does not exist among all these payors.Therefore, reimbursement can be quite different from payor to payor. We believethat reimbursement is an important factor in the success of any medical device.Consequently, we seek to obtain reimbursement for all of our products.

Reimbursement in the United States depends on ourability to obtain FDA clearances and approvals to market these products.Reimbursement also depends on our ability to demonstrate the short-term andlong-term clinical and cost-effectiveness of our products from the results weobtain from clinical experience and formal clinical trials. We present theseresults at major scientific and medical meetings and publish them in respected,peer-reviewed medical journals.

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The United States Center for Medicare and MedicaidServices, or CMS, sets reimbursement policy for the Medicare program in theUnited States. CMS policies may alter coverage and payment for vascular devicetechnologies in the future. These changes may occur as the result of NationalCoverage Decisions issued by CMS headquarters or as the result of local orregional coverage decisions by contractors under contract with CMS to reviewand make coverage and payment decisions. This administration has a national coveragepolicy, which provides for the diagnosis and treatment of vascular disease inMedicare beneficiaries. We estimate that more than 50% of vascular proceduresare performed on patients covered by Medicare. Commercial payor coverage forvascular disease varies widely across the United States.

All third-partyreimbursement programs, whether government funded or insured commercially,whether inside the United States or outside, are developing increasinglysophisticated methods of controlling health care costs through prospectivereimbursement and capitation programs, group purchasing, redesign of benefits,second opinions required prior to major surgery, careful review of bills andexploration of more cost-effective methods of delivering health care. Thesetypes of programs and legislative changes to reimbursement policies couldpotentially limit the amount which health care providers may be willing to payfor medical devices.

***International Trade***

The sale and shipment ofour products and services across international borders, as well as the purchaseof components and products from international sources, subject us to extensivegovernmental trade regulations. A variety of laws and regulations, both in theUnited States and in the countries in which we transact business, apply to thesale, shipment and provision of goods, services and technology acrossinternational borders, which include import and export laws and regulations,antiboycott laws and antibribery laws. Because we are subject to extensiveregulations in the countries in which we operate, we are subject to the riskthat laws and regulations could change in a way that would expose us toadditional costs, penalties or liabilities.

***Environmental***

We are subject to variousenvironmental health and safety laws, directives and regulations both in theU.S. and abroad. Our operations, like those of other medical device companies,involve the use of substances regulated under environmental laws, primarily inmanufacturing and sterilization processes. We do not expect that compliancewith environmental protection laws will have a material impact on our capitalexpenditures, earnings or competitive position. Given the scope and nature ofthese laws, however, there can be no assurance that environmental laws will nothave a material impact on our results of operations.

**Competition**

We competeprimarily on the basis of our ability to treat vascular diseases and disorderssafely and effectively. Our success can be impacted by the ease andpredictability of product use, adequate third-party reimbursement, brand namerecognition and cost. We believe we compete favorably with respect to thesefactors, although there can be no assurance that we will be able to continue todo so in the future or that new products that perform better than those weoffer will not be introduced. We believe our continued success depends on ourability to:

·       continueto innovate and maintain scientifically advanced technology, being responsiveto the changing needs of our diverse customer base;

·       applyour technology across disease states, product lines and markets;

·       attractand retain skilled personnel;

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·       obtainand maintain regulatory approvals; and

·       cost-effectivelymanufacture and successfully market our products.

The markets in which we compete are highlycompetitive, subject to change and impacted by new product introductions andother activities of industry participants. Several of our competitors havesignificant financial and human capital resources and have establishedreputations with our target physician customers. These competitors includeAbbott Laboratories, Boston Scientific Corporation, Cook Incorporated, CordisCorporation (a Johnson & Johnson company), and Medtronic, Inc. Wealso compete with smaller manufacturers within at least one of the threemarkets we target. In the peripheral vascular and cardiovascular market, wecompete against, among others: C.R. Bard, Inc.; Possis Medical, Inc.;and Spectranetics Corporation. In the neurovascular market, we compete with manufacturersof embolic coils and related devices, including: Balt Extrusion;Terumo/MicroVention, Inc.; and Micrus Corporation. In addition, we competewith a number of drug therapy treatments manufactured by major pharmaceuticalcompanies.

Our competitors dedicatesignificant resources to aggressively promote their products. Competitors maydevelop technologies and products that are safer, more effective, easier to useor less expensive than ours. To compete effectively, we will need to continueto demonstrate that our products are attractive alternatives to other devicesand treatments, differentiating them on the basis of safety, efficacy,performance, ease of use, brand and name recognition, reputation and price. Wehave encountered and expect to continue to encounter potential physiciancustomers who, due to existing relationships with our competitors, arecommitted to or prefer the products offered by these competitors.

**Employees**

As of December 31,2006, we had approximately 975 employees. From time to time, we also employindependent contractors to support our operations.

**IntellectualProperty Rights**

We believe that in order to maintain a competitiveadvantage in the marketplace, we must develop and maintain protection of theproprietary aspects of our technology. We rely on a combination of patent,trademark, trade secret, copyright and other intellectual property rights andmeasures to aggressively protect our intellectual property that we considerimportant to our business.

We have developed a patent portfolio internally, aswell as through acquisitions, that cover many aspects of our product offeringsin the peripheral vascular, neurovascular and cardiovascular markets. As ofDecember 31, 2006, we had 260 issued patents and over 369 pending patentapplications in the United States, Europe, Japan, Australia, Canada and othercountries throughout the world. The expiration dates of our material patentsrange from 2009 to 2024. Additionally, we own or have rights to materialtrademarks or trade names that we use in conjunction with the sale of ourproducts.

We continue to invest in internal research anddevelopment of concepts and product ideas for the peripheral vascular,neurovascular and cardiovascular markets. This, combined with our patentprogram, has increased the number of patentable concepts we generate.

We manufacture and market our products both under ourown patents and under our license agreements with other parties. Additionally,we are the sales representative and distributor of product lines of Invatec, whichhas its own proprietary and patented technology.

While we believe that our patents are valuable, ourknowledge and experience, our creative product development teams and marketingstaff, and our confidential information regarding manufacturing processes,materials and product design have been equally important in maintaining ourproprietary 

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product offering. Toprotect that value, we have instituted policies and procedures, as well as arequirement that, as a condition of employment, all employees execute aconfidentiality agreement relating to proprietary information and theassignment of intellectual property rights to us.

We also rely on unpatented proprietary technology. Weseek to protect our trade secrets and proprietary know-how, in part, with confidentialityagreements with consultants, vendors and employees, although we cannot becertain that the agreements will not be breached, or that we will have adequateremedies for any breach.

There are risks related toour intellectual property rights. You should read the information set forthunder “Item 1A. Risk Factors—If third parties claim that we infringe upon theirintellectual property rights, we may incur liabilities and costs and may haveto redesign or discontinue selling the affected product,” “Item 1A. RiskFactors—We are currently a party to a number of intellectual property claims,which are costly to defend and the resolution of which could have a materialadverse effect on our business and results of operations.” and “Item 1A. RiskFactors—If our patents and other intellectual property rights do not adequatelyprotect our products, we may lose market share to our competitors, which wouldharm our business.”

**Forward-LookingStatements**

This annual report on Form 10-K containsnot only historical information, but also forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, which aresubject to the safe harbor created by those sections. In addition, we or otherson our behalf may make forward-looking statements from time to time in oralpresentations, including telephone conferences and/or web casts open to thepublic, in press releases or reports, on our Internet web site or otherwise.All statements other than statements of historical facts included in thisreport that address activities, events or developments that we expect, believeor anticipate will or may occur in the future are forward-looking statementsincluding, in particular, the statements about our plans, objectives,strategies and prospects regarding, among other things, our financialcondition, results of operations and business. We have identified some of theseforward-looking statements with words like “believe,” “may,” “could,” “might,”“forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,”“intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” or“continue” and other words and terms of similar meaning. These forward-lookingstatements may be contained in the notes to our consolidated financialstatements and elsewhere in this report, including under the caption“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

Forward-looking statements involve risks anduncertainties. These uncertainties include factors that affect all businessesas well as matters specific to us. Some of the factors known to us that couldcause our actual results to differ materially from what we have anticipated inour forward-looking statements are described under the heading “Item 1A. RiskFactors” below.

We wish to caution readersnot to place undue reliance on any forward-looking statement that speaks onlyas of the date made and to recognize that forward-looking statements are predictionsof future results, which may not occur as anticipated. Actual results coulddiffer materially from those anticipated in the forward-looking statements andfrom historical results, due to the risks and uncertainties described under theheading “Item 1A. Risk Factors” below, as well as others that we may considerimmaterial or do not anticipate at this time. Although we believe that theexpectations reflected in our forward-looking statements are reasonable, we donot know whether our expectations will prove correct. Our expectationsreflected in our forward-looking statements can be affected by inaccurateassumptions we might make or by known or unknown risks and uncertainties,including those described below under the heading “Item 1A. Risk Factors.”  The risks and uncertainties described underthe heading “Item 1A. Risk Factors” 

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beloware not exclusive and further information concerning us and our business,including factors that potentially could materially affect our financialresults or condition, may emerge from time to time. We assume no obligation toupdate forward-looking statements to reflect actual results or changes infactors or assumptions affecting such forward-looking statements. We adviseyou, however, to consult any further disclosures we make on related subjects inour quarterly reports on Form 10-Q and current reports onForm 8-K that we file with or furnish to the Securities and ExchangeCommission.

**AvailableInformation**

ev3 LLC, our predecessor company prior to our initialpublic offering in June 2005, was formed in September 2003.Immediately prior to the consummation of our initial public offering inJune 2005, ev3 LLC merged with and into us, at which time we became theholding company for all of ev3 LLC’s subsidiaries. Our principal executiveoffices are located at 9600 54th Avenue North, Suite 100, Plymouth,Minnesota 55442. Our telephone number is (763) 398-7000, and our Internetweb site address is *www.ev3.net*.We are a Delaware corporation. The information contained on our web site orconnected to our website is not incorporated by reference into and should notbe considered part of this report.

We make available, free ofcharge and through our Internet web site, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and any amendments to any such reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934,as amended, as soon as reasonably practicable after we electronically file suchmaterial with, or furnish it to, the Securities and Exchange Commission. Wealso make available, free of charge and through our Internet web site under theInvestor Relations—Corporate Governance section, to any stockholder whorequests, the charters of our board committees and our Code of Business Conductand Code of Ethics for Senior Executive and Financial Officers. Requests forcopies can be directed to Investor Relations at (763) 398-7000.

**ITEM 1A.**        RISKFACTORS

The following aresignificant factors known to us that could materially adversely affect ourbusiness, financial condition, or operating results.

**Risks Related toOur Business and Industry.**

***We have a historyof operating losses and negative cash flow.***

Our operations to datehave consumed substantial amounts of cash, and we expect this condition tocontinue for at least the next 9 months. We had an accumulated deficit of$614.6 million at December 31, 2006. Our ability to achieve cash flowpositive operations will be influenced by many factors, including the extentand duration of our future operating losses, the level and timing of futuresales and expenditures, market acceptance of new products, the results andscope of ongoing research and development projects, competing technologies,market and regulatory developments and the future course of intellectualproperty litigation. If adequate cash flow is not available to us, our businesswill be negatively impacted.

***Some of ourproducts are emerging technologies or have been recently introduced into themarket and may not achieve market acceptance once they are introduced intotheir markets, which could adversely affect our business.***

Even if we are successfulin developing safe and effective products that receive regulatory approval,such products may not gain market acceptance. Our market share for our existingproducts may not grow, and our products that have yet to be introduced may notbe accepted in the market. We will need to invest in significant training andeducation of our physician customers to achieve market acceptance of ourproducts with no assurance of success. In order for any of our products to beaccepted, we must address the needs of potential customers and our customersmust believe our products are effective and commercially 

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beneficial.However, even if customers accept our products, this acceptance may nottranslate into sales if our competitors have developed similar products thatour customers prefer. If our products do not gain market acceptance or if ourcustomers prefer our competitors’ products, our business could be adverselyaffected.

***Delays in productintroductions could adversely affect our net sales.***

The endovascular devicemarket is highly competitive and designs change often to adjust to patentconstraints and to changing market preferences. Therefore, product life cyclesare relatively short. As a result, any delays in our product launches maysignificantly impede our ability to enter or compete in a given market and mayreduce the sales that we are able to generate from these products. As discussedunder the heading “Item 1. Business,” we plan to introduce additional productsduring 2007 which we expect to result in net sales. We may experience delays inany phase of a product launch, including during research and development, clinicaltrials, regulatory approvals, manufacturing, marketing and the educationprocess. In addition, the suppliers of products that we do not manufacture cansuffer similar delays, which could cause delays in our product introductions.If we suffer delays in product introductions, our net sales could be adverselyaffected.

***If third partiesclaim that we infringe upon their intellectual property rights, we may incurliabilities and costs and may have to redesign or discontinue selling theaffected product.***

The medical deviceindustry is litigious with respect to patents and other intellectual propertyrights. Companies operating in our industry routinely seek patent protectionfor their product designs, and many of our principal competitors have largepatent portfolios. Companies in the medical device industry have usedintellectual property litigation to gain a competitive advantage. Whether aproduct infringes a patent involves complex legal and factual issues, thedetermination of which is often uncertain. We face the risk of claims that wehave infringed on third parties’ intellectual property rights. Prior tolaunching major new products in our key markets, we normally evaluate existingintellectual property rights. However, our competitors may also have filed forpatent protection which is not as yet a matter of public knowledge or claimtrademark rights that have not been revealed through our availability searches.Our efforts to identify and avoid infringing on third parties’ intellectualproperty rights may not always be successful. Any claims of patent or otherintellectual property infringement, even those without merit, could:

·       beexpensive and time consuming to defend;

·       resultin us being required to pay significant damages to third parties;

·       causeus to cease making or selling products that incorporate the challengedintellectual property;

·       requireus to redesign, reengineer or rebrand our products, if feasible;

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·       requireus to enter into royalty or licensing agreements in order to obtain the rightto use a third party’s intellectual property, which agreements may not beavailable on terms acceptable to us or at all;

·       divertthe attention of our management; or

·       resultin our customers or potential customers deferring or limiting their purchase oruse of the affected products until resolution of the litigation.

In addition, new patents obtained by our competitorscould threaten a product’s continued life in the market even after it hasalready been introduced.

***We are currently aparty to a number of intellectual property claims, which are costly to defendand the resolution of which could have a material adverse effect on ourbusiness and results of operations.***

We cannot assure you that we do not infringe anypatents or other proprietary rights held by third parties. In that regard, in March 2005we were served with a complaint by Boston Scientific Corporation and one of itsaffiliates which claims that some of our products, including our SpideRXEmbolic Protection Device, infringe certain of Boston Scientific’s patents. BostonScientific is seeking monetary damages from us and to enjoin us from thealleged infringement. Subsequently, we added counterclaims for infringement ofthree of our patents, Boston Scientific has added two patents to its claims, aswell as a claim against us for misappropriation of trade secrets. Prior to theacquisition of Dendron GmbH by our then-subsidiary, Micro Therapeutics, Inc.,or MTI, Dendron became involved in litigation in Europe involving patentscovering certain of our products, which litigation is still active. Concurrentwith MTI’s acquisition of Dendron, MTI initiated a series of legal actionsrelated to our Sapphire coils in the Netherlands and the United Kingdom withthe primary purpose of asserting both invalidity and non-infringement by it ofcertain patents held by others with respect to detachable coils and certaindelivery systems. In addition, the patent holders against whom MTI initiatedthe actions in the Netherlands and the United Kingdom have initiated legalactions against MTI in the United States that allege infringement by MTI ofcertain patents held by them. Subsequently, we filed counterclaims assertingnon-infringement by us, invalidity of the patents, inequitable conduct in theprocurement of certain patents and violation of federal antitrust laws. A trialdate has been set for June 2007.

Because these matters are not yet concluded andbecause of the complexity of the cases, we cannot estimate the possible loss orrange of loss, if any, associated with their resolution. However, there can beno assurance that the ultimate resolution of these matters will not result in amaterial adverse effect on our business, financial condition or results ofoperations. If our products were found to infringe on any proprietary rights ofa third party, we could be required to pay significant damages or license feesto the third party or cease production, marketing and distribution of thoseproducts, which could in turn have a material adverse effect on our business,financial condition and results of operations. Litigation may also be necessaryto enforce patent rights we hold or to protect trade secrets or techniques weown. See “Item 3. Legal Proceedings” and Note 17 to our consolidated financialstatements included in this report. Such litigation is costly and may adverselyaffect our results of operations.

We may also be subject todisputes with other companies as to the ownership of patents that we maydevelop. Such disputes could result in the enjoining of sales of our productsor us being required to pay commercially unreasonable licensing fees. If thisoccurs, our net sales or the cost of selling the infringing product, and thereforeour results of operations, would be negatively affected.

***Our businessstrategy relies on assumptions about the market for our products, which, ifincorrect, would adversely affect our business prospects and profitability.***

We are focused on the marketfor endovascular devices used to treat vascular diseases and disorders. Webelieve that the aging of the general population and increasingly inactivelifestyles will continue and 

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thatthese trends will increase the need for our products. However, the projecteddemand for our products could materially differ from actual demand if ourassumptions regarding these trends and acceptance of our products by themedical community prove to be incorrect or do not materialize or if drugtherapies gain more widespread acceptance as a viable alternative treatment,which in each case would adversely affect our business prospects and results ofoperations.

***If our patents andother intellectual property rights do not adequately protect our products, wemay lose market share to our competitors, which would harm our business.***

Our success depends significantly on our ability toprotect our proprietary rights to the technologies used in our products. Werely on patent protection, as well as a combination of copyright and trademarklaws and nondisclosure, confidentiality and other contractual arrangements toprotect our proprietary technology. However, these legal means afford onlylimited protection and may not adequately protect our rights or permit us togain or keep any competitive advantage. In addition, we cannot be assured thatany of our pending patent applications will result in the issuance of a patentto us. The United States Patent and Trademark Office, or PTO, may deny orrequire significant narrowing of claims in our pending patent applications, andpatents issued as a result of the pending patent applications, if any, may notprovide us with significant commercial protection or be issued in a form thatis advantageous to us. We could also incur substantial costs in proceedingsbefore the PTO. These proceedings could result in adverse decisions as to thepriority of our inventions and the narrowing or invalidation of claims inissued patents. Our issued patents and those that may be issued in the futuremay be challenged, invalidated or circumvented, which could limit our abilityto stop competitors from marketing related products. Although we have takensteps to protect our intellectual property and proprietary technology, there isno assurance that third parties will not be able to design around our patents. Wealso rely on unpatented proprietary technology. We cannot assure you that wecan meaningfully protect all our rights in our unpatented proprietarytechnology or that others will not independently develop substantiallyequivalent proprietary products or processes or otherwise gain access to ourunpatented proprietary technology. We seek to protect our know-how and otherunpatented proprietary technology, in part with confidentiality agreements andintellectual property assignment agreements with our employees, independentdistributors and consultants. However, such agreements may not be enforceableor may not provide meaningful protection for our proprietary information in theevent of unauthorized use or disclosure or other breaches of the agreements orin the event that our competitors discover or independently develop similar oridentical designs or other proprietary information. In addition, we rely on theuse of registered trademarks with respect to the brand names of some of ourproducts. We also rely on common law trademark protection for some brand names,which are not protected to the same extent as our rights in the use of ourregistered trademarks.

Furthermore, the laws of foreign countries may notprotect our intellectual property rights to the same extent as the laws of theUnited States. For example, foreign countries generally do not allow patents tocover methods for performing surgical procedures. If we cannot adequatelyprotect our intellectual property rights in these foreign countries, ourcompetitors may be able to compete more directly with us, which could adverselyaffect our competitive position and business.

We also hold licenses fromthird parties that are necessary to use certain technologies used in the designand manufacturing of some of our products. The loss of such licenses wouldprevent us from manufacturing, marketing and selling these products, whichcould harm our business.

***We may requireadditional capital in the future, which may not be available or may beavailable only on unfavorable terms. In addition, any equity financings may bedilutive to our stockholders.***

Our capital requirementsdepend on many factors, including the amount and timing of our continued lossesand our ability to reach profitability, our expenditures on intellectualproperty and technologies, the number of clinical trials which we conduct, newproduct development and new product acquisition. To the 

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extentthat our existing capital, including amounts available under our revolving lineof credit, is insufficient to cover any losses and meet these requirements, wewill need to raise additional funds through financings or borrowings or curtailour growth and reduce our assets. From time to time, we may also sell a giventechnology or intellectual property having a development timeline ordevelopment cost that is inconsistent with our investment horizon or which doesnot adequately complement our existing product portfolio. We have historicallyrelied on financing from Warburg Pincus and other investors, but there can beno assurance that Warburg Pincus or other investors will provide such financingin the future. Any equity or debt financing, if available at all, may be on termsthat are not favorable to us. Equity financings could result in dilution to ourstockholders, and the securities issued in future financings as well as in anyfuture acquisitions may have rights, preferences and privileges that are seniorto those of our common stock. If our need for capital arises because ofcontinued losses, the occurrence of these losses may make it more difficult forus to raise the necessary capital.

***We manufacture ourproducts at single locations. Any disruption in these manufacturing facilities,any patent infringement claims with respect to our manufacturing process orotherwise any inability to manufacture a sufficient number of our products tomeet demand could adversely affect our business and results of operations.***

We rely on ourmanufacturing facilities in Plymouth, Minnesota and in Irvine, California. ThePlymouth and Irvine facilities and the manufacturing equipment we use toproduce our products if damaged or destroyed would be difficult to replace andcould require substantial lead-time to repair or replace. Our facilities may beaffected by natural or man-made disasters. In the event one of our twofacilities was affected by a disaster, we would be forced to rely onthird-party manufacturers if we could not shift production to our othermanufacturing facility. In the case of a device with a pre-market approvalapplication we might in such event be required to obtain prior U.S. Food andDrug Administration, or FDA, or notified body approval of an alternatemanufacturing facility, which could delay or prevent our marketing of theaffected product until such approval is obtained. Although we believe wepossess adequate insurance for damage to our property and the disruption of ourbusiness from casualties, such insurance may not be sufficient to cover all ofour potential losses and may not continue to be available to us on acceptableterms, or at all. It is also possible that one of our competitors could claimthat our manufacturing process violates an existing patent. If we wereunsuccessful in defending such a claim, we might be forced to stop productionat one or both of our manufacturing facilities in the United States and to seekalternative facilities. Even if we were able to identify such alternativefacilities, we might incur additional costs and experience a disruption in thesupply of our products until those facilities are available. Any disruption inour manufacturing capacity could have an adverse impact on our ability toproduce sufficient inventory of our products or may require us to incuradditional expenses in order to produce sufficient inventory, and thereforewould adversely affect our net sales and results of operations. Any disruptionor delay at our manufacturing facilities, any inability to accurately predictthe number of products to manufacture or to expand our manufacturingcapabilities if necessary could impair our ability to meet the demand of ourcustomers and these customers may cancel orders or purchase products from ourcompetitors, which could adversely affect our business and results ofoperations.

***If we lose theservices of our chief executive officer or other key personnel, we may not beable to manage our operations and meet our strategic objectives.***

Our future successdepends, in large part, on the continued service of James M. Corbett, ourpresident and chief executive officer. Mr. Corbett’s continuation with usis integral to our future success, based on his significant expertise andknowledge of our business and products. Although we have key person insurancewith respect to Mr. Corbett, any loss or interruption of the services of Mr. Corbettcould significantly reduce our ability to effectively manage our operations andimplement our strategy. Also, we depend on the continued service of key managerial,scientific, sales and technical personnel, as well as our ability to continueto attract and retain additional highly qualified personnel, especiallyexperienced medical device 

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salespersonnel. We compete for such personnel with other companies, academicinstitutions, government entities and other organizations. Any loss orinterruption of the services of our other key personnel or any employeeslowdowns, strikes or similar actions could also significantly reduce ourability to effectively manage our operations and meet our strategic objectivesbecause we cannot assure you that we would be able to find appropriatereplacement personnel should the need arise.

***Our dependence on key suppliers puts us at risk ofinterruptions in the availability of our products, which could reduce our netsales and adversely affect our results of operations. In addition, increases inprices for raw materials and components used in our products could adverselyaffect our results of operations.***

We rely on a limited numberof suppliers for the raw materials and components used in our products. Forreasons of quality assurance, cost effectiveness or availability, we procurecertain raw materials and components only from a sole supplier. Our rawmaterials and components are generally acquired through purchase orders placedin the ordinary course of business, and we do not have any guaranteed orcontractual supply arrangements with many of our key or single source suppliers.In addition, we also rely on independent contract manufacturers for some of ourproducts. Independent manufacturers have possession of, and in some cases holdtitle to, molds for certain manufactured components of our products. Ourdependence on third-party suppliers involves several risks, including limitedcontrol over pricing, availability, quality and delivery schedules, as well asmanufacturing yields and costs. Suppliers of raw materials and components maydecide, or be required, for reasons beyond our control to cease supplying rawmaterials and components to us or to raise their prices. Shortages of rawmaterials, quality control problems, production capacity constraints or delaysby our contract manufacturers could negatively affect our ability to meet ourproduction obligations and result in increased prices for affected parts. Anysuch shortage, constraint or delay may result in delays in shipments of ourproducts or components, which could adversely affect our net sales and resultsof operations. Increases in prices for raw materials and components used in ourproducts could also adversely affect our results of operations.

In addition, the FDA andforeign regulators may require additional testing of any raw materials orcomponents from new suppliers prior to our use of these materials or components.In the case of a device with a pre-market approval application, we may berequired to obtain prior FDA approval of a new supplier, which could delay orprevent our access or use of such raw materials or components or our marketingof affected products until such approval is granted. In the case of a devicewith clearance under Section 510(k) of the Federal Food, Drug andCosmetic Act, which we refer to as a 510(k), we may be required to submit a new510(k) if a change in a raw material or component supplier results in achange in a material or component supplied that is not within the 510(k) cleareddevice specifications. If we need to establish additional or replacementsuppliers for some of these components, our access to the components might bedelayed while we qualify such suppliers and obtain any necessary FDA approvals.Our suppliers of finished goods are also subject to regulatory inspection andscrutiny. Any adverse regulatory finding or action against those supplierscould impact their ability to supply us goods for distribution and sale.

***Significant and unexpected claims under our EverFlexself-expanding stent worldwide fracture-free guarantee program in excess of ourreserves could significantly harm our business, operating results and financialcondition.***

Beginning in October 2006,we began providing a worldwide fracture-free guarantee as part of our marketingand advertising strategy for our EverFlex self-expanding stents. In the eventthat an EverFlex self-expanding stent should fracture within two years ofimplantation, we will provide a free replacement product to the medicalfacility, subject to the terms and conditions of the program.  Although we have tested our EverFlexself-expanding stents in rigorous simulated fatigue testing, we commerciallylaunched our EverFlex self-expanding stents on a worldwide basis in March 2006.We, therefore, do not have at least two years of commercial data on which tobase our expected claim rates under the program. We may receive significant andunexpected claims under our guarantee program that could exceed theamount of our reserves for the program. Significant claims in excess ofour progam reserves could significantly harm our business, operatingresults and financial condition.

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***Our inability tosuccessfully grow through acquisitions, our failure to integrate any acquiredbusinesses successfully into our existing operations or our discovery ofpreviously undisclosed liabilities could negatively affect our business andresults of operations.***

In order to buildour core technology platform, we have acquired several businesses since ourinception. Our most recent acquisition was in January 2006, when wecompleted our acquisition of the outstanding shares of Micro Therapeutics, Inc.that we did not already own. We expect to actively pursue additionalacquisitions, investments in or alliances with, other companies and businessesin the future as a component of our business strategy. Our ability to growthrough acquisitions, investments and alliances depends upon our ability toidentify, negotiate, complete and integrate attractive candidates on favorableterms and to obtain any necessary financing. Our inability to complete one ormore acquisitions, investments or alliances could impair our ability to developour product lines and to compete against many industry participants, many ofwhom have product lines broader than ours. Acquisitions, investments andalliances involve risks, including:

·       difficultiesin integrating any acquired companies, personnel and products into our existingbusiness;

·       delaysin realizing projected efficiencies, cost savings, revenue synergies and otherbenefits of the acquired company or products;

·       inaccurateassessment of undisclosed, contingent or other liabilities or problems;

·       diversionof our management’s time and attention from other business concerns;

·       limitedor no direct prior experience in new markets or countries we may enter;

·       highercosts of integration than we anticipated; or

·       difficultiesin retaining key employees of the acquired business who are necessary to managethese acquisitions.

In addition, anacquisition, investment or alliance could materially impair our operatingresults and liquidity by causing us to incur debt or reallocate amounts ofcapital from other operating initiatives or requiring us to amortizetransaction expenses and acquired assets, incur non-recurring charges as aresult of incorrect estimates made in the accounting for such transactions orrecord asset impairment charges. We may also discover deficiencies in internalcontrols, data adequacy and integrity, product quality, regulatory complianceand product liabilities which we did not uncover prior to our acquisition ofsuch businesses, which could result in us becoming subject to penalties or otherliabilities. Any difficulties in the integration of acquired businesses orunexpected penalties or liabilities in connection with such businesses couldhave a material adverse effect on our results of operations and financialcondition. These risks could be heightened if we complete several acquisitionswithin a relatively short period of time.

***The demand for ourproducts, the prices which customers and patients are willing to pay for ourproducts and the number of procedures performed using our products depend uponthe ability of our customers and patients to obtain sufficient third partyreimbursement for their purchases of our products.***

Sales of our products depend in part on the sufficientreimbursement by governmental and private health care payors to our physiciancustomers or their patients for the purchase and use of our products. In theUnited States, health care providers that purchase our products generally relyon third-party payors, principally federal Medicare, state Medicaid and privatehealth insurance plans, to pay for all or a portion of the cost of endovascularprocedures. Reimbursement systems in international markets vary significantlyby country, and by region within some countries, and reimbursement approvalsmust be obtained on a country-by-country basis and can take up to 18 months orlonger. Many international markets have government-managed health care systemsthat govern reimbursement for new devices and procedures. In 

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most markets, there areprivate insurance systems as well as government-managed systems. Additionally,some foreign reimbursement systems provide for limited payments in a givenperiod and therefore result in extended payment periods. Any delays inobtaining, or an inability to obtain, reimbursement approvals or sufficientreimbursement for our products could significantly affect the acceptance of ourproducts and have a material adverse effect on our business. In addition, ifthe reimbursement policies of domestic or foreign governmental or privatehealth care payors were to change, our customers would likely change theirpurchasing patterns and/or the frequency of their purchases of the affectedproducts. Additionally, payors continue to review their coverage policiescarefully for existing and new therapies and can, without notice, deny coveragefor treatments that include the use of our products. Our business would benegatively impacted to the extent any such changes reduce reimbursement for ourproducts.

Healthcare costs have risen significantly over thepast decade. There have been and may continue to be proposals by legislators,regulators and third-party payors to keep these costs down. The continuingefforts of governments, insurance companies and other payors of healthcarecosts to contain or reduce these costs, combined with closer scrutiny of suchcosts, could lead to patients being unable to obtain approval for payment fromthese third-party payors. The cost containment measures that healthcareproviders are instituting both in the United States and internationally couldharm our business. Some health care providers in the United States have adoptedor are considering a managed care system in which the providers contract toprovide comprehensive health care for a fixed cost per person. Health careproviders may attempt to control costs by authorizing fewer elective surgicalprocedures or by requiring the use of the least expensive devices possible,which could adversely affect the demand for our products or the price at whichwe can sell our products.

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

***Consolidation inthe healthcare industry could lead to demands for price concessions or to theexclusion of some suppliers from certain of our markets, which could have anadverse effect on our business, financial condition or results of operations.***

Because healthcare costshave risen significantly over the past decade, numerous initiatives and reformsinitiated by legislators, regulators and third-party payors to curb these costshave resulted in a consolidation trend in the healthcare industry to create newcompanies with greater market power, including hospitals. As the healthcareindustry consolidates, competition to provide products and services to industryparticipants has become and will continue to become more intense. This in turnhas resulted and will likely continue to result in greater pricing pressuresand the exclusion of certain suppliers from important market segments as grouppurchasing organizations, independent delivery networks and large singleaccounts continue to use their market power to consolidate purchasing decisionsfor some of our hospital customers. We expect that market demand, government regulation,third-party reimbursement policies and societal pressures will continue tochange the worldwide healthcare industry, resulting in further businessconsolidations and alliances among our customers, which may reduce competition,exert further downward pressure on the prices of our products and may adverselyimpact our business, financial condition or results of operations.

***Our products andproduct development and marketing activities are subject to extensiveregulation with which we may not be able to obtain required regulatoryapprovals for our products in a cost-effective manner or at all, which couldadversely affect our business and results of operations.***

The production and marketing of our products and ourongoing research and development, preclinical testing and clinical trialactivities are subject to extensive regulation and review by numerousgovernmental 

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authorities both in theUnited States and abroad. U.S. and foreign regulations applicable to medicaldevices are wide-ranging and govern, among other things, the development,testing, marketing and pre-market review of new medical devices, in addition toregulating manufacturing practices, reporting, advertising, exporting, labelingand record keeping procedures. We are required to obtain FDA approval orclearance before we can market our products in the United States and certainforeign countries. The regulatory process requires significant time, effort andexpenditures to bring our products to market, and we cannot assure that any ofour products will be approved for sale. Even if regulatory approval orclearance of a product is granted, it may not be granted within the timeframethat we expect, which could have an adverse effect on our operating results andfinancial condition. In addition, even if regulatory approval or clearance of aproduct is granted, the approval or clearance could limit the uses for whichthe product may be labeled and promoted, which may limit the market for ourproducts. Even after a product is approved or cleared by the FDA, we haveongoing responsibilities under FDA regulations, non-compliance of which couldresult in the subsequent withdrawal of such approvals or clearances, or suchapprovals or clearances could be withdrawn due to the occurrence of unforeseenproblems following initial approval. Any failure to obtain regulatory approvalsor clearances on a timely basis or the subsequent withdrawal of such approvalsor clearances could prevent us from successfully marketing our products, whichcould adversely affect our business and results of operations.

Our failure tocomply with applicable regulatory requirements could result in governmentalagencies:

·       imposingfines and penalties on us;

·       preventingus from manufacturing or selling our products;

·       bringingcivil or criminal charges against us;

·       delayingthe introduction of our new products into the market;

·       suspendingany ongoing clinical trials;

·       issuingand injunction preventing us from manufacturing or selling our products orimposing restrictions;

·       recallingor seizing our products; or

·       withdrawingor denying approvals or clearances for our products.

If any or all of the foregoing were to occur, we maynot be able to meet the demands of our customers and our customers may cancelorders or purchase products from our competitors, which could adversely affectour business and results of operations.

When required, with respect to the products we marketin the United States, we have obtained pre-market notification clearance under Section 510(k),but we do not believe certain modifications we have made to our productsrequire us to submit new 510(k) notifications. However, if the FDAdisagrees with us and requires us to submit a new 510(k) notification formodifications to our existing products, we may be subject to enforcementactions by the FDA and be required to stop marketing the products while the FDAreviews the 510(k) notification. If the FDA requires us to go through alengthier, more rigorous examination than we had expected, our productintroductions or modifications could be delayed or canceled, which could causeour sales to decline. In addition, the FDA may determine that future productswill require the more costly, lengthy and uncertain pre-market approvalapplication process. Products that are approved through a pre-market approvalapplication generally need FDA approval before they can be modified. If we failto submit changes to products developed under investigational device exemptionsor pre-market approval applications in a timely or adequate manner, we maybecome subject to regulatory actions.

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Because we are subject to extensive regulation in thecountries in which we operate, we are subject to the risk that regulationscould change in a way that would expose us to additional costs, penalties orliabilities. For example, in the United States we sell a number of our productsto physicians who may elect to use these products in ways that are not withinthe scope of the approval or clearance given by the FDA or for other thanFDA-approved indications, often referred to as “off-label” use. There are lawsand regulations prohibiting the promotion of products for such off-label usewhich restrict our ability to market our products and could adversely affectour growth. Although we have strict policies against the unlawful promotion ofproducts for off-label use and we train our employees on these policies, it ispossible that one or more of our employees will not follow the policies, orthat regulations would change in a way that may hinder our ability to sell suchproducts or make it more costly to do so, which could expose us to financialpenalties as well as loss of approval to market and sell the affected products.If we want to market any of our products for use in ways for which they are notcurrently approved, we may need to conduct clinical trials and obtain approvalfrom appropriate regulatory bodies, which could be time-consuming and costly.In addition, off-label use may not be safe or effective and may result inunfavorable outcomes to patients, resulting in potential liability to us.Penalties or liabilities stemming from off-label use could have a materialadverse effect on our results of operations. In addition, if physicians ceaseor lessen their use of products for other than FDA-approved indications, salesof our products could decline, which could materially adversely affect our netsales and results of operations.

In addition, we currentlymarket our products in select countries outside of the U.S. In order to marketour products abroad, we must obtain separate regulatory approvals and complywith numerous requirements. If additional regulatory requirements areimplemented in the foreign countries in which we sell our products, the cost ofdeveloping or selling our products may increase. For example, recentregulations in Japan have increased the regulatory and quality assurancerequirements in order to obtain and maintain regulatory approval to market ourproducts in Japan. These new regulations have resulted in higher costs anddelays in securing approval to market our products in Japan. In addition, wedepend on our distributors outside the United States in seeking regulatoryapproval to market our devices in other countries and we are thereforedependent on persons outside of our direct control to secure such approvals.For example, we are highly dependent on distributors in emerging markets suchas China and Brazil for regulatory submissions and approvals and do not havedirect access to health care agencies in those markets to ensure timelyregulatory approvals or prompt resolution of regulatory or compliance matters.If our distributors fail to obtain the required approvals or do not do so in atimely manner, our net sales from our international operations and our resultsof operations may be adversely affected.

***If we or othersidentify side effects after any of our products are on the market, we may berequired to withdraw our products from the market, which would hinder orpreclude our ability to generate revenues.***

As part of ourpost-market regulatory responsibilities for our products classified as medicaldevices, we are required to report all serious injuries or deaths involving ourproducts, and any malfunctions where a serious injury or death would be likelyif the malfunction were to recur. If we or others identify side effects afterany of our products are on the market:

·       regulatoryauthorities may withdraw their approvals;

·       wemay be required to reformulate our products;

·       wemay have to recall the affected products from the market and may not be able toreintroduce them onto the market;

·       ourreputation in the marketplace may suffer; and

·       wemay become the target of lawsuits, including class action suits.

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Any of these events couldharm or prevent sales of the affected products or could substantially increasethe costs and expenses of commercializing or marketing these products.

***Our manufacturingfacilities are subject to extensive governmental regulation with whichcompliance is costly and which exposes us to penalties for non-compliance.***

We and our third partymanufacturers are required to register with the FDA as device manufacturers andas a result, we and our third party manufacturers are subject to periodicinspections by the FDA for compliance with the FDA’s Quality System Regulation,or QSR, requirements, which require manufacturers of medical devices to adhereto certain regulations, including testing, quality control and documentationprocedures. In addition, the federal Medical Device Reporting regulationsrequire us and our third party manufacturers to provide information to the FDAwhenever there is evidence that reasonably suggests that a device may havecaused or contributed to a death or serious injury or, if a malfunction were tooccur, could cause or contribute to a death or serious injury. Compliance withapplicable regulatory requirements is subject to continual review and isrigorously monitored through periodic inspections by the FDA. In the EuropeanCommunity, we are required to maintain certain International Organization forStandardization (ISO) certifications in order to sell products and we undergoperiodic inspections by notified bodies to obtain and maintain thesecertifications. If we or our manufacturers fail to adhere to QSR or ISOrequirements, this could delay production of our products and lead to fines,difficulties and delays in obtaining regulatory approvals and clearances, thewithdrawal of regulatory approvals and clearances, recalls or otherconsequences, which could in turn have a material adverse effect on ourfinancial condition and results of operations. In addition, regulatory agenciesmay not agree with the extent or speed of corrective actions relating toproduct or manufacturing problems.

***Our operations aresubject to environmental, health and safety, and other laws and regulations,with which compliance is costly and which exposes us to penalties fornon-compliance.***

Our business, propertiesand products are subject to foreign, federal, state and local laws andregulations relating to the protection of the environment, natural resources andworker health and safety and the use, management, storage, and disposal ofhazardous substances, wastes, and other regulated materials. Because we operatereal property, various environmental laws also may impose liability on us forthe costs of cleaning up and responding to hazardous substances that may havebeen released on our property, including releases unknown to us. Theseenvironmental laws and regulations also could require us to pay forenvironmental remediation and response costs at third-party locations where wedisposed of or recycled hazardous substances. The costs of complying with thesevarious environmental requirements, as they now exist or may be altered in thefuture, could adversely affect our financial condition and results of operations.

***A number of ourproducts are in clinical trials. If these trials are unsuccessful, or if theFDA or other regulatory agencies do not accept the results of such trials,these products may not successfully come to market and our business prospectsmay suffer.***

Several of our products are in the early stages ofdevelopment. Some of our products only recently emerged from clinical trialsand others have not yet reached the clinical trial stage. Our current trialsinclude the CREATE Carotid Pivotal Trial (U.S.) and DURABILITY (Europe) Trial. Wecannot assure you that we will be successful in reaching the endpoints in thesetrials or, if we do, that the FDA or other regulatory agencies will accept theresults and approve the devices for sale. Further, we continually evaluate thepotential financial benefits and costs of our clinical trials and the productsbeing evaluated in them. If we determine that the costs associated withattaining regulatory approval of a product exceed the potential financialbenefits of that product or if the projected development timeline isinconsistent with our investment horizon, we may choose to stop a clinicaltrial and/or the development of a product.

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Our ability to market our products in the UnitedStates will depend upon a number of factors, including our ability todemonstrate the safety and efficacy of our products with valid clinical data.Our ability to market our products outside of the United States is also subjectto regulatory approval, including our ability to demonstrate the safety of ourproducts in the clinical setting. Our products may not be found to be safe and,where required, effective in clinical trials and may not ultimately be approvedfor marketing by U.S. or foreign regulatory authorities. Our failure to developsafe and effective products that are approved for sale on a timely basis wouldhave a negative impact on our net sales. In particular, if we do not reach theendpoints or obtain FDA approval with respect to our products, our futuregrowth may be significantly hampered. In addition, some of the products forwhich we are currently conducting trials are already approved for sale outsideof the United States. As a result, while our trials are ongoing, unfavorabledata may arise in connection with usage of our products outside the UnitedStates which could adversely impact the approval of such products in the UnitedStates. Conversely, unfavorable data from clinical trials in the United Statesmay adversely impact sales of our products outside of the United States.

We are currentlyconducting clinical studies of some of our products under an investigationaldevice exemption. Clinical studies must be conducted in compliance withregulations of the FDA and those of regulatory agencies in other countries inwhich we conduct clinical studies. The data collected from these clinicalinvestigations will ultimately be used to support market clearance for theseproducts. There is no assurance that regulatory bodies will accept the datafrom these clinical studies or that they will ultimately allow market clearancefor these products.

***The risks inherentin operating internationally and the risks of selling and shipping our productsand of purchasing our components and products internationally may adverselyimpact our net sales, results of operations and financial condition.***

We derive a significant portion of our net sales fromoperations in international markets. For the years ended December 31, 2006and December 31, 2005, 40.1% and 46.3% of our net sales, respectively,were derived from our international operations. Our international distributionsystem consisted of eight direct sales offices and approximately 45 stockingdistribution partners as of December 31, 2006. In addition, we purchasesome components and products from international suppliers.

The sale and shipping of our products and servicesacross international borders, as well as the purchase of components andproducts from international sources, subject us to extensive U.S. and foreigngovernmental trade regulations. Compliance with such regulations is costly andexposes us to penalties for non-compliance. In 2005, we reviewed our trade controlpractices as part of our ongoing commitment to further enhance our compliancepolicies and procedures. As part of this review, we identified instances inwhich we may have incorrectly reported information about certain shipmentsimported into the United States and Europe. We have disclosed these potentialreporting errors to customs regulators in the countries of importation in theUnited States and Europe, and while we believe that no monies are owed to anygovernment as a result of these potential reporting errors other thanprocessing fees of an immaterial amount or value added taxes otherwise due, wemay incur penalties, additional fees, value added taxes, interest and dutypayments if the customs regulators disagree with our assessment. Other laws andregulations that can significantly impact us include various anti-bribery laws,including the U.S. Foreign Corrupt Practices Act, laws restricting businesswith suspected terrorists, and anti-boycott laws. Any failure to comply withapplicable legal and regulatory obligations could impact us in a variety ofways that include, but are not limited to, significant criminal, civil andadministrative penalties, including imprisonment of individuals, fines andpenalties, denial of export privileges, seizure of shipments, restrictions oncertain business activities, and exclusion or debarment from governmentcontracting. Also, the failure to comply with applicable legal and regulatoryobligations could result in the disruption of our shipping and sales activities.

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In addition, manyof the countries in which we sell our products are, to some degree, subject topolitical, economic and/or social instability. Our international salesoperations expose us and our representatives, agents and distributors to risksinherent in operating in foreign jurisdictions. These risks include:

·       theimposition of additional U.S. and foreign governmental controls or regulations;

·       theimposition of costly and lengthy new export licensing requirements;

·       theimposition of U.S. and/or international sanctions against a country, company,person or entity with whom the company does business that would restrict orprohibit continued business with the sanctioned country, company, person orentity;

·       economicinstability;

·       ashortage of high-quality sales people and distributors;

·       lossof any key personnel that possess proprietary knowledge, or who are otherwiseimportant to our success in certain international markets;

·       changesin third-party reimbursement policies that may require some of the patients whoreceive our products to directly absorb medical costs or that may necessitatethe reduction of the selling prices of our products;

·       changesin duties and tariffs, license obligations and other non-tariff barriers totrade;

·       theimposition of new trade restrictions;

·       theimposition of restrictions on the activities of foreign agents, representativesand distributors;

·       scrutinyof foreign tax authorities which could result in significant fines, penaltiesand additional taxes being imposed on us;

·       pricingpressure that we may experience internationally;

·       lawsand business practices favoring local companies;

·       longerpayment cycles;

·       difficultiesin maintaining consistency with our internal guidelines;

·       difficultiesin enforcing agreements and collecting receivables through certain foreignlegal systems;

·       difficultiesin enforcing or defending intellectual property rights; and

·       exposureto different legal and political standards due to our conducting business inover 50 countries.

We cannot assure you thatone or more of the factors will not harm our business. Any material decrease inour international sales would adversely impact our net sales, results ofoperations and financial condition. Our international sales are predominately inEurope. In Europe, health care regulation and reimbursement for medical devicesvary significantly from country to country. This changing environment couldadversely affect our ability to sell our products in some European countries.

***Fluctuations in foreign currency exchange rates couldresult in declines in our reported net sales and earnings.***

Fluctuations in the rateof exchange between the U.S. dollar and foreign currencies could adverselyaffect our financial results. Approximately 29% and 34% of our net sales duringthe fiscal year ended December 31, 2006 and 2005, respectively, weredenominated in foreign currencies. We expect that foreign 

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currencieswill continue to represent a similarly significant percentage of our net salesin the future. Approximately 71% and 68% of our net sales denominated inforeign currencies during the fiscal year ended December 31, 2006 and2005, respectively, were derived from European Union countries and weredenominated in the Euro. Additionally, we have significant intercompanyreceivables from our foreign subsidiaries, which are denominated in foreigncurrencies, principally the Euro and the Yen. Our principal exchange rate riskstherefore exist between the U.S. dollar and the Euro and between the U.S.dollar and the Yen. Our international net sales were favorably affected by theimpact of foreign currency fluctuations totaling $443 thousand during thefiscal year ended December 31, 2006 and unfavorably affected by $203thousand during the fiscal year ended December 31, 2005. We cannot assureyou that we will benefit from the impact of foreign currency fluctuations inthe future and foreign currency fluctuations in the future may adversely affectour net sales and earnings. At present, we do not engage in hedging transactionsto protect against uncertainty in future exchange rates between particularforeign currencies and the U.S. dollar. If we engage in hedging activities inthe future, such activities involve risk and may not limit our underlyingexposure from currency fluctuations or minimize our net sales and earningsvolatility associated with foreign currency exchange rate changes.

***We may becomeobligated to make large milestone payments that are not currently reflected inour financial statements in certain circumstances, which would negativelyimpact our cash flows from operations.***

Pursuant to theacquisition agreements relating to our purchase of MitraLife and ApprivaMedical, Inc. in 2002, we agreed to make additional payments to thesellers of these businesses in the event that we achieve contractually definedmilestones. Generally, in each case, these milestone payments become due uponthe completion of specific regulatory steps in the product commercializationprocess. With respect to the MitraLife acquisition, the maximum potentialmilestone payments totaled $25 million, and with respect to the Apprivaacquisition, the maximum potential milestone payments totaled $175 million.Although we do not believe that it is likely that these milestone paymentobligations became due, or will become due in the future, the formerstockholders of Appriva disagree with our position and have brought litigationagainst us making a claim for such payments and it is possible that the formerstockholders of MitraLife could also disagree with our position and make aclaim for such payments. The defense of the outstanding litigation related toour Appriva acquisition is, and any such additional dispute with MitraLifewould likely be, costly and time-consuming. In the event any such milestonepayments become due and/or any other damages become payable, our costs wouldincrease correspondingly which would negatively impact our cash flow fromoperations, as well as divert our management’s time and attention away from ourbusiness. See “Item 3. Legal Proceedings” and Note 17 to our consolidatedfinancial statements included in this report.

***We rely on ourindependent sales distributors and sales associates to market and sell ourproducts outside of the United States, Canada and Europe.***

Sales of our products inlocations outside of the United States, Canada and Europe represented 10% ofour net sales during the fiscal year ended December 31, 2006 and 13% ofour net sales during the fiscal year ended December 31, 2005. Our successoutside of the United States, Canada and Europe depends largely upon marketingarrangements with independent sales distributors and sales associates, inparticular their sales and service expertise and relationships with thecustomers in the marketplace. Independent distributors and sales associates mayterminate their relationship with us, or devote insufficient sales efforts toour products. We do not control our independent distributors and they may notbe successful in implementing our marketing plans. In addition, many of ourindependent distributors outside of the United States, Canada and Europeinitially obtain and maintain foreign regulatory approval for sale of ourproducts in their respective countries. Our failure to maintain our existingrelationships with our independent distributors and sales associates outside ofthe United States, Canada and Europe, or our failure to recruit and retainadditional skilled independent sales distributors and sales associates in these

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locations,could have an adverse effect on our operations. We have experienced turnoverwith some of our independent distributors in the past that has adverselyaffected our short-term financial results while we transitioned to newindependent distributors. Similar occurrences could happen in the future.Beginning October 1, 2006, we established a distribution arrangement withMedtronic International Trading Inc.—Japan Branch, a subsidiary ofMedtronic, Inc., pursuant to which Medtronic distributes all of ourproducts in Japan. As a result of this new arrangement, we ceased our directsales operations in Japan. Our transition from direct operations to adistributor relationship in Japan could adversely affect our sales in Japan.

***If physicians donot recommend and endorse our products or if our working relationships withphysicians deteriorate, our products may not be accepted in the market place,which would adversely affect our sales.***

In order for us to sell our products, physicians mustrecommend and endorse them. We may not obtain the necessary recommendations orendorsements from physicians. Acceptance of our products depends on educatingthe medical community as to the distinctive characteristics, perceivedbenefits, safety, clinical efficacy and cost-effectiveness of our productscompared to products of our competitors, and on training physicians in theproper application of our products. If we are not successful in obtaining therecommendations or endorsements of physicians for our products, our sales maydecline or we may be unable to increase our sales.

In addition, if we fail tomaintain our working relationships with physicians, many of our products maynot be developed and marketed in line with the needs and expectations ofprofessionals who use and support our products. The research, development,marketing and sales of many of our new and improved products is dependent uponour maintaining working relationships with physicians. We rely on theseprofessionals to provide us with considerable knowledge and experienceregarding our products and the marketing of our products. Physicians assist usas researchers, marketing consultants, product consultants, inventors and aspublic speakers. If we are unable to maintain our strong relationships withthese professionals and continue to receive their advice and input, thedevelopment and marketing of our products could suffer, which could adverselyaffect the acceptance of our products in the market place and our sales.

***If we fail tocomply with the U.S. Federal Anti-Kickback Statute and similar state laws, wecould be subject to criminal and civil penalties and exclusion from theMedicare and Medicaid and other federal health care programs, which could havea material adverse effect on our business and results of operations.***

A provision of the Social Security Act, commonlyreferred to as the Federal Anti-Kickback Statute, prohibits the offer, payment,solicitation or receipt of any form of remuneration in return for referring,ordering, leasing, purchasing or arranging for or recommending the ordering, purchasingor leasing of items or services payable by Medicare, Medicaid or any otherfederal health care program. The Federal Anti-Kickback Statute is very broad inscope and many of its provisions have not been uniformly or definitivelyinterpreted by existing case law or regulations, and thus are subject toevolving interpretations. In addition, most of the states in which our productsare sold have adopted laws similar to the Federal Anti-Kickback Statute, andsome of these laws are even broader than the Federal Anti-Kickback Statute inthat their prohibitions are not limited to items or services paid for by afederal health care program but, instead, apply regardless of the source ofpayment. Violations of the Federal Anti-Kickback Statute may result in substantialcivil or criminal penalties and exclusion from participation in federal healthcare programs.

All of our financialrelationships with health care providers and others who provide products orservices to federal health care program beneficiaries are potentially governedby the Federal Anti-Kickback Statute and similar state laws. We believe ouroperations are in material compliance with the Federal Anti-Kickback Statuteand similar state laws. However, we cannot assure you that we will not be 

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subjectto investigations or litigation alleging violations of these laws, which couldbe time-consuming and costly to us and could divert management’s attention fromoperating our business, which could have a material adverse effect on ourbusiness. In addition, if our arrangements were found to violate the FederalAnti-Kickback Statute or similar state laws, we or our officers and employeescould be subject to severe criminal and civil penalties, including, forexample, exclusion from participation in any federal health care programs,which could have a material adverse effect on our reputation, business andresults of operations.

***If there is adisruption in the supply of the products of Invatec Technology Center GmbH thatwe distribute or if our relationship with Invatec is impaired, our net salesand results of operations would be adversely impacted.***

We have entered into anagreement with Invatec Technology Center GmbH., or Invatec, an Italianmanufacturer of endovascular medical devices which prior to our arrangementhave not been marketed or sold under the Invatec brand in the United States, todistribute some of Invatec’s branded products throughout the United States. Oursuccess in marketing the Invatec products depends on our sales personnel beingproficient in the product line, building physician relationships and executingsales orders. If we are unable to market Invatec’s products successfully or ifour agreement with Invatec is terminated, our net sales and results ofoperations would suffer. Even if we market Invatec’s products successfully, ifInvatec is unable to produce enough of its products to meet our demands,including if Invatec sells its inventory to our competitors rather than to usfor marketing under their own brands, we may not be able to meet our customers’demands and our net sales and results of operations may suffer.

***Our family ofself-expanding stent products generates a large portion of our net sales. Ournet sales and business prospects would be adversely affected if sales of thisproduct were to decline.***

We are dependent on ourself-expanding stents, which generated approximately 25% of our net sales infiscal 2006 and approximately 20% of our net sales in fiscal 2005. If ourself-expanding stents were to no longer be available for sale in any key marketbecause of regulatory, intellectual property or any other reason, our net salesfrom these products and from products that typically constitute ancillarypurchases would significantly decline. A significant decline in our net sales couldalso negatively impact our product development activities and therefore ourbusiness prospects.

***We are exposed toproduct liability claims that could have an adverse effect on our business andresults of operations.***

The design, manufactureand sale of medical devices expose us to significant risk of product liabilityclaims, some of which may have a negative impact on our business. Most of ourproducts were developed relatively recently and defects or risks that we havenot yet identified may give rise to product liability claims.****Our existing product liability insurance coverage may beinadequate to protect us from any liabilities we may incur or we may not beable to maintain adequate product liability insurance at acceptable rates. If aproduct liability claim or series of claims is brought against us for uninsuredliabilities or in excess of our insurance coverage and it is ultimatelydetermined that we are liable, our business could suffer. Additionally, wecould experience a material design defect or manufacturing failure in ourproducts, a quality system failure, other safety issues or heightenedregulatory scrutiny that would warrant a recall of some of our products. Arecall of some of our products could also result in increased product liabilityclaims. Further, while we train our physician customers on the proper usage ofour products, we cannot ensure that they will implement our instructionsaccurately. If our products are used incorrectly by our customers, injury mayresult and this could give rise to product liability claims against us. Even ameritless or unsuccessful product liability claim could harm our reputation inthe industry, lead to significant legal fees and could result in the diversionof management’s attention from managing our business and may have a negativeimpact on our business and our results of operations. In addition, successfulproduct liability claims against one of our competitors could cause claims tobe made against us.

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***Our net sales coulddecline significantly if drug-eluting stents become a dominant therapy in theperipheral vascular stent market and we are not able to develop or acquire adrug-eluting stent to market and sell.***

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

***If we are unable tocontinue to develop and market new products and technologies that are acceptedby the marketplace, we may experience a decrease in demand for our products orour products could become obsolete, and our business would suffer.***

We are continually engaged in product development andimprovement programs, and the introduction of new products represents asignificant component of our growth strategy. We may not be able to competeeffectively with our competitors unless we can keep up with existing or newproducts and technologies in the endovascular device market. If we do notcontinue to introduce new products and technologies, or if our new products andtechnologies are not accepted by the physicians who use our products or thepayors who reimburse the costs of the procedures performed with our products,we may not be successful and our business would suffer. Moreover, many of ourclinical trials have durations of several years and it is possible thatcompeting therapies, such as drug therapies, may be introduced while ourproducts are still undergoing clinical trials. This could reduce the potentialdemand for our products and negatively impact our business prospects.Additionally, our competitors’ new products and technologies may beat ourproducts to market, may be more effective or less expensive than our productsor render our products obsolete.

***The marketing ofour products requires a significant amount of time and expense and we may nothave the resources to successfully market our products, which would adverselyaffect our business and results of operations.***

The marketing of ourproducts requires a significant amount of time and expense in order to identifythe physicians who may use our products, invest in training and education, andemploy a sales force that is large enough to interact with the targetedphysicians. In addition, the marketing of our products requires interactionwith many subspecialists who are moving into new practice areas and may requiremore training and education from our personnel than would be required with physicianswho are not expanding their practice areas. We may not have adequate resourcesto market our products successfully against larger competitors which have moreresources than we do. If we cannot market our products successfully, ourbusiness and results of operations would be adversely affected.

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***We face competitionfrom other companies, many of which have substantially greater resources thanwe do and may be able to more effectively develop, market and sell theirproducts than we can, which could adversely impact our business, net sales andresults of operations. Consolidation in the medical technology industry wouldexacerbate these risks.***

The markets in which we compete are highlycompetitive, subject to change and significantly affected by new productintroductions and other activities of industry participants. Although ourcompetitors range from small start-up companies to much larger companies, themarkets for most of our products are dominated by a small number of largecompanies, and we are a much smaller company relative to our primary competitors.Our products compete with other medical devices, including Invatec manufacturedproducts sold in the United States under other brand names, surgical proceduresand pharmaceutical products. A number of the companies in the medicaltechnology industry, including manufacturers of peripheral vascular,cardiovascular and neurovascular products, have substantially greater capitalresources, larger customer bases, broader product lines, larger sales forces,greater marketing and management resources, larger research and developmentstaffs and larger facilities than ours and have established reputations andrelationships with our target customers, as well as worldwide distributionchannels that are more effective than ours. Because of the size of the vasculardisease market opportunity, competitors and potential competitors havehistorically dedicated and will continue to dedicate significant resources toaggressively promote their products and develop new and improved products. Ourcompetitors and potential competitors may develop technologies and productsthat are safer, more effective, easier to use, less expensive or more readilyaccepted than ours. Their products could make our technology and productsobsolete or noncompetitive. None of our customers has long-term purchaseagreements with us and may at any time switch to the use of our competitors’products. Our competitors may also be able to achieve more efficientmanufacturing and distribution operations than we can and may offer lowerprices than we could offer profitably. We expect that as our products mature,we will be able to produce our products in a more cost effective manner andtherefore be able to compete more effectively, but it is possible that we maynot achieve such cost reductions. Any of these competitive factors couldadversely impact our business, net sales and results of operations. Inaddition, the industry has recently experienced some consolidation. Consolidationcould make the competitive environment even more difficult for smaller companiesand exacerbate these risks.

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

***We rely on ourmanagement information systems for inventory management, distribution and otherfunctions and to maintain our research and development and clinical data. Ifour information systems fail to adequately perform these functions or if weexperience an interruption in their operation, our business and results ofoperations could be adversely affected.***

The efficientoperation of our business is dependent on our management information systems. Werely on our management information systems to effectively manage accounting andfinancial functions; manage order entry, order fulfillment and inventoryreplenishment processes; and to maintain our research and development andclinical data. The failure of our management information systems to perform aswe anticipate could disrupt our business and product development and couldresult in decreased sales, increased overhead costs, excess inventory andproduct shortages, causing our business and results of operations to suffer. Inaddition, our management information systems are vulnerable to damage orinterruption from:

·       earthquake,fire, flood and other natural disasters;

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·       terroristattacks and attacks by computer viruses or hackers; and

·       powerloss or computer systems, Internet, telecommunications or data network failure.

Any such interruptioncould adversely affect our business and results of operations.

***The restrictivecovenants in our loan agreement could limit our ability to conduct our businessand respond to changing economic and business conditions and may place us at acompetitive disadvantage relative to other companies that are subject to fewerrestrictions.***

Our loan andsecurity agreement with Silicon Valley Bank requires our compliance with aliquidity ratio and minimum tangible net worth level. Our failure tocomply with these financial covenants could adversely affect our financialcondition. Our loan agreement also contains a number of limitations that limitour ability and the ability of certain of our subsidiaries to, among otherthings:

·       transferall or any part of our business or properties;

·       permitor suffer a change in control;

·       mergeor consolidate, or acquire all or substantially all of the capital stock orproperty of another company;

·       engagein new business;

·       incuradditional indebtedness or liens with respect to any of their properties;

·       paydividends or make any other distribution on or purchase of, any of theircapital stock;

·       makeinvestments in other companies; or

·       engagein related party transactions,

subject in each case to certain exceptions andlimitations. These restrictive covenants could limit our ability, and that ofcertain of our subsidiaries, to obtain future financing, withstand a futuredownturn in our business or the economy in general or otherwise conductnecessary corporate activities. The financial and restrictive covenantscontained in the loan agreement could also adversely affect our ability to respondto changing economic and business conditions and place us at a competitivedisadvantage relative to other companies that may be subject to fewerrestrictions. Transactions that we may view as important opportunities, such ascertain acquisitions, may be subject to the consent of Silicon Valley Bank,which consent may be withheld or granted subject to conditions specified at thetime that may affect the attractiveness or viability of the transaction.

We cannot assure you thatwe will be able to comply with all of these restrictions and covenants at alltimes, especially the financial covenants. Our ability to comply with theserestrictions and covenants depends on the success of our business and ouroperating results and may also be affected by events beyond our control. Abreach of any of the restrictions and covenants in our loan agreement by us orcertain of our subsidiaries could lead to an event of default under the termsof the credit agreement, notwithstanding our ability to meet our debt service obligationsthereunder. Upon the occurrence of an event of default under our loanagreement, Silicon Valley Bank has available a range of remedies customary inthese circumstances, including declaring all such debt, together with accruedand unpaid interest thereon, to be due and payable, foreclosing on the assetssecuring the loan agreement and/or ceasing to provide additional revolvingloans or letters of credit, which could have a material adverse effect on us.Although it is possible we could negotiate a waiver with our lenders of anevent of default, such a waiver would likely involve significant costs.

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***If we becomeprofitable, we cannot assure you that our net operating losses will beavailable to reduce our tax liability.***

Our ability to use, or theamount of, our net operating losses may be limited or reduced. The businessespurchased by us in 2001 and 2002 experienced “ownership changes” within themeaning of Section 382 of the Internal Revenue Code. Generally, a changeof more than 50 percentage points in the ownership of a company’s shares, byvalue, over the three-year period ending on the date the shares were acquiredconstitutes an ownership change, and these ownership changes limit our abilityto use the acquired company’s net operating losses. Furthermore, the number ofshares of our common stock issued in our June 2005 initial public offeringand in our January 2006 transaction with MTI may be sufficient, takinginto account prior or future shifts in our ownership over a three-year period,to cause us to undergo an ownership change.  As a result, our ability to use our existingnet operating losses that are not currently subject to limitation to offsetU.S. federal taxable income if we become profitable may also become subject tosubstantial limitations. Further, the amount of our net operating losses couldbe reduced if any tax deductions taken by us are limited or disallowed by theInternal Revenue Service. All of these limitations could potentially result inincreased future tax liability for us.

***A substantialportion of our assets consists of goodwill and an impairment in the value ofour goodwill would have the effect of decreasing our earnings or increasing ourlosses.***

As of December 31,2006, goodwill represented $149.1 million, or 42.2%, of our total assets.If we are required to record an impairment charge to earnings relating togoodwill, it will have the effect of decreasing our earnings or increasing ourlosses. The accounting standards on goodwill and other intangible assetsrequire goodwill to be reviewed at least annually for impairment, and do notpermit amortization. In the event that impairment is identified, a charge toearnings will be recorded and our stock price may decline as a result.

***Our quarterly operating and financial results mayfluctuate in future periods.***

Our quarterly operating and financial results may fluctuate from periodto period. Some of the factors that influence our quarterly operating resultsinclude:

·       theseasonality of our product sales;

·       themix of our products sold;

·       demandfor, and pricing of, our products; and

·       fluctuationsin foreign currency exchange rates.

Manyof the products we may seek to develop and introduce in the future will requireFDA approval or clearance and meet similar regulatory requirements in othercountries where we seek to market our products, without which we cannot beginto commercialize them. Forecasting the timing of sales of our products isdifficult due to the delay inherent in seeking FDA and other clearance orapproval, or the failure to obtain such clearance or approval. Accordingly, wemay experience significant, unanticipated quarterly losses. Because of thesefactors, our operating results in one or more future quarters may fail to meetthe expectations of securities analysts or investors, which could cause ourstock price to decline significantly.

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**Risks Related to our Common Stock**

***One of our principal stockholders and its affiliatesare able to influence matters requiring stockholder approval and coulddiscourage the purchase of our outstanding shares at a premium.***

As of March 1, 2007,Warburg Pincus beneficially owned approximately 64.3% of our outstanding commonstock. This concentration of ownership may have the effect of delaying,preventing or deterring a change in control of our company, could deprive ourstockholders of an opportunity to receive a premium for their common stock aspart of a sale or merger of our company and may negatively affect the marketprice of our common stock. Transactions that could be affected by thisconcentration of ownership include proxy contests, tender offers, mergers orother purchases of common stock that could give our stockholders theopportunity to realize a premium over the then-prevailing market price forshares of our common stock.

As a result of WarburgPincus’ share ownership and representation on our board of directors, WarburgPincus is able to influence all affairs and actions of our company, includingmatters requiring stockholder approval, such as the election of directors andapproval of significant corporate transactions. The interests of our principalstockholder may differ from the interests of our other stockholders. Forexample, Warburg Pincus could oppose a third party offer to acquire our companythat our other stockholders might consider attractive, and the third party maynot be able or willing to proceed unless Warburg Pincus supports the offer. Inaddition, if our board of directors supports a transaction requiring anamendment to our certificate of incorporation, Warburg Pincus is currently in aposition to defeat any required stockholder approval of the proposed amendment.If our board of directors supports an acquisition of our company by means of amerger or a similar transaction, the vote of Warburg Pincus alone is currentlysufficient to approve or block the transaction under Delaware law. In each ofthese cases and in similar situations, our other stockholders may disagree withWarburg Pincus as to whether the action opposed or supported by Warburg Pincusis in the best interest of our stockholders.

***Certain of our principal stockholders may haveconflicts of interests with our other stockholders or our company in thefuture.***

Certainof our principal stockholders, including Warburg Pincus, may make investmentsin companies and from time to time acquire and hold interests in businessesthat compete directly or indirectly with us. These other investments may:

·       createcompeting financial demands on our principal stockholders;

·       createpotential conflicts of interest; and

·       requireefforts consistent with applicable law to keep the other businesses separatefrom our operations.

These principalstockholders may also pursue acquisition opportunities that may becomplementary to our business and, as a result, those acquisition opportunitiesmay not be available to us. Furthermore, these principal stockholders may havean interest in us pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investment,even though such transactions might involve risks to our stockholders. Inaddition, these principal stockholders’ rights to vote or dispose of equityinterests in us are not subject to restrictions in favor of us other than as maybe required by applicable law.

***We currently are a “controlled company” within themeaning of the NASDAQ Global Select Market listing requirements and, as aresult, are exempt from certain corporate governance requirements.***

Because Warburg Pincuscontrols more than 50% of the voting power of our common stock, we arecurrently considered to be a “controlled company” for the purposes of theNASDAQ listing requirements. 

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As such,we are permitted, and have elected, to opt out of NASDAQ listing requirementsthat would otherwise require our board of directors to have a majority ofindependent directors, our board nominations to be selected, or recommended forthe board’s selection either by a nominating committee comprised entirely ofindependent directors or by a majority of our independent directors and ourcompensation committee to be comprised entirely of independent directors. Accordingly,you may not have the same protections afforded to stockholders of companiesthat are subject to all of the NASDAQ corporate governance requirements.

***We previously identified a material weakness in theinternal controls over our ability to produce financial statements free frommaterial misstatements. Our failure to maintain effective internal controlscould have a material adverse effect on our business, operating results andfinancial condition and cause our investors, shareholders, lenders, suppliersand others to lose confidence in the accuracy or completeness of our financialreports.***

As previously reported anddiscussed in Item 4, “Controls and Procedures,” in our Quarterly Report on Form 10-Qfor the quarter ended July 2, 2006, our management concluded that as of December 31,2005 we did not maintain effective controls over the preparation, review andpresentation and disclosure of our consolidated statements of cash flows. Specifically,we incorrectly reported an interest payment on demand notes payable as afinancing cash out-flow instead of an operating cash out-flow, in accordancewith generally accepted accounting principles. This control deficiency resultedin the restatement of our consolidated financial statements for the quartersended July 3, 2005 and October 2, 2005. Management also determinedthat this control deficiency constituted a material weakness in our internalcontrol over financial reporting. As a result of measures subsequentlyimplemented by us, we concluded that this material weakness in our internalcontrol over financial reporting had been fully remediated as of July 2,2006. However, our failure to maintain effective internal controls could have amaterial adverse effect on our business, operating results and financialcondition and cause our investors, shareholders, lenders, suppliers and othersto lose confidence in the accuracy or completeness of our financial reports.

***Our corporate documents and Delaware law containprovisions that could discourage, delay or prevent a change in control of ourcompany.***

Provisions in our amendedand restated certificate of incorporation and amended and restated bylaws maydiscourage, delay or prevent a merger or acquisition involving our company thatour stockholders may consider favorable. For example, our amended and restatedcertificate of incorporation authorizes our board of directors to issue up to100 million shares of “blank check” preferred stock. Without stockholderapproval, the board of directors has the authority to attach special rights,including voting and dividend rights, to this preferred stock. With theserights, preferred stockholders could make it more difficult for a third partyto acquire our company. In addition, our amended and restated certificate ofincorporation provides for a staggered board of directors, whereby directorsserve for three year terms, with approximately one third of the directorscoming up for reelection each year. Having a staggered board makes it moredifficult for a third party to obtain control of our board of directors througha proxy contest, which may be a necessary step in an acquisition of our companythat is not favored by our board of directors.

We are also subject to the anti-takeover provisions ofSection 203 of the Delaware General Corporation Law. Under theseprovisions, if anyone becomes an “interested stockholder,” we may not enterinto a “business combination” with that person for three years without specialapproval, which could discourage a third party from making a takeover offer andcould delay or prevent a change of control. For purposes of Section 203, “interestedstockholder” means, generally, someone owning 15% or more of our outstandingvoting stock or an affiliate of our company that owned 15% or more of ouroutstanding voting stock during the past three years, subject to certainexceptions as described in Section 203. Under one such exception, WarburgPincus does not constitute an “interested stockholder.”

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**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

Our corporate headquarters is located in Plymouth,Minnesota. Our peripheral vascular and cardiovascular businesses are alsoheadquartered in Plymouth, Minnesota and include our sales, manufacturing,warehousing, research and development and administrative activities. The sales,manufacturing and research and development activities of our neurovascularbusiness are primarily located in Irvine, California. Outside the UnitedStates, our European headquarters is in Paris, France, and includes our salesand marketing, and administrative activities. Our European warehouse facilitiesare located in Maastricht, Netherlands and London, England. In addition to oursales office in Paris, we have European sales and marketing offices in Bonn,London, Madrid, Maastricht, Milan and Stockholm.

Our manufacturing,research and development functions operate from a 64,000 square feet facilityin Plymouth, Minnesota, which is subject to a lease that extends toOctober 31, 2009. Our corporate headquarters is located in a 50,000 squarefeet building in Plymouth, which is subject to a lease that extends toFebruary 28, 2010. We also occupy a 96,400 square feet facility in Irvine,California, which is subject to a lease that extends to April 30, 2011 andis subject to an option to extend the lease for an additional six years. Ourdistribution center in the United States is located in Brooklyn Park, Minnesotaand occupies 16,000 square feet. Our European warehouse facility in Maastricht,Netherlands occupies 6,900 square feet and we also have a smaller warehousefacility in London, England.

**ITEM 3.**                LEGALPROCEEDINGS

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

In September 2000, Dendron, which was acquired byMTI in 2002, was named as the defendant in three patent infringement lawsuitsbrought by the Regents of the University of California, as the plaintiff, inthe District Court (Landgericht) in Dusseldorf, Germany. The complaintsrequested a judgment that Dendron’s EDC I coil device infringed three Europeanpatents held by the plaintiff and asked for relief in the form of an injunctionthat would prevent Dendron from producing and selling the devices, as well asan award of damages caused by Dendron’s alleged infringement, and other costs,disbursements and attorneys’ fees. In August 2001, the court issued awritten decision that EDC I coil devices did infringe the plaintiff’s patents,enjoined Dendron from producing and selling the devices, and requested thatDendron disclose the individual products’ costs as the basis for awardingdamages. In September 2001, Dendron appealed the decision. In addition,Dendron instituted challenges to the validity of each of these patents byfiling opposition proceedings with the European Patent Office, or EPO, againstone of the patents (MTI joined Dendron in this action in connection with itsacquisition of Dendron), and by filing nullity proceedings with the GermanFederal Patents Court against the German component of the other two patents.The opposition proceedings with the EPO on the one patent are complete, and theEPO has rejected the opposition and has upheld the validity of the one patent.Dendron retains the right to file a nullity action in Germany against thepatent. All three appeal proceedings are currently stayed on the basis of thevalidity challenges brought by Dendron.

On July 4, 2001, the University of Californiafiled another suit against Dendron alleging that the EDC I coil deviceinfringed another European patent held by the plaintiff. The complaint wasfiled in the District Court of Dusseldorf, Germany seeking additional monetaryand injunctive relief. In April 2002, the court found that EDC I coildevices did infringe the plaintiff’s patent. The patent involved is the samepatent that was involved in the case before the English Patents Court discussedbelow and that was ruled 

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by a Dutch court to beinvalid, also as discussed below. The opposition proceedings on the patent arecomplete, and the EPO has rejected the opposition and has upheld the validityof the patent.

Dendron has now filed a domestic German nullity actionagainst that patent. A hearing has been scheduled in the German Federal PatentCourt in October 2007. The infringement case is under appeal. The appealhas been stayed pending the outcome of the nullity action filed against thepatent.

An accrual for the matters discussed above wasincluded in the balance sheet of Dendron as of the date of its acquisition byMTI. As of December 31, 2006, approximately $863 thousand was recorded inaccrued liabilities in our consolidated financial statements included in thisreport. Dendron ceased all activities with respect to the EDC I coil deviceprior to MTI’s October 2002 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 that washeard by a Dutch court, as further described below. The primary purpose ofthese actions was to assert both invalidity and non-infringement by MTI ofcertain patents held by others. The range of patents at issue are held by theRegents of the University of California, with Boston Scientific Corporationsubsidiaries named as 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 by the patent holders fromengaging in infringing activities related to our Sapphire coils in mostcountries within the European Union, and may be liable for then-unspecifiedmonetary damages for our activities since September 27, 2002. InFebruary 2005, we received an initial claim from the patent holders withrespect to monetary damages, amounting to €3.6million, or approximately $4.7****million as ofDecember 1, 2006, with which we disagree. Court hearings will be heldregarding these claims and are currently scheduled for June 2007. We havefiled an appeal with the Dutch court, and believe that since the date ofinjunction in each separate country we are in compliance with the Dutch court’sinjunction. On September 5, 2006, we received a letter from the patentholders’ counsel stating that, pursuant to a recent decision in the EuropeanCourt dated July 13, 2006, they are no longer enforcing the injunctionoutside of The Netherlands. A decision on the appeal is expected in the secondhalf of 2007. The patent holders have requested a delay in the hearing onclaims damages until a decision on the appeal has been rendered. Because webelieve that we have valid legal grounds for appeal, we have determined that aloss is not probable at this time as defined by SFAS 5, “Accounting forContingencies.” However, there can be no assurance that the ultimate resolutionof this matter will not result in a material adverse effect on our business,financial condition or results of operations.

In January 2003, we initiated a legal action inthe English Patents Court seeking a declaration that a patent held by thepatent holders related to delivery catheters was invalid, and that our productsdid not infringe this patent. The patent in question was the U.K. designationof the 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 interimsettlement between the parties under which the patent holders were required tosurrender such patent to the U.K. Comptroller of Patents, and to pay our costsassociated with the legal action, including interest. As a result, the patentwas surrendered and we received interim payments from the patent holdersaggregating £500 thousand (equivalent to approximately $900 thousand based onthe dates of receipt), which we recorded as a reduction of litigation expenseupon receipt of such funds during the first quarter 2005. The parties initiatedproceedings before a costs judge regarding payment by the patent holders of theremaining costs incurred by us in such litigation. We have reached a finalsettlement with the patent holders and on October 31, 2006, received thefinal payment of £600 thousand (equivalent to approximately $1.1 million), 

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which we recorded as areduction of litigation expense in the fourth quarter of 2006. As a result ofthe settlement, we anticipate that we will no longer be involved in litigationon this matter in the United Kingdom, although no assurance can be given thatno other litigation involving us may arise in the United Kingdom.

In the United States, concurrent with the FDA’smarketing clearance of our Sapphire line of embolic coils received inJuly 2003, we, through our subsidiary MTI, initiated a declaratoryjudgment action against the patent holders in the United States District Courtfor the Western District of Wisconsin. The action included assertions ofnon-infringement by us and invalidity of a range of patents held by the patentholders related to detachable coils and certain delivery catheters. InOctober 2003, the court dismissed our actions for procedural reasonswithout prejudice and without decision as to the merits of the parties’positions. In December 2003, the University of California filed an actionagainst us in the United States District Court for the Northern District ofCalifornia alleging infringement by us with respect to a range of patents heldby the University of California related to detachable coils and certaindelivery systems. We filed a counterclaim against the University of Californiaasserting non-infringement by us, invalidity of the patents and inequitableconduct in the procurement of certain patents. In addition, we filed a claimagainst the University of California and Boston Scientific Corporation forviolation of federal antitrust laws, with the result that the court hassubsequently decided to add Boston Scientific as a party to the litigation.Motions for summary judgment made by all parties, have been denied by thecourt. A trial date has been set for June 2007. In addition, there arevarious related actions, such as requests for re-examination and reissues,pending from time to time in the U.S. Patent and Trademark Office that may ormay not have a material effect on these actions. We cannot estimate thepossible loss or range of loss, if any, associated with the resolution of thesematters. There can be no assurance that the ultimate resolution of thesematters will not result in a material adverse effect on our business, financialcondition or results of operations.

On March 30, 2005, we were served with acomplaint by Boston Scientific Corporation and one of its affiliates whichclaims that some of our products, including our SpideRX Embolic ProtectionDevice, infringe certain of Boston Scientific’s patents. This action wasbrought in the United States District Court for the District of Minnesota.Subsequently, we added counterclaims for infringement of three of our patents,Boston Scientific has added two patents into its claims, as well as a claimagainst us for misappropriation of trade secrets. We intend to vigorouslydefend and prosecute respectively the claims in this action. Because thesematters are in early stages and because of the complexity of the case, wecannot estimate the possible loss or range of loss, if any, associated withtheir resolution. However, there can be no assurance that the ultimateresolution of these matters will not result in a material adverse effect on ourbusiness, financial condition or results of operations.

The acquisition agreement relating to our acquisitionof Appriva Medical, Inc. contains four milestones to which paymentsrelate. The first milestone was required by its terms to be achieved byJanuary 1, 2005 in order to trigger a payment equal to $50 million. Wehave determined that the first milestone was not achieved by January 1,2005 and that the first milestone is not payable. On May 20, 2005, MichaelLesh, as an individual seller of Appriva stock and purporting to representcertain other sellers of Appriva stock, filed a complaint in the Superior Courtof the State of Delaware with individually specified damages aggregating $70million and other unspecified damages for several allegations, including thatwe, along with other defendants, breached the acquisition agreement and animplied covenant of good faith and fair dealing by willfully failing to takethe steps necessary to meet the first milestone under the agreement, and therebyalso failing to meet certain other milestones, and further that one milestonewas actually met. The complaint also alleges fraud, negligent misrepresentationand violation of state securities laws in connection with the negotiation ofthe acquisition agreement. We believe these allegations are without merit andintend to vigorously defend this action. We filed a motion to dismiss thecomplaint, which the court granted in June 2006 on standing grounds. Theplaintiff filed a petition for reargument, 

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which was denied onOctober 31, 2006. On November 29, 2006, the plaintiff filed a noticeof appeal of the trial court’s decision granting our motion to dismiss.Briefing of plaintiff’s appeal was completed in early March 2007, whileoral argument of the appeal has not yet been scheduled.

On or about November 21, 2005, a second lawsuitwas filed in Delaware Superior Court relating to the acquisition of ApprivaMedical, Inc. The named plaintiff is Appriva Shareholder LitigationCompany, LLC, which according to the complaint was formed for the purpose ofpursuing claims against us. The complaint alleges that Erik van der Burg andthree unidentified 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 million), which is claimed to be due and payable, and further allegesunspecified damages to be proven at trial. The complaint alleges the followingclaims: misrepresentation, breach of contract, breach of the implied covenantof good faith and fair dealing and declaratory relief. We believe theseallegations and claims are without merit and intend to vigorously defend thisaction. We filed a motion to dismiss the complaint. On August 24, 2006,the trial court converted our motion to dismiss into a motion for summaryjudgment, which motion was granted. The trial court ruled that ApprivaShareholder Litigation Company, LLC did not have standing. The trial court didnot address the merits of the claims. Appriva Shareholder Litigation Company,LLC has filed a notice of appeal of the trial court’s ruling. The DelawareSupreme Court heard oral arguments on January 16, 2007, but has yet to issuea decision.

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 class action lawsuit purportedly on behalf of MTI’sminority shareholders was filed in the Delaware Court of Chancery against MTI,MTI’s directors and us challenging our 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 anacquisition of the publicly held shares of MTI through a merger transaction. Webelieve this lawsuit is without merit and plan to defend it vigorously if theplaintiff decides to pursue it. However, there can be no assurance that theultimate resolution of this matter will not result in a material adverse effecton our business, financial condition or results of operations.

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

No matter was submitted to a vote of our securityholders during the fourth quarter ended December 31, 2006.

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**PART II**

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**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market Price**

Our common stock is listed for trading on the NASDAQGlobal Select Market under the symbol “EVVV.” Our common stock has traded on that market, which is formerly known asthe NASDAQ National Market, since the date of our initial public offering onJune 16, 2005.

The following table setsforth, in dollars and cents (in lieu of fractions), the high and low dailysales prices for our common stock, as reported by the NASDAQ Global SelectMarket, for each fiscal quarter on which our common stock was listed fortrading on NASDAQ. These prices do not reflect retail markups, markdowns orcommissions.

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| *2006*         |       |     |       |    |       |
| First Quarter  |       | $        | 17.98      |    | $          | 13.83 |   |
| Second Quarter |       | $        | 18.00      |    | $          | 12.51 |   |
| Third Quarter  |       | $        | 17.82      |    | $          | 14.29 |   |
| Fourth Quarter |       | $        | 19.05      |    | $          | 16.39 |   |

 

| ** **                                     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|----------|------------|---------|------------|
| *2005*                                         |       |     |       |    |       |
| Second Quarter  (beginning June 16, 2005) |       | $        | 14.82      |    | $          | 13.25 |   |
| Third Quarter                                  |       | $        | 21.17      |    | $          | 12.30 |   |
| Fourth Quarter                                 |       | $        | 20.93      |    | $          | 11.81 |   |

 

**Number of RecordHolders; Dividends**

As of March 1, 2007,there were 65 record holders of our common stock. To date, we have not declaredor paid any cash dividends on our common stock.

**Recent Sales ofUnregistered Equity Securities**

During the fourth quarterended December 31, 2006, we did not issue or sell any shares of our commonstock or other equity securities without registration under the Securities Actof 1933, as amended.

**Use of Proceeds**

On June 15, 2005, our registration statement onForm S-1 (Registration No. 333-123851) was declaredeffective. Our initial public offering resulted in gross proceeds to us of$167.6 million. Expenses related to the initial public offering were asfollows:  approximately $8.4 million for underwriting discounts andcommissions and approximately $4.2 million for other expenses, for totalexpenses of approximately $12.6 million. None of the offering expenses resultedin direct or indirect payments to any of our directors, officers or theirassociates, to persons owning 10% or more of our common stock or to any of ouraffiliates.

After deduction of offering expenses, we received netproceeds of approximately $154.9 million in our initial public offering,including shares sold by us pursuant to the underwriters’ over-allotmentoption. As of December 31, 2006, the proceeds from our initial publicoffering and available cash were used as follows: $36.5 million of the netproceeds were used to repay a portion of the accrued and unpaid interest on thedemand notes, $105.2 million was used for general corporate purposes and theremaining net 

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proceeds were invested inshort-term, investment-grade, interest bearing securities. We cannot predictwhether the proceeds will yield a favorable return. Other than $36.5 million ofthe net proceeds used to repay a portion of the accrued and unpaid interest ondemand notes held by Warburg, Pincus Equity Partners, L.P., our majoritystockholder, and certain of its affiliates, and The Vertical Group, L.P., whichis one of our stockholders, and certain of its affiliates, none of the netproceeds from our initial public offering have resulted in direct or indirectpayments to directors, officers or their associates, to persons who owned 10%or more of our common stock or to any of our affiliates.

We expect to use theremaining net proceeds of approximately $13.2 million from our initial publicoffering for general corporate purposes. Our management has broad discretion asto the use of the net proceeds. We may use a portion of the net proceeds forthe acquisition of, or investment in, technologies or products that complementour business. As required by Securities and Exchange Commission regulations, wewill provide further detail on our use of the net proceeds from our initialpublic offering in future periodic reports.

**Issuer Purchases ofEquity Securities**

Thefollowing table sets forth the information with respect to purchases made by oron behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) underthe Securities Exchange Act of 1934), of shares of our common stock during thethree months ended December 31, 2006.

| **Period**                                                       | ** ** | ** ** | ** ** | **Total  Number  of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Plans or  Programs(1)** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month # 1  (October 2, 2006 - November 5, 2006)   |       |       | 0          |                                     |       |                                         | N/A        |                                                                                                                                |       |                                                                                                                                   | N/A        |   |   |   | N/A |   |   |
| Month # 2  (November 6, 2006 - December 3, 2006)  |       |       | 6,950      | (2)                                      |       |                                         | $          | 18.08                                                                                                                               |       |                                                                                                                                   |       | N/A |   |   |   | N/A |   |   |
| Month # 3  (December 4, 2006 - December 31, 2006) |       |       | 0          |                                     |       |                                         | N/A        |                                                                                                                                |       |                                                                                                                                   | N/A        |   |   |   | N/A |   |   |
| Total:                                                           |       |       | 6,950      | (2)                                      |       |                                         | $          | 18.08                                                                                                                               |       |                                                                                                                                   |       | N/A |   |   |   | N/A |   |   |

 

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(1)          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 an indefinite number of shares in connection with the cashless exercise ofoutstanding stock options and the surrender of shares of common stock upon theissuance or vesting of stock grants to satisfy any required withholding oremployment-related tax obligations.

(2)          Consists of sharesrepurchased from employees in connection with the required payment ofwithholding or employment-related tax obligations due in connection with theissuance of unrestricted stock awards.

Except as set forth in thetable above, we did not purchase any shares of our common stock or other equitysecurities of ours registered pursuant to Section 12 of the SecuritiesExchange Act of 1934, as amended, during the three months endedDecember 31, 2006.

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**Stock PerformanceGraph**

The following graphcompares the annual cumulative total stockholder return on our common stockfrom June 16, 2005, the date of our initial public offering, untilDecember 31, 2006, with the annual cumulative total return over the sameperiod of the NASDAQ Stock Market (U.S.) Index and the NASDAQ Medical EquipmentIndex.

The comparison assumes the investment of $100 in eachof our common stock, the NASDAQ Stock Market (U.S.) Index and the NASDAQMedical Equipment Index on June 16, 2005, and the reinvestment of alldividends.

**COMPARISON OF 18 MONTHCUMULATIVE TOTAL RETURN***

Among ev3 Inc.

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*                    $100 investedon 6/16/05 in stock or on 5/31/05 in Index including reinvestment of dividends.Fiscal year ending December 31.

*The foregoing Stock Performance Graph shall not bedeemed to be “filed” with the Securities and Exchange Commission or subject tothe liabilities of Section 18 of the Securities Exchange Act of 1934, asamended. Notwithstanding anything to the contrary set forth in any of ourprevious filings under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended, that might incorporate future filings,including this annual report on Form 10-K, in whole or in part, theforegoing Stock Performance Graph shall not be incorporated by reference intoany such filings.*

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**ITEM 6.**                SELECTEDFINANCIAL DATA

Thefollowing selected consolidated financial data set forth the results ofoperations and balance sheet data of our company. 

| ** **                                                      | ** ** | **For the Year Ended December 31,**                                                   | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                      | ** ** | **(dollars in thousands, except per unit and per share amounts)** | ** ** |
| **Results  of Operations:**                                     | ** ** | ** **                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                       |       | $                                                                                                              | 202,438    |   | $ | 133,696 |   | $ | 86,334 |   | $ | 67,639 |   | $ | 37,084 |   |
| Operating  expenses:                                            |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                              |       | 71,321                                                                                                         |       | 55,094 |   | 39,862 |   | 30,218 |   | 16,930 |   |
| Sales, general and administrative                               |       | 141,779                                                                                                        |       | 130,427 |   | 103,031 |   | 82,479 |   | 48,139 |   |
| Research and development                                        |       | 26,725                                                                                                         |       | 39,280 |   | 38,917 |   | 45,145 |   | 32,994 |   |
| Amortization of intangible assets                               |       | 17,223                                                                                                         |       | 10,673 |   | 9,863 |   | 12,078 |   | 17,370 |   |
| (Gain) loss on sale of assets, net                              |       | 162                                                                                                            |       | 200 |   | (14,364 | ) | 14 |   | — |   |
| Acquired in-process research and development                    |       | 1,786                                                                                                          |       | 868 |   | — |   | 488 |   | 104,192 |   |
| Total operating expenses                                        |       | 258,996                                                                                                        |       | 236,542 |   | 177,309 |   | 170,422 |   | 219,625 |   |
| Loss from  operations                                           |       | (56,558                                                                                                        | )          | (102,846 | ) | (90,975 | ) | (102,783 | ) | (182,541 | ) |
| Other (income)  expense:                                        |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Gain on sale of investments, net                                |       | (1,063                                                                                                         | )          | (4,611 | ) | (1,728 | ) | (3,409 | ) | (7,386 | ) |
| Interest (income) expense, net                                  |       | (1,695                                                                                                         | )          | 9,916 |   | 25,428 |   | 12,673 |   | 1,123 |   |
| Equity loss of investee                                         |       | —                                                                                                         |       | — |   | — |   | — |   | 2,160 |   |
| Minority interest in loss of subsidiary                         |       | —                                                                                                         |       | (2,013 | ) | (13,846 | ) | (3,808 | ) | (13,258 | ) |
| Other (income) expense, net                                     |       | (2,117                                                                                                         | )          | 3,360 |   | (1,752 | ) | (1,606 | ) | (172 | ) |
| Loss before  income taxes                                       |       | (51,683                                                                                                        | )          | (109,498 | ) | (99,077 | ) | (106,633 | ) | (165,008 | ) |
| Income tax  expense                                             |       | 688                                                                                                            |       | 526 |   | 196 |   | 303 |   | 172 |   |
| Net loss                                                        |       | (52,371                                                                                                        | )          | (110,024 | ) | (99,273 | ) | (106,936 | ) | (165,180 | ) |
| Accretion of  preferred membership units to redemption value(1) |       | —                                                                                                         |       | 12,061 |   | 23,826 |   | 7,651 |   | — |   |
| Net loss  attributable to common unit/share holders             |       | $                                                                                                              | (52,371    | ) | $ | (122,085 | ) | $ | (123,099 | ) | $ | (114,587 | ) | $ | (165,180 | ) |
| Net loss per  common unit/share(2):                             |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                               |       | $                                                                                                              | (0.93      | ) | $ | (4.48 | ) | $ | (57.44 | ) | $ | (130.67 | ) | $ | (224.49 | ) |
| Weighted average  units/shares outstanding:                     |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                               |       | 56,585,025                                                                                                     |       | 27,242,712 |   | 2,142,986 |   | 876,894 |   | 735,786 |   |

 

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| ** **                                                   | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **(dollars in thousands)**  | ** ** |
| **Balance Sheet Data:**                                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                   |       | $                                     | 24,053     |   | $ | 69,592 |   | $ | 20,131 |   | $ | 23,625 |   | $ | 4,174 |   |
| Short-term  investments                                      |       | 14,700                                |       | 12,000 |   | — |   | — |   | — |   |
| Current assets                                               |       | 135,845                               |       | 151,675 |   | 68,609 |   | 58,687 |   | 24,565 |   |
| Total assets                                                 |       | 352,826                               |       | 296,828 |   | 212,046 |   | 207,023 |   | 184,397 |   |
| Current  liabilities excluding demand notes                  |       | 41,767                                |       | 37,671 |   | 36,025 |   | 32,379 |   | 32,513 |   |
| Demand notes  payable-related parties                        |       | —                                |       | — |   | 299,453 |   | 213,033 |   | 108,199 |   |
| Total liabilities                                            |       | 47,592                                |       | 38,523 |   | 336,180 |   | 250,676 |   | 141,706 |   |
| Preferred  membership units                                  |       | —                                |       | — |   | 254,028 |   | 230,202 |   | 204,513 |   |
| Total members’ and  stockholders’ equity (deficit) |       | 305,234                               |       | 245,455 |   | (394,472 | ) | (285,672 | ) | (183,015 | ) |
|                                                              |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The accretion ofpreferred membership units to redemption value presented above is based on therights to which the Class A and Class B preferred membership unitholders of ev3 LLC were entitled related to a liquidation, dissolution orwinding up of ev3 LLC. Notwithstanding this accretion right, in connection withthe merger of ev3 LLC with and into ev3 Inc., each membership unit representinga preferred equity interest in ev3 LLC was converted into one share of ourcommon stock and did not receive any additional rights with respect to theliquidation preference. Accretion was discontinued upon conversion of thepreferred units to common equity at the time of our initial public offering onJune 21, 2005.

(2)          Netloss per common unit/share and number of units/shares used in per unit/sharecalculations reflect our June 21, 2005 one for six reverse stock split forall periods presented.

**ITEM 7.**                MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATION

This Management’sDiscussion and Analysis provides material historical and prospectivedisclosures intended to enable investors and other users to assess ourfinancial condition and results of operations. Statements that are nothistorical are forward-looking and involve risks and uncertainties discussedunder the headings “Item 1. Business—Forward-Looking Statements” and “Item 1A. RiskFactors” of this report. The following discussion of our results of operationsand financial condition should be read in conjunction with our financialstatements and the related notes thereto included elsewhere in this report.

**Overview**

We are a leading global medical device company focusedon catheter-based technologies for the endovascular treatment of vasculardiseases and disorders. Our namesignifies our commitment to, and engagement in, the peripheral vascular,neurovascular and cardiovascular markets and the physician specialties thatserve them. Our broad product portfolio is focused on applications that weestimate represent an addressable worldwide endovascular market opportunity ofapproximately $3.2 billion in 2005****andup to $7.0 billion by the end of 2010. We sell over 100 productsconsisting of over 1,000 SKUs in more than 60 countries through a direct salesforce in the United States, Canada, Europe and other countries and distributorsin selected other international markets. From 2000 to 2002, our investor groupacquired certain of the assets in our cardio peripheral division to build thefoundation of our current peripheral and cardiovascular product portfolios.During this period, our investor group also purchased certain neurovascularassets to expand our neurovascular product portfolio and, through a series ofinvestments, obtained a controlling investment in Micro Therapeutics, Inc.,or MTI. Prior to 2006, MTI was our majority owned subsidiary, with theremaining shares being publicly held. In January 2006, we acquired the 

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remaining shares of MTI’scommon stock not owned by us, as a result of which MTI became our wholly ownedsubsidiary. We have dedicated significant capital and management effort toadvance our acquired technologies and broaden our product lines in order toexecute our strategies.

We believe the overall market for endovascular deviceswill grow as the demand for minimally invasive treatment of vascular diseasesand disorders continues to increase. We intend to capitalize on this marketopportunity by the continued introduction of new products. We expect tooriginate these new products primarily through our internal research anddevelopment and clinical efforts, but we may supplement them with acquisitionsor other external collaborations. Additionally, our growth has been, and willcontinue to be, impacted by our expansion into new geographic markets and theexpansion of our direct sales organization in existing geographic markets.

We were formed on January 28, 2005 as asubsidiary of ev3 LLC. Immediately prior to the consummation of our initial publicoffering on June 21, 2005, ev3 LLC was merged with and into us and wecompleted a one-for-six reverse stock split of our outstanding common stock.For additional information regarding our formation and the relatedtransactions, see Note 1 to our consolidated financial statements includedelsewhere in this report. All share and per share amounts for all periodspresented in this report reflect the reverse stock split of our common stock.

We report and manage our operations in two reportablebusiness segments based on similarities in the products sold, customer base anddistribution system. Our cardio peripheral segment contains products that areused in both peripheral vascular and cardiovascular procedures by radiologists,vascular surgeons and cardiologists. Our neurovascular segment containsproducts that are used primarily by neuroradiologists and neuro surgeons. Oursales activities and operations are aligned closely with our business segments.We generally have dedicated cardio peripheral sales teams in the United Statesand Europe 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 our neurovascular business customer base.

We have corporate infrastructure and direct salescapabilities in the United States, Canada, Europe and other countries and haveestablished distribution relationships in selected other international markets.Beginning October 1, 2006, we established a distribution arrangement withMedtronic International Trading Inc. - Japan Branch, a subsidiary of Medtronic, Inc.,pursuant to which Medtronic distributes all of our products in Japan. As a resultof this new arrangement, we ceased our direct sales operations in Japan. Ourcorporate headquarters and our manufacturing, research and development, andU.S. sales operations for our peripheral vascular and cardiovascular productlines are located in Plymouth, Minnesota. Our manufacturing, research anddevelopment, and U.S. sales operations for our neurovascular product lines arelocated in Irvine, California. Outside of the United States, our primary officeis in Paris, France. Approximately 40.1% and 46.3% of our net sales during 2006and 2005, respectively, were generated outside of the United States, as aresult of which we are sensitive to risks related to fluctuation in exchangerates and other risks associated with international operations, which couldaffect our business results. Changes in foreign currency exchange rates had apositive impact of approximately $443 thousand on our 2006 net sales ascompared to our 2005 net sales.

Since our inception, we have focused on building ourU.S. and international direct sales and marketing infrastructure that includesa worldwide sales force of approximately 248 sales professionals as of December 31,2006 in the United States, Canada and Europe. Our direct sales representativesaccounted for approximately 87% of our net sales during 2006 and 2005, 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 obtain regulatory approvals and the expansion of our globaldistribution system. As a result, our cumulative costs and expenses havesignificantly exceeded our net sales, resulting in an accumulated deficit of$614.6 million at December 31, 2006. Consequently, we have 

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financed our operationsthrough debt and equity offerings. We expect to continue to generate operatinglosses for at least the next 9 months.

Our cash, cash equivalents and short-term investmentsavailable to fund our current operations were $38.8 million at December 31,2006. We completed an initial public offering of our common stock on June 21,2005 in which we sold 11,765,000 shares of our common stock at $14.00 pershare, resulting in net proceeds to us of approximately $152.7 million, afterdeducting underwriting discounts, commissions and offering expenses. We used$36.5 million of these net proceeds to repay a portion of the accrued andunpaid interest on certain demand notes held by Warburg, Pincus EquityPartners, L.P. and certain of its affiliates, which we refer to collectively asWarburg Pincus, and The Vertical Group, L.P. and certain of its affiliates,which we refer to collectively as The Vertical Group. In addition, on July 20,2005, we sold 205,800 shares of common stock pursuant to an over-allotmentoption granted to the underwriters which resulted in net proceeds to us of $2.2million, after deducting underwriting discounts, commissions and offeringexpenses. We invested the remaining portion of the net proceeds in short-term,investment-grade, interest bearing securities. We have used these funds forgeneral corporate purposes since our initial public offering, and expect tocontinue to do so. We expect our cash balances to decrease as we continue touse cash to fund our operations, until the fourth quarter of 2007 at which timewe expect to generate a positive cash flow.

On June 28, 2006, our operating subsidiaries, ev3Endovascular, Inc., ev3 International, Inc. and ev3 Neurovascular,entered into a Loan and Security Agreement with Silicon Valley Bank, consistingof a two-year $30.0 million revolving line of credit and a 48-month $7.5million equipment financing line. As of December 31, 2006, we had $7.5million in outstanding borrowings under the equipment line and no outstandingborrowings under the revolving line of credit; however, we had approximately$1.0 million of outstanding letters of credit issued by SVB, which reduces theamount available under our revolving line of credit to approximately $29.0million.

We believe our cash, cashequivalents, short-term investments and funds available under our revolvingline of credit will be sufficient to meet our liquidity requirements through atleast the next twelve months.

**Sales and ExpenseComponents**

The following is a description of the primarycomponents of our net sales and expenses:

*Net sales.*   Wederive our net sales from the sale of endovascular devices in two primarybusiness segments: cardio peripheral and neurovascular devices. Most of oursales are generated by our global, direct sales force and are shipped andbilled to hospitals or clinics throughout the world. In countries where we donot have a direct sales force, sales are generated by shipments to distributorswho, in turn, sell to hospitals and clinics. In cases where our products areheld in consignment at a customer’s location, we generate sales at the time theproduct is used in surgery and we are notified by the hospital, rather than atshipment. We charge our customers for shipping and record shipping income aspart of net sales.

*Costof goods sold.*   We manufacture a substantialmajority of the products that we sell. Our cost of goods sold consistsprimarily of direct labor, allocated manufacturing overhead, raw materials,components and royalties and excludes amortization of intangible assets, which ispresented as a separate component of operating expenses.

*Sales,general and administrative expenses.*   Our sellingand marketing expenses consist primarily of sales commissions and support costsfor our global, direct distribution system and consulting expenses associatedwith our medical advisors, marketing costs and freight expense that we pay toship products to customers. General and administrative expenses consistprimarily of salaries and benefits, compliance systems, accounting, finance,legal, information technology, human resources and facility costs, includingany costs related to closing facilities.

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*Researchand development.*   Research and developmentexpense includes costs associated with the design, development, testing,deployment, enhancement and regulatory approval of our products. It alsoincludes costs associated with design and execution of clinical trials andregulatory submissions.

*Amortizationof intangible assets.*   Intangible assets, such aspurchased completed technology, distribution channels, intellectual property,including trademarks and patents, are amortized over their estimated usefullives. Intangible assets are amortized over periods ranging from 5 to 10 years.

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

*Acquiredin-process research and development.*   Acquiredin-process research and development is related to value assigned to thoseprojects acquired in business combinations or in the acquisition of assets forwhich the related products have not received regulatory approval and have noalternative future use.

*Gainon sale or disposal of investments, net.*   Gain onsale or disposal of investments, net, includes the difference between theproceeds received from the sale of an investment and its carrying value. Inaddition, this caption includes losses from other than temporary declines ininvestments accounted for on a cost basis.

*Interest(income) expense, net.*   Interest (income)expense, net, consists primarily of interest associated with loans from SiliconValley Bank and, prior to our initial public offering, from our principalinvestors, Warburg Pincus and The Vertical Group. Interest income results frominterest earned on investments in investment-grade, interest-bearing securitiesand money market accounts.

*Minorityinterest in loss of subsidiary.*   Minorityinterest in loss of subsidiary is the portion of MTI net losses allocated tominority stockholders.

*Other(income) expense, net.*   Other (income) expense,net primarily includes foreign exchange (gains) losses net of certain otherexpenses.

*Incometax expense.*   Income tax expense is generated incertain of our European subsidiaries. Due to our history of operating losses,we have not recorded tax benefits for U.S. income taxes through 2006.

*Accretion of preferredmembership units to redemption value.*   Accretionof preferred membership units to redemption value represents the increase incarrying value of preferred membership units of ev3 LLC prior to ev3 LLC’smerger with and into us on June 21, 2005. The increase in carrying valuewas based on the rights to which the preferred membership units were entitledrelated to a liquidation, dissolution or winding up of ev3 LLC. Accretion wasrecorded as a reduction to members’ equity and increased the loss attributableto common unit holders. Accretion was discontinued upon conversion of thepreferred units to common equity at the time of our initial public offering on June 21,2005.

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**Results ofOperations**

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:

| ** **                                                      | ** ** | **For the Year Ended  December 31,** | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Results of Operations:**                            | ** ** | ** **                                               | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Percent  Change** | ** ** |
| Net sales                                                       |       | $                                                        | 202,438    |                                                     | $          | 133,696 |   |   | 51.4 | % |   | $ | 133,696 |   | $ | 86,334 |   |   | 54.9 | % |   |
| Operating  expenses:                                            |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of goods sold                                              |       | 71,321                                                   |       | 55,094                                                   |       |   | 29.5 | % |   | 55,094 |   | 39,862 |   |   | 38.2 | % |   |
| Sales, general and administrative                               |       | 141,779                                                  |       | 130,427                                                  |       |   | 8.7 | % |   | 130,427 |   | 103,031 |   |   | 26.6 | % |   |
| Research and development                                        |       | 26,725                                                   |       | 39,280                                                   |       |   | (32.0 | )% |   | 39,280 |   | 38,917 |   |   | 0.9 | % |   |
| Amortization of intangible assets                               |       | 17,223                                                   |       | 10,673                                                   |       |   | 61.4 | % |   | 10,673 |   | 9,863 |   |   | 8.2 | % |   |
| (Gain) loss on sale of assets, net                              |       | 162                                                      |       | 200                                                      |       |   | NM |   |   | 200 |   | (14,364 | ) |   | NM |   |   |
| Acquired in-process research and development                    |       | 1,786                                                    |       | 868                                                      |       |   | NM |   |   | 868 |   | — |   |   | NM |   |   |
| Total operating expenses                                        |       | 258,996                                                  |       | 236,542                                                  |       |   | 9.5 | % |   | 236,542 |   | 177,309 |   |   | 33.4 | % |   |
| Loss from  operations                                           |       | (56,558                                                  | )          | (102,846                                                 | )          |   | (45.0 | )% |   | (102,846 | ) | (90,975 | ) |   | 13.0 | % |   |
| Other (income)  expense:                                        |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain on sale of investments, net                                |       | (1,063                                                   | )          | (4,611                                                   | )          |   | (76.9 | )% |   | (4,611 | ) | (1,728 | ) |   | 166.8 | % |   |
| Interest (income) expense, net                                  |       | (1,695                                                   | )          | 9,916                                                    |       |   | NM |   |   | 9,916 |   | 25,428 |   |   | (61.0 | )% |   |
| Minority interest in loss of subsidiary                         |       | —                                                   |       | (2,013                                                   | )          |   | NM |   |   | (2,013 | ) | (13,846 | ) |   | NM |   |   |
| Other (income) expense, net                                     |       | (2,117                                                   | )          | 3,360                                                    |       |   | NM |   |   | 3,360 |   | (1,752 | ) |   | NM |   |   |
| Loss before  income taxes                                       |       | (51,683                                                  | )          | (109,498                                                 | )          |   | (52.8 | )% |   | (109,498 | ) | (99,077 | ) |   | 10.5 | % |   |
| Income tax  expense                                             |       | 688                                                      |       | 526                                                      |       |   | 30.8 | % |   | 526 |   | 196 |   |   | 168.4 | % |   |
| Net loss                                                        |       | (52,371                                                  | )          | (110,024                                                 | )          |   | (52.4 | )% |   | (110,024 | ) | (99,273 | ) |   | 10.8 | % |   |
| Accretion of  preferred membership units to redemption value(1) |       | —                                                   |       | 12,061                                                   |       |   | NM |   |   | 12,061 |   | 23,826 |   |   | NM |   |   |
| Net loss attributable to  common share/unit holders             |       | $                                                        | (52,371    | )                                                        | $          | (122,085 | ) |   | (57.1 | )% |   | $ | (122,085 | ) | $ | (123,099 | ) |   | (0.8 | )% |   |
|                                                                 |            |                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The accretion ofpreferred membership units to redemption value presented above is based on therights to which the Class A and Class B preferred membership unitholders of ev3 LLC were entitled related to a liquidation, dissolution orwinding up of ev3 LLC. Notwithstanding this accretion right, in connection withthe merger of ev3 LLC with and into us, each membership unit representing apreferred equity interest in ev3 LLC was converted into the right to receiveone share of our common stock and did not receive any additional rights withrespect to the liquidation preference. Accretion was discontinued uponconversion of the preferred units to common equity at the time of our initialpublic offering on June 21, 2005.

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

| ** **                              | ** ** | **For the Year Ended  December 31,** | ** ** | ** ** | ** ** | **For the Year Ended  December 31,** | ** ** | ** **          | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|---------------------|------------|
| **NET SALES BY SEGMENT** | ** ** | ** **                                               | ** ** | **2006**   | ** ** | **2005**                                                 | ** ** | **Percent  Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Percent  Change** | ** ** |
| Cardio Peripheral:                      |       |                                                     |       |       |       |                                                     |       |                |       |   |   |   |   |   |   |   |   |
| Stents                                  |       | $                                                        | 64,092     |       | $          | 37,871                                                   |       |                | 69.2       | % |   | $ | 37,871 |   | $ | 20,484 |   |   | 84.9 | % |   |
| Thrombectomy and embolic protection     |       | 21,606                                                   |       | 12,869     |       |                                                     | 67.9       | %                   |       | 12,869 |   | 9,119 |   |   | 41.1 | % |   |
| Procedural support and other            |       | 35,406                                                   |       | 29,141     |       |                                                     | 21.5       | %                   |       | 29,141 |   | 23,339 |   |   | 24.9 | % |   |
| Total Cardio Peripheral                 |       | $                                                        | 121,104    |       | $          | 79,881                                                   |       |                | 51.6       | % |   | $ | 79,881 |   | $ | 52,942 |   |   | 50.9 | % |   |
| Neurovascular:                          |       |                                                     |       |       |       |                                                     |       |                |       |   |   |   |   |   |   |   |   |
| Embolic Products                        |       | $                                                        | 38,998     |       | $          | 22,463                                                   |       |                | 73.6       | % |   | $ | 22,463 |   | $ | 12,583 |   |   | 78.5 | % |   |
| Neuro access and delivery products      |       | 42,336                                                   |       | 31,352     |       |                                                     | 35.3       | %                   |       | 31,352 |   | 20,809 |   |   | 50.7 | % |   |
| Total Neurovascular                     |       | $                                                        | 81,334     |       | $          | 53,815                                                   |       |                | 51.1       | % |   | $ | 53,815 |   | $ | 33,392 |   |   | 61.2 | % |   |
| Total net sales                         |       | $                                                        | 202,438    |       | $          | 133,696                                                  |       |                | 51.4       | % |   | $ | 133,696 |   | $ | 86,334 |   |   | 54.9 | % |   |
|                                         |            |                                                          |            |            |            |                                                          |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                | ** ** | **For the Year Ended  December 31,** | ** ** | ** ** | ** ** | **For the Year Ended  December 31,** | ** ** | ** **          | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|---------------------|------------|
| **NET SALES BY GEOGRAPHY** | ** ** | ** **                                               | ** ** | **2006**   | ** ** | **2005**                                                 | ** ** | **Percent  Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Percent  Change** | ** ** |
| United States                             |       | $                                                        | 121,180    |       | $          | 71,848                                                   |       |                | 68.7       | % |   | $ | 71,848 |   | $ | 42,791 |   |   | 67.9 | % |   |
| International                             |       |                                                     |       |       |       |                                                     |       |                |       |   |   |   |   |   |   |   |   |
| Before foreign exchange impact            |       | 80,815                                                   |       | 61,848     |       |                                                     | 30.7       | %                   |       | 62,051 |   | 43,543 |   |   | 42.5 | % |   |
| Foreign exchange impact                   |       | 443                                                      |       | —     |       |                                                     | —     |                |       | (203 | ) | — |   |   | — |   |   |
| Total                                     |       | 81,258                                                   |       | 61,848     |       |                                                     | 31.4       | %                   |       | 61,848 |   | 43,543 |   |   | 42.0 | % |   |
| Total                                     |       | $                                                        | 202,438    |       | $          | 133,696                                                  |       |                | 51.4       | % |   | $ | 133,696 |   | $ | 86,334 |   |   | 54.9 | % |   |
|                                           |            |                                                          |            |            |            |                                                          |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Comparison of the Year Ended December 31, 2006 to theYear Ended December 31, 2005***

*Net sales*.   Net salesincreased 51.4% to $202.4 million in 2006 compared to $133.7 million in 2005,primarily as a result of new product introductions and the market penetrationof products introduced in the past 24 months.

*Net sales of cardio peripheral products*.   Netsales of cardio peripheral products increased 51.6% to $121.1 million in 2006compared to $79.9 million in 2005. Key new product launches that contributed tothe sales increase for the year ended December 31, 2006 included theProtégé EverFlex stents, and the SpideRX embolic protection device, both ofwhich were approved by the U.S. FDA during the first quarter of 2006. Thissales growth was also driven by increased market penetration of our Protégéfamily of self expanding stents and sales of our PTA balloon catheters in theUnited States. Net sales in our stent product line increased 69.2% to $64.1million in 2006 compared to $37.9 million in 2005. This increase isattributable to increased market penetration of EverFlex, Protégé GPS, Primusand ParaMount Mini families of stents, partially offset by sales declines inolder generation products. Net sales of our thrombectomy and embolic protectiondevices increased 67.9% to $21.6 million in 2006 largely due to theintroduction of the SpideRX in the U.S. and continued market penetrationinternationally, partially offset by sales declines in older generationproducts. Net sales of our procedural support and other products increased21.5% to $35.4 million in 2006 compared to 2005, largely due to increasedmarket penetration of PTA balloon catheters in the United States. We believethat our stent and embolic protection sales will 

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continue to lead thegrowth in our cardio peripheral segment. We expect our cardio peripheral netsales to increase in 2007 as a result of market growth, further marketpenetration by products launched during 2005 and 2006, as well as theintroduction of new products during 2007.

*Net sales of neurovascular products*.   Netsales of our neurovascular products increased 51.1% to $81.3 million in 2006compared to $53.8 million in 2005, primarily as a result of increased marketpenetration of the Onyx Liquid Embolic System and Nexus coils, as well ascontinued penetration by our microcatheters and occlusion balloon systems. Salesof our embolic products increased 73.6% to $39.0 million in 2006 compared to2005 primarily due increased market penetration of the Onyx liquid embolics forthe treatment of brain AVMs since its United States launch in July 2005,volume increases in the Onyx liquid embolics internationally and volumeincreases in the Nexus family of embolic coils.  Sales of our neuro access and deliveryproducts increased 35.0% to $42.3 million in 2006 compared to 2005 largely as aresult of volume increases across multiple product lines, including the Echelonmicrocatheters and the HyperForm and HyperGlide occlusion balloon systems.We expect our neurovascular sales to increase in 2007 due to market growth,additional market penetration by products launched during 2005 and 2006, andthe introduction of new products during 2007.

*Net sales by geography*.   Netsales in the United States increased 68.7% to $121.2 million in 2006 comparedto $71.8 million in 2005. International sales increased 31.4% to $81.2 millionin 2006 compared to $61.8 million in 2005 and represented 40.1% of company-widesales in 2006 compared to 46.3% in 2005. International sales include afavorable currency impact of approximately $443 thousand compared to 2005,principally resulting from the performance of the Euro against the U.S. dollar.Our direct sales force operations in Europe produced net sales of $48.4 millionwhich represented 60.5% of the total international net sales growth, with theremainder coming from our distribution operations in the Asia Pacific, Canada,Latin America and Middle East markets. The sales growth in our internationalmarkets was primarily a result of new product introductions and increasedproduct penetration.

*Cost of goods sold*.   As apercentage of net sales, cost of goods sold decreased to 35.2% of net sales inthe year ended December 31, 2006 compared to 41.2% in the year ended December 31,2005. This decrease was primarily attributable to our continued growth in salesvolume, ongoing investments in in-house manufacturing capabilities and costsavings achieved related to facility consolidation and our implementation anduse of lean manufacturing concepts. In our cardio peripheral segment, cost ofgoods sold as a percentage of net sales decreased to 43.1% in year ended December 31,2006 compared to 48.3% in the year ended December 31, 2005 primarilyattributable to on-going investments in in-house manufacturing capabilities,facility consolidation and increased sales volume. In our neurovascularsegment, cost of goods sold as a percentage of net sales decreased to 23.5% inyear ended December 31, 2006 compared to 30.7% in the year ended December 31,2005 due in part to the consolidation of our neurovascular manufacturingoperations into our Irvine, California facility during the second quarter of2005. Our increased production volumes and on-going cost savings programs alsocontributed to the decrease. We expect cost of goods sold as a percentage ofnet sales to continue to decline during 2007 due to higher volume in ourmanufacturing facilities and efficiency improvements from manufacturinginitiatives, offset in part by royalty payments required under the licenseagreement with Medtronic and anticipated conversion costs associated with newproduct launches occurring during 2007.

*Sales, general and administrative expense*.   Sales,general and administrative expenses increased 8.7% to $141.8 million in 2006compared to $130.4 million in 2005. Theincrease was due to a $2.7 million increase in non-cash stock-basedcompensation costs, increased International distribution costs of $1.1 millionrelated to rent and freight costs, increases in general staffing levels andhigher selling expenses related to the expansion of our neurovascular salesforce. New product introductions also contributed to the increase in the yearended December 31, 2006. Although these expenses increased in absolutedollars, as a percentage of net sales, sales, general and administrativeexpenses decreased to 70.0% in 2006 compared to 97.6% of net sales in 2005. Weexpect sales, general and administrative expenses to increase 

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intotal when compared to 2006 but continue to decline as a percentage ofnet sales as we believe that our current infrastructure can support a higherlevel of sales.

*Research and development*.   Asa percentage of net sales, research and development expense decreased to 13.2%for the year ended December 31, 2006 compared to 29.4% in 2005. Thisreduction was due to the increase in net sales combined with a decrease inclinical study expenses related to the completion of certain clinical trials in2005. The decrease in clinical costs was partially offset by increased spendingon certain internal development efforts. We expect research and developmentspending to increase in 2007 as we have multiple clinical trials planned for2007.

*Amortization of intangible assets*.   Amortizationof intangible assets increased 61.4% to $17.2 million in 2006 compared to $10.7million in 2005. This increase was primarily a result of additional amortizableintangible assets recorded as part of our acquisition of the remainingoutstanding shares of MTI in January 2006. We expect the amortization ofintangibles assets in 2007 to remain consistent with 2006 levels.

*Acquired in-process research and development*.   During2006, 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. During 2005, we incurred a charge of $868 thousandfor acquired in-process research and development as a result of The VerticalGroup’s contribution to ev3 LLC of shares of MTI. This contribution wasaccounted for under the purchase method of accounting based upon theproportionate ownership contributed to ev3 LLC. For additional discussion ofthis amount, see Note 4 to our consolidated financial statements includedelsewhere in this report.

*Gain on sale of investments, net*.   Gainon sale of investments, net was $1.1 million in 2006 compared to $4.6 millionin 2005. In 2006, we received a final $910 thousand milestone payment relatedto the 2002 sale of our investment in Enteric Medical Technologies, Inc.and a $153 thousand milestone payment related to the 2005 sale of Genyx Medical, Inc.In 2005, we received a $3.7 million milestone payment related to the sale ofour investment in Genyx Medical, Inc. and received a $878 thousandmilestone payment related to our 2002 sale of our investment in Enteric MedicalTechnologies, Inc.

*Interest(income) expense, net*.*  *Interest(income) expense net is comprised of the following:

| ** **                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Interest income              |       | $        | (2,469     | )        | $          | (2,475 | ) |
| Interest expense             |       | 774      |       | 12,391   |       |
| Interest (income)  / expense |       | $        | (1,695     | )        | $          | 9,916 |   |

 

Net interest income was $1.7 million in the year endedDecember 31, 2006 compared to net interest expense of $9.9 million in 2005.A portion of the net proceeds from our initial public offering in June 2005were invested in short-term, investment grade, interest-bearing securitiescontributing interest income of $2.5 million during the full year 2006. We alsoused a portion of the net proceeds to reduce our financing balance to zeroresulting in a reduction of interest expense.

*Other (income) expense, net*.   Other(income) expense, net was income of $2.1 million in 2006 compared to expense of$3.4 million in 2005. This change was primarily related to improvements inforeign exchange gains (losses) in 2006 compared to 2005.

*Income tax expense*.   Weincurred a modest income tax expense in 2006 related to certain of our Europeansales offices. We recorded no provision for U.S. income taxes in 2006 or in2005 due to our history of operating losses.

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*Accretion of preferred membershipunits to redemption value*.   Accretion of preferredmembership units to redemption value was recorded up to the date of our initialpublic offering in June 2005, at which time all preferred units wereconverted into common shares.

***Comparison of the Year Ended December 31, 2005 tothe Year Ended December 31, 2004***

*Net sales*.   Net salesincreased 54.9% to $133.7 million in 2005 compared to $86.3 million in 2004,primarily as a result of new product introductions and the expansion of ourdistribution system during 2005. Our U.S. direct sales force was increased from56 persons at the beginning of 2004 to 94 persons at the beginning of 2005,with most of the growth occurring in the fourth quarter of 2004. Our U.S.direct sales force was increased further to 99 persons at the end of 2005. TheU.S. sales force expansion was primarily to support new product introductionsthat began in late 2004 and continued in 2005.

*Net sales of cardio peripheral products*.   Netsales of cardio peripheral products increased 50.9% to $79.9 million in 2005compared to $52.9 million in 2004. This sales growth was primarily the resultof new product introductions and the expansion of our U.S. sales force asdescribed above, partially offset by sales declines in older generationproducts. Key new product launches that contributed to the sales increase forthe year ended December 31, 2005 included the Protégé stents, Primusstents, PTA balloon catheters, SpideRX embolic protection system, the X-Sizerthrombectomy catheter, the Diver C.E. aspiration catheter and ParaMount Ministents. Net sales in our stent product line increased 84.9% to $37.9 million in2005 compared to $20.5 million in 2004. This increase is attributable to theintroduction of the Protégé, Primus and ParaMount Mini families of stents intothe U.S. and international markets during the previous 15 months, partiallyoffset by sales declines in older generation products. Net sales of ourthrombectomy and embolic protection devices increased 41.1% to $12.9 million in2005 largely due to the introduction of the SpideRX internationally and theintroduction of the X-Sizer in the United States in late 2004, partially offsetby sales declines in older generation products. Net sales of our proceduralsupport and other products increased 24.9% to $29.1 million in 2005 compared to2004, largely due to the introduction of PTA balloon catheters in early 2005. Webelieve that our stent sales will continue to lead the growth in our cardioperipheral segment.

*Net sales of neurovascular products*.   Netsales of our neurovascular products increased 61.2% to $53.8 million in 2005compared to $33.4 million in 2004, primarily as a result of volume increases inthe NXT family of embolic coils and continued penetration by our microcathetersand occlusion balloon systems. Also contributing are the FDA approval andUnited States launch of the Onyx liquid embolic system for the treatment ofbrain AVMs in July 2005 and volume increases in the Onyx liquid embolicsinternationally. Sales of our neuro access and delivery products increased50.7% to $31.3 million in 2005 compared to 2004 largely as a result of volumeincreases across multiple product lines, including the Echelon microcatheters,the Marathon microcatheter, and the Hyper Form and HyperGlide occlusionballoon systems. Sales of our embolic products increased 78.5% to $22.5 millionin 2005 compared to 2004 primarily due to the July 2005 U.S. launch of theOnyx liquid embolics for the treatment of brain AVMs, volume increases in theOnyx liquid embolics internationally and volume increases in the NXT family ofembolic coils.

*Net sales by geography*.   Netsales in the United States increased 67.9% to $71.8 million in 2005 compared to$42.8 million in 2004. International sales increased 42.0% to $61.8 million in2005 compared to $43.5 million in 2004 and represented 46.3% of company-widesales in 2005 compared to 50.4% in 2004. International sales includes anunfavorable currency impact of approximately $203 thousand compared to 2004,principally resulting from the performance of the Euro against the U.S. dollar.Our direct sales force operations in Europe produced net sales of  $38.2 million which represented 51.1% of thetotal international net sales growth, with the remainder coming from ourdistribution operations in the Asia Pacific market and our direct sales forceoperations in Japan. The sales growth in our international markets wasprimarily a result of new product introductions and increased penetration.

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*Cost of goods sold*.   Cost ofgoods sold increased 38.2% to $55.1 million in 2005 compared to $39.9 millionin 2004 primarily as a result increased sales, as discussed above. As apercentage of net sales, cost of goods sold decreased to 41.2% of net sales in2005 compared to 46.2% of net sales in 2004. This decrease was primarilyattributable to better leveraging of fixed costs relating to increased salesand production volumes and moving the manufacturing of certain stent productsin-house. In our cardio peripheral segment, cost of goods sold as a percentageof net sales increased slightly to 48.3% in 2005 compared to 48.1% in 2004 andin our neurovascular segment, cost of goods sold as a percentage of net salesdecreased to 30.7% in 2005 compared to 43.1% in 2004.

*Sales, general and administrative expense*.   Sales,general and administrative expenses increased 26.6% to $130.4 million in 2005compared to $103.0 million in 2004. This increase was due to a $21.7 millionincrease in selling expenses primarily related to the increase in the U.S.direct sales force described above and an increase in expenses related toexpanding our international sales presence, a $3.9 million increase in generaland administrative expenses, a $1.7 million increase in finance departmentcosts related to our initial public offering, incurring $1.9 million in costsrelating to our acquisition of the shares of common stock of MTI that we didnot own, a $1.9 million increase in marketing and distribution expenses. Theseincreases were partially offset by a $1.0 million reduction in legal expensesand a $2.5 million reduction in restructuring expenses in our neurovascularsegment.

*Research and development*.   Researchand development expense increased 0.9% to $39.3 million in 2005 compared to$38.9 million in 2004. This increase was primarily due to a $4.7 millionincrease in product development expenses, partially offset by a $3.8 millionreduction in clinical expenses related to the completion of certain clinicaltrials and other reductions in regulatory expenses in our cardio peripheralsegment. Research and development expenses, as a percentage of net sales,decreased to 29.4% for 2005 from 45.1% in 2004.

*Amortization of intangible assets*.   Amortizationof intangible assets increased 8.2% to $10.7 million in 2005 compared to $9.9million in 2004. This increase was primarily a result of additional amortizableintangible assets related to The Vertical Group’s May 26, 2005contribution to ev3 LLC of shares of MTI. This contribution was accounted forunder the purchase method of accounting based upon the proportionate ownershipcontributed to ev3 LLC and resulted in an increase in amoritzable intangibleassets of $3.4 million.

*(Gain) loss on sale or disposal of assets, net*.   Weincurred a loss on sale or disposal of assets of $200 thousand in 2005. In2004, our net gain on sale of assets resulted from a gain of $14.4 millionrecognized on the sale of intellectual property originally obtained in ouracquisition of MitraLife during 2002.

*Acquired in-process research and development*.   During2005, we incurred a charge of $868 thousand for acquired in-process researchand development as a result of The Vertical Group’s contribution to ev3 LLC ofshares of MTI. This contribution was accounted for under the purchase method ofaccounting based upon the proportionate ownership contributed to ev3 LLC. For adiscussion of this amount, see Note 4 to our consolidated financial statementsincluded in this annual report on Form 10-K. We did not incurcharges for acquired in-process research and development expense during 2004.

*Gain on sale of investments, net*.   Gainon sale of investments, net was $4.6 million in 2005 compared to $1.7 millionin 2004. In 2005, we received a $3.7 million milestone payment related to thesale of our investment in Genyx Medical, Inc. and received a $878 thousandmilestone payment related to our 2002 sale of our investment in Enteric MedicalTechnologies, Inc. In 2004, we received a $1.7 million milestonepayment relating to our 2002 sale of our investment in Enteric MedicalTechnologies, Inc.

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*Interest(income) expense, net*.   Interest (income) expense, netis comprised of the following:

| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Interest income              |       | $        | (2,475     | )        | $          | (388 | ) |
| Interest expense             |       | 12,391   |       | 25,816   |       |
| Interest (income) /  expense |       | $        | 9,916      |     | $          | 25,428 |   |

 

Interest (income) expense, net decreased $15.5 millionor 61.0% to $9.9 million in 2005 compared to $25.4 million in 2004.  During 2004, we recorded a $6.8 million chargerelated to beneficial conversion features arising from the minority interests’participation in two financings of MTI during 2004 which did not re-occurduring 2005. Our outstanding debt balance was converted into common stock inconnection with our initial public offering in June 2005, which caused theremaining decrease in interest expense. We also generated approximately $2.5million of interest income during 2005 from investing the net proceeds of ourinitial public offering in June 2005.

*Other (income) expense, net*.   Other(income) expense, net was an expense of $3.4 million in 2005 compared to incomeof $1.8 million in 2004. This increase was primarily related to increases inforeign exchange losses in 2005 compared to 2004.

*Income tax expense*.   Weincurred a modest income tax expense in 2005 and 2004 related to certain of ourEuropean sales offices. We recorded no provision for U.S. income taxes in 2005or in 2004 due to our history of operating losses.

*Accretion of preferred membershipunits to redemption value*.   Accretion of preferredmembership units to redemption value decreased 49.4% to $12.1 million in 2005compared to $23.8 million in 2004 due to the conversion of the preferredmembership units into common membership units, and subsequently into shares ofcommon stock, on June 21, 2005 in connection with the merger of ev3 LLCwith and into us immediately prior to our initial public offering.

**Liquidity and Capital Resources**

| ** **                       | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| **Balance Sheet Data** | ** ** | ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)**  | ** ** |
| Cash and cash  equivalents       |       | $                                     | 24,053     |   | $ | 69,592 |   |
| Short term  investments          |       | 14,700                                |       | 12,000 |   |
| Total current  assets            |       | 135,845                               |       | 151,675 |   |
| Total assets                     |       | 352,826                               |       | 296,828 |   |
| Total current  liabilities       |       | 41,767                                |       | 37,671 |   |
| Total liabilities                |       | 47,592                                |       | 38,523 |   |
| Total stockholders’  equity |       | 305,234                               |       | 245,455 |   |
|                                  |            |                                       |            |  |  |  |  |  |  |

 

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*Contractual cashobligations.*   At December 31, 2006, we hadcontractual cash obligations and commercial commitments as follows:  

| ** **               | ** ** | **Payments Due by Period** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| ** **               | ** ** | **(dollars in thousand)**       | ** ** |
| Notes Payable            |       | $                                         | 7,500      |   |   | $ | 2,143 |   |   |   | $ | 4,286 |   |   |   | $ | 1,071 |   |   |   | $ | — |   |   |
| Purchase  commitments(1) |       | 32,744                                    |       |   | 32,744 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating leases(2)      |       | 11,194                                    |       |   | 3,929 |   |   |   | 5,689 |   |   |   | 1,576 |   |   |   | — |   |   |
| Total                    |       | $                                         | 51,438     |   |   | $ | 38,816 |   |   |   | $ | 9,975 |   |   |   | $ | 2,647 |   |   |   | $ | — |   |   |

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(1)          Representscommitments for minimum inventory purchases related to our distributionagreement with Invatec. We do not have any other significant purchaseobligations for the delivery of goods or services or other commercialcommitments. These payments are denominated in Euros and were translated in thetables above based on the respective U.S. dollar exchange rate atDecember 31, 2006. On February 15, 2007, we entered into amodification of our distribution agreement which reduced these future minimumpurchase commitments. For the reduced future minimum purchase commitments, seeNote 17 to the consolidated financial statements included elsewhere in thisreport.

(2)          Theamounts reflected in the table above for operating leases represent futureminimum lease payments under non-cancelable operating leases primarily forcertain office space, warehouse space, computers and vehicles. Portions ofthese payments are denominated in foreign currencies and were translated in thetables above based on their respective U.S. dollar exchange rates atDecember 31, 2006. These future payments are subject to foreign currencyexchange rate risk. In accordance with U.S. generally accepted accountingprinciples, or GAAP, our operating leases are not recognized in ourconsolidated balance sheet.

*Financing history.*   Wehave generated significant operating losses since our inception. Theseoperating losses, including cumulative non-cash charges for acquired in-processresearch and development of $128.7 million, have resulted in an accumulateddeficit of $614.6 million as of December 31, 2006. We completed an initialpublic offering of our common stock on June 21, 2005 in which we sold11,765,000 shares of our common stock at $14.00 per share, resulting in netproceeds to us of approximately $152.7 million, after deducting underwritingdiscounts and commissions and offering expenses. We used $36.5 million of thesenet proceeds to repay a portion of the accrued and unpaid interest on certaindemand notes held by Warburg Pincus and Vertical. In addition, on July 20,2005, we sold 205,800 shares of common stock pursuant to an over-allotmentoption granted to the underwriters which resulted in net proceeds to us of $2.2million, after deducting underwriting discounts and commissions and offeringexpenses. We invested the remaining portion of the net proceeds in short-term,investment-grade, interest-bearing securities. We have used these funds forgeneral corporate purposes since our initial public offering and expect tocontinue to do so. See Part II, Item 5 under the heading “Use of Proceeds”included elsewhere in this report.

*Cash, cash equivalents andshort-term investments.*   Our cash, cashequivalents and short-term investments available to fund current operationswere $38.8 million and $81.6 million at December 31, 2006 and 2005,respectively. We expect our cash balances to decrease as we continue to usecash to fund our operations.

*Credit facility.*   OnJune 28, 2006, our operating subsidiaries, ev3 Endovascular, Inc.,ev3 International, Inc. and Micro Therapeutics, Inc., which we referto as the “borrowers”, entered into a Loan and Security Agreement, which werefer to as the loan agreement, with Silicon Valley Bank, or SVB, consisting ofa two-year $30.0 million revolving line of credit and a 48-month $7.5million equipment 

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financing line.Pursuant to the terms of the loan agreement and subject to specified reserves,we may borrow under the revolving line of credit up to $12 million without anyborrowing base limitations. Aggregate borrowings under the revolving line ofcredit that exceed $12 million will subject the revolving line to borrowingbase limitations. These limitations allow us to borrow, subject to specifiedreserves, up to 80% of eligible domestic and foreign accounts receivables plusup to 30% of eligible inventory. Additionally, borrowings against the eligibleinventory may not exceed the lesser of 33% of the amount advanced againstaccounts receivable or $7.5 million. Borrowings under the revolving line bearinterest at a variable rate equal to SVB’s prime rate. Borrowings under theequipment line bear interest at a variable rate equal to SVB’s prime rate plus1.0%. Accrued interest on any outstanding balance under the revolving line ispayable monthly in arrears. Amounts outstanding under the equipment line as ofDecember 31, 2006 are payable in 42 consecutive equal monthly installmentsof principal, beginning on January 31, 2007. As of December 31, 2006,we had $7.5 million in outstanding borrowings under the equipment line and nooutstanding borrowings under the revolving line of credit; however, we hadapproximately $1.0 million of outstanding letters of credit issued by SVB,which reduces the amount available under our revolving line of credit toapproximately $29.0 million.

Both the revolving line ofcredit and equipment financing are secured by a first priority securityinterest in substantially all of our assets, excluding intellectual property,which is subject to a negative pledge, and are guaranteed by us. and all of ourdomestic direct and indirect subsidiaries. The loan agreement requires theborrowers to maintain a specified liquidity ratio and a tangible net worthlevel. The loan agreement imposes certain limitations on the borrowers, theirsubsidiaries and us, including without limitation, limitations on their abilityto: (i) transfer all or any part of their business or properties;(ii) permit or suffer a change in control; (iii) merge orconsolidate, or acquire any entity; (iv) engage in any material new lineof business; (v) incur additional indebtedness or liens with respect toany of their properties; (vi) pay dividends or make any other distributionon or purchase of, any of their capital stock; (vii) make investments inother companies; or (viii) engage in related party transactions, subjectin each case to certain exceptions and limitations. The loan agreement requiresus to maintain on deposit or invested with SVB or its affiliates the lesser of$15.0 million or 50% of our aggregate cash and cash equivalents. The borrowersare required to pay customary fees with respect to the facility, including afee on the average unused portion of the revolving line.

The loan agreementcontains customary events of default, including the failure to make requiredpayments, the failure to comply with certain covenants or other agreements, theoccurrence of a material adverse change, failure to pay certain otherindebtedness and certain events of bankruptcy or insolvency. Upon theoccurrence and continuation of an event of default, amounts due under the loanagreement may be accelerated.

We believe our cash, cashequivalents, short-term investments and funds available under our revolvingline of credit will be sufficient to meet our liquidity requirements through atleast the next 12 months.

*Operating activities.*   Cashused in operations during the year ended December 31, 2006 was $46.9million compared to $131.8 million in 2005, reflecting primarily our net lossand increased working capital requirements during both periods. In 2006, ournet loss included approximately $31.8 million of non-cash charges fordepreciation and amortization, acquired in-process research and development andstock-based compensation expense as compared with $20.6 million in 2005. Weexpect that operations will continue to use cash during the first nine monthsof 2007.

*Investingactivities.*   Cash used in investing activitieswas $16.0 million and $25.3 million in 2006 and 2005, respectively. During 2006we purchased property and equipment totaling $12.0 million, patents andlicenses totaling $3.5 million and of short-term investments totaling $6.8million. These cash payments were partially offset by proceeds from short-terminvestments and proceeds from the sale of investments in 

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2006. During 2005, wepurchased property and equipment totaling $13.2 million and short-terminvestments totaling $12.0 million. We also made a milestone payment related toa previous acquisition in the amount of $3.7 million and incurred $1.9 millionin merger related costs. These cash payments in 2005 were partially offset bythe receipt of $3.7 million from the sale of certain assets by GenyxMedical, Inc., in which MTI held a minority interest, the receipt of a $878thousand milestone payment related to the 2002 sales of an investment inEnteric Medical Technologies, Inc. and the receipt of $2.1 million relatedto the return of acquisition consideration resulting from a settlement of anacquisition dispute. Historically, our capital expenditures have consisted ofpurchased manufacturing equipment, research and testing equipment, computersystems and office furniture and equipment. We expect to continue to makeinvestments in property and equipment and to incur approximately $14.0 millionin capital expenditures during 2007.

*Financingactivities.*   Cash provided by financingactivities was $16.9 million during the year ended December 31, 2006generated primarily from proceeds of stock option exercises and proceeds fromborrowings on our equipment term loan with Silicon Valley Bank. During 2005,cash provided by financing activities was $206.7 million and consisted of $154.9million of net proceeds received from our initial public offering of our commonstock, inclusive of the underwriters’ exercise of their over-allotment optionon July 20, 2005, and proceeds of $49.1 million from the issuance ofdemand notes.

*Other liquidityinformation.**  *Theacquisition agreements relating to our purchase of MitraLife, ApprivaMedical, Inc. and Dendron GmbH require us to make additional payments tothe sellers of these businesses if certain milestones related to regulatorysteps in the product commercialization process are achieved. The potentialmilestone payments total $25.0 million, $175.0 million and $15.0 million withrespect to the MitraLife, Appriva and Dendron acquisitions, respectively,during the period of 2003 to 2009. We do not believe it is likely that we willhave obligations with respect to the MitraLife milestones in the future. Wehave determined that the first milestone with respect to the Appriva agreementwas not achieved by the January 1, 2005 milestone date and that the firstmilestone is not payable. On September 27, 2005, we announced that we haddecided to discontinue the development and commercialization of our PLAATOdevice, which is the technology we acquired in the Appriva transaction.Although we recently had obtained conditional approval from the FDA for anInvestigational Device Exemption (“IDE”) clinical trial for the PLAATO device,we determined that, due to the time, cost and risk of enrollment, the trialdesign ultimately mandated by the FDA was not commercially feasible for us atsuch 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 duringthe second quarter 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.

Our future liquidity andcapital requirements will be influenced by numerous factors, including theextent and duration of future operating losses, the level and timing of futuresales and expenditures, the results and scope of ongoing research and productdevelopment programs, working capital to support our sales growth, receipt ofand time required to obtain regulatory clearances and approvals, sales andmarketing programs, continuing acceptance of our products in the marketplacecompeting technologies, market and regulatory developments, and the futurecourse of intellectual property litigation. We believe 

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that theresources generated from our initial public offering, together with fundsavailable under our revolving credit facility, are sufficient to meet ourliquidity requirements through at least the next 12 months. In the event thatwe require additional working capital to fund future operations and any futureacquisitions, we may negotiate a financing arrangement with an independentinstitutional lender, sell notes to public or private investors or selladditional shares of stock or other equity securities. There is no assurancethat any financing transaction will be available on terms acceptable to us, orat all, or that any financing transaction will not be dilutive to our currentstockholders. If we require additional working capital, but are not able toraise 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 “Item 3. Legal Proceedings” andNote 3 and Note 17 to our consolidated financial statements included elsewherein this report.

**Critical Accounting Policies and Estimates**

We have adopted variousaccounting policies to prepare our consolidated financial statements inaccordance with U.S. Generally Accepted Accounting Principles, or GAAP. Ourmost significant accounting policies are described in Note 2 to our auditedconsolidated financial statements included elsewhere in this report. Thepreparation of our consolidated financial statements in conformity with U.S.GAAP requires us to make estimates and assumptions that affect the amountsreported in our consolidated financial statements and accompanying notes. Ourestimates and assumptions, including those related to bad debts, inventories,intangible assets, sales returns and discounts, and income taxes are updated asappropriate.

Certain of our morecritical accounting policies require the application of significant judgment bymanagement in selecting the appropriate assumptions for calculating financialestimates. By their nature, these judgments are subject to an inherent degreeof uncertainty. These judgments are based on our historical experience, termsof existing contracts, our observance of trends in the industry, informationprovided by our physician customers and information available from otheroutside sources, as appropriate. Different, reasonable estimates could havebeen used in the current period. Additionally, changes in accounting estimatesare reasonably likely to occur from period to period. Both of these factorscould have a material impact on the presentation of our financial condition,changes in financial condition or results of operations.

We believe that thefollowing financial estimates are both important to the portrayal of ourfinancial condition and results of operations and require subjective or complexjudgments. Further, we believe that the items discussed below are properlyrecorded in our consolidated financial statements for all periods presented.Management has discussed the development, selection and disclosure of our mostcritical financial estimates with the audit committee of our board of directorsand our independent registered public accounting firm. The judgments aboutthose financial estimates are based on information available as of the date ofour consolidated financial statements. Those financial estimates include:

***Revenue Recognition***

We recognize revenue in accordance with SEC StaffAccounting Bulletin No. 104, Revenue Recognition, which requires that fourbasic 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 

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regular sales aretypically FOB shipping point, net 30 days. Regular sales include orders fromcustomers for replacement of customer stock, replenishment of consignmentproduct used by customers, orders for a scheduled case/surgery and stockingorders.

We allow customers toreturn defective or damaged products for credit. Our estimate for sales returnsis based upon contractual commitments and historical return experience which weanalyze by geography and is recorded as a reduction of sales for the period inwhich the related sales occurred. Historically, our return experience has beenlow with return rates of less than 3.0% of our net sales.

***Stock-Based Compensation***

We currently use the Black-Scholes option pricingmodel to determine the fair value of stock options and other equity incentiveawards. The determination of the fair value of stock-based compensation awardson the date of grant using an option-pricing model is affected by our stockprice, as well as assumptions regarding a number of complex and subjectivevariables which include the expected life of the award, the expected stockprice volatility over the expected life of the awards, expected dividend yield,risk-free interest rate and the forfeiture rate.

We estimate the expected term of options based uponour historical experience. We estimate expected volatility and forfeiture ratesbased on a combination of historical factors related to our common stock sinceour June 2005 initial public offering and the volatility rates of a set ofguideline companies. The guideline companies consist of public and recentlypublic medical technology companies. The risk-free interest rate is determinedusing U.S. Treasury rates appropriate for the expected term. Dividend yield isestimated to be zero as we have never paid dividends and have no plans of doingso in the future.

We estimate forfeitures at the time of grant andrevise those estimates in subsequent periods if actual forfeitures differ fromthose estimates. We use historical data to estimate forfeitures and recordstock-based compensation expense only for those awards that are expected tovest. Generally, all stock-based compensation is amortized on a straight-linebasis over the respective requisite service periods, which are generally thevesting periods.

If factors change and we employ different assumptionsfor estimating stock-based compensation expense in future periods, the futureperiods may differ significantly from what we have recorded in the currentperiod and could materially affect our results of operations. It may alsoresult in a lack of comparability with other companies that use differentmodels, methods and assumptions.

The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable, characteristics not present in ouroption grants. Existing valuation models, including the Black-Scholes andlattice binomial models, may not provide reliable measures of the fair valuesof 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. Certain stock-based payments, such as employee stockoptions, may expire worthless or otherwise result in zero intrinsic value ascompared to the fair values originally estimated on the grant date and reportedin our consolidated financial statements. Alternatively, value may be realizedfrom these instruments that is significantly higher than the fair valuesoriginally estimated on the grant date and reported in our consolidatedfinancial statements. There is not currently a market-based mechanism or otherpractical application to verify the reliability and accuracy of the estimatesstemming from these valuation models.

See****Note2 and Note 14****to our consolidated financialstatements for further information regarding our SFAS 123(R) disclosures.

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***Allowance for Doubtful Accounts***

We make judgments as to our ability to collectoutstanding receivables and provide allowance for a portion of receivables whencollection becomes doubtful. Provisions are made based upon a specific reviewof all significant outstanding account balances and the overall quality and ageof those balances not specifically reviewed. In determining the provision forinvoices not specifically reviewed, we analyze historical collection experienceand current economic trends. If the historical data used to calculate theallowance provided for doubtful accounts does not reflect our future ability tocollect outstanding receivables or if the financial condition of customers wereto deteriorate, 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.

Our accounts receivablebalance was $45.1 million and $28.5 million, net of accounts receivableallowances, comprised of both allowances for doubtful accounts and salesreturns, of $3.9 million and $3.6 million at December 31, 2006 and 2005,respectively.

***Excess and Obsolete Inventory***

We calculate an inventoryreserve for estimated obsolescence or excess inventory based on historicalturnover and assumptions about future demand for our products and marketconditions. Our industry is characterized by regular new product development,and as such, our inventory is at risk of obsolescence following theintroduction and development of new or enhanced products. Our estimate andassumptions for excess and obsolete inventory are reviewed and updated on aquarterly basis. The estimates we use for demand are also used for near-termcapacity planning and inventory purchasing and are consistent with our salesforecasts. Future product introductions and related inventories may requireadditional reserves based upon changes in market demand or introduction ofcompeting technologies. Increases in the reserve for excess and obsoleteinventory result in a corresponding expense to cost of goods sold. Our reservefor excess and obsolete inventory was $4.7 million and $4.0 million atDecember 31, 2006 and 2005, respectively.

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

When we acquire anothercompany, the purchase price is allocated, as applicable, between acquiredin-process research and development, other identifiable intangible assets,tangible net assets and goodwill as required by U.S. GAAP. In-process researchand development is defined as the value assigned to those projects for whichthe related products have not received regulatory approval and have noalternative future use. Determining the portion of the purchase price allocatedto in-process research and development and other intangible assets requires usto make significant estimates that may change over time. During 2006, werecorded an in-process research and development charge of $1.8 million relatedto the January 6, 2006 acquisition of the remaining minority interest inMTI.

The income approach wasused to determine the fair values of the acquired in-process research anddevelopment. This approach establishes fair value by estimating the after-taxcash flows attributable to the in-process project over its useful life and thendiscounting these after-tax cash flows back to the present value. Revenueestimates were based on relative market size, expected market growth rates andmarket share penetration. Gross margin estimates were based on the estimatedcost of the product at the time of introduction and historical gross marginsfor similar products offered by us or by competitors in the marketplace. Theestimated selling, general and administrative expenses were based on historicaloperating expenses of the acquired company as well as long-term expense levelsbased on industry comparables. The costs to complete each project were based onestimated direct project expenses as well 

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as theremaining labor hours and related overhead costs. In arriving at the value ofacquired in-process research and development projects, we considered theproject’s stage of completion, the complexity of the work to be completed, thecosts already incurred, the remaining costs to complete the project, thecontribution of core technologies, the expected introduction date and theestimated useful life of the technology. The discount rate used to arrive atthe present value of acquired in-process research and development as of the acquisitiondate was based on the time value of money and medical technology investmentrisk factors. We believe that the estimated acquired in-process research anddevelopment amounts determined represent the fair value at the date ofacquisition and do not exceed the amount a third party would pay for theprojects.

Goodwill represents theexcess of the aggregate purchase price over the fair value of net assets,including in-process research and development, of the acquired businesses.Goodwill is tested for impairment annually, or more frequently if changes incircumstance or the occurrence of events suggest an impairment exists. The testfor impairment requires us to make several estimates about fair value, most ofwhich are based on projected future cash flows. Our estimates associated withthe goodwill impairment tests are considered critical due to the amount ofgoodwill recorded on our consolidated balance sheets and the judgment requiredin determining fair value amounts, including projected future cash flows.Goodwill was $149.1 million and $94.5 million at December 31, 2006 and2005, respectively.

Other intangible assetsconsist primarily of purchased developed technology, patents, customerrelationships and trademarks and are amortized over their estimated usefullives, 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$40.0 million and $26.2 million at December 31, 2006 and 2005,respectively.

The evaluation of assetimpairments related to goodwill and other intangible assets require us to makeassumptions about future cash flows over the life of the assets beingevaluated. These assumptions require significant judgment and actual resultsmay differ from assumed or estimated amounts.

***Accounting forIncome Taxes***

As part of the process of preparing our consolidatedfinancial statements, we are required to determine our income taxes in each ofthe jurisdictions in which we operate. This process involves estimating ouractual current tax expense together with assessing temporary differencesresulting from recognition of items for income tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded on our consolidated balance sheets. We must then assess the likelihoodthat our deferred tax assets will be recovered from future taxable income and,to the extent we believe that recovery is not likely, we must establish avaluation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must reflect this increase as anexpense within the tax provision in our consolidated statement of operations.

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Management’s judgment isrequired in determining our provision for income taxes, our deferred tax assetsand liabilities and any valuation allowance recorded against our net deferredtax assets. We will continue to monitor the realizability of our deferred taxassets and adjust the valuation allowance accordingly. We have recorded a fullvaluation allowance on our net deferred tax assets of $192.0 million and $176.1million as of December 31, 2006 and 2005, respectively. A portion of thevaluation allowance will be recorded as a reduction to goodwill if and whenthat portion of the deferred tax asset is realized and the related valuationallowance is reversed.

**Seasonality**

Our business is seasonalin nature. Historically, demand for our products has been the highest in ourfourth fiscal quarter. We traditionally experience lower sales volumes in ourthird fiscal quarter than throughout the rest of the year as a result of theEuropean holiday schedule during the summer months.

**Off-Balance SheetArrangements**

We do not have anyoff-balance sheet arrangements, as defined by the rules and regulations ofthe SEC, that have or are reasonably likely to have a material effect on ourfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources. Asa result, we are not materially exposed to any financing, liquidity, market orcredit risk that could arise if we had engaged in these arrangements.

**Recent AccountingPronouncements**

On January 1, 2006, we adopted the provisions ofStatement of Financial Accounting Standards No. 123(R), “Share-BasedPayment” (SFAS 123(R)) using the modified prospective method. SFAS 123(R) requirescompanies to measure and recognize the cost of employee services received inexchange for awards of equity instruments based on the grant date fair value ofthose awards. Compensation cost under SFAS 123(R) is recognized ratablyusing the straight-line attribution method over the expected vesting period. Inaddition, 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. Priorperiods are not restated under this transition method. Options previouslyawarded and classified as equity continue to maintain their equityclassification and there has been no reclassification of awards in ourconsolidated balance sheet.

Prior to January 1, 2006 and since the beginningof 2003, we accounted for share-based awards under the recognition provisionsof SFAS 123, “Accounting for Stock-Based Compensation” using the modifiedprospective method of adoption described in SFAS 148. We used the minimum valuepricing model for measuring the fair value of our options granted through thefirst quarter 2005, which does not take into consideration volatility. Inaccordance with SFAS 123, subsequent to April 5, 2005, the date of ourinitial filing of the registration statement relating to our initial publicoffering with the SEC, 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, asallowed under SFAS 123.

In November 2005, the FASB issued FASB StaffPosition No. 123(R)-3 (FSP 123(R)-3), “Transition ElectionRelated to Accounting for the Tax Effects of Share-Based Payment Awards.” FSP123(R)-3 provides an elective alternative transition method forcalculating the pool of excess tax benefits available to absorb taxdeficiencies recognized subsequent to the adoption of SFAS 123(R). Theimplementation of FSP 123(R)-3 did not have a material impact on ourresults of operations and financial condition.

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48clarifies when tax benefits should be recorded in financial statements,requires 

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certain disclosures ofuncertain tax matters and indicates how any tax reserves should be classifiedin a balance sheet. FIN 48 is effective for us on January 1, 2007. We donot believe the adoption of FIN 48 will have a material impact on our resultsof operations and financial condition.

In September 2006, the FASB issued SFAS 157,“Fair Value Measurement.”  This standardprovides guidance on using fair value to measure assets and liabilities. SFAS157 clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. Under the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy. The statement iseffective for us beginning in 2008; however, early adoption is permitted. Wehave not yet determined the impact, if any, that the implementation of SFAS 157will have on our results of operations and financial condition.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108 *“*Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*”*(SAB 108). SAB 108provides interpretive guidance on how the effects of the carryover or reversalof prior year misstatements should be considered in quantifying a current yearmisstatement. The SEC staff believes that registrants should quantify errors usingboth a balance sheet and an income statement approach and evaluate whethereither approach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material. SAB 108 iseffective for fiscal years ending on or after November 15, 2006, withearly application encouraged. The adoption of this standard did not have amaterial impact on our consolidated financial statements.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to variousmarket risks, which are potential losses arising from adverse changes in marketrates and prices, such as interest rates and foreign exchange fluctuations. Wemay enter into derivatives or other financial instruments for trading or speculativepurposes; however, our policy is to only enter into contracts that can bedesignated as normal purchases or sales.

***Interest Rate Risk***

Borrowings under ourrevolving line of credit bear interest at a variable rate equal to SVB’s primerate. Borrowings under the equipment line bear interest at a variable rateequal to SVB’s prime rate plus 1.0%. We currently do not use interest rateswaps to mitigate the impact of fluctuations in interest rates. As ofDecember 31, 2006, we had no borrowings under our revolving line of creditand had $7.5 million in borrowings under the equipment line. Based upon thisdebt level, a 10% increase in the interest rate on such borrowings would causeus to incur an increase in interest expense of approximately $70 thousand on anannual basis.

***Foreign Currency Exchange Rate Risk***

Fluctuations in the rate of exchange between the U.S.dollar and foreign currencies could adversely affect our financial results.Approximately 29% and 34% of our net sales in 2006 and 2005, respectively, weredenominated in foreign currencies. We expect that foreign currencies willcontinue to represent a similarly significant percentage of our net sales inthe future. Selling, marketing and administrative costs related to these salesare largely denominated in the same respective currency, thereby limiting ourtransaction risk exposure. However, for sales not denominated in U.S. dollars,if there is an increase in the rate at which a foreign currency is exchangedfor U.S. dollars, it will require more of the foreign currency to equal aspecified amount of U.S. dollars than before the rate increase. In such casesand if we price our products in the foreign currency, we will receive less inU.S. dollars than we did before the rate increase went into effect. If we priceour products in U.S. dollars and competitors price their products in local 

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currency, an increase inthe relative strength of the U.S. dollar could result in our price not beingcompetitive in a market where business is transacted in the local currency.

Approximately 71% and 68% of our net sales denominatedin foreign currencies in 2006 and 2005, respectively, were derived fromEuropean Union countries and were denominated in the Euro. Additionally, wehave significant intercompany receivables from our foreign subsidiaries, whichare denominated in foreign currencies, principally the Euro and the Yen. Ourprincipal exchange rate risks therefore exist between the U.S. dollar and theEuro and between the U.S. dollar and the Yen. Fluctuations from the beginningto the end of any given reporting period result in the remeasurement of ourforeign currency-denominated receivables and payables, generating currencytransaction gains or losses that impact our non-operating income/expense levelsin the respective period and are reported in other (income) expense, net in ourconsolidated financial statements. We recorded a $2.1million foreign currencytransaction gain in 2006 and a $3.6 million foreign currency transaction lossin 2005, related to the translation of our foreign denominated net receivablesinto U.S. dollars. We do not currently hedge our exposure to foreign currencyexchange rate fluctuations. We may, however, hedge such exposure to foreigncurrency exchange rates in the future.

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**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA
| Description                                                                                                                                 | ** ** | ** **  | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------|
| Management’s Report on Internal Control over Financial  Reporting                                                                      |       | F-1         |
| Reports of Independent Registered Public Accounting  Firms                                                                                  |       | F-2 - F-4   |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                                                          |       | F-5         |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005 and 2004                                            |       | F-6         |
| Consolidated Statements of Members’ and Stockholders’  Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004 |       | F-7         |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004                                            |       | F-8 - F-9   |
| Notes to the Consolidated Financial Statements for the  years ended December 31, 2006, 2005 and 2004                              |       | F-10 - F-36 |
| Schedule II—Valuation and Qualifying Accounts                                                                                          |       | F-37        |

 

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**MANAGEMENT’S REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING**

As management of ev3 Inc.,we are responsible for establishing and maintaining an adequate system ofinternal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended, forev3 Inc. and its subsidiaries. This system is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.

ev3’s internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of ev3; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of ev3 are being madeonly in accordance with authorizations of management and directors of ev3; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of ev3’s assets that could have a materialeffect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements and even when determined to be effective, can only providereasonable assurance with respect to financial statement preparation andpresentation. Also, projection of any evaluation of the effectiveness ofinternal control over financial reporting to future periods is subject to therisk that controls may become inadequate because of changes in conditions, orthat the degree or compliance with the policies or procedures may deteriorate.

With our participation,management evaluated the effectiveness of ev3’s internal control over financialreporting as of December 31, 2006. In making this evaluation, managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control—Integrated Framework. Based onthis assessment, management concluded that ev3’s internal control overfinancial reporting was effective as of December 31, 2006.

Ernst & YoungLLP, ev3’s independent registered public accounting firm, audited management’sassessment of the effectiveness of ev3’s internal control over financialreporting and, based on that audit, issued the report which is includedelsewhere in this report.
| /s/ James M. Corbett                  |   |                                  | /s/ Patrick D. Spangler |   |
|---------------------------------------|--------|---------------------------------------|-------------------------|--------|
| James M. Corbett                      |   | Patrick D. Spangler                   |
| President and Chief Executive Officer |   | Chief Financial Officer and Treasurer |

 

March 14, 2007

Further discussion of our internal controls andprocedures is included in Item 9A of this report, under the heading “Item 9A.Controls and Procedures.”

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors andStockholdersev3 Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting included in Item 8, that ev3 Inc. maintainedeffective internal control over financial reporting as of December 31,2006, based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). ev3 Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(PCAOB) (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that ev3 Inc. maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, ev3 Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standardsof the PCAOB (United States), the consolidated balance sheets of ev3 Inc. as ofDecember 31, 2006 and the related consolidated statements of operations,members’ and stockholders’ equity (deficit), and cash flows for the year thenended of ev3 Inc. and our report dated March 8, 2007, expressed anunqualified opinion thereon.
| /s/ Ernst & Young  LLP |
|---------------------------------|
| Minneapolis,  Minnesota         |
| March 8,  2007             |

** **

F-2

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholdersev3 Inc.

We have audited theaccompanying consolidated balance sheets of ev3 Inc. and subsidiaries as of December 31,2006 and the related consolidated statements of operations, members’ andstockholders’ equity (deficit), and cash flows for the year then ended. Ouraudit also included the financial statement schedule listed in Item 15.These financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(PCAOB) (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of ev3 Inc. and subsidiaries at December 31,2006 and the consolidated results of their operations and their cash flows forthe year then ended, in conformity with U.S. generally accepted accountingprinciples. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth herein.

As discussed in Note 2,Summary of Significant Accounting Policies, to the consolidated financialstatements, effective January 1, 2006 the company adopted Statement ofFinancial Accounting Standards No. 123(R), “*Share BasedPayment*”.

We also have audited, in accordance with the standardsof the PCAOB (United States), the effectiveness of ev3 Inc.’s internal controlover financial reporting as of December 31, 2006, based on criteriaestablished in *Internal Control-IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated March 8, 2007, expressed an unqualifiedopinion thereon.
| /s/ Ernst & Young  LLP |
|---------------------------------|
| Minneapolis,  Minnesota         |
| March 8,  2007             |

F-3

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**Reportof Independent Registered Public Accounting Firm**

To the Board of Directorsand Stockholders of ev3 Inc.:

In our opinion, theconsolidated balance sheet as of December 31, 2005 and the relatedconsolidated statements of operations, members’ and stockholders’ equity(deficit) and cash flows for each of two years in the period endedDecember 31, 2005 present fairly, in all material respects, the financialposition of ev3 Inc. and its subsidiaries at December 31, 2005, andthe results of their operations and their cash flows for each of the two yearsin the period ended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in ouropinion, the financial statement schedule for each of the two years in theperiod ended December 31, 2005 presents fairly, in all material respects,the information set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.
| /s/ PRICEWATERHOUSECOOPERS LLP |
|--------------------------------|
| Minneapolis,  Minnesota        |   |
| March 3,  2006            |   |

 

F-4

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

| ** **                                                                                                                                                                       | ** **   | **December 31,** | ** **   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------|--------------|
| ** **                                                                                                                                                                       | ** **   | **2006**              | ** **   | **2005** | ** ** |
| **Assets**                                                                                                                                                                       | ** **   |                  | ** **   | ** ** |   | ** ** | ** ** |
| ***Current  assets***                                                                                                                                                            | *** *** | * *              | *** *** | *** *** | * * | *** *** | *** *** |
| Cash and cash equivalents                                                                                                                                                        |         |                  | $            | 24,053 |   |   | $ | 69,592 |   |
| Short-term investments                                                                                                                                                           |         |                  | 14,700       |   |   | 12,000 |   |
| Accounts receivable, less allowance of $3,924 and  $3,607 respectively                                                                                                           |         |                  | 45,137       |   |   | 28,519 |   |
| Inventories                                                                                                                                                                      |         |                  | 42,124       |   |   | 32,987 |   |
| Prepaid expenses and other assets                                                                                                                                                |         |                  | 7,162        |   |   | 7,042 |   |
| Other receivables                                                                                                                                                                |         |                  | 2,669        |   |   | 1,535 |   |
| *Total current assets*                                                                                                                                                           |         |                  | 135,845      |   |   | 151,675 |   |
| Restricted cash                                                                                                                                                                  |         |                  | 2,022        |   |   | 3,102 |   |
| Property and equipment, net                                                                                                                                                      |         |                  | 24,072       |   |   | 17,877 |   |
| Goodwill                                                                                                                                                                         |         |                  | 149,061      |   |   | 94,456 |   |
| Other intangible assets, net                                                                                                                                                     |         |                  | 40,014       |   |   | 26,230 |   |
| Other assets                                                                                                                                                                     |         |                  | 1,812        |   |   | 3,488 |   |
| *Total assets*                                                                                                                                                                   |         |                  | $            | 352,826 |   |   | $ | 296,828 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                                   | ** **   |                  | ** **   | ** ** |   | ** ** | ** ** |
| ***Current  liabilities***                                                                                                                                                       | *** *** | * *              | *** *** | *** *** | * * | *** *** | *** *** |
| Accounts payable                                                                                                                                                                 |         |                  | $            | 13,140 |   |   | $ | 11,716 |   |
| Accrued compensation and benefits                                                                                                                                                |         |                  | 16,382       |   |   | 14,612 |   |
| Accrued liabilities                                                                                                                                                              |         |                  | 10,102       |   |   | 11,343 |   |
| Current portion of long-term debt                                                                                                                                                |         |                  | 2,143        |   |   | — |   |
| Total current liabilities                                                                                                                                                        |         |                  | 41,767       |   |   | 37,671 |   |
| Long-term debt                                                                                                                                                                   |         |                  | 5,357        |   |   | — |   |
| Other long-term liabilities                                                                                                                                                      |         |                  | 468          |   |   | 852 |   |
| *Total liabilities*                                                                                                                                                              |         |                  | 47,592       |   |   | 38,523 |   |
| Minority interest                                                                                                                                                                |         |                  | —       |   |   | 12,850 |   |
| ***Stockholders’  equity***                                                                                                                                                 | *** *** | * *              | *** *** | *** *** | * * | *** *** | *** *** |
| Common stock, $0.01 par value, 100,000,000 shares  authorized, 57,594,742 and 49,350,647 shares issued and outstanding as  of December 31, 2006 and 2005, respectively |         |                  | 576          |   |   | 493 |   |
| Additional paid in capital                                                                                                                                                       |         |                  | 919,221      |   |   | 807,032 |   |
| Accumulated deficit                                                                                                                                                              |         |                  | (614,578     | ) |   | (562,207 | ) |
| Accumulated other comprehensive income                                                                                                                                           |         |                  | 15           |   |   | 137 |   |
| *Total stockholders’ equity*                                                                                                                                                |         |                  | 305,234      |   |   | 245,455 |   |
| *Total  liabilities and stockholders’ equity*                                                                                                                               |         |                  | $            | 352,826 |   |   | $ | 296,828 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

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

| ** **                                                   | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                    |       | $                                                             | 202,438    |   | $ | 133,696 |   | $ | 86,334 |   |
| Operating expenses:                                          |       |                                                          |       |   |   |   |   |
| Cost of goods sold                                           |       | 71,321                                                        |       | 55,094 |   | 39,862 |   |
| Sales, general and administrative                            |       | 141,779                                                       |       | 130,427 |   | 103,031 |   |
| Research and development                                     |       | 26,725                                                        |       | 39,280 |   | 38,917 |   |
| Amortization of intangible assets                            |       | 17,223                                                        |       | 10,673 |   | 9,863 |   |
| (Gain) loss on sale of assets, net                           |       | 162                                                           |       | 200 |   | (14,364 | ) |
| Acquired in-process research and development                 |       | 1,786                                                         |       | 868 |   | — |   |
| Total operating expenses                                     |       | 258,996                                                       |       | 236,542 |   | 177,309 |   |
| Loss from operations                                         |       | (56,558                                                       | )          | (102,846 | ) | (90,975 | ) |
| Other (income) expense:                                      |       |                                                          |       |   |   |   |   |
| Gain on sale of investments, net                             |       | (1,063                                                        | )          | (4,611 | ) | (1,728 | ) |
| Interest (income) expense, net                               |       | (1,695                                                        | )          | 9,916 |   | 25,428 |   |
| Minority interest in loss of subsidiary                      |       | —                                                        |       | (2,013 | ) | (13,846 | ) |
| Other (income) expense, net                                  |       | (2,117                                                        | )          | 3,360 |   | (1,752 | ) |
| Loss before income taxes                                     |       | (51,683                                                       | )          | (109,498 | ) | (99,077 | ) |
| Income tax  expense                                          |       | 688                                                           |       | 526 |   | 196 |   |
| Net loss                                                     |       | (52,371                                                       | )          | (110,024 | ) | (99,273 | ) |
| Accretion of  preferred membership units to redemption value |       | —                                                        |       | 12,061 |   | 23,826 |   |
| Net loss attributable to common holders                      |       | $                                                             | (52,371    | ) | $ | (122,085 | ) | $ | (123,099 | ) |
| Net loss per  common share/unit (basic and diluted)(a)  |       | $                                                             | (0.93      | ) | $ | (4.48 | ) | $ | (57.44 | ) |
| Weighted average  shares/units outstanding(a)                |       | 56,585,025                                                    |       | 27,242,712 |   | 2,142,986 |   |

 

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(a)           Net loss per commonshare/unit attributable to common holders and the weighted average commonshares outstanding reflect the June 21, 2005 1-for-6 reversestock split for all periods presented.

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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**ev3 Inc.CONSOLIDATED STATEMENTS OF MEMBERS’ ANDSTOCKHOLDERS’ EQUITY (DEFICIT)**(Dollars inthousands, except per share/unit amounts)
|                                                                  | ** ** | ** **     | ** ** | **Members’** | ** ** | **Common Stock** | ** ** | ** **  | ** **     | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Members’ and  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------------|------------|----------------|------------|-------------------|------------|-----------------------|------------|-------------|----------------|---------------------------------------|------------|------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Units**      | ** ** | **Capital**       | ** ** | **Shares**            | ** ** | **Amount**  | ** **     | **APIC**                              | ** ** | **Income (Loss)** | ** ** | **Deficit**                                                   | ** ** | **(Deficit)** | ** ** |
| **Balance as of January 1, 2004**                           | ** ** | **10,226,196** | ** ** |              | **$**      | **35,128**            | ** ** |        | **—**     | ** **                            |       | **$**                  | **—** | ** **                                                    |       | **$** | **—** | ** ** |   | **$** | **(951** | **)** |   |   | **$** | **(319,849** | **)** |   |   | **$** | **(285,672** | **)** |   |
| Accretion of preferred membership units                          |       | —         |       |              | —     | ** **            |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | (23,826 | ) |   |   | (23,826 | ) |   |
| Compensation expense on unit  options                            |       | —         |       |              | 2,711      | ** **            |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | — |   |   |   | 2,711 |   |   |
| Exercise of unit options                                         |       | 88,262         |       |              | 88         | ** **            |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | — |   |   |   | 88 |   |   |
| Members’ contribution                                       |       | 4,979,032      |       |              | 10,000     | ** **            |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | — |   |   |   | 10,000 |   |   |
| Comprehensive  loss:                                             |       |           |       |              |       | ** **            |       | ** **  | ** **     |                                  | ** ** |                   |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                         |       |           |       |              |       | ** **            |       | ** **  | ** **     |                                  | ** ** |                   |       |                                                          |       |   | — |   |   |   | (99,273 | ) |   |   | (99,273 | ) |   |
| Cumulative translation adjustment                                |       |           |       |              |       | ** **            |       | ** **  | ** **     |                                  | ** ** |                   |       |                                                          |       |   | (743 | ) |   |   | — |   |   |   | (743 | ) |   |
| Gain on change in ownership percentage of MTI                    |       | —         |       |              | —     |                  |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | 2,243 |   |   |   | 2,243 |   |   |
| Comprehensive loss                                               |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   |   |   |   |   |   |   |   |   | (97,773 | ) |   |
| **Balance as of December 31, 2004**                         | ** ** | **15,293,490** | ** ** |              | **$**      | **47,927**            | ** ** |        | **—**     | ** **                            |       | **$**                  | **—** | ** **                                                    |       | **$** | **—** | ** ** |   | **$** | **(1,694** | **)** |   |   | **$** | **(440,705** | **)** |   |   | **$** | **(394,472** | **)** |   |
| Accretion of preferred membership units                          |       | —         |       |              | —     |                  |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | (12,061 | ) |   |   | (12,061 | ) |   |
| Compensation expense on options                                  |       | —         |       |              | 1,309      |                  |       | —      |           |                                  | —     |                   |       | 3,530                                                         |       |   | — |   |   |   | — |   |   |   | 4,839 |   |   |
| Exercise of options                                              |       | 502,140        |       |              | 660        |                  |       | 49,193      |           |                                  | —     |                   |       | 430                                                           |       |   | — |   |   |   | — |   |   |   | 1,090 |   |   |
| Restricted stock grant                                           |       | —         |       |              | —     |                  |       | 185,000     |           |                                  | 2          |                   |       | (2                                                            | )          |   | — |   |   |   | — |   |   |   | — |   |   |
| Members’ contribution                                       |       | 3,004,332      |       |              | 8,404      |                  |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | — |   |   |   | 8,404 |   |   |
| Conversion of preferred /common member ship units                |       | (18,799,962    | )          |              | (58,300    | )                     |       | 83,918,016  |           |                                  | 839        |                   |       | 323,550                                                       |       |   | — |   |   |   | — |   |   |   | 266,089 |   |   |
| 1-for-6 reverse common stock split                               |       | —         |       |              | —     |                  |       | (69,931,666 | )              |                                  | (699       | )                      |       | 699                                                           |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Contribution of demand notes                                     |       | —         |       |              | —     |                  |       | 23,159,304  |           |                                  | 231        |                   |       | 323,999                                                       |       |   | — |   |   |   | — |   |   |   | 324,230 |   |   |
| Common stock issued in conjunction with initial  public offering |       | —         |       |              | —     |                  |       | 11,970,800  |           |                                  | 120        |                   |       | 154,826                                                       |       |   | — |   |   |   | — |   |   |   | 154,946 |   |   |
| Comprehensive  loss:                                             |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                         |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   | — |   |   |   | (110,024 | ) |   |   | (110,024 | ) |   |
| Cumulative translation adjustment                                |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   | 1,831 |   |   |   | — |   |   |   | 1,831 |   |   |
| Gain on change in ownership percentage of MTI                    | ** ** | —         |       |              | —     |                  |       | —      |           |                                  | —     |                   |       | —                                                        |       |   | — |   |   |   | 583 |   |   |   | 583 |   |   |
| Comprehensive loss                                               |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   |   |   |   |   |   |   |   |   | (107,610 | ) |   |
| **Balance December 31, 2005**                               | ** ** | **—**     | ** ** |              | **$**      | **—**            | ** ** |        | **49,350,647** | ** **                            |       | **$**                  | **493**    | ** **                                                    |       | **$** | **807,032** | ** ** |   | **$** | **137** | ** ** |   |   | **$** | **(562,207** | **)** |   |   | **$** | **245,455** | ** ** |   |
| Compensation expense on options and restricted stock             |       | —         |       |              | —     |                  |       | —      |           |                                  | —     |                   |       | 6,760                                                         |       |   | — |   |   |   | — |   |   |   | 6,760 |   |   |
| Exercise of options                                              |       | —         |       |              | —     |                  |       | 1,160,594   |           |                                  | 12         |                   |       | 9,924                                                         |       |   | — |   |   |   | — |   |   |   | 9,936 |   |   |
| MTI acquisition                                                  |       | —         |       |              | —     |                  |       | 6,997,354   |           |                                  | 70         |                   |       | 95,368                                                        |       |   | — |   |   |   | — |   |   |   | 95,438 |   |   |
| Unrestricted stock grants                                        |       | —         |       |              | —     |                  |       | 28,341      |           |                                  | —     |                   |       | 393                                                           |       |   | — |   |   |   | — |   |   |   | 393 |   |   |
| Restricted stock grant                                           |       | —         |       |              | —     |                  |       | 74,024      |           |                                  | 1          |                   |       | (1                                                            | )          |   | — |   |   |   | — |   |   |   | — |   |   |
| Shares repurchased                                               |       | —         |       |              | —     |                  |       | (16,218     | )              |                                  | —     |                   |       | (255                                                          | )          |   | — |   |   |   | — |   |   |   | (255 | ) |   |
| Comprehensive  loss:                                             |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                         |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   | — |   |   |   | (52,371 | ) |   |   | (52,371 | ) |   |
| Cumulative translation adjustment                                |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   | (122 | ) |   |   | — |   |   |   | (122 | ) |   |
| Comprehensive loss                                               |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   |   |   |   |   |   |   |   |   | (52,493 | ) |   |
| **Balance  December 31, 2006**                              | ** ** | **—**     | ** ** |              | **$**      | **—**            | ** ** |        | **57,594,742** | ** **                            |       | **$**                  | **576**    | ** **                                                    |       | **$** | **919,221** | ** ** |   | **$** | **15** | ** ** |   |   | **$** | **(614,578** | **)** |   |   | **$** | **305,234** | ** ** |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-7

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

| ** **                                                                   | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating activities**                                                     |       |                                                          |       |   |   |   |   |
| Net loss                                                                     |       | $                                                             | (52,371    | ) | $ | (110,024 | ) | $ | (99,273 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities  |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                                |       | 22,878                                                        |       | 14,816 |   | 15,112 |   |
| Provision for bad debts                                                      |       | 728                                                           |       | 650 |   | 1,163 |   |
| Provision for inventory obsolescence                                         |       | 3,787                                                         |       | 4,037 |   | 1,403 |   |
| Acquired in-process research and development                                 |       | 1,786                                                         |       | 868 |   | — |   |
| (Gain) loss on disposal of assets                                            |       | 162                                                           |       | 200 |   | (14,354 | ) |
| Amortization of beneficial conversion feature and  non-cash interest expense |       | —                                                        |       | — |   | 6,885 |   |
| Gain on sales of investments                                                 |       | (1,063                                                        | )          | (4,611 | ) | (1,728 | ) |
| Stock compensation expense                                                   |       | 7,153                                                         |       | 4,873 |   | 2,732 |   |
| Minority interest in loss of subsidiary                                      |       | —                                                        |       | (2,013 | ) | (13,846 | ) |
| Change in operating  assets and liabilities:                                 |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                          |       | (17,362                                                       | )          | (10,477 | ) | (3,688 | ) |
| Inventories                                                                  |       | (12,287                                                       | )          | (14,712 | ) | (5,169 | ) |
| Prepaids and other assets                                                    |       | (619                                                          | )          | 4,177 |   | (8,643 | ) |
| Accounts payable                                                             |       | 1,186                                                         |       | 3,804 |   | 885 |   |
| Accrued expenses and other liabilities                                       |       | (890                                                          | )          | 882 |   | (344 | ) |
| Change in accrued  interest on demand notes payable                          |       | —                                                        |       | (24,319 | ) | 18,736 |   |
| Net cash used in operating activities                                        |       | (46,912                                                       | )          | (131,849 | ) | (100,129 | ) |
| **Investing activities**                                                     |       |                                                          |       |   |   |   |   |
| Purchase of short-term investments                                           |       | (6,750                                                        | )          | (12,000 | ) | — |   |
| Proceeds from sale of short-term investments                                 |       | 4,050                                                         |       | — |   | — |   |
| Purchase of property and equipment                                           |       | (11,983                                                       | )          | (13,216 | ) | (3,172 | ) |
| Purchase of patents and licenses                                             |       | (3,516                                                        | )          | (1,677 | ) | (1,327 | ) |
| Proceeds from sale of assets                                                 |       | 69                                                            |       | 17 |   | 15,317 |   |
| Proceeds from sale of investments                                            |       | 1,063                                                         |       | 4,611 |   | 1,728 |   |
| Acquisitions, net of cash acquired                                           |       | (70                                                           | )          | (5,703 | ) | (3,750 | ) |
| Return of acquisition consideration                                          |       | —                                                        |       | 2,124 |   | — |   |
| Change in restricted cash                                                    |       | 1,116                                                         |       | (266 | ) | (209 | ) |
| Other                                                                        |       |                                                          |       | 841 |   |   |   |
| Net cash (used  in) provided by investing activities                         |       | (16,021                                                       | )          | (25,269 | ) | 8,587 |   |
|                                                                              |            |                                                               |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-8

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

| ** **                                                                                             | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Financing activities**                                                                               |       |                                                          |       |   |   |   |   |
| Proceeds from initial public offering, net                                                             |       | $                                                             | —     |   | $ | 154,946 |   | $ | — |   |
| Issuance of demand notes payable                                                                       |       | —                                                        |       | 49,100 |   | 67,684 |   |
| Proceeds from long-term debt                                                                           |       | 7,500                                                         |       | — |   | — |   |
| Payments on capital lease obligations                                                                  |       | (123                                                          | )          | (29 | ) | — |   |
| Members equity contributions                                                                           |       | —                                                        |       | — |   | 10,000 |   |
| Proceeds from issuance of notes payable, net of  costs                                                 |       | —                                                        |       | — |   | 11,008 |   |
| Proceeds from exercise of stock options                                                                |       | 9,936                                                         |       | 1,090 |   | 88 |   |
| Proceeds from issuance of  subsidiary stock to minority shareholders                                   |       | —                                                        |       | 1,041 |   | 424 |   |
| Proceeds from term financing                                                                           |       | —                                                        |       | 600 |   | — |   |
| Debt issuance costs                                                                                    |       | (118                                                          | )          | — |   | — |   |
| Other                                                                                                  |       | (255                                                          | )          | — |   | (1,243 | ) |
| Net cash provided by financing activities                                                              |       | 16,940                                                        |       | 206,748 |   | 87,961 |   |
| Effect of  exchange rate changes on cash                                                               |       | 454                                                           |       | (169 | ) | 87 |   |
| Net (decrease)  increase in cash and cash equivalents                                                  |       | (45,539                                                       | )          | 49,461 |   | (3,494 | ) |
| Cash and cash  equivalents, beginning of period                                                        |       | 69,592                                                        |       | 20,131 |   | 23,625 |   |
| Cash and cash  equivalents, end of period                                                              |       | $                                                             | 24,053     |   | $ | 69,592 |   | $ | 20,131 |   |
| Supplemental cash  flow information:                                                                   |       |                                                          |       |   |   |   |   |
| Cash paid for interest                                                                                 |       | $                                                             | 626        |   | $ | 36,581 |   | $ | 87 |   |
| Cash paid for income taxes                                                                             |       | $                                                             | 570        |   | $ | 24 |   | $ | 74 |   |
| Supplemental  non-cash disclosure:                                                                     |       |                                                          |       |   |   |   |   |
| Reclassification of demand notes from current  liabilities to long-term debt                           |       | $                                                             | —     |   | $ | — |   | $ | 299,453 |   |
| Financed insurance premiums (see Note 17)                                                              |       | 3,500                                                         |       | — |   | — |   |
| Net assets acquired in conjunction with MTI step  acquisition (see Note 4)                             |       | 95,438                                                        |       | 8,404 |   | — |   |
| Contribution of demand notes payable upon initial  public offering (see Note 11)                       |       | —                                                        |       | 324,230 |   | — |   |
| Preferred  membership units converted to common stock upon initial public offering  (see Note 13) |       | $                                                             | —     |   | $ | 266,089 |   | $ | — |   |

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-9

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**ev3 Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Dollars inthousands, except per share/unit amounts)

**1.**   Organizationand Description of Business

ev3 Inc. (“we,” “our” or “us”) is a global medicaldevice company focused on catheter-based technologies for the endovasculartreatment of vascular diseases and disorders. We develop, manufacture andmarket a wide range of products that include stents, embolic protectiondevices, thrombectomy devices, balloon angioplasty catheters, foreign objectretrieval devices, guidewires, embolic coils, liquid embolics, microcathetersand occlusion balloon systems. We market our products in the United States,Europe, Canada and Japan through a direct sales force, and through distributorsin certain other international markets.

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 thatowned a controlling interest in Micro Therapeutics, Inc. (“MTI”) at thetime of formation. At the time of ev3 LLC’s formation, MTI was a publiclytraded operating company. ev3 LLC’s majority equity holder, Warburg, PincusEquity Partners, L.P. and certain of its affiliates (“Warburg Pincus”), owned amajority, controlling interest in both Endovascular and MII at the time offormation. In accordance with Financial Accounting Standards Board Statement(“SFAS”) 141, *Business Combinations*and Financial Technical Bulletin (“FTB”) 85-5, *Issues related to Accounting for Business Combinations*, ev3LLC accounted for the transaction as a combination of entities under commoncontrol. The combination was accounted for on a historical cost basis as theownership interests in the combining companies were substantially the same beforeand after the transaction. On January 28, 2005, we were formed as asubsidiary of ev3 LLC. Immediately prior to the consummation of our initialpublic offering on June 21, 2005, ev3 LLC was merged with and into us (the“Merger”), and we became the holding company for all of ev3 LLC’s subsidiaries.

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/unit and per share/unit amounts for all periods presented in theseconsolidated financial statements reflect this split.

On May 26, 2005, Warburg Pincus and The VerticalGroup, L.P. and certain of its affiliates (“Vertical”) contributed all of itsshares of MTI’s common stock to ev3 LLC in exchange for common membershipunits.

In accordance with SFAS 141, the contribution ofthe shares by Warburg Pincus is accounted for as a transfer of assets betweenentities under common control, resulting in the retention of historical basedaccounting. These consolidated financial statements give effect to thecontribution of MTI shares owned by Warburg Pincus as though such contributionoccurred in 2003 and 2004 when Warburg Pincus acquired its interest in MTI. Thecontribution of the MTI shares by Vertical has been accounted for under thepurchase method of accounting on the contribution date.

At December 31, 2005,there was a minority interest of 30% in MTI. As described in Note 4, onJanuary 6, 2006, we acquired the outstanding shares of MTI that we did notalready own through a merger of MII with and into MTI. MTI was the survivingentity and, as a result of this merger, became our wholly owned subsidiary.

F-10

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**2.**   Summaryof Significant Accounting Policies

*Principles ofConsolidation*

The consolidated financialstatements include our accounts and the accounts of our wholly ownedsubsidiaries and other subsidiaries in which we maintain a controllinginterest. All significant intercompany balances and transactions have beeneliminated. At December 31, 2006, MTI was a wholly owned subsidiary (seeNote 4). At December 31, 2005, there was a minority interest of 30% inMTI. Prior to our acquisition of the remaining outstanding shares of MTI thatwe did not already own, the minority shareholders of MTI had the right toreceive their proportionate share of MTI’s equity and in turn absorb aproportionate share of MTI’s losses.

*Use of Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts and disclosures in theconsolidated financial statements and accompanying notes. Actual results coulddiffer from those estimates.

*Cash Equivalents*

We consider highly liquidinvestments with maturities of three months or less from the date of purchaseto be cash equivalents. These investments are stated at cost, which approximatesfair market value.

*Accounts Receivable*

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. We make judgmentsas to our ability to collect outstanding receivables and provide an allowancefor credit losses when collection becomes doubtful. Provisions are made basedupon a specific review of all significant outstanding account balances and theoverall quality and age of those balances not specifically reviewed. Indetermining the allowance required, we analyze historical collection experienceand current economic trends. If the historical data used to calculate theallowance for doubtful accounts does not reflect our future ability to collectoutstanding receivables or if the financial condition of customers were to deteriorate,resulting in impairment of their ability to make payments, an increase in theprovision for doubtful accounts may be required.

*Inventories*

Inventories are stated at the lower of standard costor market value, determined on a first-in, first-out basis.

We calculate an inventoryreserve for estimated obsolescence or excess inventory based on historicalturnover and assumptions about future demand for our products and market conditions.Our industry is characterized by regular new product development, and as such,our inventory is at risk of obsolescence following the introduction anddevelopment of new or enhanced products. Our estimate and assumptions forexcess and obsolete inventory are reviewed and updated on a quarterly basis.The estimates we use for demand are also used for near-term capacity planningand inventory purchasing and are consistent with our sales forecasts. Futureproduct introductions and related inventories may require additional reservesbased upon changes in market demand or introduction of competing technologies. Increasesin the reserve for excess and obsolete inventory result in a correspondingexpense to cost of goods sold.

F-11

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*Restricted Cash*

Restricted cash consistsof various deposits supporting credit arrangements.

*Property andEquipment*

Property and equipment arestated at cost, less accumulated depreciation and amortization. Additions andimprovements that extend the lives of assets are capitalized, whileexpenditures for repairs and maintenance are expensed as incurred. Depreciationis computed using the straight-line method over the estimated useful lives ofthe assets. Amortization of capital leases and leasehold improvements isprovided on a straight-line basis over the estimated lives of the relatedassets or the life of the lease, whichever is shorter, and generally rangesfrom three to seven years. Machinery and other equipment are depreciated overthree to ten years, computer hardware and software are depreciated over threeto five years, furniture and fixtures over five to seven years. Construction inprocess is not depreciated until the related asset is placed in service.

*Goodwill*

We evaluate the carryingvalue of goodwill during the fourth quarter of each year and between annualevaluations if events occur or circumstances change that indicate that thecarrying amount of goodwill may be impaired. We have two reporting units:Cardio Peripheral and Neurovascular, the same as our operating segments. Whenevaluating whether goodwill is impaired, the fair value of the reporting unitto which the goodwill is assigned is compared to its carrying amount, includinggoodwill. If the carrying amount of a reporting unit exceeds its fair value,then the amount of the impairment loss must be measured. The impairment loss,if any, is calculated by comparing the implied fair value of reporting unitgoodwill to its carrying amount. Fair value of the reporting unit is based onvarious valuation techniques, including the discounted value of estimatedfuture cash flows.

*Impairment ofLong-Lived Assets and Amortizable Intangible Assets*

Long-lived assets such asproperty, equipment, and intangible assets are reviewed for impairment whenevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable. An impairment loss is recognized when estimatedfuture undiscounted cash flows expected to result from the use of the asset andits eventual disposition are less than the carrying amount. Where available,quoted market prices are used to determine fair market value. When quotedmarket prices are not available, various valuation techniques, including thediscounted value of estimated future cash flows, are utilized.

*Investments*

We have made certainstrategic investments in companies of less than 20% of their outstanding equityinterests, and in various stages of development and account for theseinvestments under the cost method of accounting. The valuation of investmentsaccounted for under the cost method is based on all available financialinformation related to the investee, including valuations based on recent thirdparty equity investments in the investee. If an unrealized loss on anyinvestment is considered to be other than temporary, the loss is recognized inthe period the determination is made. All investments are reviewed for changesin circumstances or occurrence of events that suggest our investment may not berecoverable.

*Revenue Recognition*

We sell the majority of our products via directshipment to hospitals or clinics. Sales are made through our direct salesforce, distributors or through consignment arrangements with hospitals andclinics. We recognize revenue when all of the following criteria are met:persuasive evidence of an arrangement exists; 

F-12

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delivery has occurred; thesales price is fixed or determinable; and collectibility is reasonably assured.These criteria are met at the time of shipment when the risk of loss and titlepasses to the customer or distributor, unless a consignment arrangement exists.Revenue from consignment arrangements is recognized based on product usageindicating that the sale is complete. We record estimated sales returns,discounts and rebates as a reduction of net sales in the same period revenue isrecognized.

Sales to distributors are recognized at the time ofshipment, provided that we have received an order, the price is fixed ordeterminable, collectibility of the resulting receivable is reasonably assuredand we can reasonably estimate returns. Non-refundable fees received fromdistributors upon entering into multi-year distribution agreements, where thereis no culmination of a separate earnings process, are deferred and amortized overthe term of the distribution agreement or the expected period of performance,whichever is longer.

Costs related to productsdelivered are recognized in the period revenue is recognized. Cost of goodssold consists primarily of direct labor, allocated manufacturing overhead, rawmaterials and components and excludes amortization of intangible assets.

*Shipping andHandling Costs*

All shipping and handlingcosts are expensed as incurred and recorded as a component of sales, generaland administrative expense in the consolidated statement of operations. Suchexpenses for the years ended December 31, 2006, 2005 and 2004 wereapproximately $2.5 million, $2.2 million and $1.6 million, respectively.Shipping and handling amounts, if any, billed to customers are included in netsales.

*Advertising Costs*

All advertising costs areexpensed as incurred. We market our products primarily through a direct salesforce and advertising expenditures are not material.

*Research andDevelopment*

Research and developmentcosts are expensed as incurred and include the costs to design, develop, test,deploy and enhance our products. It also includes costs related to theexecution of clinical trials and costs incurred to obtain regulatory approvalfor our products.

*Acquired In-processResearch and Development (“IPR&D”)*

When we acquire anothercompany or group of assets, the purchase price is allocated, as applicable,between IPR&D, net tangible assets, goodwill, and other intangible assets.We define IPR&D as the value assigned to those projects for which therelated products have not received regulatory approval and have no alternativefuture use. Determining the portion of the purchase price allocated toIPR&D requires us to make significant estimates. The amount of the purchaseprice allocated to IPR&D is determined by estimating the future cash flowsof each project or technology and discounting the net cash flows back to theirpresent value. The discount rate used is determined at the time of theacquisition and includes consideration of the assessed risk of the project notbeing developed to a stage of commercial feasibility. Amounts allocated toIPR&D are expensed at the time of acquisition.

*Foreign CurrencyTranslation*

The local currency isgenerally designated as the functional currency for our internationaloperations. Accordingly, assets and liabilities are translated into U.S.Dollars at year-end exchange rates, and revenues and expenses are translated ataverage exchange rates prevailing during the year. Currency translationadjustments resulting from fluctuations in exchange rates are recorded in othercomprehensive income. 

F-13

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Gainsand losses on foreign currency transactions are included in “other (income)expense” in the consolidated statements of operations. Foreign currencytransactions resulted in transaction gains of $2.1 million for the year endedDecember 31, 2006, transaction losses of $3.6 million for the year endedDecember 31, 2005 and transaction gains of $1.9 million for the year endedDecember 31, 2004.

*Income Taxes*

We account for incometaxes under the liability method. Deferred income taxes are recognized for thetax consequences in future years of differences between the tax bases of assetsand liabilities and their financial reporting amounts at each year end, basedon enacted tax laws and statutory tax rates applicable to the periods in whichthe differences are expected to affect taxable earnings. Valuation allowancesare established when necessary to reduce deferred tax assets to the amount thatis more likely than not to be realized. The effect of changes in tax rates isrecognized in the period in which the rate change occurs.

*Loss per Membership Share/Unit*

Basic loss per membershipshare /unit (referred to as “share” hereafter) is computed based on the weightedaverage number of common shares outstanding. Diluted loss per share is computedbased on the weighted average number of common shares outstanding adjusted bythe number of additional shares that would have been outstanding had thepotentially dilutive common shares been issued and reduced by the number ofshares we could have repurchased with the proceeds from the potentiallydilutive shares. Potentially dilutive shares include share options and othershare-based awards granted under share-based compensation plans. For the yearsended December 31, 2006, 2005 and 2004, all potential common shares wereanti-dilutive. Accordingly, diluted loss per share is equivalent to basic lossper share.

*Comprehensive Loss*

Comprehensive lossconsists of net loss, the effects of foreign currency translation and, prior tofiscal 2006, gains on changes of interest related to ownership changes in MTI.

*Concentrations of Credit Risk*

Financial instruments thatpotentially subject us to credit risk consist principally of accountsreceivable and cash. We have a credit policy and perform ongoing creditevaluations of our customers. We do not generally require collateral or othersecurity and maintain an allowance for potential credit losses. Managementbelieves this risk is limited due to the large number and diversity ofhospitals and distributors who comprise our customer base.

We maintain cash and cashequivalents with various major financial institutions. We perform periodicevaluations of the relative credit standings of these financial institutionsand attempt to limit the amount of credit exposure with any one institution bymaintaining accounts at multiple institutions.

*Accounting for Stock-Based Compensation-Transition andDisclosure.*

On January 1, 2006,we adopted the provisions of Statement of Financial Accounting StandardsNo. 123(R), “Share-Based Payment” (SFAS 123(R)) using the modifiedprospective 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.Compensation cost under SFAS 123(R) is recognized ratably using thestraight-line attribution method over the expected vesting period, which isconsidered to be the requisite service period. In addition, pursuant to SFAS 123(R),we are required to estimate the amount of expected forfeitures when calculatingthe compensation costs, instead of accounting for forfeitures as incurred,which was our previous method. All of our options previously awarded wereclassified as equity instruments and continue to maintain their equityclassification under SFAS 123(R).

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Prior to January 1,2006 and since the beginning of 2003, we accounted for share-based awards underthe recognition provisions of SFAS 123, “Accounting for Stock-BasedCompensation” using the modified prospective method of adoption described inSFAS 148. We used the minimum value pricing model for measuring the fairvalue of our options granted through the first quarter 2005, which does nottake into consideration volatility. In accordance with SFAS 123,subsequent to April 5, 2005, the date of our initial filing of theregistration statement relating to our initial public offering with theSecurities and Exchange Commission, we used the Black-Scholes method, includingan estimated volatility assumption, to estimate the fair value of all optiongrants. Expense previously recognized related to options that were cancelled orforfeited prior to vesting was reversed in the period of the cancellation orforfeiture, as allowed under SFAS 123.

The fair value ofoptions are estimated at the date of grant using the Black-Scholes optionpricing model with the assumptions listed below. Risk free interest rate isbased on U.S. Treasury rates appropriate for the expected term. Expectedvolatility and forfeiture rates are based on a combination of historicalfactors related to our common stock since our June 2005 initial publicoffering and the volatility rates of a set of guideline companies. The guidelinecompanies consist of public and recently public medical technology companies.Dividend yield is zero as we do not expect to declare any dividends in theforeseeable future. The expected term is based on the weighted average timebetween grant and employee exercise. The fair value of stock granted toemployees is based upon the closing market value of our common stock on thedate of grant.

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **               | ** ** | **ev3 Inc.**                          | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** |
| Risk free interest rate  |       | 4.7                                        | %          | 3.8 | % | 4.0 | % | 3.5 | % | 3.7 | % |
| Expected forfeiture rate |       | 4.5 - 5.0                                  | %          | — |   | — |   | — |   | — |   |
| Expected dividend yield  |       | 0.0                                        | %          | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
| Expected volatility      |       | 49.1                                       | %          | 50.0 | % | 56.0 | % | — |   | 63.0 | % |
| Expected option term     |       | 3.75 years                                 |       | 4 years |   | 4 years |   | 5 years |   | 4 years |   |

 

In accordance with theprovisions of SFAS 123(R) and Emerging Issues Task Force Issue 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods or Services”, we account fornon-employee equity-based awards, in which goods or services are theconsideration received for the equity instruments issued, at their fair value.

The following tablesummarizes the stock-based compensation expense for employees and non-employeesrecognized in the income statement for each period:

| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stock Based Compensation Charges:**  |       |                                       |       |   |   |   |   |
| Cost of goods sold                     |       | $                                          | 630        |   | $ | 653 |   | $ | 223 |   |
| Sales, general and  administrative     |       | 5,868                                      |       | 3,141 |   | 1,883 |   |
| Research and development               |       | 655                                        |       | 1,079 |   | 626 |   |
| Total Stock Based Compensation Charges |       | $                                          | 7,153      |   | $ | 4,873 |   | $ | 2,732 |   |

 

*Fiscal Year*

We operate on amanufacturing calendar with our fiscal year always ending on December 31.Each quarter is 13 weeks, consisting of one five-week and two four-weekperiods.

*New Accounting Pronouncements*

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48clarifies when tax benefits should be recorded in financial statements, requirescertain disclosures of uncertain tax matters and indicates how any tax reservesshould be classified in a balance sheet. FIN 48 is effective for us onJanuary 1, 2007. We do not believe the adoption of FIN 48 will have amaterial impact on our results of operations and financial condition.

F-15

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In September 2006,the FASB issued SFAS 157, “Fair ValueMeasurement”. The standard provides guidance for using fair value tomeasure assets and liabilities. SFAS 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy. The statement is effective for us beginning in 2008;however, early adoption is permitted. We have not yet determined the impact, ifany, that the implementation of SFAS 157 will have on our results of operationsand financial condition.

**3.**   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 to WarburgPincus and Vertical. On June 21, 2005, we completed an initial publicoffering in which we sold 11,765,000 shares of our common stock at $14.00 pershare for net cash proceeds of $152.7 million, net of underwriting discountsand other offering costs. Immediately prior to the consummation of theoffering, ev3 LLC merged with and into ev3 Inc. and 24,040,718 Class Apreferred membership units, 41,077,336 Class B preferred membership units,and 18,799,962 common membership units of ev3 LLC were converted into83,918,016 shares of common stock of ev3 Inc. (on a pre-split basis). Immediatelythereafter, we completed a one-for-six reverse stock split whereby the83,918,016 shares of common stock were converted into 13,986,350 shares ofcommon stock. Prior to the consummation of the offering, and subsequent to thereverse stock split, we also issued 21,964,815 and 1,194,489 shares of commonstock to Warburg Pincus and Vertical, respectively, in exchange for theircontribution of $324.2 million aggregate principal amount of demand notes andaccrued and unpaid interest thereon. The remaining balance of the accrued andunpaid interest on the demand notes, totaling $36.5 million, was repaid usingproceeds from the offering. On July 20, 2005, we sold an additional205,800 shares of common stock pursuant to the over-allotment option granted tothe underwriters in connection with the initial public offering. Our netproceeds from this sale totaled $2.2 million, after deducting underwritingdiscounts and other offering expenses. The total net cash proceeds we receivedfrom our initial public offering were $154.9 million.

On June 28, 2006, our operating subsidiaries, ev3Endovascular, Inc., ev3 International, Inc. and Micro Therapeutics, Inc.(collectively, the “Borrowers”), entered into a Loan and Security Agreement (“LoanAgreement”) with Silicon Valley Bank (“SVB”), consisting of a two-year $30.0million revolving line of credit and a 48-month $7.5 million equipmentfinancing line. Pursuant to the terms of the Loan Agreement, and subject tospecified reserves, we may borrow under the revolving line of credit up to $12million without any borrowing base limitations. Aggregate borrowings under therevolving line of credit that exceed $12 million will subject the revolvingline to borrowing base limitations. These limitations allow us to borrow,subject to specified reserves, up to 80% of eligible domestic and foreignaccounts receivables plus up to 30% of eligible inventory. Additionally,borrowings against the eligible inventory may not exceed the lesser of 33% ofthe amount advanced against accounts receivable or $7.5 million. Borrowingsunder the revolving line bear interest at a variable rate equal to SVB’s primerate. Borrowings under the equipment line bear interest at a variable rateequal to SVB’s prime rate plus 1.0%. Accrued interest on any outstandingbalance under the revolving line is payable monthly in arrears. Amountsoutstanding under the equipment line as of December 31, 2006 will bepayable in 42 consecutive equal monthly installments of principal, beginning onJanuary 31, 2007. As of December 31, 2006, we had $7.5 million inoutstanding borrowings under the equipment line and no outstanding borrowingsunder the revolving line of credit; however, we had approximately $1.0 millionof outstanding letters of credit issued by SVB, which reduces the amountavailable under our revolving line of credit to approximately $29.0 million.

Both the revolving line of credit and equipmentfinancing are secured by a first priority security interest in substantiallyall of our assets, excluding intellectual property, which is subject to anegative pledge, and are guaranteed by ev3 Inc. and all of our domestic directand indirect subsidiaries. The Loan Agreement requires the Borrowers tomaintain a specified liquidity ratio and a tangible net worth level. 

F-16

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The Loan Agreement imposescertain limitations on the Borrowers, their subsidiaries and ev3 Inc.,including without limitation, on their ability to: (i) transfer all or anypart of their business or properties; (ii) permit or suffer a change incontrol; (iii) merge or consolidate, or acquire any entity; (iv) engagein any material new line of business; (v) incur additional indebtedness orliens with respect to any of their properties; (vi) pay dividends or makeany other distribution on or purchase of, any of their capital stock; (vii) makeinvestments in other companies; or (viii) engage in related partytransactions, subject in each case to certain exceptions and limitations. TheLoan Agreement requires us to maintain on deposit or invested with SVB or itsaffiliates the lesser of $15.0 million or 50% of our aggregate cash and cashequivalents. The Borrowers are required to pay customary fees with respect tothe facility, including a fee on the average unused portion of the revolvingline of credit.

The Loan Agreement contains customary loan covenantsand events of default, including the failure to make required payments, thefailure to comply with certain covenants or other agreements, the occurrence ofa material adverse change, failure to pay certain other indebtedness andcertain events of bankruptcy or insolvency. Upon the occurrence andcontinuation of an event of default, amounts due under the Loan Agreement maybe accelerated. As of December 31, 2006, we were in compliance with allloan covenants under the Loan Agreement.

Our future liquidity andcapital requirements will be influenced by numerous factors, including clinicalresearch and product development programs, working capital to support our salesgrowth, receipt of and time required to obtain regulatory clearances andapprovals, sales and marketing programs and the acceptance of our products inthe marketplace. We believe that our current resources, together with fundsavailable under our revolving line of credit, are sufficient to cover ourliquidity requirements through at least the next twelve months. However, thereis no assurance that additional funding will not be needed. Further, ifadditional funding were needed, there is no assurance that such funding will beavailable to us or our subsidiaries on acceptable terms, or at all. If werequire additional working capital but are not able to raise additional funds,we may be required to significantly curtail or cease ongoing operations.

**4.**   MTIStep 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 effective time of the merger wasautomatically converted into the right to receive 0.476289 of a share of ourcommon stock (the “Exchange Ratio”) and cash in lieu of any fractional share ofour common stock. We issued approximately 7.0 million new shares of our commonstock to MTI’s public stockholders in the merger. Fair value of the sharesissued was measured as the average closing price per share of our stock on theNASDAQ National Market System for the five day trading period centered aroundthe date that the terms of the acquisition were agreed to and announced. Inaddition, each outstanding option to purchase shares of MTI common stock wasconverted into an option to purchase shares of our common stock on the sameterms and conditions (including vesting) as were applicable under such MTIoption. The exercise price and number of shares for which each such MTI optionis (or will become) exercisable was adjusted based on the Exchange Ratio.  The fair value of the replacement stockoptions 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 FinancialStatements. Step acquisition accounting requires the allocation of the excesspurchase price to the fair value of net assets acquired. The excess purchaseprice is determined as the difference between the cash paid and the historicalbook value of the interest in net assets acquired. The effects of theacquisition do not materially change our results of operations. Therefore, proforma disclosures are not included.

F-17

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*Thefollowing table presents the purchase price for the acquisition (in thousands)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     |   |

 

*The followingsummarizes the allocation of the excess purchase price over historical bookvalues (in thousands) 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 |       | 1,786    |       |
| Goodwill                                      |       | 54,605   |       |
| Accrued  liabilities                          |       | (2,012   | )          |
| 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 approachestablishes fair value by estimating the after-tax cash flows attributable toany in-process project over its useful life and then discounting theseafter-tax cash flows back to the present value. The costs to complete eachproject were based on estimated direct project expenses as well as theremaining labor hours and related overhead costs. In arriving at the value ofacquired in-process research and development projects, we considered theproject’s stage of completion, the complexity of the work to be completed, thecosts already incurred, the remaining costs to complete the project, thecontribution of core technologies, the expected introduction date and theestimated useful life of the technology. The discount rate used to arrive atthe present value of acquired in-process research and development as of theacquisition date was based on the time value of money and medical technologyinvestment risk factors. The discount rate used was approximately 14%. Webelieve that the estimated acquired in-process research and development amountdetermined represents the fair value at the date of acquisition and does notexceed the amount a third party would pay for the project.

Prior to acquiring the outstanding shares of MTI thatwe did not already own on January 6, 2006, we, through our wholly ownedsubsidiary, MII, acquired a controlling interest in MTI in various stepinvestments commencing in 2001. MTI was a publicly held Delaware corporationthat develops, manufactures and markets minimally invasive medical devices fordiagnosis and treatment primarily of neurovascular diseases. We held anapproximate interest in MTI of 70.0% and 66.0% at December 31, 2005 and2004, respectively.

We made an additional investment in MTI in 2005. Theinvestment was accounted for using the step acquisition method prescribed byARB 51, Consolidated Financial Statements. Step acquisition accountingrequires the allocation of the excess purchase price to the fair value of netassets acquired. The excess 

F-18

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purchase price isdetermined as the difference between the cash paid and the historical bookvalue of the interest in net assets acquired.

On May 26, 2005, all of the shares of MTI’scommon stock directly held by Warburg Pincus and Vertical were contributed toev3 LLC in exchange for 10,804,500 and 3,004,332 common membership units (pre-splitbasis), respectively. These common membership units were subsequently convertedinto shares of our common stock in connection with the subsequent merger of ev3LLC with and into ev3 Inc. on June 21, 2005. MTI shares contributed byWarburg Pincus, representing a 15.7% interest in MTI, have been accounted foras a transfer of assets between entities under common control and theconsolidated financial statements give effect to the contribution by WarburgPincus as though such contributions occurred in 2003 and 2004 when WarburgPincus acquired its interest in MTI. Shares of MTI contributed by Vertical,representing a 4.3% interest, have been accounted for under the purchase methodof accounting at the date of the contribution by Vertical.

The number of membership units of ev3 LLC issued inexchange for the MTI shares directly held by Warburg Pincus and Vertical wasdetermined based on fair value. Fair value of the MTI shares contributed wasmeasured as the average closing price per share of MTI’s common stock on theNASDAQ National Market System for the twenty trading days from and includingthe date our Registration Statement with respect to our initial public offeringwas first filed with the Securities and Exchange Commission. Fair value of ev3LLC’s equity issued in exchange for the MTI shares was based on the midpoint ofthe range of estimated initial public offering prices per share, afterconsideration of the reverse stock split.

*The following table presents the purchase price forthe additional investment in 2005:*

| ** **                                         | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| Fair value of  shares issued                       |       | $        | 8,404      |   |
| Cash paid                                          |       | —   |       |
| Interest acquired  in historical book value of MTI |       | (2,021   | )          |
| Excess purchase price  over historical book values |       | $        | 6,383      |   |

 

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

| ** **                                    | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|
| Inventory                                     |       | $        | 104        |   |
| Developed  technology                         |       | 2,043    |       |
| Customer  relationships                       |       | 894      |       |
| Trademarks and  tradenames                    |       | 458      |       |
| Acquired  in-process research and development |       | 868      |       |
| Goodwill                                      |       | 2,066    |       |
| Accrued  liabilities                          |       | (50      | )          |
| Total                                         |       | $        | 6,383      |   |

 

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The weighted average life of the acquired intangibleassets was five years in each of the allocation periods above. The acquiredin-process research and development charge was estimated considering anappraisal and represents the estimated fair value of the in-process projects atthe date of contribution of the MTI shares. As of the acquisition date, thein-process projects had not yet reached technological feasibility and had noalternative use. The primary basis for determining technological feasibility ofthese projects is obtaining regulatory approval to market the products. Accordingly,the value attributable to these projects, which had yet to obtain regulatoryapproval, was expensed in conjunction with the acquisition. If the projects arenot successful, or completed in a timely manner, we may not realize thefinancial benefits expected from these projects.

To the extent that investments in MTI by third partyinvestors reduced our ownership interest, the difference between the carryingvalue of the interest indirectly sold by us, and the consideration paid by thethird party investor is considered a change in interest transaction. We haveadopted an accounting policy of recording change of interest gains or losseswithin equity as part of comprehensive income (loss) as permitted by StaffAccounting Bulletin (“SAB”) 5H. Change of interest gains recorded in equitywere $583 thousand and $2.2 million in the years ended December 31, 2005and 2004, respectively.

In 2005, we incurred $1.9million of acquisition related costs associated with the purchase of theoutstanding shares of MTI that we did not already own.

**5.**   Short-terminvestments

Short-term investmentsconsist of debt securities, which have investment grade credit ratings. Thedebt securities are classified and accounted for as available-for-sale and arereported at fair value with unrealized gains and losses, if any, excluded fromearnings and reported in other comprehensive income. Management determines theappropriate classification of its investments in securities at the time ofpurchase and reevaluates such determination at each balance sheet date. Theshort-term investments consist of floating rate taxable municipal bonds withmaturities from 2019 to 2036. We have the option to put the bonds to theremarketing agent who is obligated to repurchase the bonds at par. As of December 31,2006 and 2005, our cost approximated fair value related to these investments.

**6.**   Inventories

*Inventoryconsists of the following:*

| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials     |       | $                     | 7,100      |   | $ | 5,823 |   |
| Work-in-progress  |       | 3,271                 |       | 1,944 |   |
| Finished goods    |       | 36,478                |       | 29,195 |   |
|              |       | 46,849                |       | 36,962 |   |
| Inventory reserve |       | (4,725                | )          | (3,975 | ) |
| Inventory, net    |       | $                     | 42,124     |   | $ | 32,987 |   |

 

F-20

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**7.**   Propertyand Equipment

*Propertyand equipment consists of the following:*

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Machinery and  equipment                   |       | $                     | 20,472     |   | $ | 14,222 |   |
| Office furniture  and equipment            |       | 11,440                |       | 10,669 |   |
| Leasehold  improvements                    |       | 9,750                 |       | 6,596 |   |
| Construction in  progress                  |       | 2,040                 |       | 2,916 |   |
|                                       |       | 43,702                |       | 34,403 |   |
| Less:                                      |       |                  |       |   |   |
| Accumulated  depreciation and amortization |       | (19,630               | )          | (16,526 | ) |
| Property and equipment,  net               |       | $                     | 24,072     |   | $ | 17,877 |   |

 

Depreciation andamortization expense for property and equipment for the years ended December 31,2006, 2005 and 2004 was $5.6 million, $4.1 million and $4.2 million,respectively.

**8.**   Goodwilland Other Intangible Assets

*The changes in the carrying amount of goodwill byoperating segment for the years ended December 31, 2006 and 2005 were asfollows:*

| ** **                                                | ** ** | **Cardio  Peripheral** | ** ** | **Neuro-  vascular** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
| Balance as of  January 1, 2005                       |       |                   | 73,431     |                 |       | 21,083    |       | 94,514 |   |
| Settlement of  litigation over purchase price adjustments |       |                   | (2,124     | )                    |       | —    |       | (2,124 | ) |
| Goodwill related  to May MTI step acquisition        |       |                   | —     |                 |       | 2,066     |       | 2,066 |   |
| Balance as of  December 31, 2005                     |       |                   | 71,307     |                 |       | 23,149    |       | 94,456 |   |
| Goodwill related  to acquisition of MTI common stock      |       |                   | —     |                 |       | 54,605    |       | 54,605 |   |
| Balance as of  December 31, 2006                     |       |                   | $          | 71,307               |       |      | $          | 77,754 |   | $ | 149,061 |   |
|                                                           |            |                        |            |                      |            |           |            |  |  |  |  |  |

 

*Other intangible assets consist of the following:*

| ** **                 | ** ** | ** **                                     | ** ** | **December 31,**       | ** ** |
|----------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **Weighted**                                   | ** ** | **2006**                    | ** ** | **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        |                        |       | $ | 11,435 |   |   | $ | (4,009 | ) |   | $ | 7,426 |   | $ | 8,390 |   |   | $ | (3,300 | ) |   | $ | 5,090 |   |
| Developed  technology      |       |                                           | 6.0        |                        |       | 63,616 |   |   | (40,119 | ) |   | 23,497 |   | 48,068 |   |   | (29,951 | ) |   | 18,117 |   |
| Trademarks and  tradenames |       |                                           | 7.0        |                        |       | 5,122 |   |   | (2,634 | ) |   | 2,488 |   | 3,093 |   |   | (1,721 | ) |   | 1,372 |   |
| Customer  relationships    |       |                                           | 5.0        |                        |       | 16,094 |   |   | (9,491 | ) |   | 6,603 |   | 6,131 |   |   | (4,480 | ) |   | 1,651 |   |
| Other intangible assets    |       |                                           |       |                        |       | $ | 96,267 |   |   | $ | (56,253 | ) |   | $ | 40,014 |   | $ | 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 that approximate the pattern of economic benefit.

Total amortization of intangible assets was $17.2 million,$10.7 million and $9.9 million for the years ended December 31, 2006, 2005and 2004, respectively.

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*Based on the intangible assets in service as of December 31,2006, estimated amortization expense for the next five years ending December 31is as follows:*

| 2007 |   | $     | 11,361 |   |
|------|--------|-------|--------|--------|
| 2008 |   | 7,777 |   |
| 2009 |   | 5,045 |   |
| 2010 |   | 3,901 |   |
| 2011 |   | 2,487 |   |

 

**9.**   Investments

We had a licensingagreement and an approximate 14% interest in Genyx Medical, Inc. (“Genyx”).The carrying value of our investment in Genyx was fully written off and reducedto $0 as of December 31, 2004, and we had no obligation to fund Genyx’soperations. In January 2005, we sold our interest in Genyx and recorded again of $3.7 million. During the second quarter 2006, we received a milestonepayment of $153 thousand related to the sale of our investment in Genyx, and amilestone payment of $910 thousand related to the 2002 sale of our investmentin Enteric Medical Technologies, Inc. (“Enteric”). This was the finalmilestone payment related to the sale of our investment in Enteric. During thesecond quarter 2005, we received an $878 thousand milestone payment related tothe 2002 sale of our investment in Enteric. These amounts are included in the “Gainon sale of investments, net” caption in the Other Income/Expense section of theincome statement.

**10.**   AccruedLiabilities

*Accrued liabilities consist of the following:*

| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Accrued  professional services |       | $                    | 1,900      |   | $ | 1,043 |   |
| Accrued clinical  studies      |       | 359                  |       | 3,633 |   |
| Office closure                 |       | 345                  |       | 391 |   |
| Accrued other                  |       | 7,498                |       | 6,276 |   |
| Total accrued  liabilities     |       | $                    | 10,102     |   | $ | 11,343 |   |

 

**11.**   NotesPayable

*Long-termdebt consists of the following (in thousands):*

| ** **            | ** ** | **December 31** | ** ** |
|-----------------------|------------|----------------------|------------|
| ** **            | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Equipment term  loan  |       | $                    | 7,500      |   | $ | — |   |
| Less: current portion |       | (2,143               | )          | — |   |
| Total long-term  debt |       | $                    | 5,357      |   | $ | — |   |

 

On June 28, 2006, our operating subsidiaries, ev3Endovascular, Inc., ev3 International, Inc. and Micro Therapeutics, Inc.,entered into a Loan and Security Agreement, with Silicon Valley Bank, or SVB,consisting of a two-year $30.0 million revolving line of credit and a 48-month$7.5 million equipment financing line. Borrowings under the revolving line bearinterest at a variable rate equal to SVB’s prime rate. Borrowings under theequipment line bear interest at a variable rate equal to SVB’s prime rate plus1.0%.  Accrued interest on any outstandingbalance under the revolving line is payable monthly in arrears. Amountsoutstanding under the equipment line as of December 31, 2006 will bepayable in 42 consecutive equal monthly installments of principal, beginning onJanuary 31, 2007.

F-22

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*Annual maturities of our long-term debt at December 31,2006 are as follows (in thousands):*

| 2007  |   | $     | 2,143  |   |
|-------|--------|-------|--------|--------|
| 2008  |   | 2,143 |   |
| 2009  |   | 2,143 |   |
| 2010  |   | 1,071 |   |
| Total |   | $     | 7,500  |   |

 

*Endovascular NotesPayable*

Endovascular issued demandnotes to Warburg Pincus and Vertical in order to obtain the necessary funds tocomplete acquisitions, meet working capital requirements and fund operatinglosses prior to the company’s initial public offering. At June 21, 2005,the closing date of our initial public offering, Endovascular had outstanding$316.0 million aggregate principal amount of demand notes plus $44.7 million ofaccrued and unpaid interest thereon. These notes were payable to WarburgPincus, our majority stockholder, and Vertical, our second largest stockholder.Immediately prior to our initial public offering, we issued 21,964,815 and1,194,489 shares of common stock to Warburg Pincus and Vertical, respectively,in exchange for their contribution of $324.2 million principal amount of thedemand notes and a portion of the accrued and unpaid interest thereon. Uponsuccessful consummation of our initial public offering, we utilized $36.5million of the net proceeds to reduce our financing balance to zero at June 21,2005. The notes provided for interest at 8% per annum and interest expensetotaled $12.2 million and $18.7 million for the years ended December 31,2005 and 2004, respectively.

**12.**   Interest(Income) / Expense

Interestincome and interest expense for the years ended December 31, 2006, 2005and 2004 are as follows:

| ** **                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income              |       | $        | (2,469     | )        | $          | (2,475   | )          | $ | (388 | ) |
| Interest expense             |       | 774      |       | 12,391   |       | 25,816   |       |
| Interest (income) /  expense |       | $        | (1,695     | )        | $          | 9,916    |       | $ | 25,428 |   |

 

**13.**   Members’Equity and Redeemable Convertible Preferred Membership Units

ev3 LLC, when it wasformed, authorized and issued 733,455 Common Membership Units (Common),24,040,718 Class A Preferred Membership Units (Class A) and41,077,336 Class B Preferred Membership Units (Class B). The Class Aunits were issued in exchange for 100% of the outstanding units of MII, and theClass B units and Common units were exchanged for 100% of the outstandingpreferred and common shares of Endovascular. This exchange has been reflectedretroactively in the consolidated financial statements.

*Redeemable ConvertiblePreferred Membership Units*

Class A and Class B Preferred units(together the “Preferred units”) were redeemable at the option of the holder.Preferred units had special rights relating to conversion to Common units,liquidation, election of directors, and certain other matters. The Preferredunits were entitled to vote on all matters along with the holders of Commonunits on an as-if converted basis. The Preferred units were convertible intoCommon units on a 1:6 basis, subject to an adjustment for any interest, splits,distribution, or other actions.

In connection with the merger of ev3 LLC with and intoev3 Inc., 24,040,718 Class A preferred membership units of ev3 LLC with acarrying value of $98.7 million and 41,077,336 Class B preferred 

F-23

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membership units of ev3LLC with a carrying value of $167.4 million were converted into commonmembership units of ev3 LLC, and subsequently into shares of our common stock,on a 1:1 basis. The newly converted shares were then subject to a 1-for-6reverse stock split (See Note 1).

The preferred units wereaccreted to their liquidation value at the first redemption date with theaccretion in the value of the preferred units recorded as a charge to theaccumulated deficit until the date of conversion in common equity.

**14.**   EquityBased Compensation Plans

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, 6,000,000 shares ofour common stock are available for issuance under the plan.

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 generallyexpire 90 days after termination of employment. Options granted to outsideconsultants generally vest over the term of their consulting contract andgenerally expire 90 days after termination of the consulting relationship. Theexercise price per share for each option is set by the board of directors orthe compensation committee at the time of grant and pursuant to the terms ofthe plan may not be less than the fair market value per share on the grantdate.

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 4).

In addition to our 2005 Incentive Stock Plan, wemaintain the ev3 Inc. Employee Stock Purchase Plan (“ESPP”). The maximum numberof shares of our common stock available for issuance under the ESPP is 750,000shares, subject to adjustment as provided in the ESPP. The ESPP provides forsix-month offering periods beginning on January 1 and July 1 of eachyear; provided, however, that the compensation committee of the board ofdirectors may decide in its sole discretion when to commence the first offeringperiod so long as such offering period is commenced within 12 months of thedate the ESPP was first approved by the board of directors, which was an February 13,2006.  The first offering period willcommence on January 1, 2007. The purchase price of the shares will be 85%of the lower of the fair market value of our common stock at the beginning orend of the offering period. This discount may not exceed the maximum discountrate permitted for plans of this type under Section 423 of the InternalRevenue Code of 1986, as amended.  Weexpect the ESPP to be compensatory for financial reporting purposes.

F-24

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*A summary of option activity for all plans (dollars inthousands, except per share amounts) during the year ended December 31,2006 is as follows:*

| ** **                                                      | ** ** | **Awarded Shares  Outstanding** | ** ** | **Weighted-Average  Exercise Price Per  Share** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| Balance at  January 1, 2006                                |       |                                 | 3,638,309  |                                                      |       |                            | $          | 11.41 |   |   |   |   |   |   |
| MTI options converted to ev3 options as a result of  the merger |       |                                 | 2,449,905  |                                                      |       |                            | $          | 9.75 |   |   |   |   |   |   |
| Granted:                                                        |       |                                 |       |                                                      |       |                            |       |   |   |   |   |   |   |
| Options to purchase common stock                                |       |                                 | 1,321,355  |                                                      |       |                            | $          | 16.25 |   |   |   |   |   |   |
| Exercised                                                       |       |                                 | (1,162,282 | )                                                         |       |                            | $          | 8.55 |   |   |   |   |   |   |
| Forfeited                                                       |       |                                 | (834,163   | )                                                         |       |                            | $          | 11.54 |   |   |   |   |   |   |
| Expired                                                         |       |                                 | (53,876    | )                                                         |       |                            | $          | 15.17 |   |   |   |   |   |   |
| Balance at December 31, 2006                               |       |                                 | 5,359,248  |                                                      |       |                            | $          | 12.47 |   |   |   | $ | 26,863 |   |   |
| Options  exercisable at December 31, 2006                  |       |                                 | 2,648,168  |                                                      |       |                            | $          | 11.08 |   |   |   | $ | 17,518 |   |   |

 

*A summary of the weighted average grant date fairvalue of options granted under all plans for each period is as follows:*

| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **ev3 Inc.**                          | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** |
| Weighted average  grant date fair value of options issued: |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At market                                                  |       |                                       | $          | 7.11 |   |   |   | $ | 6.05 |   |   | $ | 1.95 |   |   | — |   |   | $ | 2.02 |   |
| Below market                                               |       |                                       | —     |   |   |   | $ | 5.05 |   |   | $ | 1.86 |   |   | $ | 4.68 |   |   | — |   |
| Above market                                               |       |                                       | —     |   |   |   | — |   |   | — |   |   | $ | 0.24 |   |   | — |   |
|                                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2006, the total compensationcost for nonvested options not yet recognized in our statements of operationswas $16.2 million, net of estimated forfeitures. This amount is expected to berecognized over a weighted average period of 2.6 years.

The intrinsic value of a stock option award is theamount by which the fair market value of the underlying stock exceeds theexercise price of the award. The total intrinsic value of options exercised was$9.1 million during the year ended December 31, 2006.

*For options outstanding and exercisable atDecember 31, 2006, the exercise price ranges and average remaining liveswere as follows:*

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Exercise Price Per Share** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Per Share  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** |
| $0.36 - $8.81                               |       |                         | 751,968    |                         |       |   | $ | 6.90 |   |   |   | 6.8 years |   |   | 541,590 |   |   | $ | 6.47 |   |   |
| $8.82                                       |       |                         | 1,315,333  |                         |       |   | $ | 8.82 |   |   |   | 6.9 years |   |   | 982,105 |   |   | $ | 8.82 |   |   |
| $8.94 - $14.70                              |       |                         | 1,956,007  |                         |       |   | $ | 13.57 |   |   |   | 8.0 years |   |   | 831,749 |   |   | $ | 13.27 |   |   |
| $14.93 - $17.01                             |       |                         | 873,865    |                         |       |   | $ | 16.24 |   |   |   | 8.6 years |   |   | 96,499 |   |   | $ | 15.85 |   |   |
| $17.06 - $229.02                            |       |                         | 462,075    |                         |       |   | $ | 20.12 |   |   |   | 6.3 years |   |   | 196,225 |   |   | $ | 23.53 |   |   |
|                                        |       |                         | 5,359,248  |                         |       |   | $ | 12.47 |   |   |   | 7.5 years |   |   | 2,648,168 |   |   | $ | 11.08 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-25

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*A summary of restricted stock awards activity for allplans (dollars in thousands, except per share amounts) during the year ended December 31,2006 is as follows:*

| ** **                                   | ** ** | **Awarded  Shares  Outstanding** | ** ** | **Weighted-Average  Grant Date Fair  Value** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------|------------|
| Nonvested balance  at January 1, 2006   |       |                             | 185,000    |                                                   |       |   | $ | 14.68 |   |   |
| Granted:                                     |       |                             |       |                                                   |       |   |   |   |   |
| Restricted stock awards                      |       |                             | 85,524     |                                                   |       |   | $ | 16.05 |   |   |
| Unrestricted stock grant                     |       |                             | 28,341     |                                                   |       |   | — |   |   |
| Vested                                       |       |                             | (74,591    | )                                                      |       |   | $ | 14.38 |   |   |
| Forfeited                                    |       |                             | (6,500     | )                                                      |       |   | $ | 17.15 |   |   |
| Nonvested balance at  December 31, 2006 |       |                             | 217,774    |                                                   |       |   | $ | 15.42 |   |   |

 

The value of these shares of restricted stock wasmeasured at the closing market price of our common stock on the grant date. Theunamortized compensation expense for these awards was $3.3 million as of December 31,2006, which will be recognized over the remaining weighted average vestingperiod of approximately 2.9 years.

During the year ended December 31, 2006, weissued an aggregate of 28,341 shares of stock to key employees in the form ofunrestricted stock grants. Of the 28,341 shares of common stock issued to theseemployees as stock grants, we immediately repurchased an aggregate of 9,268shares to pay the employees’ withholding or employment-related tax obligationsdue in connection with the issuance of the stock grants. The value of thesestock grants was measured at the closing market price of our common stock onthe date of grant. The resulting compensation expense of $393 thousand wasrecorded in 2006 upon issuance of the shares.

During 2000 and 2001,Warburg Pincus and certain of our employees and directors entered into loanagreements in order for certain employees and directors to buy ownershipinterests in us. These outstanding loans are considered to be a part of a stockcompensation arrangement. Modifications are measured for compensation expense.Additional compensation expense, if any, is recognized over the remaining lifeof the loan and is immaterial for the years ended December 31, 2006 and2005. We recognized $937 thousand of compensation expense for the year ended December31, 2004. The total outstanding principal balance and accrued interest on thenotes held by Warburg Pincus and issued by certain of our employees anddirectors at December 31, 2006 and 2005 was an aggregate of $4.9 millionand $5.2 million, respectively.

**15.**          DefinedContribution Plans

We offer substantially all our employees theopportunity to participate in defined contribution retirement plans qualifyingunder the provisions of Section 401(k) of the Internal Revenue Code. Thegeneral purpose of these plans is to provide employees with an incentive tomake regular savings in order to provide additional financial security duringretirement. The Plan provides for a match of 50% of the employees’ pre-taxcontribution, up to a maximum of 3% of eligible earnings. The employee isimmediately vested in the matching contribution. Compensation expense relatedto this plan was $2.1 million, $1.3 million and $716 thousand for the yearsended December 31, 2006, 2005 and 2004, respectively.

Expenses to administer theplans are borne by us and have amounted to approximately $12 thousand, $13thousand and $24 thousand for the years ended 2006, 2005 and 2004,respectively.

F-26

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**16.**          Income Taxes

Following is areconciliation of the U.S. Federal statutory rate to our effective tax rate: 

| ** **                       | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| U.S. Federal  statutory tax rate |       |                                                          | (35.0      | )% |   |   | (34.0 | )% |   |   | (34.0 | )% |   |
| Meals and  entertainment         |       |                                                          | 0.6        | % |   |   | 0.3 | % |   |   | 0.2 | % |   |
| Foreign income taxes             |       |                                                          | 0.9        | % |   |   | 3.1 | % |   |   | 2.4 | % |   |
| State income  taxes              |       |                                                          | (3.0       | )% |   |   | (5.4 | )% |   |   | (4.4 | )% |   |
| Non-deductible  expenses         |       |                                                          | —     |   |   |   | — |   |   |   | 3.1 | % |   |
| Change in  valuation allowance   |       |                                                          | 39.6       | % |   |   | 35.9 | % |   |   | 32.5 | % |   |
| Other, net                       |       |                                                          | (1.8       | )% |   |   | 0.8 | % |   |   | 0.4 | % |   |
| Effective tax rate               |       |                                                          | 1.3        | % |   |   | 0.7 | % |   |   | 0.2 | % |   |

 

*The components ofev3 Inc.’s provision for income taxes are as follows:*

| ** **           | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:             |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| U.S. .               |       |                                                          | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   |
| Foreign              |       |                                                          | 688        |   |   |   | 525 |   |   |   | 194 |   |   |
| Total Current        |       |                                                          | 688        |   |   |   | 525 |   |   |   | 194 |   |   |
| Deferred:            |       |                                                          | 0          |   |   |   | 0 |   |   |   | 0 |   |   |
| Total tax  provision |       |                                                          | $          | 688 |   |   |   | $ | 525 |   |   |   | $ | 194 |   |   |

 

*ev3 Inc. had the following deferred tax assets andliabilities as of:*

| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred Tax Assets:                               |       |                  |       |   |   |
| Inventories                                        |       | $                     | 1,794      |   | $ | 1,070 |   |
| Tax credit  carryforwards                          |       | 5,182                 |       | 5,488 |   |
| Unrealized losses  on investments                  |       | 3,135                 |       | 3,267 |   |
| Property and  equipment                            |       | 709                   |       | 774 |   |
| Net operating  loss carryforwards                  |       | 170,428               |       | 156,139 |   |
| Other reserves  and accruals                       |       | 2,792                 |       | 2,776 |   |
| Capitalized  research & development costs |       | 16,588                |       | 8,827 |   |
| Other                                              |       | 3,095                 |       | 4,258 |   |
| Valuation  allowance                               |       | (191,960              | )          | (176,142 | ) |
| Total Deferred  Tax Assets                         |       | 11,763                |       | 6,457 |   |
| Deferred Tax  Liabilities:                         |       |                  |       |   |   |
| Intangible assets                                  |       | (11,763               | )          | (6,457 | ) |
| Net deferred tax asset  (liability)                |       | $                     | —     |   | $ | — |   |

 

We have established a complete valuation allowanceagainst our net deferred tax assets because it was determined by management atboth December 31, 2006 and 2005 that it was more likely than not that suchdeferred tax assets would not be realized. Of the total valuation allowance, $50.5million will be recorded as a reduction to goodwill if and when that portion ofthe deferred tax asset is realized and the related valuation allowance isreversed.

F-27

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At December 31,2006, ev3 Inc. had U.S. and foreign gross net operating loss carryforwards of$447.4 million (net of $29.9 million expected to expire before utilization dueto the Internal Revenue Code (“IRC”) Section 382 limitation). The generaltime frame of the net operating loss carryforwards expiration is as follows: 

| **U. S.** | ** ** | **Foreign** | ** ** | **Total** | ** ** | **Carryforward  Expiration Period** | ** ** |
|----------------|------------|-------------|------------|-----------|------------|------------------------------------------|------------|
| $28,228        |       | $           | 16,995     |      | $          | 45,223                                   |       | 2008 - 2018 |   |
| 108,285        |       | —      |       | 108,285   |       | 2019 - 2022                              |       |
| 263,126        |       | —      |       | 263,126   |       | 2023 - 2026                              |       |
| —         |       | 30,788      |       | 30,788    |       | No expiration date                       |       |
| $399,639       |       | $           | 47,783     |      | $          | 447,422                                  |       |   |   |

 

In addition, we currently have $303.3 million in statenet operating loss carryforwards. These net operating loss carryforwards willexpire in varying amounts between 2007 and 2026.

ev3 Inc. has research and experimentation creditcarryforwards for federal and California purposes of approximately $3.3 millionand $2.7 million, respectively (collectively net of $1.1 million expected toexpire before utilization due to the IRC Section 383 limitation) whichwill expire between 2011 and 2026. ev3 Inc. also has a manufacturer’sinvestment credit carryforward for California tax reporting purposes ofapproximately $164 thousand (net of $20 thousand limited under California law)which will expire between 2007 and 2011.

The acquisitions made during 2001 and 2002 resulted inownership changes which limit our ability to utilize our net operating loss andcredit carryforwards pursuant to IRC Section 382. The closing of a July 2001financing transaction between MTI and MII resulted in a change in ownership inMTI as defined by IRC Section 382 and similar state provisions. It is alsopossible that prior to the acquisitions by Endovascular in 2001 and 2002 theacquired companies may have experienced an ownership change. These possiblechanges would further limit the availability of the acquired company’sattributes. Furthermore, subsequent changes in equity could further limit theutilization of the federal net operating loss and credit carryforwards. Suchlimitations could result in expiration of carryforward periods prior toutilization of the net operating loss and credit carryforwards. Our initialpublic offering during 2005 and the acquisition of 100% of MTI in 2006 did notresult in an ownership change pursuant to IRC Section 382.

The net operating losses of certain subsidiariesacquired in prior years are subject to the separate return limitation year (“SRLY”)provisions of the Treasury Regulations. Net operating loss carryforwards fromthese acquisitions may only be used to offset future taxable income generatedby these subsidiaries.

The above amounts includethe consolidated worldwide balances of the company, including MTI. As ev3 Inc.completed the acquisition of MTI on January 6, 2006, we will include MTIin our consolidated 2006 U.S. tax return. In connection with the purchaseaccounting related to the final step of the acquisition of MTI, deferred taxliabilities were recorded on certain intangible assets arising from theacquisition. This resulted in a decrease to the net deferred asset of thecompany and thus a reduction of the valuation allowance.

**17.**          Commitmentsand Contingencies

*Operating Leases*

We lease variousmanufacturing and office facilities and certain equipment under operatingleases.

F-28

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*Total future non-cancelable minimum lease commitmentsare as follows:*

| **Years ending December 31:** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                         |       | $          | 3,929      |       |
| 2008                                         |       | 2,804      |       |
| 2009                                         |       | 2,885      |       |
| 2010                                         |       | 1,206      |       |
| 2011                                         |       | 370        |       |
|                                         |       | $          | 11,194     |       |

 

Rent expense related to non-cancelable operatingleases for the years ended December 31, 2006, 2005 and 2004 was $4.1million, $3.9 million and $3.8 million, respectively.

Portions of our paymentsfor operating leases are denominated in foreign currencies and were translatedin the table above based on their respective U.S. dollar exchange rates at December 31,2006. These future payments are subject to foreign currency exchange rate risk.

*PurchaseObligations*

Wehave entered into a supply agreement with Invatec, which includes minimumpurchase obligations over the initial three-year term beginning January 1,2005. During this period, we are committed to the following minimum inventorypurchases:

| **Years ending December 31:** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                         |       | $          | 32,744     |       |
|                                              |            |            |            |            |            |  |

 

These payments are denominated in Euros and weretranslated at the respective exchange rate at December 31, 2006. Thesefuture payments are subject to foreign currency exchange rate risk. Theagreement may be terminated early by either party upon the occurrence ofcertain events, including by Invatec upon a change of control of ev3 Inc.involving a competitor of Invatec or if ev3 fails to achieve certain minimumannual purchase requirements. In the event Invatec terminates the agreementupon the occurrence of certain events, including a change of control of ev3Inc. involving a competitor of Invatec, we may be required to pay to Invatecliquidated damages of $5.0 million or $15.0 million, depending on the eventcausing the termination. In lieu of terminating the agreement for our failureto meet certain minimum annual purchase requirements, Invatec may require us topay an indemnification amount equal to 80% of the difference between theaggregate minimum annual value of purchases required under the agreement andthe total actual purchases of products during the same contractual year.

Subsequent to year end on February 15, 2007, weentered into a termination and settlement agreement with Invatec S.r.l.originally dated June 24, 2004 and further amended effective as of December 31,2004, pursuant to which the parties mutually agreed to terminate our ExistingDistribution Agreement (the “Existing Distribution Agreement”). Under the termsof the termination and settlement agreement, we are not obligated to payInvatec any liquidated damages in connection with the termination of theexisting distribution agreement. Also on February 15, 2007, we executed anew distribution agreement with Invatec Technology Center GmbH appointing us asa non-exclusive distributor of certain of Invatec’s products for the UnitedStates and Puerto Rico (the “Distribution Agreement”).

In connection with the execution of the DistributionAgreement, we paid Invatec $9.3 million for these distribution rights that willbe accounted for as an intangible asset and amortized over the term of theagreement. This payment was comprised of a one time sign-up fee of $6.5 millionpaid in cash and retainage of the remaining unamortized portion of therecoverable sign-up fee from the Existing Agreement of $2.8 million asadditional consideration. The Distribution Agreement provides for certain 

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minimum annual purchasesby ev3, which are less than the annual purchase requirements under the ExistingDistribution Agreement. The minimum purchases required are $10.3 million and$13.5 million in 2007 and 2008, respectively. If we fail to achieve thoseminimum annual purchase requirements, Invatec may require us to pay an amountto Invatec equal to an agreed upon value multiplied by the difference betweenthe portion of minimum annual amount of purchases required under the agreementand the total actual purchases of products by us during the same period. Invatecalso retained the right to sell its products into the United States under otherbrands. If Invatec elects to sell certain of its products under its own brandor as co-branded with another party in the United States or Puerto Rico, ev3will no longer be required to make its minimum annual purchases under theDistribution Agreement, however, Invatec will still be obligated to supply ev3with product. During the term of the Distribution Agreement, we are permittedto design and develop (but not launch, market, sell, promote or distribute)competing products in the United States and Puerto Rico.

The term of theDistribution Agreement extends until December 31, 2008. The DistributionAgreement may be terminated early by us or Invatec upon the occurrence ofcertain events, including an uncured breach of the agreement, and by us withsix months prior written notice so long as we purchase a prorated portion ofour annual minimum purchase amount through the termination date.  Invatec will not be able to terminate theDistribution Agreement in the event a competitor of Invatec acquires acontrolling interest in us, as was allowed under the Existing DistributionAgreement, so long as such competitor continues to operate ev3 independently orcauses ev3 to purchase its annual minimum purchase requirements. Under theDistribution Agreement, we are permitted to continue to sell our inventory ofInvatec products for a period of up to six months after the termination of theDistribution Agreement.

*Letters of Credit*

As of December 31,2006, we had $2.5 million of outstanding letters of credit, which werecollateralized by $1.6 million of restricted cash.

*Financed InsurancePolicies*

We routinely enter intoagreements to finance insurance premiums for periods not to exceed the terms ofthe related insurance policies. In the three months ended July 2, 2006, weentered into an agreement to finance $3.5 million in insurance-related premiumsassociated with the annual renewal of certain of our insurance policies. Theamount financed accrues interest at a 6.4% annual rate and is payable inmonthly installments over an 11 month period. During the third quarter 2006, weagreed to pay a portion of the insurance premiums directly to the carrierthereby reducing the amount financed by $1.4 million. The remaining outstandingbalances under these agreements were $665 thousand and $368 thousand as of December 31,2006 and 2005, respectively, and are included in accrued liabilities on ourconsolidated balance sheet.

*Earn-OutContingencies*

Under the terms of thestock purchase agreement we entered into in connection with our acquisition ofDendron in September 2000, we may be required to make additional paymentswhich are contingent upon Dendron products achieving certain revenue targetsbetween 2003 and 2008. In 2003, the $4.0 million revenue target for sales ofDendron products during 2003 was met. Accordingly, an additional payment to theformer Dendron stockholders of $3.75 million was made in 2004. In 2004, the$5.0 million revenue target for sales of Dendron products during 2004 was met.Accordingly, a payment to the former Dendron stockholders of $3.75 million wasaccrued in 2004 and was paid in 2005. We may be required to make a finalpayment of $7.5 million, which is contingent upon Dendron products achievingannual revenues of 

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$25million in any year during the period between now and 2008. Any such finalpayment would be due in the year following the year of target achievement.

*License Agreements*

We have various licensingagreements with third parties for the use of certain technologies for whichroyalties ranging from 3% to 12% of net sales are paid. We incurred costs of$2.9 million, $1.7 million and $1.6 million in connection with royalty andlicensing agreements, for the years ended December 31, 2006, 2005 and2004, respectively.

*Other*

We closed redundantoffices in 2004 to consolidate our operations into two main facilities inIrvine, California and Plymouth, Minnesota. In connection with the officeclosures, we recorded employee and contractual termination costs ofapproximately $2.9 million, which is included in selling, general andadministrative expenses on the consolidated statements of operations for theyear ended December 31, 2004. Unpaid costs related to these closures of$345 thousand and $391 thousand at December 31, 2006 and 2005,respectively, are included in accrued liabilities on the consolidated balancesheet.

*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 byMTI in 2002, was named as the defendant in three patent infringement lawsuitsbrought by the Regents of the University of California, as the plaintiff, inthe District Court (Landgericht) in Dusseldorf, Germany. The complaintsrequested a judgment that Dendron’s EDC I coil device infringed three Europeanpatents held by the plaintiff and asked for relief in the form of an injunctionthat would prevent Dendron from producing and selling the devices, as well asan award of damages caused by Dendron’s alleged infringement, and other costs,disbursements and attorneys’ fees. In August 2001, the court issued awritten decision that EDC I coil devices did infringe the plaintiff’s patents,enjoined Dendron from producing and selling the devices, and requested thatDendron disclose the individual products’ costs as the basis for awardingdamages. In September 2001, Dendron appealed the decision. In addition,Dendron instituted challenges to the validity of each of these patents byfiling opposition proceedings with the European Patent Office, or EPO, againstone of the patents (MTI joined Dendron in this action in connection with itsacquisition of Dendron), and by filing nullity proceedings with the GermanFederal Patents Court against the German component of the other two patents.The opposition proceedings with the EPO on the one patent are complete, and theEPO has rejected the opposition and has upheld the validity of the one patent.Dendron retains the right to file a nullity action in Germany against thepatent. All three appeal proceedings are currently stayed on the basis of thevalidity challenges brought by Dendron.

On July 4, 2001, the University of Californiafiled another suit against Dendron alleging that the EDC I coil deviceinfringed another European patent held by the plaintiff. The complaint wasfiled in the District Court of Dusseldorf, Germany seeking additional monetaryand injunctive relief. In April 2002, the court found that EDC I coildevices did infringe the plaintiff’s patent. The patent involved is the samepatent that was involved in the case before the English Patents Court discussedbelow and that was ruled by a Dutch court to be invalid, also as discussedbelow. The opposition proceedings on the patent are complete, and the EPO hasrejected the opposition and has upheld the validity of the patent.

Dendron has now filed a domestic German nullity actionagainst that patent. A hearing has been scheduled in the German Federal PatentCourt in October 2007. The infringement case is under appeal. The appealhas been stayed pending the outcome of the nullity action filed against thepatent.

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An accrual for the matters discussed above wasincluded in the balance sheet of Dendron as of the date of its acquisition byMTI. As of December 31, 2006, approximately $863 thousand was recorded inaccrued liabilities in our consolidated financial statements included in thisreport. Dendron ceased all activities with respect to the EDC I coil deviceprior to MTI’s October 2002 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 further described below. The primary purpose ofthese actions was to assert both invalidity and non-infringement by MTI ofcertain patents held by others. The range of patents at issue are held by theRegents of the University of California, with Boston Scientific Corporationsubsidiaries named as exclusive licensees, collectively referred to as the “patentholders,” 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 by the patent holders fromengaging in infringing activities related to our Sapphire coils in mostcountries within the European Union, and may be liable for then-unspecifiedmonetary damages for our activities since September 27, 2002. In February 2005,we received an initial claim from the patent holders with respect to monetarydamages, amounting to €3.6 million, orapproximately $4.7****million as of December 1,2006, with which we disagree. Court hearings will be held regarding theseclaims and are currently scheduled for June 2007. We have filed an appealwith the Dutch court, and believe that since the date of injunction in eachseparate country we are in compliance with the Dutch court’s injunction. On September 5,2006, we received a letter from the patent holders’ counsel stating that,pursuant to a recent decision in the European Court dated July 13, 2006,they are no longer enforcing the injunction outside of The Netherlands. Adecision on the appeal is expected in the second half of 2007. The patentholders have requested a delay in the hearing on claims damages until adecision on the appeal has been rendered. Because we believe that we have validlegal grounds for appeal, we have determined that a loss is not probable atthis 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 inthe English Patents Court seeking a declaration that a patent held by thepatent holders related to delivery catheters was invalid, and that our productsdid not 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 interimsettlement between the parties under which the patent holders were required tosurrender such patent to the U.K. Comptroller of Patents, and to pay our costsassociated with the legal action, including interest. As a result, the patentwas surrendered and we received interim payments from the patent holdersaggregating £500 thousand (equivalent to approximately $900 thousand based onthe dates of receipt), which we recorded as a reduction of litigation expenseupon receipt of such funds during the first quarter 2005. The parties initiatedproceedings before a costs judge regarding payment by the patent holders of theremaining costs incurred by us in such litigation. We have reached a finalsettlement with the patent holders and on October 31, 2006, received thefinal payment of £600 thousand (equivalent to approximately $1.1 million),which we recorded as a reduction of litigation expense in the fourth quarter2006. As a result of the settlement, we anticipate that we will no longer beinvolved in litigation on this matter in the United Kingdom, although noassurance can be given that no other litigation involving us may arise in theUnited Kingdom.

In the United States, concurrent with the FDA’smarketing clearance of our Sapphire line of embolic coils received in July 2003,we, through our subsidiary MTI, initiated a declaratory judgment action against

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the patent holders in theUnited States District Court for the Western District of Wisconsin. The actionincluded assertions of non-infringement by us and invalidity of a range ofpatents held by the patent holders related to detachable coils and certaindelivery catheters. In October 2003, the court dismissed our actions forprocedural reasons without prejudice and without decision as to the merits ofthe parties’ positions. In December 2003, the University of Californiafiled an action against us in the United States District Court for the NorthernDistrict of California alleging infringement by us with respect to a range ofpatents held by the University of California related to detachable coils andcertain delivery systems. We filed a counterclaim against the University ofCalifornia asserting non-infringement by us, invalidity of the patents andinequitable conduct in the procurement of certain patents. In addition, wefiled a claim against the University of California and Boston ScientificCorporation for violation of federal antitrust laws, with the result that thecourt has subsequently decided to add Boston Scientific as a party to thelitigation. Motions for summary judgment made by all parties, have been deniedby the court. A trial date has been set for June 2007. In addition, thereare various related actions, such as requests for re-examination and reissues,pending from time to time in the U.S. Patent and Trademark Office that may ormay not have a material effect on these actions. We cannot estimate thepossible loss or range of loss, if any, associated with the resolution of thesematters. There can be no assurance that the ultimate resolution of thesematters will not result in a material adverse effect on our business, financialcondition or results of operations.

On March 30, 2005, we were served with acomplaint by Boston Scientific Corporation and one of its affiliates whichclaims that some of our products, including our SpideRX Embolic ProtectionDevice, infringe certain of Boston Scientific’s patents. This action wasbrought in the United States District Court for the District of Minnesota.Subsequently, we added counterclaims for infringement of three of our patents,Boston Scientific has added two patents into its claims, as well as a claimagainst us for misappropriation of trade secrets. We intend to vigorouslydefend and prosecute respectively the claims in this action. Because thesematters are in early stages and because of the complexity of the case, wecannot estimate the possible loss or range of loss, if any, associated withtheir resolution. However, there can be no assurance that the ultimateresolution of these matters will not result in a material adverse effect on ourbusiness, financial condition or results of operations.

The acquisition agreement relating to our acquisitionof Appriva Medical, Inc. contains four milestones to which paymentsrelate. The first milestone was required by its terms to be achieved by January 1,2005 in order to trigger a payment equal to $50 million. We have determinedthat the first milestone was not achieved by January 1, 2005 and that thefirst milestone is not payable. On May 20, 2005, Michael Lesh, as anindividual seller of Appriva stock and purporting to represent certain othersellers of Appriva stock, filed a complaint in the Superior Court of the Stateof Delaware with individually specified damages aggregating $70 million andother unspecified damages for several allegations, including that we, alongwith other defendants, breached the acquisition agreement and an impliedcovenant of good faith and fair dealing by willfully failing to take the stepsnecessary to meet the first milestone under the agreement, and thereby alsofailing to meet certain other milestones, and further that one milestone wasactually met. The complaint also alleges fraud, negligent misrepresentation andviolation of state securities laws in connection with the negotiation of theacquisition agreement. We believe these allegations are without merit andintend to vigorously defend this action. We filed a motion to dismiss thecomplaint, which the court granted in June 2006 on standing grounds. Theplaintiff filed a petition for reargument, which was denied on October 31,2006. On November 29, 2006, the plaintiff filed a notice of appeal of thetrial court’s decision granting our motion to dismiss. Briefing of plaintiff’sappeal was completed in early March 2007, while oral argument of theappeal has not yet been scheduled.

On or about November 21, 2005, a second lawsuitwas filed in Delaware Superior Court relating to the acquisition of ApprivaMedical, Inc. The named plaintiff is Appriva Shareholder LitigationCompany, LLC, which according to the complaint was formed for the purpose ofpursuing claims against us. The 

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complaint alleges thatErik van der Burg and three unidentified institutional investors have assignedtheir claims as former shareholders of Appriva to Appriva ShareholderLitigation Company, LLC. The complaint alleges specified damages in the form ofthe second milestone payment ($25 million), which is claimed to be due andpayable, and further alleges unspecified damages to be proven at trial. Thecomplaint alleges the following claims: misrepresentation, breach of contract,breach of the implied covenant of good faith and fair dealing and declaratoryrelief. We believe these allegations and claims are without merit and intend tovigorously defend this action. We filed a motion to dismiss the complaint. On August 24,2006, the trial court converted our motion to dismiss into a motion for summaryjudgment, which motion was granted. The trial court ruled that ApprivaShareholder Litigation Company, LLC did not have standing. The trial court didnot address the merits of the claims. Appriva Shareholder Litigation Company,LLC has filed a notice of appeal of the trial court’s ruling. The DelawareSupreme Court heard oral arguments on January 16, 2007, but has yet toissue a decision.

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 class action lawsuit purportedly on behalf of MTI’sminority shareholders was filed in the Delaware Court of Chancery against MTI,MTI’s directors and us challenging our previously announced exchange offer withMTI. The complaint alleged the then-proposed transaction constituted a breachof defendants’ fiduciary duties. The complaint sought an injunction preventingthe completion of the transaction with MTI or, if the transaction were to becompleted, rescission of the transaction or rescissory damages, unspecifieddamages, costs and attorneys’ fees and expenses. On January 6, 2006, wecompleted an acquisition of the publicly held shares of MTI through a mergertransaction. We believe this lawsuit is without merit and plan to defend itvigorously if the plaintiff decides to pursue it. However, there can be noassurance that the ultimate resolution of this matter will not result in amaterial adverse effect on our business, financial condition or results ofoperations.

**18.**          Segmentand Geographic Information

We operate in two operating segments: cardioperipheral and neurovascular.

The cardio peripheral operating segment includesperipheral vascular products which are used to treat vascular disease in legs,kidney (or renal), neck (or carotid), and generally all vascular diseases otherthan in the brain or the heart and cardiovascular products which are used totreat coronary artery disease, atrial fibrillation and other disorders inheart.

The neurovascular operating segment includes productsthat are used to treat vascular disease and disorders in the brain, includinganeurysms and arterial-venous malformations.

Management measures segment profitability on the basisof 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.

We sell our products through a direct sales force inthe United States, Canada and Europe as well as through distributors in otherinternational markets. Our customers include a broad physician base consistingof vascular surgeons, neuro surgeons, other endovascular specialists,radiologists, neuroradiologists and cardiologists.

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*The following is segment information:*

| ** **                               | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net sales**                            | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cardio Peripheral:**                   | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stents                                   |       | $                                                             | 64,092     |   | $ | 37,871 |   | $ | 20,484 |   |
| Thrombectomy and embolic protection |       | 21,606                                                        |       | 12,869 |   | 9,119 |   |
| Procedural support and other        |       | 35,406                                                        |       | 29,141 |   | 23,339 |   |
| Total Cardio Peripheral                  |       | $                                                             | 121,104    |   | $ | 79,881 |   | $ | 52,942 |   |
| **Neurovascular**                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Embolic products                         |       | 38,998                                                        |       | 22,463 |   | 12,583 |   |
| Neuro access and delivery products  |       | 42,336                                                        |       | 31,352 |   | 20,809 |   |
| Total Neurovascular                      |       | $                                                             | 81,334     |   | $ | 53,815 |   | $ | 33,392 |   |
| Total net sales                          |       | $                                                             | 202,438    |   | $ | 133,696 |   | $ | 86,334 |   |
| **Gross  profit**                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cardio Peripheral                        |       | $                                                             | 68,933     |   | $ | 41,329 |   | $ | 27,477 |   |
| Neurovascular                            |       | 62,184                                                        |       | 37,273 |   | 18,995 |   |
| Total                                    |       | $                                                             | 131,117    |   | $ | 78,602 |   | $ | 46,472 |   |
| **Total  assets**                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cardio Peripheral                        |       | $                                                             | 209,414    |   | $ | 239,255 |   |   |   |
| Neurovascular                            |       | 143,412                                                       |       | 57,573 |   |   |   |
| Total                                    |       | $                                                             | 352,826    |   | $ | 296,828 |   |   |   |
| Gross profit(1)                          |       | $                                                             | 131,117    |   | $ | 78,602 |   | $ | 46,472 |   |
| Operating expense                        |       | 187,675                                                       |       | 181,448 |   | 137,447 |   |
| Loss from operations                     |       | $                                                             | (56,558    | ) | $ | (102,846 | ) | $ | (90,975 | ) |

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

For the years ended December 31, 2006, 2005 and2004, no single customer represented more than 10% of our consolidated netsales.

*The following table presents net sales and long-livedassets by geographic area for the years ended December 31:*

| **Geographic Data** | ** ** | ** ** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|----------|------------|
| **Net  Sales**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States            |       | $          | 121,180    |       | $          | 71,848   |       |
| International            |       | 81,258     |       | 61,848     |       |
| Total net sales          |       | $          | 202,438    |       | $          | 133,696  |       |
| **Long-lived Assets**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States            |       | $          | 23,422     |       | $          | 17,198   |       |
| International            |       | 650        |       | 679        |       |
| Total long-lived assets  |       | $          | 24,072     |       | $          | 17,877   |       |

 

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**19.**          LossPer Share

*Thefollowing outstanding convertible preferred units, convertible demand notes,redeemable common units, and options were excluded from the computation ofdiluted loss per membership share/unit as they had an antidilutive effect:*

| ** **                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Convertible  preferred stock class A (assuming conversion using the contractual conversion  ratio to common units) |       | —                                     |       | — |   | 4,006,786 |   |
| Convertible  preferred stock class B (assuming conversion using the contractual conversion  ratio to common units) |       | —                                     |       | — |   | 6,846,222 |   |
| Demand notes  (assuming conversion at stated value into common units)                                              |       | —                                     |       | — |   | 14,019,335 |   |
| Options                                                                                                            |       | 5,359,248                                  |       | 3,638,309 |   | 1,633,393 |   |
|                                                                                                               |       | 5,359,248                                  |       | 3,638,309 |   | 26,505,736 |   |

 

**20.**          QuarterlyFinancial Data (Unaudited)

| ** **     | ** ** | **Net Sales** | ** ** | **Loss from  Operations** | ** ** | **Net Loss** | ** ** | **Net Loss  Attributable to  Common  Share Holders** | ** ** | **Loss Per  Share** | ** ** |
|----------------|------------|--------------------|------------|--------------------------------|------------|-------------------|------------|---------------------------------------------------------------------|------------|--------------------------|------------|
| 2006           |       |               |       |                           |       |              |       |                                                                |       |                     |       |   |   |   |   |
| First Quarter  |       | $                  | 42,237     |                           |       | $                 | (25,085    | )                                                                   |       | $                        | (24,501    | ) |   | $ | (24,501 | ) |   | $ | (0.44 | ) |
| Second Quarter |       | 50,620             |       |                           | (13,650    | )                 |       | (10,823                                                             | )          |                     | (10,823    | ) |   | (0.19 | ) |
| Third Quarter  |       | 51,906             |       |                           | (12,795    | )                 |       | (12,467                                                             | )          |                     | (12,467    | ) |   | (0.22 | ) |
| Fourth Quarter |       | 57,675             |       |                           | (5,028     | )                 |       | (4,580                                                              | )          |                     | (4,580     | ) |   | (0.08 | ) |
| 2005           |       |               |       |                           |       |              |       |                                                                |       |                     |       |   |   |   |   |
| First Quarter  |       | $                  | 27,682     |                           |       | $                 | (29,321    | )                                                                   |       | $                        | (32,369    | ) |   | $ | (38,795 | ) |   | $ | (14.94 | ) |
| Second Quarter |       | 31,540             |       |                           | (28,960    | )                 |       | (35,222                                                             | )          |                     | (40,857    | ) |   | (4.60 | ) |
| Third Quarter  |       | 33,500             |       |                           | (21,906    | )                 |       | (20,457                                                             | )          |                     | (20,457    | ) |   | (0.42 | ) |
| Fourth Quarter |       | 40,974             |       |                           | (22,659    | )                 |       | (21,976                                                             | )          |                     | (21,976    | ) |   | (0.45 | ) |

 

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**ev3 Inc.Schedule IIValuation and Qualifying Accounts**

| **Description**                                         | ** ** | ** ** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Revenue, Costs  or Expenses** | ** ** | **Other  Additions** | ** ** | **Deductions** | ** ** | **Balance at  End of Period** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------|------------|----------------|------------|----------------------------------------------|------------|
| **Reserves deducted from assets  to which it applies:** | ** ** |       | ** ** | ** **                                     |       |                                                       | ** ** | ** **           |       |           | ** ** | ** **                                   |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Year ended  December 31, 2006                      |       |       |       | ** **                                     |       |                                                       |       | ** **           |       |           |       | ** **                                   |       |   |   |   |   |   |   | ** ** |   |
| Reserve for  deferred income tax asset                  |       |       | $          | 176,142                                        | ** ** |                                                       |       | $                    | 15,818     | ** **     |       |                                         | $          | — | ** ** |   |   | $ | — |   |   |   | $ | 191,960 | ** ** |   |
| Accounts  receivable allowances                         |       |       | 3,607      | ** **                                     |       |                                                       | 746        | ** **           |       |           | —     | ** **                                   |       |   | (429 | ) |   |   | 3,924 | ** ** |   |
| Reserve for  inventory obsolescence                     |       |       | 3,975      | ** **                                     |       |                                                       | 3,725      | ** **           |       |           | —     | ** **                                   |       |   | (2,975 | ) |   |   | 4,725 | ** ** |   |
| Year ended  December 31, 2005                      |       |       |       | ** **                                     |       |                                                       |       | ** **           |       |           |       | ** **                                   |       |   |   |   |   |   |   | ** ** |   |
| Reserve for  deferred income tax asset                  |       |       | $          | 144,261                                        | ** ** |                                                       |       | $                    | 31,881     | ** **     |       |                                         | $          | — | ** ** |   |   | $ | — |   |   |   | $ | 176,142 | ** ** |   |
| Accounts  receivable allowances                         |       |       | 2,694      | ** **                                     |       |                                                       | 1,110      | ** **           |       |           | —     | ** **                                   |       |   | (197 | ) |   |   | 3,607 | ** ** |   |
| Reserve for  inventory obsolescence                     |       |       | 3,687      | ** **                                     |       |                                                       | 4,037      | ** **           |       |           | —     | ** **                                   |       |   | (3,749 | ) |   |   | 3,975 | ** ** |   |
| Year ended  December 31, 2004                      |       |       |       | ** **                                     |       |                                                       |       | ** **           |       |           |       | ** **                                   |       |   |   |   |   |   |   | ** ** |   |
| Reserve for  deferred income tax asset                  |       |       | $          | 108,953                                        | ** ** |                                                       |       | $                    | 35,308     | ** **     |       |                                         | $          | — | ** ** |   |   | $ | — |   |   |   | $ | 144,261 | ** ** |   |
| Accounts  receivable allowances                         |       |       | 1,574      | ** **                                     |       |                                                       | 2,701      | ** **           |       |           | —     | ** **                                   |       |   | (1,581 | ) |   |   | 2,694 | ** ** |   |
| Reserve for inventory  obsolescence                     |       |       | 4,193      | ** **                                     |       |                                                       | 1,403      | ** **           |       |           | —     | ** **                                   |       |   | (1,909 | ) |   |   | 3,687 | ** ** |   |

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(a)—other additions related to acquisitions.

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**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

We maintain disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) that are designed to reasonablyensure that information required to be disclosed by us in the reports we fileor submit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure. In designing and evaluating our disclosurecontrols and procedures, we recognize that any controls and procedures, nomatter how well designed and operated can provide only reasonable assurance ofachieving the desired control objectives and we necessarily are required toapply our judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.

Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered in this annual reporton Form 10-K. Based on that evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures were effective as of the end of such period to provide reasonableassurance that information required to be disclosed in our Exchange Act reportsis recorded, processed, summarized, and reported within the time periodsspecified in the SEC’s rules and forms, and that material informationrelating to our company and our consolidated subsidiaries is made known tomanagement, including our Chief Executive Officer and Chief Financial Officer,particularly during the period when our periodic reports are being prepared.

**Management’s Reporton Internal Control Over Financial Reporting**

Our management report on internalcontrol over financial reporting is included in this report in Item 8,under the caption “Management’s Report on Internal Control over FinancialReporting.” The report of Ernst & Young LLP, our independentregistered public accounting firm, regarding management’s assessment of ourinternal control over financial reporting and the effectiveness of our internalcontrol over financial reporting is included in this report in Item 8, underthe heading “Report of Independent Registered Public Accounting Firm.”

**Change in InternalControl Over Financial Reporting**

There was no change in ourinternal control over financial reporting that occurred during our quarterended December 31, 2006 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

Not applicable.

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

**Our Directors**

Thefollowing table sets forth certain information that has been furnished to us byeach of our directors.

| **Name of  Nominee/Director** | ** ** | ** ** | ** ** | **Age**                                                                                            | ** ** | **Principal Occupation** | ** ** | **Director Since** |
|-------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------|
| John K. Bakewell(1)(3)        |       | 45         |       | Executive  Vice President and Chief Financial Officer of Wright Medical Group, Inc.           |       | 2006                     |
| Richard B.  Emmitt(1)(2)(3)   |       | 62         |       | General Partner of The  Vertical Group, L.P.                                                       |       | 2005                     |
| Dale A. Spencer(3)            |       | 61         |       | Private  Investor and Independent Consultant to ev3 Inc.                                           |       | 2005                     |
| Douglas W. Kohrs(2)           |       | 49         |       | President and Chief  Executive Officer of Tornier                                                  |       | 2005                     |
| Elizabeth  H. Weatherman(2)   |       | 47         |       | Managing Director of  Warburg Pincus LLC                                                           |       | 2005                     |
| James M. Corbett              |       | 48         |       | President and Chief  Executive Officer of ev3 Inc.                                                 |       | 2005                     |
| Daniel J. Levangie(1)         |       | 56         |       | President, Surgical  Products Division, Executive Vice President and Director of Cytyc Corporation |       | 2007                     |
| Thomas E. Timbie              |       | 49         |       | President of Timbie & Company, LLC                                                        |       | 2005                     |

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(1)          Member of audit committee

(2)          Member of compensationcommittee

(3)          Nominees for election at2007 Annual Meeting.

There are no familyrelationships among any of our directors.

***Additional Information About Our Directors***

*John K. Bakewell*has served as one of our directors since April 2006.Mr. Bakewell serves as Executive Vice President and Chief FinancialOfficer of Wright Medical Group, Inc., a publicly held orthopaedic medical device company specializing inthe design, manufacture and marketing of reconstructive joint devices andbiologics products, a position he has held since December 2000.Previously, he served as Vice President, Finance and Administration and ChiefFinancial Officer of Altra Energy Technologies, Inc., a software ande-commerce solutions provider to the energy industry, from 1998 to 2000.Mr. Bakewell was Vice President of Finance and Chief Financial Officer ofCyberonics, Inc., a publicly held manufacturer of medical devices for thetreatment of epilepsy and other neurological disorders, from 1993 to 1998, and wasChief Financial Officer of ZEOS International Ltd., a publicly heldmanufacturer and direct marketer of personal computers and related products,from 1990 to 1993.

*Richard B. Emmitt*has served as one of our directors since June 2005.Mr. Emmitt was a member of the board of managers of ev3 LLC from August 2003through the date of the merger of ev3 LLC with and into ev3 on June 21,2005. Since 1989, Mr. Emmitt has been a General Partner of The VerticalGroup, L.P., an investment management and venture capital firm focused on themedical device industry. Mr. Emmitt currently serves on the Board ofDirectors of American Medical Systems Holdings, Inc., a publicly heldcompany, as well as of BioSET, Inc., Incumed, Inc, C2M Medical, Inc., GalilMedical, Inc. (Israeli), Tepha, Inc. and Tornier B.V. (Dutch), allprivately held companies.

*Dale A. Spencer*has served as one of our directors since June 2005and also serves as a consultant to us. Mr. Spencer was a member of theboard of managers of ev3 LLC from August 2003 through the date of themerger of ev3 LLC with and into ev3 on June 21, 2005. Mr. Spencerserved as President, Chief Executive Officer and Chairman of the Board ofDirectors of SCIMED Life Systems Inc. prior to its 

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*mergerwith Boston Scientific Corporation in 1995. At Boston Scientific, Mr. Spencerserved as Executive Vice President in the Office of the Chairman from 1995 to1997 and was a member of the Board of Directors from 1995 to 1999. Since thattime, Mr. Spencer has been a private investor, primarily in the medicaldevice industry. Mr. Spencer currently serves on the Board of Directors ofNorthstar Neuroscience, Inc., a public company, as well as Anulex, Inc.,CVRx, Inc. and Optobionics Corporation, all privately held companies.*

*Douglas W. Kohrs*has served as one of our directors since June 2005.Mr. Kohrs was a member of the board of managers of ev3 LLC from March 2005through the date of the merger of ev3 LLC with and into ev3 on June 21,2005. Mr. Kohrs serves as President and Chief Executive Officer of TornierB.V., a global orthopedic company and majority-owned subsidiary of WarburgPincus, a position he has held since July 2006. Mr. Kohrs served asChief Executive Officer of American Medical Systems Holdings, Inc. from April 1999until January 2005. He served on the Board of Directors of AmericanMedical Systems Holdings from 1999 to May 2006, and served as Chairman ofthe Board from March 2004 to May 2006. Mr. Kohrs currentlyserves as a director of Kyphon Inc., a publicly held company, as well as DiscDynamics Inc., Pioneer Surgical Technologies and AxioMed Spine Corporation andTornier B.V., all privately held companies.

*Elizabeth H. Weatherman*has served as one of our directors since June 2005.Ms. Weatherman was a member of the board of managers of ev3 LLC from August 2003through the date of the merger of ev3 LLC with and into ev3 on June 21,2005. Ms. Weatherman is a Managing Director of Warburg Pincus LLC and amember of the firm’s Executive Management Group. Ms. Weatherman joinedWarburg Pincus’ health care group in 1988 and is currently responsible for thefirm’s medical device investment activities. Ms. Weatherman currently serveson the Board of Directors of American Medical Systems Holdings, Inc. andKyphon Inc., both publicly held companies, as well as of Bacchus Vascular, Inc.and Tornier B.V., Inc., both privately held companies.

*James M. Corbett*is a director of our company and has served asour President and Chief Executive Officer since January 2004 and was amember of the board of managers of ev3 LLC from August 2003 through thedate of the merger of ev3 LLC with and into ev3 Inc. on June 21, 2005.From October 2003 to January 2004, Mr. Corbett served as thePresident and Chief Operating Officer of ev3 LLC. From January 2002 to October 2003,Mr. Corbett served as our Executive Vice President and PresidentInternational. Mr. Corbett served as Chairman of the Board of MicroTherapeutics, Inc. from January 2002 to January 2006 and as itsActing President and Chief Executive Officer from April 2002 through October 2002.From February 2001 to January 2002, Mr. Corbett worked as anindependent medical device consultant. From January 1999 to February 2001,Mr. Corbett was President and Chief Executive Officer of Home Diagnostics, Inc.,a medical device company. Prior to that, he served as Senior Vice President andthen President for International of Boston Scientific Corporation, whichfollowed his tenure as Vice President of International at SCIMED Life Systems, Inc.

*Daniel J. Levangie*has served as one of our directors since February 23,2007. Mr. Levangie has served as the President, Surgical ProductsDivision, and as an Executive Vice President and member of the Board ofDirectors of Cytyc Corporation, a leading provider of surgical and diagnosticproducts targeting women’s health and cancer, since July****2006.In addition to his current position, Mr. Levangie has held severalpositions with Cytyc Corporation, including Executive Vice President &Chief Operating Officer from July 2000 to June 2002, Chief Executive Officerand President of Cytyc Health Corporation from July 2002 to December 2003 andExecutive Vice President and Chief Commercial Officer from January 2004 to June2006. Mr. Levangie has been with Cytyc Corporation since 1992. Mr. Levangieis a member of the board of directors of Dune Medical Devices Ltd., a privatelyowned medical device company engaged in the development and commercializationof devices for real time tissue characterization.

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*Thomas E. Timbie*hasserved as one of our directors since June 2005. Mr. Timbie served asa Vice President of ev3 from April 2005 until June 2005 and as ev3’sInterim Chief Financial Officer from January 2005 until April 2005. Mr. Timbiewas a member of the board of managers of ev3 LLC from March 2004. Since2000, Mr. Timbie has been the President of Timbie & Company, LLC,a financial consulting firm that he founded. During 2000, Mr. Timbie was theInterim Vice President and Chief Financial Officer of e-dr. Network, Inc.,a business-to-business exchange in the optical device market. Mr. Timbiecurrently serves on the Board of Directors of American Medical Systems Holdings, Inc.and Wright Medical Group, Inc., both publicly held companies.

***Arrangements Relating to the Composition of our Boardof Directors***

We and certain ofour stockholders, including Warburg Pincus LLC and certain of its affiliates(collectively, “Warburg Pincus”), The Vertical Group, L.P. and certain of itsaffiliates (collectively, “The Vertical Group”) and members of our management,are parties to a holders agreement, which includes terms relating to thecomposition of our board of directors. The holders agreement requires us to nominateand use our best efforts to have elected to our board of directors:

·       twopersons designated by Warburg, Pincus Equity Partners, L.P. and certain of itsaffiliates, which we refer to collectively as the “Warburg Pincus Entities,”and Vertical Fund I, L.P. and Vertical Fund II, L.P., which we refer totogether as the “Vertical Funds,” if the Warburg Pincus Entities, the VerticalFunds and their affiliates collectively beneficially own 20% or more of ourcommon stock; or

·       oneperson designated by the Warburg Pincus Entities and the Vertical Funds if theWarburg Pincus Entities, the Vertical Funds and their affiliates collectivelybeneficially own at least 10% but less than 20% of our common stock.

Mr. Emmitt and Ms. Weathermanwere the initial designees under the holders agreement. In the event anydirector designated by the Warburg Pincus Entities and the Vertical Funds isunable to serve or is removed or withdraws from our board of directors, theWarburg Pincus Entities and the Vertical Funds will have the right to designatea substitute for such director. We and certain of our stockholders, includingcertain members of our management party to the holders agreement, have agreedto take all action within our or their respective power, including the votingof shares of common stock owned by us or them as is necessary to cause theelection of the substitute director designated by the Warburg Pincus Entitiesand the Vertical Funds or to, upon the written request of the Warburg PincusEntities and the Vertical Funds, remove with or without cause a directorpreviously designated by such institutional investors.

**Our ExecutiveOfficers**

Ourexecutive officers, their ages and positions held, as of March 1, 2007,are as follows:

| **Name**            | ** ** | ** ** | ** ** | **Age**                                            | ** ** | **Position** |
|---------------------|------------|------------|------------|----------------------------------------------------|------------|--------------|
| James M. Corbett    |       | 48         |       | President and Chief  Executive Officer             |
| Stacy Enxing Seng   |       | 42         |       | President, Cardio  Peripheral Division             |
| Pascal E.R. Girin   |       | 47         |       | President, International                           |
| Matthew Jenusaitis  |       | 45         |       | President, Neurovascular  Division                 |
| Kevin M. Klemz      |       | 45         |       | Vice President,  Secretary and Chief Legal Officer |
| Gregory Morrison    |       | 43         |       | Vice President, Human  Resources                   |
| Michael D. Ritchey  |       | 50         |       | Vice President,  Corporate Marketing               |
| Patrick D. Spangler |       | 51         |       | Chief Financial Officer and Treasurer              |

 

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Each of our executive officers serves at thediscretion of our board of directors and holds office until his or hersuccessor is elected and qualified or until his or her earlier resignation orremoval. There are no family relationships among any of our executive officers.

Information regarding thebusiness experience of our executive officers is set forth below.

*James M. Corbett* is a director of our company and has served as ourPresident and Chief Executive Officer since January 2004 and was a member ofthe board of managers of ev3 LLC from August 2003 through the date of themerger of ev3 LLC with and into ev3 Inc. on June 21, 2005. From October 2003to January 2004, Mr. Corbett served as the President and Chief OperatingOfficer of ev3 LLC. From January 2002 to October 2003, Mr. Corbett servedas our Executive Vice President and President International. Mr. Corbettserved as chairman of the board of directors of Micro Therapeutics, Inc.from January 2002 to January 2006 and as its Acting President and ChiefExecutive Officer from April 2002 through October 2002. From February 2001 to January2002, Mr. Corbett worked as an independent medical device consultant. FromJanuary 1999 to February 2001, Mr. Corbett was President and ChiefExecutive Officer of Home Diagnostics, Inc., a medical device company. Priorto that, he served as Senior Vice President and then President forInternational of Boston Scientific Corporation, which followed his tenure asVice President of International at SCIMED Life Systems, Inc. Mr. Corbetthas a Bachelor of Science in Business Administration from Kansas University.

*Stacy Enxing Seng*has served as our President, Cardio PeripheralDivision since March 2005 and previously served as our Vice President,Marketing and New Business Development. Ms. Enxing Seng has served invarious positions since April 2001. From March 1999 to April 2001, sheserved as Vice President of Marketing for the cardiology division at BostonScientific/SCIMED. Ms. Enxing Seng has a Bachelor of Arts in Public Policyfrom Michigan State University and a Master of Business Administration fromHarvard University.

*Pascal E.R. Girin*has served as our President, Internationalsince July 2005 and previously served as our General Manager, Europe from September2003 to July 2005. From September 1998 to August 2003, Mr. Girin served invarious capacities at BioScience Europe Baxter Healthcare Corporation, mostrecently as Vice President. Mr. Girin received an Engineering Education atthe French Ecole des Mines.

*Matthew Jenusaitis* has served as our President, Neurovascular Divisionsince April 2006. Prior to joining ev3, Mr. Jenusaitis has been inthe medical device industry for over 20 years, including positions at BaxterHealthcare Corporation, SCIMED Life Systems, Inc. and Boston ScientificCorporation. From July 2003 to August 2005, Mr. Jenusaitis served asPresident of Boston Scientific’s Peripheral Interventions business. Mr. Jenusaitishas a Bachelor of Science in Chemical Engineering****fromCornell University, a Master of Biochemical Engineering from Arizona StateUniversity and a Master of Business Administration from the University ofCalifornia, Irvine.

*Kevin M. Klemz*has served as our Vice President, Secretary andChief Legal Officer since January 2007. Prior to joining ev3, Mr. Klemzwas a partner in the law firm Oppenheimer Wolff & Donnelly LLP wherehe was a corporate lawyer for over 20 years.  Mr. Klemz has a Bachelor of Arts inBusiness Administration from Hamline University and a Juris Doctorate fromWilliam Mitchell College of Law.

*Gregory Morrison*has served as our Vice President, HumanResources since March 2002. From March 1999 to February 2002, Mr. Morrisonserved as Vice President of Organizational Effectiveness for Thomson Legal &Regulatory, a division of The Thomson Corporation that provides integratedinformation solutions to legal, tax, accounting, intellectual property,compliance, business and government professionals. Mr. Morrison has aBachelor of Arts in English and Communications from North Adams State Collegeand a Master of Arts in Corporate Communications from Fairfield University.

*Michael D. Ritchey*has served as our Vice President, CorporateMarketing since December 2006. Prior to joining ev3, Mr. Ritcheyserved as Senior Vice President of Fleishman Hillard Inc., an international 

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*publicrelations firm, a position he had held since November 2005. From November 2003to July 2005, Mr. Ritchey served as Senior Vice President ofLehmanMillet, a healthcare focused advertising and marketing communicationsagency. From April 1999 to November 2003, Mr. Ritchey was ChiefMarketing Officer for FischerHealth, a healthcare communications firm anddivision of Porter Novelli. Mr. Ritchey has a Bachelor of Arts in MediaManagement from California State University, Northridge and a Master of BusinessAdministration in Marketing from the University of Southern California.*

*Patrick D. Spangler*has served as our Chief Financial Officer and Treasurer since April 2005.From June 1997 to January 2005, Mr. Spangler served as theExecutive Vice President, Chief Financial Officer and Assistant Secretary forEmpi, Inc., a company specializing in rehabilitative medical devices. FromJanuary 2005 until March 2005, Mr. Spangler served as aconsultant to Empi, Inc. Mr. Spangler has a Bachelor of Science in Accountingfrom the University of Minnesota, a Master of Business Administration fromUniversity of Chicago and a Master of Business Taxation from the University ofMinnesota.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe Securities Exchange Act of 1934, as amended, requires our directors andexecutive officers and all persons who beneficially own more than 10% of theoutstanding shares of our common stock to file with the SEC initial reports ofownership and reports of changes in ownership of our common stock. Executiveofficers, directors and greater than 10% beneficial owners are also required tofurnish us with copies of all Section 16(a) forms they file. To ourknowledge, based on review of the copies of such reports and amendments to suchreports furnished to us with respect to the year ended December 31, 2006,and based on written representations by our directors and executive officers,all required Section 16 reports under the Securities Exchange Act of 1934,as amended, for our directors, executive officers and beneficial owners ofgreater than 10% of our common stock were filed on a timely basis during theyear ended December 31, 2006.

**Code of Conduct andEthics**

Our Code of BusinessConduct applies to all of our employees, officers and directors, including ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions, and meets therequirements of the SEC. We also have a Code of Ethics for Senior Executive andFinancial Officers that applies to our Chief Executive Officer, Chief FinancialOfficer, Presidents, and any other senior executive or financial officersperforming similar functions and so designated from time to time by the Chief ExecutiveOfficer. A copy of our Code of Business Conduct and Code of Ethics for SeniorExecutive and Financial Officers is available on the Investor Relations—CorporateGovernance section of our corporate website at *www.ev3.net.* We intend to discloseany amendments to and any waivers from a provision of our Code of BusinessConduct and Code of Ethics for Senior Executive and Financial Officers on acurrent report on Form 8-K filed with the SEC.

**Changes toNomination Procedures**

We have made no materialchanges to the procedures by which stockholders may recommend nominees to theboard of directors, as described in our most recent proxy statement.

**Audit Committee**

Our board of directors has a standing audit committee,which has the composition and responsibilities described below.

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*Responsibilities.*   Ouraudit committee oversees a broad range of issues surrounding our accounting andfinancial reporting processes and audits of our financial statements. Our auditcommittee:

·       assistsour board of directors in monitoring the integrity of our financial statements,our compliance with legal and regulatory requirements, our independentregistered public accounting firm’s qualifications and independence, and theperformance of our internal audit function and independent registered publicaccounting firm;

·       assumesdirect responsibility for the appointment, compensation, retention andoversight of the work of any independent registered public accounting firmengaged for the purpose of performing any audit, review or attest services andfor dealing directly with any such independent registered public accountingfirm;

·       providesa medium for consideration of matters relating to any audit issues; and

·       preparesthe audit committee report that the Securities and Exchange Commission, or SEC,rules require be included in our annual proxy statement or annual reporton Form 10-K.

Our audit committee operates under a written charteradopted by our board of directors, which can be found on the Investor Relations—CorporateGovernance section of our corporate website at *www.ev3.net*. A printed copy of suchcharter is also available to any stockholder upon request to our CorporateSecretary at ev3 Inc., 9600 - 54th Avenue North, Plymouth, MN 55442 or bytelephone at (763) 398-7000. The audit committee reviews and evaluates,at least annually, the performance of the audit committee and its members,including compliance of the audit committee with its charter.

*Composition.*   Thecurrent members of our audit committee are Messrs. Bakewell, Emmitt andLevangie. Mr. Bakewell is the chair of our audit committee. Prior to Mr. Bakewell’selection as a director and as a member of our audit committee in April 2006,our former director, Mr. Cochrane, served as a member and chair of ouraudit committee. In addition, prior to his resignation from the audit committeein August 2006, Mr. Kohrs also served as a member of our auditcommittee.

Each current member of ouraudit committee qualifies as “independent” for purposes of membership on auditcommittees pursuant to the Marketplace Rules of the NASDAQ Stock Marketand the rules and regulations of the SEC and is “financially literate” asrequired by the Marketplace Rules of the NASDAQ Stock Market. In addition,our board of directors has determined that Mr. Bakewell qualifies as an “auditcommittee financial expert” as defined by the rules and regulations of theSEC and meets the qualifications of “financial sophistication” under theMarketplace Rules of the NASDAQ Stock Market as a result of his experienceas a chief financial officer of several public companies. Other members of ouraudit committee who have served as chief executive officers or chief financialofficers of public companies or have similar experience or understanding withrespect to certain accounting auditing matters may also be considered auditcommittee financial experts. These designations related to our audit committeemembers’ experience and understanding with respect to certain accounting andauditing matters are disclosure requirements of the SEC and the NASDAQ StockMarket and do not impose upon any of them any duties, obligations orliabilities that are greater than those generally imposed on a member of ouraudit committee or of our board of directors.

**ITEM 11.**         EXECUTIVECOMPENSATION

**Compensation Discussion and Analysis**

ThisCompensation Discussion and Analysis describes the material elements of thecompensation awarded to, earned by or paid to our President and Chief ExecutiveOfficer, our Chief Financial Officer and Treasurer and our other executiveofficers included in the Summary Compensation Table on page 97 below. Theseindividuals are referred to in this report as our “named executive officers.”  The discussion 

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below focuses on the information contained in the tablesand related footnotes and narrative primarily for 2006 under the heading “ExecutiveCompensation” below, but also describes compensation actions taken during 2005and 2007 to the extent it enhances the understanding of our executivecompensation disclosure for 2006.

***Objectives and Philosophy***

Our executivecompensation program is designed to:

·       attract and retainexecutives important to the success of our company and the creation of valuefor our stockholders;

·       motivate our executives toachieve company and individual performance objectives and create stockholdervalue; and

·       reward our executives forthe achievement of company and individual performance objectives, the creationof stockholder value in the short and long term and their contributions, ingeneral, to the success of our company.

In order to achieve these objectives, we have adopted compensation plans,and our compensation committee and board make compensation decisions, based onthe following philosophy and principles:

·       As a growth company, we need to attract, retain and motivate executivesand key employees with the capability to enable us to achieve significantlygreater scale. We therefore benchmark our compensation against companies withwhom we compete for market share and executive talent.

·       We target base compensation at the 50th to 75th percentileof companies in our peer group, with the opportunity to earn total compensationabove the market median when the performance of our business exceeds ouraggressive plan targets.

·       As a performance-driven company, we favor having a significant componentof variable compensation tied to results and achievement over solely fixedcompensation.

·       We will differentiate individual compensation among our executives basedon scope and nature of responsibility, education and experience, jobperformance and potential.

·       In order to foster cooperation and communication among our executivesand among their respective teams, the compensation committee and the board ofdirectors places primary emphasis on company performance (rather thanindividual performance) as measured against goals approved by the compensationcommittee.

·       We seek toreward achievement of aggressive performance objectives that are aligned withthe interests of our stockholders. Our incentive compensation programs aredesigned to provide increased earnings potential for our executives asaggressive performance targets are met or surpassed.

***Compensation Committee***

Only one member of our compensationcommittee is an “independent director” under the Marketplace Rules of theNASDAQ Stock Market. As a “controlled company” under the NASDAQ listingrequirements, we are permitted, and have elected, to opt out of the NASDAQlisting requirements that would otherwise require our compensation committee tobe comprised entirely of independent directors.

The primary task of ourcompensation committee in connection with the compensation of our executiveofficers is to recommend to our board the compensation payable to our executiveofficers and to administer the equity and incentive compensation plansapplicable to our executive officers. After 

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receivingand reviewing the recommendations of our compensation committee, our entireboard makes final decisions concerning executive compensation, including awardsunder our equity and incentive compensation plans. Under a policy documentrecently adopted by the board, the board specifically has retained allauthority to make equity awards to our directors and executive officers.

Our President and ChiefExecutive Officer, with the assistance of our Vice President, Human Resources,assists the compensation committee in gathering compensation related dataregarding our executive officers and makes recommendations to the compensationcommittee regarding the form and amount of compensation to be paid to eachexecutive officer (other than himself).

In making its finalrecommendations to the board regarding the form and amount of compensation tobe paid to our executive officers, the compensation committee considers therecommendations of our President and Chief Executive Officer, but alsoconsiders other factors, such as its own views as to the form and amount ofcompensation to be paid and, in certain instances, the input of compensationconsultants. Final deliberations and decisions by our compensation committeeregarding its recommendations to our board concerning executive officercompensation, including compensation to be paid to our President and ChiefExecutive Officer, are made by the compensation committee, without the presenceof the President and Chief Executive Officer or any other executive officer ofour company. In making final decisions regarding compensation to be paid to ourexecutive officers, the board gives considerable weight to the recommendationsof our compensation committee.

***Setting Executive Compensation***

Based on the objectives described above, our compensation committee andboard have structured our annual and long-term incentive-based cash and non-cashexecutive compensation to motivate executives to achieve the business goalsestablished by the company and reward the executives for achieving these goals.To assist in this process for 2006 compensation, in late 2005 our managementretained Watson Wyatt Worldwide, an independent compensation consultant, tobenchmark the compensation of our named executive officers and certain otherexecutive officers against the compensation offered by comparable companies.For each of the named executive officers, Watson Wyatt provided comparativecompensation data from six surveys as to base salary, short-term cashincentives and long-term incentives for companies in the 25th, 50th and 75th percentiles of the companies in each of thesurveys. The surveys used included:

·       2005/2006 Watson Wyatt Top Management Survey—bio-medicalequipment & supplies;

·       2005 Mercer Executive Compensation Survey—durable goods manufacturing;

·       2005 Medic Survey—companies with revenues > $500 million;

·       2005 Medic Survey—all companies;

·       2004 Radford Biotech Executive Survey—> 500 employees; and

·       2004 Radford Biotech Executive Survey.

In late 2006, our managementengaged Mercer Human Resources Consulting as an independent compensationconsultant to benchmark the compensation of our President and Chief ExecutiveOfficer, our Chief Financial Officer and our two division presidents, StacyEnxing Seng and Matthew Jenusaitis, against the compensation offered bycompetitors. Mercer compared each of these executive’s pay packages topublished survey data for companies with similar revenues in the biotechnologysector (including medical device manufacturers). For each position, Mercer useddata collected from Presidio (2006 Biotech industry report), including datafrom a group of biotech companies, with average revenues of $179 to $181million, and data from Top Five Data Services (2005 Report on Executive Compensationin the Biotech/Pharma industry), including data from a group of biotech orpharma companies, with average revenues of $200 million.

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Aspart of its analysis, Mercer increased the compensation information in thereported data from 2005 by an annual factor of 4.3% and the compensationinformation in the reported data from 2006 by an annual factor of 3.9%, toreflect expected salary increases in the biotech/medical devices sector and tomore accurately reflect pay levels as of October 1, 2006. Mercer alsoapplied a premium of 15% to the reported data for the two division presidentsto reflect additional responsibilities of these individuals compared with theduties typically associated with their positions.

Thecompensation surveys described above were provided to our compensationcommittee and board, which used data from these surveys to review and analyzecompensation for the named executive offices and make adjustments asappropriate. While the compensation committee and board recognize thatbenchmarking may not always be appropriate as a stand-alone tool for settingcompensation due to the aspects of our business and objectives that may beunique to our company, the compensation committee and board neverthelessbelieve that gathering this information is an important part of itscompensation-related decision-making process.

***Executive Compensation Components***

The principal elements of our executive compensationprogram for 2006 included:

·       base salary;

·       short-termcash incentive compensation;

·       long-termequity-based incentive compensation; and

·       executivebenefits and perquisites.

Inaddition, our executive compensation program also includes certain change incontrol arrangements.

Indetermining the form of compensation to pay our named executive officers, thecompensation committee views these elements of our executive compensationprogram as related but distinct. The compensation committee does not believethat significant compensation derived by an executive from one element of ourcompensation program should necessarily negate or result in a reduction in theamount of compensation the executive receives from other elements. At the sametime, the compensation committee does not believe that minimal compensationderived from one element of compensation should necessarily result in anincrease in the amount the executive should receive from one or more otherelements of compensation.

Exceptas described below, the compensation committee has not adopted any formal orinformal policies or guidelines for allocating compensation between long-termand currently paid out compensation, between cash and non-cash compensation, oramong different forms of non-cash compensation. However, the compensationcommittee’s philosophy is to make a greater percentage of an executive’scompensation performance-based, and therefore at risk, as the executive’sposition and responsibility increases given the influence more senior levelexecutives generally have on company performance. Thus, individuals withgreater roles and responsibilities associated with achieving our company’sobjectives should bear a greater proportion of the risk that those goals arenot achieved and should receive a greater proportion of the reward ifobjectives are met or surpassed.

*Base Salary*

*Generally.*   We provide a base salary for our namedexecutive officers, which, unlike some of the other elements of our executivecompensation program, is not subject to company or individual performance risk.We recognize the need for most executives to receive at least a portion oftheir total compensation in the form of a guaranteed base salary that is paidin cash regularly throughout the year to support a reasonable standard ofliving.

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We initially fix base salariesfor our executives at a level we believe enables us to hire and retain them ina competitive environment and to reward satisfactory individual performance anda satisfactory level of contribution to our overall business objectives. Wealso take into account the base compensation that is payable by companies inour peer group.

*SalaryIncreases.*   Ourcompensation committee targets the 50th to 75th percentileof the compensation survey datafor the base salaries of the named executive officers. Adjustments to the basesalary level may be made based on comparisons to the survey data and evaluationof the officer’s level of responsibility and experience as well as company-wideperformance. Our compensation committee also considers each named executiveofficer’s experience andqualifications, individual performance and the impact of such performance onour results. In practice, at anypoint in time our salaries tend to be closer to the 50th percentile of the comparative data, becausebase salaries in compensation surveys tend to increase with company size and aswe have experienced rapid growth we have not adjusted base salaries quicklyenough to keep up with the our changing comparables.

The compensation committeereviews base salaries for our named executive officers toward the end of eachyear and generally approves any increases early the following year. Regardlessof when the final decision regarding base salaries for a calendar year is madeby the compensation committee, any increases in base salaries are effective asof January 1 of that year, often resulting in a retroactive payment to theexecutive shortly after the final decision is made.

Base salaries for the named executive officers for 2006and 2007, and the percentage increases between periods, are as follows:

| ** **          | ** ** | **2006** | ** ** | **2007** | ** ** | **Percentage Increase  Between Periods** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------------------------------------------------|------------|
| James M. Corbett    |       | $        | 380,000    |     | $          | 420,000                                            |       |   | 10.5 | % |   |
| Patrick D. Spangler |       | $        | 258,750    |     | $          | 289,800                                            |       |   | 12.0 | % |   |
| Stacy Enxing Seng   |       | $        | 269,100    |     | $          | 298,644                                            |       |   | 11.0 | % |   |
| Pascal E.R. Girin   |       | $        | 363,741    |     | $          | 363,741                                            |       |   | 0.0 | % |   |
| Jeffrey  J. Peters  |       | $        | 232,875    |     | $          | 248,190                                            |       |   | 6.6 | % |   |

 

*Analysis.*   The increases in the base salaries for thenamed executive officers from 2006 to 2007 (other than Mr. Girin) eachreflected a merit increase of 4% and an additional adjustment intended to bringthe base salaries closer to market comparables. After these increases, the 2007base salaries for Messrs. Corbett and Spangler and Ms. Enxing Seng are each below the 50th percentileof base salaries reflected in the Mercer survey data (the Mercer survey did notinclude comparative data for Messrs. Girin or Peters). Mr. Girin’sbase salary, unlike the base salaries of the other named executive officers,includes an amount designated as on “expatriation bonus,” intended tocompensate for the burdens and costs of the extensive travel requirements ofhis position, as well as a housing allowance intended to compensate for thehigher cost of living in France, where Mr. Girin is based, compared to theUnited States. Mr. Girin’s base salary was not increased from 2006 to 2007because the percentage of cash versus equity in his total compensation for 2006was greater than that of the rest of the management team and somewhatinconsistent with our compensation philosophy. Thus, our compensation committeechose instead to increase the equity portion of his compensation for 2007.

*Short-term Incentive Compensation*

*Generally.*   Under the terms of the ev3 Inc. ExecutivePerformance Incentive Plan, our named executive officers, as well as otherexecutives of our company, are eligible to earn quarterly cash bonus paymentsbased on our financial performance. This plan is designed to provide a directfinancial incentive to our executive officers for achievement of specificperformance goals of our company.

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Eachof the named executive officers has a yearly incentive target under theperformance incentive plan, expressed as a percentage of his or her base salary.The level of each incentive target is based on the individual’s level ofresponsibility within the company. The incentive targets of the named executiveofficers currently are as follows:  Mr. Corbett(50%); Mr. Spangler (45%); Ms. Enxing Seng (45%); Mr. Girin(45%); and Mr. Peters (40%).

Eachexecutive’s bonus payment under the plan for a particular quarter is determinedby multiplying the executive’s target bonus amount (the executive’s incentivetarget times his or her base salary) for the quarter by a percentage determinedbased on the achievement of corporate financial goals. The performance of eachof our business units is measured separately (U.S. cardio peripheral, U.S.neurovascular and International), and a different percentage can be determinedfor executives in our various business units. In addition, in some cases, theexecutive will receive an additional bonus amount based on individualperformance. For each executive, 20% of the annual target bonus amount iseligible to be paid for each of the first three quarters, while 40% of theannual target bonus amount is eligible to be paid for the fourth quarter. Becauseshort-term incentive compensation is a significant component of ourcompensation program, we have decided to set goals and make bonus payouts on aquarterly rather than annual basis.

Thebonus payout percentage for each quarter is primarily based on the achievementof corporate performance goals. Before the start of each year, our Presidentand Chief Executive Officer recommends to the compensation committee corporateperformance goals for the year, broken down by quarter, and the bonus payoutpercentages that will result from the various levels of achievement of theseperformance goals. These goals are established at levels that are achievable,but require better than expected corporate performance. The compensationcommittee then makes its recommendation to the board of directors concerningthese performance goals. The board of directors then makes the final decisionconcerning the corporate performance goals under the plan.

Bonuspayouts under the performance plan are determined on a quarterly basis. As soonas practicable after the appropriate financial and other data have beencompiled after the end of each quarter, the President and Chief ExecutiveOfficer determines the bonus payout percentage for the quarter for the companyoverall and a separate bonus payout percentage for each of our business units. Hethen makes further adjustments to certain individual bonuses, based onindividual performance for the quarter. He recommends these bonus payouts tothe compensation committee, which then makes its recommendation to the board ofdirectors. The board of directors then makes the final decision concerningbonus payouts under the plan. As permitted by the charter of our compensationcommittee, during 2006 the compensation committee delegated its duties andresponsibilities under the performance incentive plan to determine the firstthree quarterly bonus payouts for our named executive officers to the chair ofour compensation committee, Mr. Kohrs, although the final payout decisionswere made by our full board.

*Corporate PerformanceGoals.*   Theprimary factor in determining the bonus payout percentages under the incentiveplan during 2006 and 2007 was net sales. For 2006, the bonus payout percentagefor each quarter was primarily determined based on the level of net sales forthat quarter as compared with a target amount. The payout percentage was thendecreased based on a formula if operating expenses for the quarter exceeded atarget amount and was further increased or decreased based on the gross marginas a percent of sales for the quarter as compared with a target margin level. Forthe fourth quarter, the bonus payout percentage was eligible to be furtherincreased if we achieved a target determined based on EBITDA, excludingstock-based compensation.

For2007, the quarterly bonus payout percentage will once again be based primarilyon the level of net sales for the quarter compared with a target amount(although the targets have been increased from 2006). The bonus payoutpercentage for each quarter will then be increased or decreased based on thegross margin as a percent of sales and controllable operating expenses as apercent of sales, in each case as 

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compared with a target percentage. For the fourthquarter of 2007, the bonus payout percentage will be eligible to be furtherincreased if we achieve certain working capital management goals for the yearand achieve a target determined based on EBITDA, excluding stock-basedcompensation for the year.

Our bonus payout percentages during 2006 by quarter andfor the full year were as follows:

| **Unit**               | ** ** | ** ** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Year** | ** ** |
|------------------------|------------|------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|----------|------------|
| U.S. cardio peripheral |       | 86.9       | %          | 125.7  | %          | 75.0   | %          | 65.2   | %          | 83.6   | %          |
| U.S. neurovascular     |       | 86.9       | %          | 137.5  | %          | 108.5  | %          | 77.6   | %          | 97.6   | %          |
| International          |       | 86.9       | %          | 125.0  | %          | 91.2   | %          | 71.7   | %          | 89.3   | %          |
| Corporate              |       | 86.9       | %          | 130.3  | %          | 92.2   | %          | 73.8   | %          | 91.4   | %          |

 

Whetherwe will achieve the corporate performance goals set forth above for 2007 cannotbe predicted. However, we have attempted to establish goals that requiresuperior performance to achieve but are, nevertheless, achievable.

*Award Payouts.*   Award payments made to our named executiveofficers under the performance incentive plan for 2006 were as follows:

| ** **          | ** ** | **$ Amount** | ** ** | **% Target** | ** ** |
|---------------------|------------|-------------------|------------|-------------------|------------|
| James M. Corbett    |       | $                 | 173,402    |              |       | 91 | % |   |
| Patrick D. Spangler |       | $                 | 109,882    |              |       | 94 | % |   |
| Stacy Enxing Seng   |       | $                 | 100,686    |              |       | 83 | % |   |
| Pascal E.R. Girin   |       | $                 | 135,451    |              |       | 83 | % |   |
| Jeffrey  J. Peters  |       | $                 | 88,468     |              |       | 95 | % |   |

 

*Analysis.*   The bonus payouts made to Messrs. Corbett,Spangler and Peters for 2006 were largely based on overall corporateperformance for the year, since each have responsibilities across all of ourbusiness units. The bonuses for Messrs. Spangler and Peters also reflectan additional amount for individual performance. Ms. Enxing’s bonus payoutwas primarily based on the performance of our U.S. cardio peripheral businessunit, which she heads, as well as an additional amount for individualperformance. Mr. Girin’s bonus payout was primarily based on theperformance of our international business unit, which he heads, as well as anadditional amount for individual performance.

*Long-Term Incentive Compensation.*

*Generally.*   Long-term incentives comprise the largestportion of each named executive officer’s compensation package, consistent withour philosophy and principles discussed above. The compensation committee’sobjective is to provide named executive officers with long-term incentive awardopportunities that are consistent with comparative compensation survey data andbased on each officer’s individual performance. Through the grant of theseequity incentives, we seek to align the long-term interests of our executiveswith the long-term interests of our stockholders by creating a strong anddirect linkage between compensation and long-term stockholder return. Althoughwe have not adopted any detailed stock retention or ownership guidelines, ourboard of directors has adopted Corporate Governance Guidelines that addressownership of our common stock by our named executive officers and thatencourage our executives to have a financial stake in our company in order toalign the interests of our stockholders and management.

Currently, we provide namedexecutive officers (and many of our other officers and key employees) withstock options and restricted stock or restricted stock units. In 2005, ourboard and stockholders approved the ev3 Inc. Amended and Restated 2005Incentive Stock Plan, pursuant to which our named executive officers (as wellas other officers and key employees) are eligible to receive equitycompensation awards, including stock options, stock appreciation rights, stockgrants and stock unit grants. For more 

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informationconcerning the terms of this plan, we refer you to “Executive Compensation—Grantsof Plan-Based Awards—ev3 Amended and Restated 2005 Incentive Stock Plan.”  Our board of directors has adopted the ev3Long Term Incentive Program to assist the compensation committee in itsrecommendations concerning grants of equity awards under the incentive stockplan. Our board has also adopted a policy document entitled “Policy andProcedures Regarding Grants of Stock Options, Restricted Stock and OtherEquity-Based Incentive Awards,” which includes policies that the board intendsto follow in connection with issuing equity awards.

*Typesof Grants.*   Underour long-term incentive program and our policy document, the compensationcommittee can recommend and the board can issue three types of equityawards:  performance recognition grants,talent acquisition grants and special recognition grants.

Performance recognition grantsare discretionary grants that are made on an annual basis. Each year, ourPresident and Chief Executive Officer reviews the overall long-term incentiveprogram and makes a recommendation to the compensation committee of the targetedtotal share pool and share grant ranges for specific levels of employees (whichdiffer based on the level of responsibility within the company), other than forhimself. Share grant ranges are established for each employee level, withactual grants made based on individual performance and, for certain of ourexecutive officers from time to time, to increase the individual’s ownershipinterest in the company. These share grant ranges are determined primarilybased on benchmark data from compensation surveys. The compensation committeemakes a recommendation to the board concerning the performance recognitiongrants, including a recommendation concerning the President and Chief ExecutiveOfficer, and the board makes the final decision.

Historically, performancerecognition grants were generally issued in the form of stock options. In late2006, the board, on the recommendation of our President and Chief ExecutiveOfficer and our compensation committee, decided to begin to issue restrictedstock (awards or units) as a significant part of the annual performancerecognition grant under the plan in 2007. The board determined that restrictedstock was an effective means to encourage the retention of employees, and thatthe board’s goal of retaining its executives would be furthered by addingrestricted stock to our equity award program. In connection with this decision,our management retained Mercer Human Resources Consulting to advise management,the compensation committee and the board.

Under this new policy, for executiveofficers (including the named executive officers) once a determination is madeof the appropriate number of shares to be issued in a performance recognitiongrant, the target value of one-half of these shares is determined using theBlack Scholes model (which is representative of the FAS 123R expense that thecompany will incur) and a number of restricted stock (awards or units) aregranted with this target value. Typically, the number of shares of restrictedstock (awards or units) will be fewer than the number of shares that would havebeen covered by a stock option of equivalent target value.

Performance recognition grantsare made annually in the first quarter of the year, in order to coordinate thetiming with any annual salary increases and any cash performance bonus payments.Awards are priced based on the closing fair market value of a share of commonstock on the date of grant. Previous awards, whether vested or unvested, haveno impact on the current year’s awards. We do not have any program, plan orpractice to time stock option or restricted stock grants to executives incoordination with the release of material non-public information.

Talent acquisition grants aremade in the form of stock options or restricted stock (awards or units), andare used for new hires and promotions of executive officers (and other keyemployees). These grants are recommended by our President and Chief ExecutiveOfficer (except in the case of a new President and Chief Executive Officer) andare considered and acted on by the compensation committee and board as 

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partof the compensation package of the executive officer at the time of hire orpromotion (with the grant date and determination of fair market value and theexercise price delayed until the hire date).

The compensation committee andboard will also from time to time consider and make special recognition grants,based generally on the recommendation of our President and Chief ExecutiveOfficer. These grants, which are made solely in the form of restricted stock,are used to recognize special achievements or to create an incentive for anindividual or team to achieve a critical business project or milestone.

*StockOptions.*   Animportant objective of our long-term incentive program is to strengthen therelationship between the long-term value of our stock price and the potentialfinancial gain for employees. Stock options provide named executive officerswith the opportunity to purchase our common stock at a price fixed on the grantdate regardless of future market price. The vesting of our stock options isgenerally time-based. One-quarter of the shares underlying the stock optiontypically vest on the first year anniversary of the date of grant (or if later,on the date of hire) and 1/36 of the shares underlying the stock option vestthereafter on the one-month anniversary of the date of grant (or date of hire).However, the board may from time to time grant options that vary from thisvesting schedule. Our policy is to only grant options with an exercise priceequal to 100% of the fair market value of our common stock on the date ofgrant.

A stock option becomes valuableonly if our common stock price increases above the option exercise price andthe holder of the option remains employed during the period required for theoption to “vest.”  This provides anincentive for an option holder to remain employed by us. In addition, stockoptions link a portion of an employee’s compensation to stockholders’ interestsby providing an incentive to achieve corporate goals and increase the marketprice of our stock.

*RestrictedStock.*   Restrictedstock awards are intended to retain key employees, including the namedexecutive officers, through vesting periods. Restricted stock awards providethe opportunity for capital accumulation and more predictable long-termincentive value. For grants to recipients in the United States, we makerestricted stock awards of shares of common stock, while for grants torecipients outside of the United States, we use restricted stock units as aperformance incentive.

Restricted stock awards areshares of our common stock that are awarded with the restriction that the namedexecutive officer continuously provides services to ev3 or its affiliates(whether as an employee or as a consultant) until the date of vesting. Thepurpose of granting restricted stock awards is to encourage ownership andresult in business decisions that may drive stock price appreciation, andencourage retention of our named executive officers. Named executive officersare allowed to vote restricted stock awards as a stockholder based on thenumber of shares held under restriction. The named executive officers are alsoawarded dividends on the restricted stock awards held.

The specific terms of vesting ofa restricted stock award depends upon whether the award is a performancerecognition grant, talent acquisition grant or special recognition grant. Performancerecognition grants of restricted stock awards are made in the first quarter ofeach year vest and become non-forfeitable in four equal annual installments on November 15th of eachyear, commencing on the November 15th of theyear of grant. Time-based talent acquisition grants of restricted stock awards,granted to new hires or promoted employees, and time-based special recognitiongrants of restricted stock awards, vest in a similar manner, except that thefirst installment will be pro-rated, depending on the date of grant. Prior to January 2007,restricted stock awards vested in four equal annual installments from the dateof grant of the restricted stock award. In January 2007 the compensationcommittee changed its policy on vesting practices, as described above, and allexisting restricted stock awards were amended to conform to the revised policy.The vesting of special recognition grants of restricted stock awards is tied tothe satisfaction of specified performance milestones. In rare instances, astock grant will be non-forfeitable as of the date of grant (see discussionbelow of the grant in 2006 to Ms. Exing Seng).

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Restrictedstock units are similar to restricted stock awards, but with a few keydifferences. A restricted stock unit is a commitment by us to issue a share ofour common stock for each restricted stock unit at the time the restrictions inthe award agreement lapse. Restricted stock units are provided to namedexecutive officers who are not on the United States payroll because of thedifferent tax treatment in many other countries. Restricted stock unit awardsare eligible for dividend equivalent payments each time we pay dividends.

*2006 Awards.*   In January 2006, Mr. Corbett wasawarded a performance recognition grant in the form of an option to purchase200,000 shares of our common stock. This award was at the mid-point of therange established at the beginning of the year. In January 2006 Messrs. Spanglerand Peters, and Ms. Enxing Sing, were awarded performance recognitiongrant in the form of an option to purchase 25,000, 20,000 and 20,000 shares,respectively, of our common stock. Each of these awards was at the mid-point ofthe range established at the beginning of the year. In January 2006, Mr. Girinwas awarded a performance recognition grant in the form of an option topurchase 25,000 shares of our common stock. Mr. Girin also received aperformance recognition grant at that time in the form of a restricted stockunit relating to 5,000 shares of our common stock. The combined stock optionand restricted stock unit award to Mr. Girin was above the mid-point ofthe range established at the beginning of the year, and was intended toincrease his ownership in the company, which is currently at a lower level thanthe other named executive officers.

In June 2006Ms. Enxing Seng also received a special recognition restricted stock awardgrant, which was non-forfeitable as of the date of grant. This grant was madeto Ms. Enxing Seng to assist her in repaying an equity purchase loan thathad previously been made to her by Warburg Pincus. See “Related PersonRelationships and Transactions—Loans from Majority Stockholder to ExecutiveOfficers and Directors.”

Additionalinformation concerning the long-term incentive compensation information for ournamed executive officers during 2006 is included in the Summary CompensationTable—2006 on page 97. Additional information on long-term incentiveawards is shown in the Grants of Plan-Based Awards—2006 Table on page 99and the Outstanding Equity Awards at Fiscal Year-end—2006 on page 103.

*Executive Benefits and Perquisites; Other CompensationArrangements*

Itis generally our policy not to extend significant perquisites to our executivesthat are not available to our employees generally. The only significantperquisites that we provide to any of our named executive officers that are notavailable to employees generally are a housing allowance and car allowance paidto Mr. Girin. See “Executive Compensation—Summary Compensation Table—2006.”  We believe that such allowances are customaryfor an executive such as Mr. Girin. Our named executive officers alsoreceive benefits, which are also received by our other employees, including 401(k) matchingcontributions, and health, dental and life insurance benefits. We do notprovide pension arrangements or post-retirement health coverage for ourexecutives or employees. We also do not provide any nonqualified definedcontribution or other deferred compensation plans.

Allof our employees, including our named executive officers, are employed at will.The only employment agreements we have entered into with our named executive officersare agreements that include non-compete, non-solicitation and confidentialityclauses. We have, however, entered into written change in control agreementswith all of our executive officers and certain other personnel, which providefor certain cash and other benefits upon the termination of the executiveofficer’s employment with us under certain circumstances, as described below.

***Change in Control and Post-Termination Severance Arrangements***

Theev3 Inc. Amended and Restated 2005 Incentive Stock Plan and the individualagreements entered into in connection with the grant of stock options and stockawards under this plan provide for the immediate vesting of all stock optionsand stock awards then held by our named executive officers upon 

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the completion of a change in control of our company. Inaddition, our named executive officers have entered into agreements with usthat provide for the immediate vesting of all stock options and awards upon theoccurrence of a “change in control” of our company and also require us toprovide them certain severance payments and benefits under certaincircumstances in the event of such a change in control. These payments andbenefits include a lump sum cash payment equal to one year’s base pay plusbonus (150% of this amount in the case of Mr. Corbett), as well ascontinued benefits for a certain minimum time period. Mr. Corbett would bedue this lump sum payment as a result of such a change in control unless hewere terminated by the successor company during a six-month period for “cause”or during that time period terminated employment without “good reason.”  The other named executive officers would onlybe entitled to this lump sum payment if they were not offered employment by thesuccessor or were employed by the successor but within 24 months wereterminated for any reason other than death or “cause” or terminated their ownemployment without “good reason.”  Thesearrangements, including the quantification of the payment and benefits providedunder these arrangements, are described in more detail elsewhere in this reportunder the heading “Executive Compensation—Potential Payments Upon Terminationor Change in Control.”

Weinitially entered into a change in control agreement with Messrs. Corbett,Peters and Girin and Ms. Enxing Seng on September 1, 2003 and Mr. Spangleron March 4, 2005. Each of these change in control agreements initiallyprovided for the payment of benefits upon the occurrence of our change incontrol or the change in control of one of our subsidiaries. In September 2006we entered into amended change in control agreements with each of the namedexecutive officers. The amended change in control agreements incorporatecertain revisions to ensure that payments to individuals under the agreementswill comply in form and operation with the deferred compensation rules containedin Section 409A under the Internal Revenue Code, and to eliminate thepayment of benefits upon the occurrence of a change in control of one of oursubsidiaries.

Webelieve the change in control provisions in our stock plan and the agreementsdescribed above are particularly important to the company. Pursuant to theterms of our stock plan and these agreements, all stock options and stockawards held by our named executive officers become immediately vested (and, thecase of options, exercisable) upon the completion of a change in control of ourcompany. Thus, the immediate vesting of stock options and stock awards istriggered by the change in control and thus is known as a “single trigger”change in control arrangement. While “single trigger” change in controlarrangements are often criticized as creating a “windfall” for holders of theequity awards, we nonetheless believe that such arrangements are appropriate inthis situation. These arrangements provide important retention incentivesduring what can often be an uncertain time for employees and provide executiveswith additional monetary motivation to complete a transaction that the board ofdirectors believes is in the best interests of our stockholders. If anexecutive were to leave prior to the completion of the change in control,non-vested awards held by the executive would terminate. We also believe thatsingle trigger vesting also is consistent with the policies of our competitors.

Inorder for our named executive officers to receive any other payments orbenefits as a result of a change in control of our company, other than Mr. Corbett,there must be a termination event, such as a termination of the executive’semployment by our successor without cause or a termination of the executive’semployment by the executive for good reason. The termination of the executive’semployment by the executive without good reason will not give rise toadditional payments or benefits either in a change in control situation orotherwise. Thus, these additional payments and benefits will not just betriggered by a change in control, but will also require a termination event notwithin the control of the executive, and thus are known as “double trigger”change in control arrangements. Mr. Corbett’s agreement, on the otherhand, is a single trigger arrangement, since he would be due a severancepayment under his agreement in most situations simply as a result of a changein control. We believe that single trigger arrangements are common forcorporate chief executive officers, since chief executive officers frequentlyare not kept on by acquirors.

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We believe that the severanceand change in control protections provided in the agreements described aboveare an important part of our executive compensation program. We believe thatthese arrangements mitigate some of the risk that exists for executives workingin a smaller company, where there is a meaningful likelihood that the companymay be acquired. These arrangements are intended to attract and retainqualified executives who may have employment alternatives that may appear tothem, in light of a possible change in control, to be less risky absent thesearrangements. We also believe similar protections are typically provided byother companies, including companies with which we compete for executivetalent, and thus believe we must continue to offer such protections in order tobe competitive.

***Total Compensation Mix***

The table below illustrates how total compensation forour named executive officers for 2006 was allocated between performance andnon-performance based components, how performance based compensation isallocated between short-term and long-term components and how totalcompensation is allocated between cash and equity components. For purposes ofthis table, our long-term equity based compensation  (including the amount of long-term equity incentivesincluded in total compensation) is based on its grant date fair value computedin accordance with FAS 123R, which is different than the manner in which thisamount is calculated for purposes of the Summary Compensation Table. See “ExecutiveCompensation—Summary Compensation Table—2006.” 

| ** **          | ** ** | **Total Compensation Mix  (base salary, short-term cash incentives, long-term equity incentives  and executive benefits and perquisites)** | ** ** |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **% of Total   Compensation that is:**                                                                                                                                             | ** ** | **% of Performance Based  Total Compensation that is:** | ** ** | **% of Total   Compensation that is:** | ** ** |
| ** **          | ** ** | **Performance  Based(1)**                                                                                                                                                                                   | ** ** | **Not  Performance  Based(2)** | ** ** | **Short-term(3)** | ** ** | **Long-Term(4)** | ** ** | **Cash Based(5)** | ** ** | **Equity Based(6)** | ** ** |
| James M. Corbett    |       |                                                                                                                                                                                                        | 80         | % |   |   | 20 | % |   |   | 11 | % |   |   | 89 | % |   |   | 28 | % |   |   | 72 | % |   |
| Patrick D. Spangler |       |                                                                                                                                                                                                        | 52         | % |   |   | 48 | % |   |   | 39 | % |   |   | 61 | % |   |   | 68 | % |   |   | 32 | % |   |
| Stacy Enxing Seng   |       |                                                                                                                                                                                                        | 64         | % |   |   | 36 | % |   |   | 20 | % |   |   | 80 | % |   |   | 49 | % |   |   | 51 | % |   |
| Pascal E.R. Girin   |       |                                                                                                                                                                                                        | 49         | % |   |   | 51 | % |   |   | 34 | % |   |   | 66 | % |   |   | 68 | % |   |   | 32 | % |   |
| Jeffrey  J. Peters  |       |                                                                                                                                                                                                        | 49         | % |   |   | 51 | % |   |   | 39 | % |   |   | 61 | % |   |   | 70 | % |   |   | 30 | % |   |

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(1)          Short-termcash incentives plus long-term equity incentives divided by total compensation

(2)          Basesalary plus executive benefits and perquisites divided by total compensation

(3)          Short-termcash incentives divided by short-term cash incentives plus long-term equityincentives

(4)          Long-termequity incentives divided by short-term cash incentives plus long-term equityincentives

(5)          Basesalary plus short-term cash incentives and executive benefits and perquisites dividedby total compensation

(6)          Long-termequity incentives divided by total compensation

Consistentwith the philosophy of our compensation program, the majority of our namedexecutive officers’ compensation is performance-based. As a performance drivenculture we favor having a significant component of variable compensation tiedto results and achievement over solely fixed compensation. To align theinterests of our named executive officers with the interests of ourstockholders, the majority of the performance-based compensation paid to ournamed executive officers is in the form of long-term equity incentives and asignificant part of the total compensation paid to our named executive officersis equity based. The compensation paid in 2006 to Mr. Corbett, ourPresident and Chief Executive Officer, and Ms. Enxing Seng, head of ourcardio peripheral business unit, included a larger performance-based elementthan the other named executive officers, relatively more of which was in theform of long-

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term equity, reflecting their responsibilities forbusiness units. Because Mr. Spangler, our Chief Financial Officer, and Mr. Peters,our Chief Technology Officer, have corporate responsibilities, their totalcompensation is somewhat less performance based and somewhat less long-term,although a significant portion of their total compensation is still at risk andis long-term, equity based, consistent with our compensation philosophy.Mr. Girin, head of our international business unit, has a more balanceddistribution of compensation, reflecting his responsibilities for markets thatare still developing and salary benchmarks for comparable executives.

***Tax and Accounting Implications***

*Section 162(m)*

Section 162(m) of theInternal Revenue Code limits to $1,000,000 per person the amount that apublicly held company may deduct for compensation paid to its five most highlypaid executive officers in any fiscal year. However, this limitation does notapply, among other things, to compensation that satisfies the requirements ofperformance-based compensation under Section 162(m). Under IRSregulations, compensation received through the exercise of an option or stockappreciation right will be treated as performance based compensation and willnot be subject to the $1,000,000 limit if the option or stock appreciationright and the plan pursuant to which it is granted satisfy certainrequirements.

The only performance basedcompensation not subject to the $1,000,000 limit is the compensation that wouldbe recognized by our named executive officers upon exercise of any of theoptions issued under our 2005 incentive stock plan before July 1, 2005. Futureoption awards under the 2005 incentive stock plan and incentive awards orbonuses may satisfy the requirements of performance based compensation if wesatisfy certain requirements in connection with making and administering suchawards, including having such awards made by a compensation committee that iscomprised solely of two or more independent, outside directors. At present, ourcompensation committee has only one independent, outside director, as definedby IRS regulations, and as a result any options granted under our plan will notbe treated as performance based compensation when exercised.

Thenon-performance based compensation of our named executive officers for 2006 didnot exceed the $1.0 million limit for any officer.

*Nonqualified Deferred Compensation*

On October 22,2004, the American Jobs Creation Act of 2004 was signed into law, changing thetax rules applicable to nonqualified deferred compensation arrangements.While the final regulations have not become effective yet, the Company believesit is operating in good faith compliance with the statutory provisions whichwere effective January 1, 2005.

*Accounting for Stock-Based Compensation*

Effective January 1,2003, we adopted the fair value recognition provisions of FASB Statement 123,Accounting for Stock-Based Compensation. Beginningon January 1, 2006, we began accounting for stock-based payments includingour amended and restated 2005 incentive stock plan in accordance with therequirements of FASB Statement 123(R).

**Compensation Committee Report**

As stated above, our compensation committee recommends to ourboard the compensation payable to our executive officers, including awardsunder our equity and incentive compensation plans applicable to our executiveofficers. However, decisions concerning executive compensation are subject tofinal review and approval by our entire board.

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Our compensation committee andthe other members of our board of directors have reviewed and discussed the foregoing “Compensation Discussion andAnalysis” section of this report with our management. Based on this review anddiscussion, the compensation committee recommended to our board of directors,and the full board of directors agreed, that the “Compensation Discussion andAnalysis” section be included in this report for filing with the Securities andExchange Commission.

Thisreport is dated as of March 8, 2007.

*Compensation Committee*

DouglasW. Kohrs, ChairRichard B. EmmittElizabeth H. Weatherman

*Remainder of Board of Directors*

John K. BakewellDale A. SpencerJames M. CorbettThomas E. TimbieDaniel J. Levangie

*The foregoing CompensationCommittee Report shall not be deemed to be “filed” with the Securities andExchange Commission or subject to the liabilities of Section 18 of theSecurities Exchange Act of 1934, as amended. Notwithstanding anything to thecontrary set forth in any of our previous filings under the Securities Act of1933, as amended, or the Securities Exchange Act of 1934, as amended, thatmight incorporate future filings, in whole or in part, the foregoing CompensationCommittee Report shall not be incorporated by reference into any such filings.*

**CompensationCommittee Interlocks and Insider Participation**

None of our executive officersserve as a member of the board of directors or compensation committee of anyentity that has one or more executive officers who serve on our board ofdirectors or compensation committee. None of the members of our compensationcommittee have been an officer or employee of us or one of our subsidiaries.

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**Summary of Cash andOther Compensation**

The following tableprovides summary information concerning all compensation awarded to our namedexecutive officers during the fiscal year ended December 31, 2006.

**SUMMARYCOMPENSATION TABLE - 2006**

| Name and  Principal Position   | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards(1)** | ** ** | **Option  Awards(2)** | ** ** | **Non-Equity  Incentive  Plan  Compensation(3)** | ** ** | **All Other  Compensation(4)** | ** ** | **Total** | ** ** |   |
|------------------------------------------|------------|------------|------------|----------|------------|------------|------------|-----------|------------|----------------------|------------|-----------------------|------------|--------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|--------|
| James M. Corbett                         |       |       | 2006       |     |       | $          | 380,000    |      |       | $                    | —     |                  |       |                                             | $          | 375,487                             |       |      |       | $      | 864,496 |   |   |   | $ | 173,402 |   |   |   | $ | 4,066 |   |   | $ | 1,797,451 |   |
| *President and Chief Executive  Officer* |       |       |       |     |       |       |       |      |       |                 |       |                  |       |                                             |       |                                |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Patrick D. Spangler                      |       |       | 2006       |     |       | 258,750    |       |      | —     |                 |       |                  | —     |                                             |       |                                | 263,799    |      |       |   | 109,882 |   |   |   | 8,702 |   |   | 641,133 |   |
| *Chief Financial Officer and Treasurer*  |       |       |       |     |       |       |       |      |       |                 |       |                  |       |                                             |       |                                |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Stacy Enxing Seng                        |       |       | 2006       |     |       | 269,100    |       |      | —     |                 |       |                  | 384,872    |                                             |       |                                | 234,541    |      |       |   | 100,686 |   |   |   | 10,406 |   |   | 999,605 |   |
| *President, Cardio Peripheral  Division* |       |       |       |     |       |       |       |      |       |                 |       |                  |       |                                             |       |                                |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Pascal E.R. Girin(5)                     |       |       | 2006       |     |       | 363,741    |       |      | —     |                 |       |                  | 20,249     |                                             |       |                                | 185,912    |      |       |   | 135,451 |   |   |   | 48,063 |   |   | 753,416 |   |
| *President, International*               |       |       |       |     |       |       |       |      |       |                 |       |                  |       |                                             |       |                                |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Jeffrey J. Peters(6)                     |       |       | 2006       |     |       | 232,875    |       |      | 25         |                 |       |                  | 75,097     |                                             |       |                                | 162,031    |      |       |   | 88,468 |   |   |   | 7,908 |   |   | 566,404 |   |
| *Chief Technology Officer*               |       |       |       |     |       |       |       |      |       |                 |       |                  |       |                                             |       |                                |       |      |       |   |   |   |   |   |   |   |   |   |   |
|                                          |            |            |            |          |            |            |            |           |            |                      |            |                       |            |                                                  |            |                                     |            |           |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Reflects the dollar amount recognized foreach named executive officer for financial statement reporting purposes withrespect to the fiscal year ended December 31, 2006 in accordance with FAS123R, but excludes any impact of assumed forfeiture rates. We refer you to note 2 to our consolidated financialstatements for the fiscal year ended December 31, 2006 for a discussion ofthe assumptions made in calculating the dollar amount recognized for eachofficer for financial statement reporting purposes with respect to the fiscalyear ended December 31, 2006 in accordance with FAS 123R. The followingtable provides additional information regarding the dollar amount recognizedduring the fiscal year ended December 31, 2006, without taking intoaccount forfeiture rates, for each stock award held by each named executiveofficer:

|                      | ** ** | **Grant Date** | ** ** | **Number of Securities  Underlying Stock   Award (#)** | ** ** | **Amount Recognized  in Financial  Statements in 2006 ($)** | ** ** |
|----------------------|------------|---------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| James M. Corbett     |       |                | 12/29/05   |                                                                            |       |                                                                                 | 100,000    |   |   |   | $ | 375,487 |   |   |
| Patrick D.  Spangler |       |                | None       |                                                                            |       |                                                                                 | —     |   |   |   | — |   |   |
| Stacy Enxing Seng    |       |                | 12/29/05   |                                                                            |       |                                                                                 | 35,000     |   |   |   | 131,420 |   |   |
|                      |       |                | 6/12/06    |                                                                            |       |                                                                                 | 18,313     |   |   |   | 253,452 |   |   |
| Pascal E.R. Girin    |       |                | 1/27/06    |                                                                            |       |                                                                                 | 5,000      |   |   |   | 20,249 |   |   |
| Jeffrey J. Peters    |       |                | 12/29/05   |                                                                            |       |                                                                                 | 20,000     |   |   |   | 75,097 |   |   |

 

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(2)             Reflects the dollar amount recognized foreach named executive officer for financial statement reporting purposes withrespect to the fiscal year ended December 31, 2006 in accordance with FAS123R, but excludes any impact of assumed forfeiture rates. We refer you to note 2 to our consolidated financialstatements for the fiscal year ended December 31, 2006 for a discussion ofthe assumptions made in calculating the dollar amount recognized for eachofficer for financial statement reporting purposes with respect to the fiscalyear ended December 31, 2006 in accordance with FAS 123R. The followingtable provides additional information regarding the dollar amount recognizedduring the fiscal year ended December 31, 2006, without taking intoaccount forfeiture rates, for each option award held by each named executiveofficer:

|                      | ** ** | **Grant Dates** | ** **   | **Number of Securities  Underlying Options  Granted (#)** | ** ** | **Amount Recognized  in Financial  Statements in 2006 ($)** | ** ** |
|----------------------|------------|----------------------|--------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| James M. Corbett     |       |                 | 2006         |                                                                          |       |                                                                                 | 200,000    |   |   |   | $ | 330,350 |   |   |
|                      |       |                 | 2005         |                                                                          |       |                                                                                 | 353,988    |   |   |   | 526,950 |   |   |
|                      |       |                 | 2002  - 2004 |                                                                          |       |                                                                                 | 97,345     |   |   |   | 7,196 |   |   |
| Patrick D.  Spangler |       |                 | 2006         |                                                                          |       |                                                                                 | 25,000     |   |   |   | 41,294 |   |   |
|                 |       |                 | 2005         |                                                                          |       |                                                                                 | 141,000    |   |   |   | 222,505 |   |   |
| Stacy Enxing Seng    |       |                 | 2006         |                                                                          |       |                                                                                 | 20,000     |   |   |   | 33,035 |   |   |
|                      |       |                 | 2005         |                                                                          |       |                                                                                 | 132,405    |   |   |   | 196,008 |   |   |
|                      |       |                 | 2002  - 2004 |                                                                          |       |                                                                                 | 70,673     |   |   |   | 5,498 |   |   |
| Pascal E.R. Girin    |       |                 | 2006         |                                                                          |       |                                                                                 | 25,000     |   |   |   | 41,294 |   |   |
|                 |       |                 | 2005         |                                                                          |       |                                                                                 | 94,666     |   |   |   | 141,923 |   |   |
|                 |       |                 | 2002  - 2004 |                                                                          |       |                                                                                 | 35,600     |   |   |   | 2,695 |   |   |
| Jeffrey J. Peters    |       |                 | 2006         |                                                                          |       |                                                                                 | 20,000     |   |   |   | 33,035 |   |   |
|                      |       |                 | 2005         |                                                                          |       |                                                                                 | 85,006     |   |   |   | 125,518 |   |   |
|                      |       |                 | 2002  - 2004 |                                                                          |       |                                                                                 | 42,113     |   |   |   | 3,478 |   |   |

 

(3)             Represents amounts paid under the ev3 Inc. ExecutivePerformance Incentive Plan, which is described in more detail below under theheading “—Grants of Plan-Based Awards—ev3 Inc. Executive Performance IncentivePlan.

(4)             The amounts shown in this column includethe following with respect to each named executive officer:

| **Name**            | ** ** | ** ** | ** ** | **401(k)  Match** | ** ** | **Insurance  Premiums** | ** ** | **Auto  Allowance** | ** ** | **Other Personal  Benefits(a)** | ** ** |
|---------------------|------------|------------|------------|-------------------|------------|-------------------------|------------|---------------------|------------|--------------------------------------|------------|
| James M. Corbett    |       |       | $          | —            |       |                    |       | $                   | 860        |                                 |       |   | $ | — |   |   |   | $ | — |   |   |
| Patrick D. Spangler |       |       | 6,600      |              |       |                    | 860        |                |       |                                 | —     |   |   |   | — |   |   |
| Stacy Enxing Seng   |       |       | 6,600      |              |       |                    | 860        |                |       |                                 | —     |   |   |   | — |   |   |
| Pascal E.R. Girin   |       |       | —     |              |       |                    | —     |                |       |                                 | 28,365     |   |   |   | 19,698 |   |   |
| Jeffrey J. Peters   |       |       | 6,600      |              |       |                    | 860        |                |       |                                 | —     |   |   |   | — |   |   |

 

(a)    Includes inthe case of Mr. Girin a housing allowance in the amount of $19,698.

(5)          Reflected in U.S. dollars but paid in Euros. Conversioninto U.S. dollars based on conversion rate as of December 31, 2006.  Conversion rate as of December 31, 2006was one Euro to $1.3132. Base salary includes expatriate compensation of USD$56,139.

(6)          Mr. Peters resigned from his position as ChiefTechnology Officer effective as of February 28, 2007.

*EmploymentAgreements.*   We typically execute employmentoffer letters in conjunction with the hiring of our named executive officersthat describe starting annual salary, eligibility for participation in ourperformance incentive programs and initial stock option grants. The acceptanceof our offer of employment is conditioned upon the execution of an employmentagreement that includes non-compete, non-solicitation and confidentialityclauses. Our employment agreements do not contain any commitments regardingsalary or benefits, except for the timing of payment and a general descriptionof benefits. All of our named executive officers are employed at-will and arenot guaranteed employment for any specified duration.

*ev3401(k) Retirement Plan.**  *Underthe ev3 Inc. 401(k) Retirement Plan, participants, including namedexecutive officers, may voluntarily request that we reduce his or her pre-taxcompensation by up to 75% (subject to certain special limitations) andcontribute such amounts to the 401(k) plan’s trust. We 

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contribute matchingcontributions in an amount equal to 50% of a participant’s pre-tax401(k) contributions (other than catch-up contributions) for the payperiod or, if less, 3% of the participant’s eligible earnings for that pay period. The401(k) plan also has a “true-up” provision, meaning that at the endof the plan year an eligible participant may receive an additional matchingcontribution by applying the plan’s matching contribution formula to theparticipant’s aggregate 401(k) contributions and eligible earningsfor the entire plan year. Under the 401(k) plan, we may, in our solediscretion, also make profit sharing contributions on behalf of eligibleparticipants for any plan year. For 2006, we did not make anydiscretionary profit sharing contributions under the 401(k) plan.

*Indemnification Agreements.*   We have entered into agreements with ourexecutive officers under which we are required to indemnify them againstexpenses, judgments, penalties, fines, settlements and other amounts actuallyand reasonably incurred, including expenses of a derivative action, inconnection with an actual or threatened proceeding if any of them may be made aparty because he or she is or was one of our executive officers. We will beobligated to pay these amounts only if the executive officer acted in goodfaith and in a manner that he or she reasonably believed to be in or notopposed to our best interests. With respect to any criminal proceeding, we willbe obligated to pay these amounts only if the executive officer had noreasonable cause to believe his or her conduct was unlawful. Theindemnification agreements also set forth procedures that will apply in theevent of a claim for indemnification.

**Grants ofPlan-Based Awards**

Thefollowing table provides information concerning grants of plan-based awards toeach of our named executive officers during the fiscal year ended December 31,2006. Plan-based awards were granted to our named executive officers during2006 under the ev3 Inc. Executive Performance Incentive Plan and the ev3Inc. Amended and Restated 2005 Incentive Stock Plan. The material terms ofthese awards and the material plan provisions relevant to these awards aredescribed in the footnotes to the table below or in the narrative following thetable below.

**GRANTSOF PLAN-BASED AWARDS - 2006**

|                     | ** ** | ** ** | ** ** | **Estimated Future Payouts  Under Non-Equity Incentive Plan Awards(1)** | ** ** | **All Other  Stock   Awards:  Number of  Shares of   Stock or** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise or  Base  Price of   Option** | ** ** | **Grant Date  Fair Value  Stock and  Option** | ** ** |
|---------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Name**            | ** ** | ** ** | ** ** | **Grant  Date**                                                                                  | ** ** | **Threshold  ($)**                                                                            | ** ** | **Target  ($)**                                                             | ** ** | **Maximum  ($)**                                        | ** ** | **Units  (#)(2)**                                            | ** ** | **Options  (#)(3)** | ** ** | **Awards  ($/Sh)** | ** ** | **Awards  ($)(4)** | ** ** |
| James M. Corbett    |       | —     |       |                                                                                             | —     |                                                                                          |       | $                                                                           | 190,000    |                                                    |       | —                                                       |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                     |       | 01/20/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | — |   |   |   | 200,000 |   |   |   | $ | 16.05 |   |   |   | $ | 1,398,960 |   |   |
| Patrick D. Spangler |       | —     |       |                                                                                             | —     |                                                                                          |       | 116,438                                                                     |       |                                                    | —     |                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                |       | 01/20/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | — |   |   |   | 25,000 |   |   |   | 16.05 |   |   |   | 174,870 |   |   |
| Stacy Enxing Seng   |       | —     |       |                                                                                             | —     |                                                                                          |       | 121,095                                                                     |       |                                                    | —     |                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                     |       | 01/20/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | — |   |   |   | 20,000 |   |   |   | 16.05 |   |   |   | 139,896 |   |   |
|                     |       | 06/12/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | 18,313 |   |   |   | — |   |   |   | — |   |   |   | 253,452 |   |   |
| Pascal E.R. Girin   |       | —     |       |                                                                                             | —     |                                                                                          |       | 163,683                                                                     |       |                                                    | —     |                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                |       | 01/20/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | — |   |   |   | 25,000 |   |   |   | 16.05 |   |   |   | 174,870 |   |   |
|                |       | 01/27/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | 5,000 |   |   |   | — |   |   |   | — |   |   |   | 83,750 |   |   |
| Jeffrey J. Peters   |       | —     |       |                                                                                             | —     |                                                                                          |       | 93,150                                                                      |       |                                                    | —     |                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                     |       | 01/20/06   |       |                                                                                             | —     |                                                                                          |       | —                                                                      |       |                                                    | —     |                                                         |       |   | — |   |   |   | 20,000 |   |   |   | 16.05 |   |   |   | 139,896 |   |   |
|                     |            |            |            |                                                                                                  |            |                                                                                               |            |                                                                             |            |                                                         |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             The amount in the target column represents potentialtarget amount payouts under the ev3 Inc. Executive Performance Incentive Plan,the material terms of which are described in more detail below under theheading “—ev3 Inc. Executive Performance Incentive Plan.”  Due to the structure of the ev3 Inc.Executive Performance Incentive Plan, there were no threshold or maximumamounts for payouts under the plan in 2006.

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(2)             Represents an unrestricted stock grant in the case of Ms. EnxingSeng and a restricted stock unit, in the case of Mr. Girin, granted underthe ev3 Inc. Amended and Restated 2005 Incentive Stock Plan, the material termsof which are described in more detail below under the heading “—ev3 Inc.Amended and Restated 2005 Incentive Stock Plan.” Ms. Enxing Seng’s stockgrant was unrestricted, and thus, non-forfeitable upon issuance. Mr. Girin’srestricted stock unit will vest and 50% of the shares underlying the stockgrant will be issued on January 27, 2008; an additional 25% of the sharesunderlying the stock unit grant will vest and be issued on January 27,2009; and the remaining shares underlying the stock unit grant will vest and beissued on November 25, 2009, in each case so long as Mr. Girinremains an employee or consultant of our company. Mr. Girin will have novoting, dividend or other rights as a stockholder of our company with respectto the shares underlying the stock grant until such shares have vested and beenissued.

(3)             Represents options granted under the ev3 Inc. Amendedand Restated 2005 Incentive Stock Plan, the material terms of which aredescribed in more detail below under the heading “—ev3 Inc. Amended andRestated 2005 Incentive Stock Plan.”  Allsuch options were granted subject to stockholder approval of an amendment tothe 2005 plan to increase the number of shares of common stock available forissuance under the plan. Stockholder approval of such an amendment was obtainedon May 9, 2006. The grant date of the options for purposes of 123(R),however, is the date that the non-employee directors of our compensationcommittee approved the option grant, however, since stockholder approval of theamendment was essentially a formality or perfunctory since our board ofdirectors unanimously recommended that stockholders vote in favor of the amendmentand our majority stockholder has a representative on our board. The options have a ten-year term andvest over a four-year period, with 25% of the underlying shares vesting on theone-year anniversary of the date of grant and 1/36 of the remaining 75% of theunderlying shares vesting each month after the one-year anniversary date, ineach case, so long as the individual remains an employee or consultant of ourcompany.

(4)             We refer you to note 2 to our consolidated financialstatements for the fiscal year ended December 31, 2006 for a discussion ofthe assumptions made in calculating the grant date fair value of stock andoption awards.

*ev3Inc. Executive Performance Incentive Plan.**  *Under the terms of the ev3 Inc.Executive Performance Incentive Plan, our named executive officers, as well asother executives of our company, are eligible to earn quarterly cash bonusesbased on our quarterly financial performance. The material terms of our plandescribed in detail under Item 11—Executive Compensation under the heading “CompensationDiscussion and Analysis—Executive Compensation Components—Short-term IncentiveCompensation.”

*ev3Inc. Amended and Restated 2005 Incentive Stock Plan.**  *Under the terms of the ev3 Inc.Amended and Restated 2005 Incentive Stock Plan, our named executive officers,in addition to other employees and individuals, are eligible to receive equitycompensation awards, such as stock options, stock appreciation rights, stockgrants and stock unit grants. To date, only non-statutory stock options, stockgrants and stock unit grants have been granted under the plan. The plancontains both an overall limit on the number of shares of our common stock thatmay be issued, as well as individual and other grant limits.

Under the terms of the plan, stock options must begranted with a per share exercise price equal to at least the fair market valueof a share of our common stock on the date of grant. For purposes of the plan,the fair market value of our common stock is the closing sale price of ourcommon stock, as reported by the NASDAQ Global Select Market. We generally setthe per share exercise price of all stock options granted under the plan at anamount equal to the fair market value of a share of our common stock on thedate of grant. The plan prohibits our board of directors to take any action,whether through amendment, cancellation, replacement grants, or any othermeans, to reduce the exercise price of any outstanding stock options absent theapproval of our stockholders.

Options become exercisable at such times and in suchinstallments as may be determined by our board of directors, provided that mostoptions may not be exercisable after 10 years from their date of grant. Thevesting of our stock options is generally time-based and is as follows:  one-quarter of the shares underlying thestock option on the first year anniversary of the date of grant (or if later,on the date of hire) and 1/36 of the shares underlying the stock option on theone-month anniversary of the date of grant (or date of hire) thereafter, ineach case rounding downto the nearest whole number of shares to avoid the vesting of fractionalshares.

Optionees may pay the exercise price of stock optionsin cash, except that the Compensation Committee may allow payment to be made(in whole or in part) by certain “cashless exercise” methods, 

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such as using abroker-assisted cashless exercise procedure pursuant to which the optionee,upon exercise of an option, irrevocably instructs a broker or dealer to sell asufficient number of shares of our common stock or loan a sufficient amount ofmoney to pay all or a portion of the exercise price of the option and/or anyrelated withholding tax obligations and remit such sums to us and directs us todeliver stock certificates to be issued upon such exercise directly to suchbroker or dealer.

Under the terms ofthe grant certificates under which stock options have been granted to the namedexecutive officers, if an officer’s employment or service with our companyterminates for any reason, the unvested portion of the option will immediatelyterminate and the officer’s right to exercise the then vested portion of theoption will:

·       immediatelyterminate if the officer’s employment or service relationship with our companyterminated for “cause”;

·       continuefor a period of one year if the officer’s employment or service relationshipwith our company terminates as a result of the officer’s death or disability;or

·       continuefor a period of 90 days if the officer’s employment or service relationshipwith our company terminates for any reason, other than for cause or upon deathor disability.

“Cause” for purposes of the grant certificates means: (1) anoptionee has engaged in conduct that in the judgment of the board of directorsconstitutes gross negligence, misconduct or gross neglect in the performance ofthe optionee’s duties and responsibilities, including conduct resulting orintending to result directly or indirectly in gain or personal enrichment foroptionee at our expense; (2) an optionee has been convicted of or has pledguilty to a felony for fraud, embezzlement or theft; (3) an optionee hasengaged in a breach of any of our policies for which termination of employmentor service is a permissible consequence or an optionee has not immediatelycured any performance or other issues raised by an optionee’s supervisor; (4) anoptionee had knowledge of (and did not disclose to us in writing) any conditionthat could potentially impair the optionee’s ability to perform the functionsof his or her job or service relationship fully, completely and successfully;or (5) an optionee has engaged in any conduct that would constitute “cause”under the terms of his or her employment or consulting agreement, if any.

Recipients of stock grants under the plan have theright to vote and receive cash dividends with respect to the shares subject tosuch stock grants, even if the stock grants are restricted or subject toforfeiture. Any stock dividends or other distributions of property made withrespect to shares that remain subject to forfeiture are held by us and therecipient’s rights to receive such dividends or other property will beforfeited or will be nonforfeitable at the same time the shares of stock withrespect to which the dividends or other property are attributable are forfeitedor become nonforfeitable.

Under the terms of the grant certificates under whichthe restricted stock grants have been granted to the named executive officers,other than Mr. Girin, if a named executive officer ceases to be anemployee or consultant of our company for any reason, then the officer willforfeit all of the unvested or restricted shares of our common stock subject tothe stock grant. Under the terms of the grant certificate under which Mr. Girinwas granted a restricted stock unit, if Mr. Girin ceases to be an employeeor consultant of our company for any reason, other than his death, then he willforfeit all of the unvested or unissued shares of our common stock subject tothe stock grant. If Mr. Girin ceases to be an employee or consultant ofour company as a result of his death, then all of the unvested or unissuedshares of our common stock subject to the stock grant will be immediately vestedand issued to Mr. Girin’s heirs. Any shares of our common stock issued to Mr. Girinas a result of a restricted stock unit grant must be held by him for a minimumof two years after issuance.

As described in more detail under the heading “—PotentialPayments Upon Termination or Change in Control,” if there is a change incontrol of our company, then, under the terms of the 2005 plan, all conditionsto the exercise of all outstanding options and all issuance or forfeitureconditions on all 

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outstanding stock grantsand stock unit grants will be deemed satisfied; provided if any such issuanceor forfeiture condition relates to satisfying any performance goal and there isa target for the goal, the issuance or forfeiture condition will be deemedsatisfied generally only to the extent of the stated target.

*Other InformationRegarding Plan-Based Awards.*   Under change incontrol letter agreements we have entered into with our named executiveofficers, upon the occurrence of a change in control, all stock options orstock awards then held by the officer pursuant to our stock incentive planswould be accelerated and all such options would become fully vested andimmediately exercisable, unless in the case of all of the named executiveofficers, except Mr. Corbett, the acquiring entity or successor assumes orreplaces unvested stock options or awards granted to the officer and theacquiring entity or successor offers the officer employment after the change incontrol and the officer’s employment is not thereafter terminated under thecircumstances that would entitle the officer to a cash payment as described inmore detail under the heading “—Potential Payments Upon Termination or Changein Control.”

**Outstanding EquityAwards at Fiscal Year End**

Thefollowing table provides information regarding unexercised stock options,restricted stock or restricted stock units that have not vested for each of ournamed executive officers that remained outstanding at December 31, 2006. Wedid not have any equity incentive plan awards outstanding at December 31,2006.

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**OUTSTANDINGEQUITY AWARDS AT FISCAL YEAR-END - 2006**

|                     | ** ** | **Option Awards** | ** ** | **Stock Awards**                                                  | ** ** |
|---------------------|------------|------------------------|------------|------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Number of**     | ** ** | **Number of**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Name**            | ** ** | ** **             | ** ** | **Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Securities  Underlying  Unexercised  Options (#)  Unexercisable(1)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of Stock  That Have  Not Vested (#)** | ** ** | **Market Value  of Shares or  Units That  Have Not  Vested ($)(2)** | ** ** |
| James M. Corbett    |       |                   | 0          |                                                                   |       |   | 200,000 | (3) |   |   | $ | 16.05 |   |   |   | 01/20/2016 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 106,250    |                                                                   |       |   | 193,750 | (4) |   |   | 14.00 |   |   |   | 07/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 952        |                                                                   |       |   | 953 | (5) |   |   | 8.40 |   |   |   | 05/26/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 24,956     |                                                                   |       |   | 27,127 | (7) |   |   | 8.82 |   |   |   | 01/07/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 18,880     |                                                                   |       |   | 12,370 | (8) |   |   | 8.82 |   |   |   | 07/29/2014 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 1,428      |                                                                   |       |   | 477 | (9) |   |   | 8.76 |   |   |   | 05/20/2014 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 7,595      |                                                                   |       |   | 2,821 | (10) |   |   | 8.82 |   |   |   | 01/01/2014 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 13,229     |                                                                   |       |   | 3,481 | (11) |   |   | 8.82 |   |   |   | 10/29/2013 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 1,905      |                                                                   |       |   | 0 |   |   |   | 6.47 |   |   |   | 05/22/2013 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 10,838     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 04/07/2013 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 21,996     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 08/07/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 4,230      |                                                                   |       |   | 0 |   |   |   | 3.54 |   |   |   | 06/20/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 10,561     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 06/20/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 4,762      |                                                                   |       |   | 0 |   |   |   | 9.13 |   |   |   | 06/04/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 23,814     |                                                                   |       |   | 0 |   |   |   | 14.70 |   |   |   | 01/14/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 7,620      |                                                                   |       |   | 0 |   |   |   | 13.23 |   |   |   | 01/02/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | —     |                                                                   |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 75,000 | (12) |   |   | $ | 1,292,250 |   |   |
| Patrick D. Spangler |       |                   | 0          |                                                                   |       |   | 25,000 | (3) |   |   | 16.05 |   |   |   | 01/20/2016 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | 23,375     |                                                                   |       |   | 42,625 | (4) |   |   | 14.00 |   |   |   | 07/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | 32,813     |                                                                   |       |   | 42,187 | (13) |   |   | 8.82 |   |   |   | 03/14/2015 |   |   |   | — |   |   |   | — |   |   |
| Stacy Enxing Seng   |       |                   | 0          |                                                                   |       |   | 20,000 | (3) |   |   | 16.05 |   |   |   | 01/20/2016 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 35,088     |                                                                   |       |   | 63,984 | (4) |   |   | 14.00 |   |   |   | 07/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 11,458     |                                                                   |       |   | 13,542 | (6) |   |   | 8.82 |   |   |   | 02/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 3,993      |                                                                   |       |   | 4,340 | (7) |   |   | 8.82 |   |   |   | 01/07/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 1,762      |                                                                   |       |   | 1,154 | (8) |   |   | 8.82 |   |   |   | 07/19/2014 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 8,073      |                                                                   |       |   | 4,427 | (14) |   |   | 8.82 |   |   |   | 05/07/2014 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 15,300     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 04/07/2013 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 27,097     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 08/07/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 8,574      |                                                                   |       |   | 0 |   |   |   | 3.54 |   |   |   | 06/20/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 12,860     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 06/20/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | —     |                                                                   |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 26,250 | (12) |   |   | 452,288 |   |   |
| Pascal E.R. Girin   |       |                   | 0          |                                                                   |       |   | 25,000 | (3) |   |   | 16.05 |   |   |   | 01/20/2016 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | 31,167     |                                                                   |       |   | 56,833 | (4) |   |   | 14.00 |   |   |   | 07/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | 3,194      |                                                                   |       |   | 3,472 | (7) |   |   | 8.82 |   |   |   | 01/07/2015 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | 3,021      |                                                                   |       |   | 1,979 | (8) |   |   | 8.82 |   |   |   | 07/19/2014 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | 25,500     |                                                                   |       |   | 5,100 | (15) |   |   | 8.82 |   |   |   | 08/15/2013 |   |   |   | — |   |   |   | — |   |   |
|                |       |                   | —     |                                                                   |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,000 | (16) |   |   | 86,150 |   |   |
| Jeffrey J. Peters   |       |                   | 0          |                                                                   |       |   | 20,000 | (3) |   |   | 16.05 |   |   |   | 01/20/2016 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 21,548     |                                                                   |       |   | 39,292 | (4) |   |   | 14.00 |   |   |   | 07/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 5,729      |                                                                   |       |   | 6,771 | (6) |   |   | 8.82 |   |   |   | 02/01/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 5,590      |                                                                   |       |   | 6,076 | (7) |   |   | 8.82 |   |   |   | 01/07/2015 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 3,524      |                                                                   |       |   | 2,309 | (8) |   |   | 8.82 |   |   |   | 07/19/2014 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 3,750      |                                                                   |       |   | 1,250 | (18) |   |   | 8.82 |   |   |   | 12/09/2013 |   |   |   |   |   |   |   |   |   |   |
|                     |       |                   | 12,240     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 04/07/2013 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 14,477     |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 08/07/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 2,854      |                                                                   |       |   | 0 |   |   |   | 3.54 |   |   |   | 06/20/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 4,563      |                                                                   |       |   | 0 |   |   |   | 8.82 |   |   |   | 06/20/2012 |   |   |   | — |   |   |   | — |   |   |
|                     |       |                   | —     |                                                                   |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 15,000 | (12) |   |   | $ | 258,450 |   |   |
|                     |            |                        |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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          (1) Upon theoccurrence of a change in control, the unvested and unexercisable optionsdescribed in this table may be accelerated and become fully vested andimmediately exercisable as of the date of the change in control. For moreinformation, we refer you to the discussion under the heading “—PotentialPayments Upon Termination or Change in Control.”

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          (2) The marketvalue of restricted stock or restricted stock units that have not vested yet isbased on the closing sale price of our common stock on December 29, 2006($17.23), the last trading day prior to the last day of fiscal year ended December 31,2006.

          (3) This optionvests over a four-year period, with 25% of the underlying shares vesting on January 20,2007 and 1/36 of the remaining 75% of the underlying shares vesting on the 20th day of eachmonth of the next 36 months thereafter.

          (4) This optionvests over a four-year period, with 25% of the underlying shares vesting on July 1,2006 and 1/36 of the remaining 75% of the underlying shares vesting on the 1st day of eachmonth of the next 36 months thereafter.

          (5) This optionvests over a four-year period, with 25% of the underlying shares vesting on May 26,2006 and 1/36 of the remaining 75% of the underlying shares vesting on the 26th day of eachmonth of the next 36 months thereafter.

          (6) This optionvests over a four-year period, with 25% of the underlying shares vesting on February 1,2006 and 1/36 of the remaining 75% of the underlying shares vesting on the 1st day of eachmonth of the next 36 months thereafter.

          (7) This optionvests over a four-year period, with 25% of the underlying shares vesting on January 7,2006 and 1/36 of the remaining 75% of the underlying shares vesting on the 20th day of eachmonth of the next 36 months thereafter.

          (8) This optionvests over a four-year period, with 25% of the underlying shares vesting on July 29,2005 and 1/36 of the remaining 75% of the underlying shares vesting on the 29th day of eachmonth of the next 36 months thereafter.

          (9) This optionvests over a four-year period, with 25% of the underlying shares vesting on May 20,2005 and 1/36 of the remaining 75% of the underlying shares vesting on the 20th day of eachmonth of the next 36 months thereafter.

    (10) This optionvests over a four-year period, with 25% of the underlying shares vesting on January 1,2005 and 1/36 of the remaining 75% of the underlying shares vesting on the 1st day of eachmonth of the next 36 months thereafter.

    (11) This optionvests over a four-year period, with 25% of the underlying shares vesting on October 28,2004 and 1/36 of the remaining 75% of the underlying shares vesting on the 28th day of eachmonth of the next 36 months thereafter.

    (12) Thisrestricted stock grant vests as follows: one-third of the underlying shares will vest on November 15, 2007;one-third of the underlying shares will vest on November 15, 2008 and theremaining one-third of the underlying shares will vest on November 15,2009.

    (13) This optionvests over a four-year period, with 25% of the underlying shares vesting on March 14,2006 and 1/36 of the remaining 75% of the underlying shares vesting on the 14th day of eachmonth of the next 36 months thereafter.

    (14) This optionvests over a four-year period, with 25% of the underlying shares vesting on May 7,2005 and 1/36 of the remaining 75% of the underlying shares vesting on the 7th day of eachmonth of the next 36 months thereafter.

    (15) This optionvests over a four-year period, with 25% of the underlying shares vesting on August 15,2005 and 1/36 of the remaining 75% of the underlying shares vesting on the 15th day of eachmonth of the next 36 months thereafter.

    (16) Thisrestricted stock unit grant vests as follows: 50% of the underlying shares will vest and be issued on January 27,2008; an additional 25% of the underlying shares will vest and be issued on January 27,2009 and the remaining underlying shares will vest and be issued on November 25,2009.

    (17) This optionvests over a four-year period, with 25% of the underlying shares vesting on April 3,2007 and 1/36 of the remaining 75% of the underlying shares vesting on the 31st day of eachmonth of the next 36 months thereafter.

    (18) Thisoption vests over a four-year period, with 25% of the underlying shares vestingon December 9, 2004 and 1/36 of the remaining 75% of the underlying sharesvesting on the 9th dayof each month of the next 36 months thereafter.

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**Options Exercisedand Stock Vested During Fiscal Year**

The following table provides information regarding theexercise of stock options and the vesting of restricted stock or restrictedstock units during the fiscal year ended December 31, 2006 for each of ournamed executive officers on an aggregated basis.

**OPTIONSEXERCISES AND STOCK VESTED - 2006**

| ** **          | ** ** | **Option Awards** | ** ** | **Stock Awards**                                               | ** ** |
|---------------------|------------|------------------------|------------|---------------------------------------------------------------------|------------|
| **Name**            | ** ** | ** **             | ** ** | **Number of  Shares Acquired  on Exercise (#)** | ** ** | **Value Realized  on Exercise ($)(1)** | ** ** | **Number of  Shares Acquired  on Vesting (#)** | ** ** | **Value Realized  on Vesting ($)(2)** | ** ** |
| James M. Corbett    |       |                   | —     |                                                                |       |   | — |   |   |   | 25,000 |   |   |   | $ | 452,000 |   |   |
| Patrick D. Spangler |       |                   | —     |                                                                |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Stacy Enxing Seng   |       |                   | —     |                                                                |       |   | — |   |   |   | 27,063 |   |   |   | 411,652 |   |   |
| Pascal E.R. Girin   |       |                   | —     |                                                                |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Jeffrey J. Peters   |       |                   | —     |                                                                |       |   | — |   |   |   | 5,000 |   |   |   | 90,400 |   |   |
|                     |            |                        |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          The aggregate dollarvalue realized upon exercise is the difference between the market price of theunderlying shares of our common stock on the date of exercise, based on theclosing sale price of our common stock on the date of exercise, and theexercise price of the options.

(2)          The aggregate dollarvalue realized upon vesting is the market value of the underlying shares of ourcommon stock, based on the closing sale price of our common stock on the dateof vesting.

**Potential PaymentsUpon Termination or Change in Control**

All of our named executive officers are employed “at will” and are notentitled to any severance or other payments under any agreement or contractupon their termination of employment without cause or otherwise. We dohave a discretionary practice of entering into severance packages withemployees upon termination of the employment. In the event a named executiveofficer was terminated the compensation committee would exercises its businessjudgment in determining whether or not a separation arrangement was appropriateand would determine the terms of any separation arrangement in light of allrelevant circumstances including the individual’s term of employment, pastaccomplishments and reasons for separation from the Company. We also have entered into agreements with ournamed executive officers that require us to provide compensation to them in theevent of a “change in control” of our company or a termination of theiremployment in connection with, or within a certain period of time after, achange in control of our company. For purposes of the agreements, a“change in control” means:

·       thesale, lease, exchange or other transfer, directly or indirectly, of all orsubstantially all of our assets, in one transaction or in a series of relatedtransactions, to a third party;

·       anythird party, other than a bona fide underwriter, is or becomes the “beneficialowner” (as defined in Rule 13d-3 under the Securities Exchange Actof 1934, as amended), directly or indirectly, of securities(x) representing 50% or more of the combined voting power of ouroutstanding securities ordinarily having the right to vote at elections ofdirectors, or (y) resulting in such third party becoming an affiliate ofour company, including pursuant to a transaction described in the next bulletbelow;

·       theconsummation of any transaction or series of transactions under which we aremerged or consolidated with any other company, other than a merger orconsolidation which would result in our stockholders immediately prior theretocontinuing to own (either by remaining outstanding or by being converted intovoting securities of the surviving entity) more than 50% of the combined 

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voting power of the votingsecurities of the surviving entity outstanding immediately after such merger orconsolidation; or

·       the“continuity directors” cease for any reason to constitute at least a majorityof our board of directors.

For purposes of this definition, a “continuitydirector” means an individual who, as of the date of the change in controlagreement, is a member of our board of directors, and any other individual whobecomes a director subsequent to the date of the agreement whose election, ornomination for election by our stockholders, was approved by a vote of at leasta majority of the directors then comprising the continuity directors, butexcluding for this purpose any individual whose initial assumption of officeoccurs as a result of an actual or threatened election contest with respect tothe election or removal of directors or other actual or threatened solicitationof proxies or consents by or on behalf of a person or entity other than ourboard of directors.

*JamesM. Corbett Change in Control Agreement.**  *Mr. Corbett’s agreement entitles him, upon theoccurrence of a change in control, to base pay owed to him through such dateand a pro rata portion of his bonus plan payment based on the number of monthsin the year worked prior to the change in control. In addition, whether or notMr. Corbett is offered future employment with the successor or thesurviving subsidiary, Mr. Corbett would receive a lump sum payment equalto 18 months of his then-current base pay, and an amount equal to 150% of hisbonus plan payment for the current year. The amount of the bonus plan paymentis based on the assumption that all of the annual performance milestones willhave been satisfied for such year. However, if Mr. Corbett is employed bythe successor or the surviving subsidiary, this cash payment would be deferreduntil the earlier of the end of the six-month period or the date ofMr. Corbett’s termination following the change in control. Further,however, no such payment would be due if Mr. Corbett’s employment isterminated during six-month period for “cause” or by Mr. Corbett without“good reason.”  For purposes of theagreement, “cause” means: (1) Mr. Corbett’s gross misconduct;(2) his willful and continued failure to perform substantially his dutiesafter notice of such failure; or (3) his conviction of willfully engagingin illegal conduct constituting a felony or gross misdemeanor under federal orstate law which is materially and demonstrably injurious to our company orwhich impairs his ability to perform substantially his duties. For purposes ofthe agreement, “good reason” includes: (1) a substantial change in status,position(s), duties or responsibilities; (2) a reduction in base pay, amaterial change in the annual bonus plan payment expectations, or an adverse changein the form or timing of such payments; (3) our failure to provideMr. Corbett similar benefits at a similar cost to those provided prior tothe change in control; and (4) our requiring Mr. Corbett to be basedmore than 50 miles from where his office was located prior to the change incontrol.

Upon the occurrence of a change in control,Mr. Corbett’s stock options or stock awards pursuant to our stockincentive plans would be accelerated and all such options would become fullyvested and immediately exercisable. In addition, beginning on the date oftermination following a change in control, Mr. Corbett would also beentitled to group health plan benefits for himself and his dependents for up to18 months and reasonable outplacement services with a cost of up to $40,000. Tothe extent any payments received by Mr. Corbett under the agreementconstitute parachute payments which result in an excise tax underSection 4999 of the Code, Mr. Corbett would receive a gross-uppayment to cover such excise tax as well as applicable taxes on such gross-uppayment. The agreement also provides that, in addition to any otherindemnification obligations that we may have, if, following a change in controlof our company, Mr. Corbett incurs damages, costs or expenses (including,without limitation, judgments, fines and reasonable attorneys’ fees) as aresult of his service to our company or status as an officer of our company, wewill indemnify him to the fullest extent permitted by law, except to the extentthat such damages, costs or expenses arose as a result of his gross negligenceor willful misconduct.

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*OtherNamed Executive Officers Change in Control Agreements.**  *The agreements with our other named executiveofficers entitle each of them, upon the occurrence of a change in control, tobase pay owed to the officer through such date and a pro rata portion of theofficer’s bonus plan payment based on the number of months in the year workedprior to the change in control. In addition, if the officer is not offeredfuture employment with the successor or the surviving subsidiary, then theofficer would be entitled to receive a lump sum cash payment equal to 12 monthsof the officer’s then-current base pay and the full amount of a bonus planpayment for the next 12 months, with the bonus plan payment equal to the amountfor the current year. If the officer is offered future employment but isterminated by the successor or surviving subsidiary for any reason other thandeath or for cause, or if the officer terminates his or her employment for goodreason within 24 months following the change in control, then the officer wouldbe entitled to receive a lump sum cash payment equal to 12 months of theofficer’s then-current base pay and the full annualized amount due under theofficer’s then-current bonus plan payment commitment which is payable withinthe next 12 months. The amount of the bonus plan payment in both situations isbased on the assumption that all of the annual performance milestones will havebeen satisfied for such year.

In addition, upon the occurrence of a change incontrol, the officer’s stock options or stock awards pursuant to our stockincentive plans would be accelerated and all such options would become fullyvested and immediately exercisable unless the acquiring entity or successorassumes or replaces the unvested stock options or stock awards granted to theofficer and the acquiring entity or successor offers the officer employmentafter the change in control and his or her employment is not thereafter terminatedunder the circumstances that would entitle the officer to a cash payment asdescribed above. The officer would also be entitled to group health planbenefits for the officer and his or her dependents for up to 18 months,reasonable outplacement services with a cost of up to $20,000 and the sameindemnification rights and tax gross-up payment rights as found inMr. Corbett’s agreement.

If, upon a change in control, an offer of employmentis made to the officer by the successor or the surviving subsidiary anddeclined by the officer, the officer will not be entitled to the lump sum cashpayment, group health plan benefits, or tax gross-up payment rights describedabove.

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*Potential Payments toNamed Executive Officers.**  *The followingtable describes the potential payments to each of our named executive officers (i)in the event of their termination upon the occurrence of a change in control ofour company, or (ii) within 24 months following the change in control, their involuntarytermination or termination by them with good reason. For purposes of thiscalculation we have assumed the change in control and termination eventoccurred on December 31, 2006 and the acquiring company has elected not toassume any stock options or stock awards held by the named executive officers,resulting in the acceleration of their vesting under the terms of each namedexecutive officer’s change in control agreement.

| Name                | ** ** | ** **                                        | ** ** | **Executive Benefits and Payments** | ** ** | **Potential Payments   in connection with Change in Control** | ** ** |
|---------------------|------------|---------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| James M. Corbett    |       | Lump Sum Payment Based on Base Salary(1)          |       |                                          | $     | 570,000                                                                 |       |   |
|                     |       | Lump Sum Payment Based on Annual Bonus Plan(1)(2) |       |                                          | 285,000    |                                                                    |       |
|                     |       | Unvested and Accelerated Stock Options(3)(4)      |       |                                          | 1,259,437  |                                                                    |       |
|                     |       | Unvested and Accelerated Restricted Stock(3)(5)   |       |                                          | 1,292,250  |                                                                    |       |
|                     |       | Group Health Plan Benefits(6)                     |       |                                          | 23,062     |                                                                    |       |
|                     |       | Outplacement Services(7)                          |       |                                          | 40,000     |                                                                    |       |
|                     |       | Accrued Paid Time Off(8)                          | ** ** | ** **                                    | 98,873     |                                                                    |       |
|                     |       | 280G Tax Gross-up Payment(9)                      | ** ** | ** **                                    | 633,000    |                                                                    |       |
|                     |       | Total:                                            | ** ** | ** **                                    | 4,201,622  |                                                                    |       |
| Patrick D. Spangler |       | Lump Sum Payment Based on  Base Salary            |       |                                          | $     | 258,750                                                                 |       |   |
|                |       | Lump Sum Payment Based on Annual Bonus Plan(10)   |       |                                          | 116,438    |                                                                    |       |
|                |       | Unvested and Accelerated Stock Options(4)(11)     |       |                                          | 521,971    |                                                                    |       |
|                |       | Unvested and Accelerated Restricted Stock(5)(11)  |       |                                          | —     |                                                                    |       |
|                |       | Group Health Plan Benefits(6)                     |       |                                          | 14,239     |                                                                    |       |
|                |       | Outplacement Services                             |       |                                          | 20,000     |                                                                    |       |
|                |       | 280G Tax Gross-up Payment(9)                      | ** ** | ** **                                    | —     |                                                                    |       |
|                |       | Total:                                            | ** ** | ** **                                    | 931,397    |                                                                    |       |
| Stacy Enxing Seng   |       | Lump Sum Payment Based on  Base Salary            |       |                                          | $     | 269,100                                                                 |       |   |
|                     |       | Lump Sum Payment Based on Annual Bonus Plan(10)   |       |                                          | 121,095    |                                                                    |       |
|                     |       | Unvested and Accelerated Stock Options(4)(11)     |       |                                          | 427,592    |                                                                    |       |
|                     |       | Unvested and Accelerated Restricted Stock(5)(11)  |       |                                          | 452,288    |                                                                    |       |
|                     |       | Group Health Plan Benefits(6)                     |       |                                          | 14,239     |                                                                    |       |
|                     |       | Outplacement Services                             |       |                                          | 20,000     |                                                                    |       |
|                     |       | 280G Tax Gross-up Payment(9)                      | ** ** | ** **                                    | —     |                                                                    |       |
|                     |       | Total:                                            | ** ** | ** **                                    | 1,304,314  |                                                                    |       |

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| Pascal E.R. Girin(12) |   | Lump Sum Payment Based on Base Salary            |       |       | $  | 363,741 |   |   |
|-----------------------|--------|--------------------------------------------------|------------|------------|---------|---------|--------|--------|
|                  |   | Lump Sum Payment Based on Annual Bonus Plan(10)  |       |       | 163,683 |    |   |
|                  |   | Unvested and Accelerated Stock Options(4)(11)    |       |       | 301,805 |    |   |
|                  |   | Unvested and Accelerated Restricted Stock(5)(11) |       |       | 86,150  |    |   |
|                  |   | Group Health Plan Benefits(6)                    | ** ** | ** ** | 40,928  |    |   |
|                  |   | Outplacement Services                            |       |       | 20,000  |    |   |
|                  |   | 280G Tax Gross-up Payment(9)                     | ** ** | ** ** | —  |    |   |
|                  |   | Total:                                           | ** ** | ** ** | 976,308 |    |   |
| Jeffrey J. Peters     |   | Lump Sum Payment Based on  Base Salary           |       |       | $  | 232,875 |   |   |
|                       |   | Lump Sum Payment Based on Annual Bonus Plan(10)  |       |       | 104,794 |    |   |
|                       |   | Unvested and Accelerated Stock Options(4)(11)    |       |       | 288,488 |    |   |
|                       |   | Unvested and Accelerated Restricted Stock(5)(11) |       |       | 258,450 |    |   |
|                       |   | Group Health Plan Benefits(6)                    |       |       | 1,435   |    |   |
|                       |   | Outplacement Services                            |       |       | 20,000  |    |   |
|                       |   | 280G Tax Gross-up Payment(9)                     | ** ** | ** ** | —  |    |   |
|                       |   | Total:                                           |       |       | 906,042 |    |   |

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       (1) If Mr. Corbett is employed by the successor or the surviving subsidiaryafter the change in control, this payment would be deferred until the earlierof six months after the date of the change in control or the date ofMr. Corbett’s termination following the change in control. Otherwise, thispayment would be paid upon the occurrence of the change in control.

       (2) The bonus plan payment to Mr. Corbett is an amount equal to150% of Mr. Corbett’s bonus plan payment for the current year. Inaccordance with the change in control agreement, the amount of the bonus planpayment is based on the assumption that all of the annual performancemilestones were satisfied.

       (3) In the event of a change in control, Mr. Corbett’s stock options andstock awards would be accelerated and become fully vested and, as applicable,immediately exercisable, regardless of whether the acquiring entity orsuccessor assumes or replaces the unvested stock options or stock awardsgranted to Mr. Corbett.

       (4) The value of the automatic acceleration of the vesting of unvestedstock options held by a named executive officer is based on the differencebetween: (i) the market price of the shares of our common stock underlyingthe unvested stock options held by such officer as of December 31, 2006,which is based on the closing sale price of our common stock onDecember 29, 2006 ($17.23), the last trading day prior toDecember 31, 2006, and (ii) the exercise price of the options.

       (5) The value of the automatic acceleration of the vesting of restrictedstock or restricted stock units held by a named executive officer is based on:(i) the number of unvested shares of restricted stock or restricted stockunits held by such officer as of December 31, 2006, multiplied by(ii) the market price of our common stock on December 31, 2006, whichis based on the closing sale price of our common stock on December 29,2006 ($17.23), the last trading day prior to December 31, 2006.

       (6) The value of the group health plan benefits is based on premiumsrates in effect in December 2006.

       (7) Mr. Corbett is entitled to reasonable outplacement services atthe time the lump sum payments based on base salary and the annual bonus planare made. In the case where Mr. Corbett is employed by the successor orthe surviving subsidiary after the change in control, the Mr. Corbett’s rightto payment of reasonable outplacement services would be deferred until theearlier of six months after the date of 

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the change in control orthe date of Mr. Corbett’s termination following the change in control.Otherwise, Mr. Corbett would have a right to payment of reasonableoutplacement services upon the occurrence of the change in control.

       (8) Represents amounts paid for accrued time off in excess of theaccrual cap under our Paid Time Off Policy for U.S. Employees.

       (9) The value of the gross-up payment to cover excise taxes underSection 4999 of the Code for parachute payments under Section 280G ofthe Code.

(10) For a termination upon change in control, the bonus plan payment isthe full amount of a bonus plan payment for the next 12 months, with the bonusplan payment equal to the amount for the current year. For an involuntary or goodreason termination within 24 months following change in control, the bonus planpayment is the full annualized amount due under the officer’s then-currentbonus plan payment commitment which is payable within the next 12 months, whichwas assumed for purposes of this table to be equal to the amount for the currentyear. In accordance with the change in control agreement, the amount of thebonus plan payment is based on the assumption that all of the annualperformance milestones were satisfied.

(11)   For the purposes of the tableabove, it is assumed that the acquiring entity or successor will not assume theunvested stock options or stock awards or replace them with substantiallysimilar stock options or agreements. Under the terms of the change in controlagreement with the officer, the stock options and stock awards would beaccelerated and become fully vested and, as applicable, immediately exercisableunless the acquiring entity or successor assumes or replaces the unvested stockoptions or stock awards granted to the officer and the acquiring entity orsuccessor offers the officer employment after the change in control and his orher employment is not thereafter terminated by the officer for good reason orby the acquiring entity or successor for any reason other than death or forcause.

(12) For the purposes of determining the value of payments to Mr. Girin,it is assumed that any notice requirements under applicable law will have beensatisfied.

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**DirectorCompensation**

***Summaryof Cash and Other Compensation***

The following tableprovides summary information concerning the compensation of each individual whoserved as a director of our company during the year ended December 31,2006, other than James M. Corbett, our President and Executive Officer, whosecompensation is set forth under the heading “Executive Compensation.”

**DIRECTORCOMPENSATION—2006**

| **Name**                | ** ** | ** ** | ** **    | **Fees Earned or Paid  in Cash ($)** | ** ** | **Option  Awards ($)(1)(2)(3)** | ** **    | **All Other  Compensation ($)(4)** | ** ** | **Total ($)** | ** **                                                    |
|-------------------------|------------|------------|---------------|---------------------------------------------------------------|------------|--------------------------------------|---------------|----------------------------------------------|------------|--------------------|---------------------------------------------------------------|
| John K. Bakewell(5)     |       |       | $ 30,500 |                                                          |       |                                 | $ 48,029 |                                         |       |               | $         — |   |   | $ 78,529 |   |
| Haywood D.  Cochrane(6) |       |       | 8,500         |                                                          |       |                                 | 48,715        |                                         |       |               | —                                                        |   |   | 57,215 |   |
| Richard B. Emmitt       |       |       | —        |                                                          |       |                                 | 2,762         |                                         |       |               | —                                                        |   |   | 2,762 |   |
| Douglas W. Kohrs        |       |       | 34,000        |                                                          |       |                                 | 76,375        |                                         |       |               | —                                                        |   |   | 110,375 |   |
| Dale A. Spencer         |       |       | —        |                                                          |       |                                 | 133,730       |                                         |       |               | 309,000                                                       |   |   | 442,730 |   |
| Thomas E. Timbie        |       |       | 24,000        |                                                          |       |                                 | 191,638       |                                         |       |               | —                                                        |   |   | 215,638 |   |
| Elizabeth H. Weatherman |       |       | —        |                                                          |       |                                 | 2,762         |                                         |       |               | —                                                        |   |   | 2,762 |   |

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(1)          Reflectsthe dollar amount recognized for each director for financial statementreporting purposes with respect to the fiscal year ended December 31, 2006in accordance with FAS 123R, without taking into account forfeiture rates. Werefer you to note 2 to our consolidated financial statements for the fiscalyear ended December 31, 2006 for a discussion of the assumptions made incalculating the dollar amount recognized for each director for financialstatement reporting purposes with respect to the fiscal year ended December 31,2006 in accordance with FAS 123R. The following table provides additionalinformation regarding the dollar amount recognized during the fiscal year endedDecember 31, 2006, without taking into account forfeiture rates, for eachoption award held by each director:

| **Name**                 | ** ** | ** ** | ** ** | **Grant  Date** | ** ** | **Number of  Securities  Underlying  Options  Granted (#)** | ** ** | **Amount  Recognized  in Financial  Statements  in 2006 ($)** | ** ** |
|--------------------------|------------|------------|------------|-----------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| John K. Bakewell         |       |       | 2006       |            |       |                                                                  | 30,000     |                                                                         |       |   | 48,029 |   |   |
| Haywood D.  Cochrane     |       |       | 2005       |            |       |                                                                  | 31,666     |                                                                         |       |   | 48,715 |   |   |
| Richard B. Emmitt        |       |       | 2005       |            |       |                                                                  | 1,905      |                                                                         |       |   | 2,098 |   |   |
|                     |       |       | 2004       |            |       |                                                                  | 1,905      |                                                                         |       |   | 664 |   |   |
| Douglas W. Kohrs         |       |       | 2006       |            |       |                                                                  | 20,000     |                                                                         |       |   | 23,705 |   |   |
|                     |       |       | 2005       |            |       |                                                                  | 25,833     |                                                                         |       |   | 52,670 |   |   |
| Dale A. Spencer          |       |       | 2005       |            |       |                                                                  | 66,905     |                                                                         |       |   | 127,667 |   |   |
|                     |       |       | 2004       |            |       |                                                                  | 1,905      |                                                                         |       |   | 667 |   |   |
|                     |       |       | 2002       |            |       |                                                                  | 53,101     |                                                                         |       |   | 5,396 |   |   |
| Thomas E. Timbie         |       |       | 2006       |            |       |                                                                  | 20,000     |                                                                         |       |   | 23,457 |   |   |
|                     |       |       | 2005       |            |       |                                                                  | 91,666     |                                                                         |       |   | 168,176 |   |   |
|                     |       |       | 2004       |            |       |                                                                  | 16,666     |                                                                         |       |   | 5 |   |   |
| Elizabeth H.  Weatherman |       |       | 2005       |            |       |                                                                  | 1,905      |                                                                         |       |   | 2,098 |   |   |
|                     |       |       | 2004       |            |       |                                                                  | 1,905      |                                                                         |       |   | 664 |   |   |

 

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(2)          Thefollowing table provides informationregarding each stock option grant to each director during the fiscal year endedDecember 31, 2006:

| ** **              | ** ** | **Grant**  | ** ** | **Number of  Securities  Underlying  Options** | ** ** | **Exercise  Price**     | ** ** | **Expiration** | ** **   | **Grant Date  Fair Value of** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------|------------|-------------------------|------------|----------------|--------------|----------------------------------------------|------------|
| **Name**                | ** ** | ** ** | ** ** | **Date**                                            | ** ** | **Granted (#)(a)** | ** ** | **($/Share)**  | ** **   | **Date**                                     | ** ** | **Option Awards ($)(b)** | ** ** |
| John K. Bakewell        |       | 04/05/2006 |       |                                                | 10,833     | (c)                     |       |           | $ 17.71 |                                         |       | 04/05/2016 |   |   | $ 86,339 |   |   |
|                    |       | 04/05/2006 |       |                                                | 5,833      | (c)                     |       |           | 17.71        |                                         |       | 04/05/2016 |   |   | 46,489 |   |   |
|                    |       | 06/12/2006 |       |                                                | 13,334     | (d)                     |       |           | 13.84        |                                         |       | 06/12/2016 |   |   | 83,049 |   |   |
| Haywood D.  Cochrane    |       | —     |       |                                                | —     |                    |       |           | —       |                                         |       | — |   |   | — |   |   |
| Richard B. Emmitt       |       | —     |       |                                                | —     |                    |       |           | —       |                                         |       | — |   |   | — |   |   |
| Douglas W. Kohrs        |       | 05/09/2006 |       |                                                | 1,666      | (e)                     |       |           | 14.93        |                                         |       | 05/09/2016 |   |   | 11,194 |   |   |
|                    |       | 05/09/2006 |       |                                                | 833        | (e)                     |       |           | 14.93        |                                         |       | 05/09/2016 |   |   | 5,597 |   |   |
|                    |       | 06/12/2006 |       |                                                | 17,501     | (d)                     |       |           | 13.84        |                                         |       | 06/12/2016 |   |   | 109,003 |   |   |
| Dale A. Spencer         |       | —     |       |                                                | —     |                    |       |           | —       |                                         |       | — |   |   | — |   |   |
| Thomas E. Timbie        |       | 05/09/2006 |       |                                                | 1,666      | (e)                     |       |           | 14.93        |                                         |       | 05/09/2016 |   |   | 11,194 |   |   |
|                    |       | 06/12/2006 |       |                                                | 18,334     | (d)                     |       |           | 13.84        |                                         |       | 06/12/2016 |   |   | 114,191 |   |   |
| Elizabeth H. Weatherman |       | —     |       |                                                | —     |                    |       |           | —       |                                         |       | — |   |   | — |   |   |
|                         |            |            |            |                                                     |            |                         |            |                |              |                                              |            |  |  |  |  |  |  |  |  |

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(a)          Represents optionsgranted under the ev3 Inc. Amended and Restated 2005 Incentive Stock Plan, thematerial terms of which are described in more detail under the heading “ExecutiveCompensation—ev3 Inc. Amended and Restated 2005 Incentive Stock Plan.”

(b)         We refer you to note 2 toour consolidated financial statements for the fiscal year ended December 31,2006 for a discussion of the assumptions made in calculating the grant datefair value of option awards.

(c)          This option vests withrespect to 25% of the underlying shares of our common stock on each of thefollowing dates, so long as the individual remains a director of our company asof such dates:  April 5, 2006, April 5,2007, April 5, 2008 and April 5, 2009.

(d)         This option vests withrespect to 25% of the underlying shares of our common stock on each of thefollowing dates, so long as the individual remains a director of our company asof such dates:  June 12, 2006, June 12,2007, June 12, 2008 and June 12, 2009.

(e)          This option vests withrespect to 25% of the underlying shares of our common stock on each of thefollowing dates, so long as the individual remains a director of our company asof such dates:  May 9, 2006, May 9,2007, May 9, 2008 and May 9, 2009.

(3)          Thefollowing table provides informationregarding the aggregate number of options to purchase shares of our commonstock outstanding at December 31, 2006 and held by each of the directorslisted in the above table:

| **Name**                | ** ** | ** ** | ** ** | **Aggregate  Number  of Securities  Underlying  Options** | ** ** | **Exercisable/  Unexercisable** | ** ** | **Range of  Exercise  Price(s)** | ** ** | **Range of  Expiration  Date(s)** | ** ** |
|-------------------------|------------|------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| John K. Bakewell        |       |       | 30,000     |                                                           |       | 7,499/22,501                    |       | $ 13.84 - $17.71                 |       | 04/05/2016 - 06/12/2016      |       |
| Haywood D. Cochrane     |       |       | —     |                                                           |       | —                          |       | —                                |       | —                                 |       |
| Richard B. Emmitt       |       |       | 15,240     |                                                           |       | 13,810/1,430                    |       | 6.47 - 12.28                          |       | 07/26/2011 - 05/26/2015      |       |
| Douglas W. Kohrs        |       |       | 45,833     |                                                           |       | 17,916/27,917                   |       | 8.82 - 14.93                          |       | 03/01/2015 - 06/12/2016      |       |
| Dale A. Spencer         |       |       | 139,094    |                                                           |       | 105,164/33,930                  |       | 3.54 - 13.41                          |       | 05/31/2011 - 07/12/2015      |       |
| Thomas E. Timbie        |       |       | 166,664    |                                                           |       | 101,316/65,348                  |       | 8.82 - 14.93                          |       | 03/09/2014 - 06/12/2016      |       |
| Elizabeth H. Weatherman |       |       | 15,240     |                                                           |       | 13,810/1,430                    |       | 6.47 - 12.28                          |       | 07/26/2011 - 05/26/2015      |       |

 

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(4)          We do not generallyprovide perquisites and other personal benefits to our directors and thus anyperquisites or personal benefits actually provided to any director are lessthan $10,000 in the aggregate.

(5)          Mr. Bakewell becamea director effective April 5, 2006.

(6)          Mr. Cochraneresigned as a director effective April 5, 2006.

(7)          Includeamounts paid to Mr. Spencer pursuant to a consulting agreement asdescribed in more detail below.

***AnnualCash Retainers, Meeting Fees and Reimbursement of Expenses***

We pay each of our directors who are not our employeesor consultants or who are not employees of Warburg Pincus or The Vertical Group(collectively referred to as our “outside directors”) an annual cash retainerand an additional cash retainer if they serve as chair of our audit committeeor compensation committee. Our current outside directors include John K.Bakewell, Douglas W. Kohrs, Daniel J. Levangie and Thomas E. Timbie and excludeJames M. Corbett, Richard B. Emmitt, Dale A. Spencer and Elizabeth H.Weatherman. Haywood D. Cochrane served as an outside director until hisresignation on April 5, 2006. We pay each of our outside directors anannual cash retainer of $24,000, paid on a quarterly basis. In addition, we paythe chair of our audit committee an additional annual retainer of $20,000 andthe chair of our compensation committee an additional annual retainer of$10,000, paid on a quarterly basis. The chair of our audit committee iscurrently Mr. Bakewell and the chair of our compensation committee iscurrently Mr. Kohrs. These additional annual payments to the chairs of ouraudit committee and compensation committee were approved by our board ofdirectors, upon recommendation by our compensation committee, on June 12,2006. Prior to June 12, 2006, all members of our board committees receivedan annual payment of $10,000, in addition to the $24,000 annual cash retainer. Wedo not pay our outside directors separate fees for attending board andcommittee meetings.

We do not pay any cashcompensation to our other directors who are not outside directors for serving onour board of directors or any of our board committees. We do, however,reimburse each member of our board of directors, including directors who arenot outside directors, for out-of-pocket expenses incurred in connection withattending our board and committee meetings.

***StockOptions***

Under our current policy regarding equity-basedcompensation for directors, which was approved by our board of directors on December 6,2006, we grant options to purchase shares of our common stock to all of ourdirectors, except James M. Corbett, effective as of the date of the director’sfirst appointment or election to the board and on an annual basis thereafter. Werefer to these directors as our “non-employee directors.”  Each non-employee director receives aninitial grant of an option, effective as of the date of the director’s firstappointment or election to the board, to purchase no less than 30,000, but nomore than 50,000 shares of our common stock, with the exact number to bedetermined by our board at the time of the director’s first appointment orelection to the board. On an annual basis, each non-employee director receivesan option, effective as of the date of our annual meeting of stockholders, topurchase 20,000 shares of our common stock. All of these initial and annualoptions have a term of 10 years and vest immediately with respect to 25% of theshares purchasable thereunder and vest with respect to the remaining 75%annually over the next three years.

Prior to our current policy, our policy with respectto option grants to directors was to grant each outside director (alldirectors, excluding Messrs. Corbett, Emmitt and Spencer and Ms. Weatherman)an initial option to purchase 10,833 shares of our common stock upon an outsidedirector’s first appointment or election to the board and an annual grant of anoption to purchase 1,666 shares of our common stock in each year of servicethereafter and to grant each outside director who will serve as the chair of acommittee of our board of directors an additional initial option to purchase5,833 shares of our common stock upon 

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the director’s firstappointment or election to the board and an annual grant of an option topurchase 833 shares of our common stock in each year of service thereafter.

We refer you to footnote 2 to the DirectorCompensation table above for a summary of all grants of options to purchaseshares of our common stock to our directors, excluding Mr. Corbett, duringthe fiscal year ended December 31, 2006. We refer you to footnote 3 to theDirector Compensation table above for a summary of all options to purchaseshares of our common stock held by our directors, excluding Mr. Corbett,as of December 31, 2006. Information regarding stock option grants to Mr. Corbettduring the fiscal year ended December 31, 2006 is set forth under theheading “Executive Compensation—Grants of Plan-Based Awards” and informationregarding all stock options held by Mr. Corbett as of December 31,2006 is set forth under the heading “Executive Compensation—Outstanding EquityAwards at Fiscal Year End.”

Although Mr. Emmittand Ms. Weatherman, to date, have not received any grants of options topurchase shares of our common stock in consideration of their services asdirectors of our company, such individuals, nonetheless, hold options topurchase shares of our common stock as a result of their service as directorsof Micro Therapeutics, Inc., or MTI. As explained in more detail under theheading “Related Party Relationships and Transactions—MTI Transaction,” on January 6,2006, we acquired the outstanding shares of MTI that we did not already ownthrough a merger of Micro Investment, LLC, our wholly owned subsidiary, withand into MTI, with MTI continuing as the surviving corporation and a whollyowned subsidiary of our company. As a result of the merger, each share ofcommon stock of MTI outstanding at the effective time of the merger wasautomatically converted into the right to receive 0.476289 of a share of ourcommon stock and cash in lieu of any fractional share of our common stock andeach outstanding option to purchase shares of MTI common stock was convertedinto an option to purchase shares of our common stock on the same terms andconditions (including vesting) as were applicable under such MTI option and theexercise price and number of shares for which each such option is (or willbecome) exercisable was adjusted based on the exchange ratio indicated above.

***Consultingand Change in Control Agreements with Dale A. Spencer***

We have entered into aconsulting agreement with Dale A. Spencer, one of our directors, under which wehave engaged Mr. Spencer as an independent consultant. Pursuant to theagreement, we have agreed to pay Mr. Spencer a fee of $23,750 per month,which fee is reduced by any cash fees paid to Mr. Spencer by any entitiesaffiliated with us. In addition, we are required to pay Mr. Spencer anadditional $2,000 per month to defray the costs of his insurance and disabilitycoverage benefits. In 2006, we paid Mr. Spencer $309,000 in the aggregate.

The term of the consulting agreement with Mr. Spencerautomatically renews for an additional one-year period on July 1 of eachyear, unless either party give notice to the other party at least 30 days priorto the July 1 renewal date of the party’s desire not to extend the term ofthe agreement. The agreement will be terminated prior to the end of any renewalterm in the event of Mr. Spencer’s death or disability and may beterminated by Mr. Spencer at any time and for any reason upon 30 daysprior written notice and may be terminated by us at any time and for any reasonupon written notice. If we terminate the agreement without “cause,” we mustcontinue to pay Mr. Spencer his consulting fees for the remainder of thethen current term. “Cause” is defined under the agreement to mean (1) anyact of personal dishonesty taken by Mr. Spencer in connection with hisresponsibilities as a consultant and intended to result in substantial personalenrichment; (2) the conviction of a felony by Mr. Spencer; (3) grossmisconduct by Mr. Spencer which is injurious to our company and (4) continuedviolations by Mr. Spencer of his obligations under the consultingagreement after prior written notice of such violations.

Under the agreement, we have agreedto indemnify Mr. Spencer to the fullest extent permitted by the DelawareGeneral Corporation Law, for any liabilities, costs or expenses arising out ofhis association with our company, except to the extent that such liabilities,costs or expenses arise under or are related to his gross negligence or willfulmisconduct. The agreement also contains non-competition and non-solicitation 

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covenantswhich restrict Mr. Spencer’s activities during the term of the agreement,as well as confidentiality provisions.

We have also entered into a changein control letter agreement with Mr. Spencer, which provides that inthe event of a “change in control” of our company, all of Mr. Spencer’sthen unvested, non-statutory stock options or other stock awards granted to himunder our stock incentive plans as of the date of the change in control will beaccelerated and become fully vested and immediately exercisable. The change incontrol agreement also provides that, in addition to any other indemnificationobligations that we may have, if, following a change in control of our company,Mr. Spencer incurs damages, costs or expenses (including, withoutlimitation, judgments, fines and reasonable attorneys’ fees) as a result of hisservice to our company or status as an independent consultant of our company,we will indemnify him to the fullest extent permitted by law, except to theextent that such damages, costs or expenses arose as a result of his grossnegligence or willful misconduct.

The change in controlagreement will continue in effect so long as Mr. Spencer remains as eithera consultant or a director of our company or, if later, until our obligationsto him arising under the agreement have been satisfied in full. The term “changein control” for purposes of Mr. Spencer’s agreement has the same meaningas in the change in control agreement for our other executive officers, whichare described under the heading “Executive Compensation—Potential Payments UponTermination or a Change in Control” contained elsewhere in this report. If achange in control of our company occurred on December 31, 2006, theautomatic acceleration of Mr. Spencer’s stock options would be valued at$136,609, based on the difference between: (i) the market price of theshares of our common stock underlying the unvested stock options held by Mr. Spenceras of December 31, 2006, which is based on the closing sale price of ourcommon stock on December 29, 2006 ($17.23), the last trading day prior to December 31,2006, as reported by the NASDAQ Global Select Market, and (ii) theexercise price of the options.

***IndemnificationAgreements***

Wehave entered into agreements with our directors under which we are required toindemnify them against expenses, judgments, penalties, fines, settlements andother amounts actually and reasonably incurred, including expenses of aderivative action, in connection with an actual or threatened proceeding if anyof them may be made a party because he or she is or was one of our directors. Wewill be obligated to pay these amounts only if the director acted in good faithand in a manner that he or she reasonably believed to be in or not opposed toour best interests. With respect to any criminal proceeding, we will beobligated to pay these amounts only if the director had no reasonable cause tobelieve his or her conduct was unlawful. The indemnification agreements alsoset forth procedures that will apply in the event of a claim forindemnification.

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

**Securities Authorized for Issuance Under Equity Compensation Plans**

The following table and notes provide information about shares of ourcommon stock that may be issued under all of our existing equity compensationplans as of December 31, 2006. 

| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                              | ** ** | **(c)**                                                                                                     | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation Plans  (excluding securities  reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 5,359,248  | (1)                                                                                                                                                  |       |                                                                                                        | $          | 12.47 |   |   |   | 3,831,571 | (2) |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                 |       |                                                                                                        | —     |   |   |   | — |   |   |
| **Total**                                                   |       |       | 5,359,248  |                                                                                                                                                 |       |                                                                                                        | $          | 12.47 |   |   |   | 3,831,571 |   |   |
|                                                             |            |            |            |                                                                                                                                                      |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

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(1)          Amount includes optionsoutstanding as of December 31, 2006 under the ev3 Inc. Amended and Restated2005 Incentive Stock Plan, the ev3 LLC Amended and Restated 2003 IncentivePlan, the Micro Therapeutics, Inc.’s 1993 Incentive Stock Option,Nonqualified Stock Option and Restricted Stock Purchase Plan or the MicroTherapeutics, Inc.’s 1996 Stock Incentive Plan, as amended.

(2)          Amount includes3,081,571 shares remaining available at December 31, 2006 for futureissuance under the ev3 Inc. Amended and Restated 2005 Incentive Stock Plan and750,000 shares remaining available at December 31, 2006 for futureissuance under the ev3 Inc. Employee Stock Purchase Plan.

**SECURITYOWNERSHIP OF PRINCIPAL STOCKHOLDERSAND MANAGEMENT**

The following table sets forth information known to us regarding thebeneficial ownership of our common stock as of March 1, 2007 for:

·       eachperson known by us to beneficially own more than 5% of the outstanding sharesof our common stock;

·       eachof our directors;

·       ourChief Executive Officer, Chief Financial Officer and our three other mosthighly compensated executive officers named in the Summary Compensation Tableunder the heading “Executive Compensation and Other Benefits—Summary of Cashand Other Compensation”; and

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·       all of our executiveofficers and directors as a group.

|                                                                        | ** ** | **Shares Beneficially Owned(2)** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Name and Address of Beneficial Owner(1)**   | ** ** | ** **                                 | ** ** | **Number** | ** ** | **Percentage** | ** ** |
| **Stockholders owning 5% or more:**                                    | ** ** | ** **                                 | ** ** |   | ** ** | ** ** |   |
| Warburg, Pincus  Equity Partners, L.P.(3)                              |       | 37,401,560                                 |       |   | 64.3 | % |   |
| Vertical Fund I,  L.P.(4)                                              |       | 2,815,511                                  |       |   | 4.8 | % |   |
| Vertical Fund II,  L.P.(4)                                             |       | 668,713                                    |       |   | 1.2 | % |   |
| **Directors and named executive  officers:**                           | ** ** | ** **                                 | ** ** |   | ** ** | ** ** |   |
| James M.  Corbett(5)                                                   |       | 504,373                                    |       |   | * |   |   |
| John K.  Bakewell(6)                                                   |       | 11,665                                     |       |   | * |   |   |
| Richard B.  Emmitt(7)                                                  |       | 3,498,034                                  |       |   | 6.0 | % |   |
| Douglas W.  Kohrs(8)                                                   |       | 20,624                                     |       |   | * |   |   |
| Daniel J.  Levangie(9)                                                 |       | 7,500                                      |       |   | * |   |   |
| Dale A. Spencer(10)                                                    |       | 235,702                                    |       |   | * |   |   |
| Thomas E.  Timbie(11)                                                  |       | 106,871                                    |       |   | * |   |   |
| Elizabeth H.  Weatherman(12)                                           |       | 37,415,370                                 |       |   | 64.3 | % |   |
| Patrick D.  Spangler(13)                                               |       | 92,198                                     |       |   | * |   |   |
| Jeffrey J.  Peters(14)                                                 |       | 121,131                                    |       |   | * |   |   |
| Stacy Enxing  Seng(15)                                                 |       | 196,651                                    |       |   | * |   |   |
| Pascal E.R.  Girin(16)                                                 |       | 81,550                                     |       |   | * |   |   |
| All executive officers  and directors as a group (16 persons)(17) |       | 42,408,996                                 |       |   | 71.6 | % |   |
|                                                                        |            |                                            |            |  |  |  |  |  |  |

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                 * Represents beneficial ownership of less thanone percent of our common stock.

       (1) Unless otherwise indicated, the address for each of the stockholdersin the table above is c/o ev3 Inc., 9600 54th Avenue North, Plymouth, Minnesota55442.

       (2) The number of shares beneficially owned by a person includes sharessubject to options held by that person that are currently exercisable within 60days of March 1, 2007 and shares pursuant to stock grants which vest overtime and are subject to forfeiture until vested. Percentages are calculatedpursuant to Rule 13d-3 under the Securities Exchange Act of 1934, asamended. Percentage calculations assume, for each person and group, that allshares that may be acquired by such person or group pursuant to optionscurrently exercisable or that become exercisable within 60 days following March 1,2007 are outstanding for the purpose of computing the percentage of commonstock owned by such person or group. However, those unissued shares of commonstock described above are not deemed to be outstanding for calculating thepercentage of common stock owned by any other person. Except as otherwiseindicated, the persons in this table have sole voting and investment power withrespect to all shares of common stock shown as beneficially owned by them,subject to community property laws where applicable and subject to theinformation contained in the footnotes to this table.

       (3) Includes 35,344,471 shares owned directly and 2,057,089 sharesbeneficially owned by two affiliated partnerships. Warburg Pincus Partners LLC,or WPP LLC, a New York limited liability company and a subsidiary of WarburgPincus & Co., or WP, a New York general partnership, is the solegeneral partner of Warburg, Pincus Equity Partners, L.P., or WPEP, a Delawarelimited partnership. WPEP is managed by Warburg Pincus LLC, or WP LLC, a NewYork limited liability company. WPEP, WPP LLC, WP and WP LLC are each referredto as a “Warburg Pincus Entity” and are collectively referred to as the “WarburgPincus Entities”. Each of the Warburg Pincus Entities shares with the otherWarburg Pincus Entities the voting and investment control of all of the sharesof common stock such Warburg Pincus Entity may be deemed to beneficially own. CharlesR. Kaye and Joseph P. Landy are each managing general partners of WP andco-presidents and managing members of WP 

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LLC. Each of theseindividuals disclaims beneficial ownership of the shares of common stock of ev3that the Warburg Pincus Entities may be deemed to beneficially own. The addressof the Warburg Pincus Entities is 466 Lexington Avenue, New York, New York10017.

       (4) The Vertical Group, L.P., or The Vertical Group, a Delaware limitedpartnership, is the sole general partner of each of Vertical Fund I, L.P., aDelaware limited partnership, or VFI, and Vertical Fund II, L.P., a Delawarelimited partnership, or VFII. The Vertical Group, VFI and VFII are collectivelyreferred to as the “Vertical Group Entities”. The Vertical Group shares withVFI and VFII the voting and investment control of all of the shares of commonstock VFI and VFII, respectively, may be deemed to beneficially own. There arefive general partners of The Vertical Group, each of whom may be deemed toshare with the Vertical Group Entities and the other general partners of TheVertical Group the voting and investment control of all of the shares of commonstock The Vertical Group may be deemed to beneficially own. The five generalpartners of The Vertical Group are Stephen D. Baksa, Richard B.Emmitt, Yue-teh Jang, Jack W. Lasersohn and John E. Runnells. Theaddress of the Vertical Group Entities is 25 DeForest Avenue, Summit, NewJersey 07901.

       (5) Includes 355,720 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter and 118,860 shares pursuant to stock grantswhich vest over time and are subject to forfeiture until vested.

       (6) Includes 11,665 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter.

       (7) Mr. Emmitt, one of ev3’s directors, is a general partner of TheVertical Group, L.P. and a managing director of The Vertical Group, Inc.All shares indicated as owned by Mr. Emmitt are included because of hisaffiliation with the Vertical Group Entities. Mr. Emmitt may be deemed toshare with the Vertical Group Entities and the other general partners of TheVertical Group the voting and investment control of all of the shares of ev3 commonstock The Vertical Group may be deemed to beneficially own. Mr. Emmittdoes not own any shares individually and disclaims beneficial ownership of allshares owned by the Vertical Group Entities. The number of shares indicated asowned by Mr. Emmitt includes 13,810 shares subject to options exercisableas of March 1, 2007 or within 60 days thereafter. Mr. Emmitt’saddress is c/o The Vertical Group, 25 DeForest Avenue, Summit, New Jersey07901. See footnote 4 above.

       (8) Includes 20,624 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter.

       (9) Includes 7,500 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter.

(10) Includes 7,172 shares held by a revocable trust and 105,164 sharessubject to options exercisable as of March 1, 2007 or within 60 daysthereafter.

(11) Consists of 106,871 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter.

(12) Ms. Weatherman, one of ev3’s directors, is a managing directorand member of WP LLC and a general partner of WP. 37,401,560 shares indicatedas owned by Ms. Weatherman are included because of her affiliation withthe Warburg Pincus Entities. Ms. Weatherman disclaims beneficial ownershipof all shares owned by the Warburg Pincus Entities. The number of sharesindicated to be owned by Ms. Weatherman also includes 13,810 sharessubject to options exercisable as of March 1, 2007 or within 60 daysthereafter. Ms. Weatherman’s address is c/o Warburg Pincus LLC, 466 LexingtonAvenue, New York, New York 10017. See footnote 3 above.

(13) Consists of 75,751 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter and 16,447 shares pursuant to a stock grantwhich vests over time and are subject to forfeiture until vested.

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(14) Includes 88,512 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter and 29,254 shares pursuant to stock grantswhich vest over time and are subject to forfeiture until vested.

(15) Includes 142,774 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter and 43,794 shares pursuant to stock grantswhich vest over time and are subject to forfeiture until vested.

(16) Includes 81,550 shares subject to options exercisable as of March 1,2007 or within 60 days thereafter. Does not include 26,930 shares pursuant tostock grants that will be issued over time upon vesting.

(17) The amount beneficially owned by all currentdirectors and executive officers as a group includes: (i) 1,061,251 sharesissuable upon exercise of options exercisable as of March 1, 2007 orwithin 60 days thereafter held by these individuals and (ii) 286,500shares pursuant to stock grants which vest over time and are subject to forfeitureuntil vested.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

**Relationship withWarburg Pincus Entities**

As of March 1, 2007,Warburg Pincus Entities beneficially owned approximately 64.3% of ouroutstanding common stock. Elizabeth H. Weatherman, one of our directors, is aManaging Director of Warburg Pincus LLC and a member of the firm’s ExecutiveManagement Group. As described in more detail below under the heading “—HoldersAgreement,” Ms. Weatherman was elected to our board of directors as aboard designee of the Warburg Pincus Entities and the Vertical Funds, as wasRichard B. Emmitt, another one of our directors. In July 2006, Douglas W.Kohrs, one of our directors, became President and Chief Executive Officer ofTornier B.V., a global orthopedic company and majority-owned subsidiary ofWarburg Pincus.

**Holders Agreement**

We are a party to aholders agreement along with our principal stockholders, the Warburg PincusEntities and the Vertical Fund, and certain of our directors and executive officers,including Dale A. Spencer, James M. Corbett and Stacy Enxing Seng. Pursuant tothe terms of this agreement, we are required to nominate and use our bestefforts to have elected to our board of directors:

·       twopersons designated by the Warburg Pincus Entities and the Vertical Funds if theWarburg Pincus Entities, the Vertical Funds and their affiliates collectivelybeneficially own 20% or more of our common stock; or

·       oneperson designated by the Warburg Pincus Entities and the Vertical Funds if theWarburg Pincus Entities, the Vertical Funds and their affiliates collectivelybeneficially own at least 10% but less than 20% of our common stock.

Mr. Emmitt and Ms. Weathermanare the initial designees under the holders agreement. The parties to the holdersagreement also agreed to be subject to lock-up agreements in certaincircumstances, including in up to two registration statements filed after ourinitial public offering.

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**Registration RightsAgreement**

On June 21,2005, we entered into a registration rights agreement with certain of ourstockholders, directors, officers and employees, including, among others,Warburg Pincus, The Vertical Group, Dale A. Spencer, James M. Corbett and StacyEnxing Seng, who we refer to as the holders, with respect to shares of ourcommon stock held by them. Pursuant to the registration rights agreement, weagreed to:

·       useour reasonable best efforts to effect up to two registered offerings of atleast $10 million each upon the demand of the holders of not less than amajority of the shares of our common stock then held by the holders;

·       useour best efforts to effect up to three registrations of at least$1 million each on Form S-3, once we become eligible to usesuch form, if any holder so requests; and

·       maintainthe effectiveness of each such registration statement for a period of120 days or until the distribution of the registrable securities pursuantto the registration statement is complete.

Pursuant to theregistration rights agreement, the holders also have incidental or “piggyback”registration rights with respect to any registrable shares, subject to certainvolume and marketing restrictions imposed by the underwriters of the offeringwith respect to which the rights are exercised. We also agreed to use our bestefforts to qualify for the use of Form S-3 for secondary sales. Weagreed to bear the expenses, including the fees and disbursements of one legalcounsel for the holders, in connection with the registration of the registrablesecurities, except for any underwriting commissions relating to the sale of theregistrable securities.

**Loans from MajorityStockholder to Executive Officers and Directors**

Warburg Pincus, our majority stockholder, has enteredinto loan agreements with a number of our officers and directors, each asdescribed below. These loans are full recourse. The purpose of these loans wasto fund the purchase of equity interests in ev3 LLC or its predecessors andwere not arranged by such entities.

*James M. Corbett*, our President and Chief Executive Officerand one of our directors, is a party to two loan agreements with WarburgPincus, both of which accrue interest at the rate of 3.46% per annum and matureon September 30, 2007 and February 20, 2008. As of December 31,2006, the aggregate outstanding principal amount of these loans wasapproximately $1,167,943, which also represents the largest aggregate principalamount outstanding during 2006. Mr. Corbett did not pay any principal orinterest during 2006.

*Dale A. Spencer*,one of our directors, is a party to nine loan agreements with Warburg Pincus,which accrue interest at rates per annum ranging from 3.46% to 6.10% and havematurities ranging from May 31, 2006 to February 20, 2008. Mr. Spencersold 4,200 shares of our common stock in our initial public offering uponexercise by the underwriters of their over-allotment option and used theproceeds from the sale of those shares to repay a portion of his loans fromWarburg Pincus. As of December 31, 2006, the aggregate outstandingprincipal amount of these loans was approximately $3,804,299, which alsorepresents the largest aggregate principal amount outstanding during 2006.Mr. Spencer did not pay any principal or interest during 2006.

*StacyEnxing Seng*, our President, Cardio Peripheral Division, is aparty to four loan agreements with Warburg Pincus, which accrue interest atrates per annum ranging from 4.63% to 4.77% and have maturities ranging from May 31,2005 to March 5, 2006. The largest aggregate amount of principaloutstanding during 2006 was approximately $316,426, which is the amount Ms. EnxingSeng paid off in full, together with approximately $66,392 in interest, on September 29,2006.

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**MTI Transaction**

On January 6, 2006, we acquired the outstandingshares of MTI that we did not already own through a merger of Micro Investment,LLC, our wholly owned subsidiary, with and into MTI, with MTI continuing as thesurviving corporation and a wholly owned subsidiary of ev3 Inc. Pursuant to anagreement and plan of merger, dated as of November 14, 2005, by and amongus, Micro Investment, LLC and MTI, and as a result of the merger, each share ofcommon stock of MTI outstanding at the effective time of the merger wasautomatically converted into the right to receive 0.476289 of a share of ourcommon stock and cash in lieu of any fractional share of our common stock. Inaddition, each outstanding option to purchase shares of MTI common stock wasconverted into an option to purchase shares of our common stock on the sameterms and conditions (including vesting) as were applicable under such MTIoption and the exercise price and number of shares for which each such optionis (or will become) exercisable was adjusted based on the exchange ratioindicated above. In connection with the merger, we issued approximately 7.0million new shares of our common stock to MTI’s public stockholders. The sharesof our common stock issued in the merger were registered under the SecuritiesAct of 1933, as amended, pursuant to a registration statement on Form S-4(File No. 333-129956) initially filed with the SEC on November 23,2005 and declared effective on December 7, 2005.  Subsequent to the completion of the merger,MTI filed a Form 15 with the SEC to terminate registration of MTI’s commonstock under the Securities Exchange Act of 1934, as amended, and MTI’s commonstock was delisted from trading on the NASDAQ National Market as of the closeof the market on January 6, 2006.

At the time of the MTI transaction, Messrs. Corbett,Emmitt, Spencer and Ms. Weatherman, each of whom are members of our boardof directors, also served on the MTI board of directors, and received the samemerger consideration as other MTI common stockholders and option holders. As aresult of the MTI transaction, Mr. Corbett beneficially owned 88,500 sharesof MTI common stock and received options to purchase 40,008 shares of ourcommon stock in the transaction; Messrs. Emmitt and Spencer eachbeneficially owned 25,000 shares of MTI common stock and received options topurchase 13,336 shares of our common stock; and Ms. Weathermanbeneficially owned 34,066,579 shares of MTI common stock and received optionsto purchase 13,336 shares of our common stock.

The merger agreement provides that we and MTI as thesurviving corporation will indemnify each of the present and former MTIdirectors, special committee members, officers and employees of MTI for aperiod of six years after the completion of the merger against liabilities fortheir actions or omissions as directors, special committee members, officers oremployees before the completion of the merger, including for acts or omissionsoccurring in connection with the approval of the merger agreement and thecompletion of the merger.

The merger agreement also provides that all rights toindemnification by MTI now existing in favor of each indemnified party, asprovided in MTI’s certificate of incorporation or bylaws or pursuant to anyother agreements in effect on the date of the merger agreement, will survivethe merger. For a period of six years following the completion of the merger,we will cause the certificates of incorporation and bylaws of MTI and any ofits subsidiaries to contain provisions no less favorable with respect to suchindemnification and exculpation rights.

The merger agreement alsoprovides that for a period of six years after the completion of the merger, MTIas the surviving corporation will provide to the MTI directors, specialcommittee members, officers and employees liability insurance protection withthe same coverage and in the same amount as and on terms no less favorable tosuch individuals than that provided by MTI’s insurance policies at the time ofthe merger. The persons benefiting from the insurance provisions of the mergeragreement include all persons who served as directors and officers of MTI priorto the completion of the merger who were covered by MTI’s insurance policy atthe time of the merger. MTI will not be required to expend in any one year anamount more than 200% of the annual premiums paid by MTI as of the date of themerger agreement for 

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directors’and officers’ liability insurance, and if that insurance cannot be obtained atall or if the annual premiums of that insurance coverage exceed this amount,MTI will be obligated to obtain the maximum amount of such insurance availablefor a cost not exceeding that amount.

**ArrangementsRegarding Board of Directors of MTI**

Prior to the mergerof Micro Investment, LLC, our wholly owned subsidiary, or MII, with and intoMTI in January 2006, MII was a party to a securities purchase agreementwith MTI which contained certain board of director and other provisions. Pursuantto this agreement, MTI was obligated to nominate and use its best efforts tocause to be elected and to remain as a director on its board of directors:

·       oneperson designated by MII, as long as MII owned at least 5%, but less than 10%,of the outstanding shares of common stock of MTI;

·       twopersons designated by MII, as long as MII owned at least 10%, but less than20%, of the outstanding shares of common stock of MTI;

·       threepersons designated by MII, as long as MII owned at least 20%, but less than30%, of the outstanding shares of common stock of MTI; and

·       fourpersons designated by MII, as long as MII owned at least 30% of the outstandingshares of common stock of MTI.

In addition, the securities purchase agreementprovided that for so long as MII owned at least 10% of the outstanding sharesof MTI’s common stock, at least one of the members of the MTI’s board ofdirectors designated by MII would serve as a member of each committee of theboard. MII’s designees to MTI’s board of directors were Dale A. Spencer,Richard B. Emmitt and Elizabeth H. Weatherman, each of whom is also one ofour directors. In addition, James M. Corbett, our President and Chief ExecutiveOfficer who is one of our directors, was chairman of MTI’s board of directorsfrom January 2002 through January 2006 and was MTI’s acting Presidentand Chief Executive Officer from April 2002 through October 2002.

Pursuant to the terms of the securities purchaseagreement, we also had a right to participate in future sales by MTI of itsequity securities based upon the percentage ownership in MTI at the time of thesale, except in certain limited circumstances. This subscription right wouldhave terminated if MII’s ownership percentage in MTI fell below 10%.

James M. Corbett, RichardB. Emmitt, Dale A. Spencer and Elizabeth H. Weatherman, members of our board ofdirectors, served on MTI’s board of directors through January 6, 2006.Messrs. Corbett, Emmitt and Spencer and Ms. Weatherman receivedgrants of options to purchase shares of MTI common stock as compensation fortheir services as directors of MTI. These options converted into options topurchase shares of our common stock in connection with the merger of MicroInvestment, LLC with and into MTI in January 2006. Currently, James M.Corbett and Patrick D. Spangler serve as directors of MTI. These individuals donot receive any separate compensation for their services as directors of MTI.

**Director and ExecutiveOfficer Compensation**

Please see “DirectorCompensation” and “Executive Compensation” for information regarding thecompensation of our directors and executive officers and for informationregarding employment, consulting, change in control, indemnification and otheragreements we have entered into with our directors and executive officers.

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**Policies andProcedures Regarding Related Party Transactions**

Our board of directors has delegated to our auditcommittee, pursuant to the terms of a written policy, the authority to review,approve and ratify related party transactions. If it is not feasible for ouraudit committee to take an action with respect to a proposed related partytransaction, the board or another committee of the board, may approve or ratifyit. No member of the board or any committee may participate in any review,consideration or approval of any related party transaction with respect towhich such member or any of his or her immediate family members is the relatedparty.

Our policy defines a “relatedparty transaction” as a transaction, arrangement or relationship (or anyseries of similar transactions, arrangements or relationships) in which we(including any of our subsidiaries) were, are or will be a participant and inwhich any related party had, has or will have a direct or indirect interest.

Prior to enteringinto or amending any related party transaction, the party involved must providenotice to our legal department of the facts and circumstances of the proposedtransaction, including:

·       the relatedparty’s relationship to us and his or her interest in the transaction;

·       the materialfacts of the proposed related party transaction, including the proposedaggregate value of such transaction or, in the case of indebtedness, the amountof principal that would be involved;

·       the purposeand benefits of the proposed related party transaction with respect to us;

·       ifapplicable, the availability of other sources of comparable products orservices; and

·       an assessmentof whether the proposed related party transaction is on terms that arecomparable to the terms available to an unrelated third party or to employeesgenerally.

If the legaldepartment determines the proposed transaction is a related party transaction,the proposed transaction will be submitted to the audit committee forconsideration. In determining whether to approve a proposed related partytransaction, the audit committee will consider, among other things, thefollowing:

·       the purposeof the transaction;

·       the benefitsof the transaction to us;

·       the impact ona director’s independence in the event the related party is a non-employeedirector, an immediate family member of a non-employee director or an entity inwhich a non-employee director is a partner, shareholder or executive officer;

·       theavailability of other sources for comparable products or services;

·       the terms ofthe transaction; and

·       the termsavailable to unrelated third parties or to employees generally.

We also produce quarterlyreports of any amounts paid or payable to, or received or receivable from, anyrelated party. These reports allow us identify any related party transactionsthat were not previously approved or ratified. In that event, the transactionwill be promptly submitted to the audit committee for consideration of all therelevant facts and circumstances, including those considered when a transactionis submitted for pre-approval. Under our policy, certain related partytransactions as defined under our policy will be deemed to be pre-approved by theaudit committee and will not be subject to these procedures.

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**DirectorIndependence**

Because Warburg Pincus owns more than 50% of thevoting power of our common stock, we are considered a “controlled company” forthe purposes of the NASDAQ listing requirements, and we qualify for, and relyon, the “controlled company” exception to the board of directors and committeecomposition requirements under the Marketplace Rules of the NASDAQ StockMarket. Pursuant to this exception, we are exempt from the rules thatrequire our board of directors to be comprised of a majority of “independentdirectors.”

The board of directors hasaffirmatively determined that three of our eight current directors—Messrs. Bakewell,Emmitt and Levangie—are “independent directors” and our former director thatserved until April 5, 2006, Haywood D. Cochrane, was an “independentdirector” under the Marketplace Rules of the NASDAQ Stock Market. TheMarketplace Rules of the NASDAQ Stock Market provide a non-exclusive listof persons who are not considered independent. Under these rules, anindependent director is a person other than an officer or employee of thecompany or any parent or subsidiary. In addition, a director who is, or duringthe past three years was, employed by the company or by any parent orsubsidiary of the company, other than prior employment as an interim chairmanor chief executive officer, would not be considered independent. No directorqualifies as independent unless the board of directors affirmatively determinesthat the director does not have a material relationship with the listed companythat would interfere with the exercise of independent judgment. In making anaffirmative determination that each of Messrs. Bakewell, Emmitt andLevangie is an “independent director” and Mr. Cochrane prior to hisresignation was an “independent director,” the board of directors reviewed anddiscussed information provided by these individuals and by us with regard toeach of their business and personal activities as they may relate to us and ourmanagement.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

**Dismissal of Prior Independent Registered Public Accounting Firm**

On June 22, 2006, we dismissedPricewaterhouseCoopers LLP, or PwC, as our independent registered publicaccounting firm. The decision to dismiss PwC was approved by our board ofdirectors and the audit committee of our board of directors. The reports of PwCon our combined consolidated financial statements for our fiscal years ended December 31,2005 and 2004 contained no adverse opinion or disclaimer of opinion and werenot qualified or modified as to uncertainty, audit scope, or accountingprinciple. During our fiscal years ended December 31, 2005 and 2004, andthrough June 22, 2006, there were no disagreements with PwC on any matterof accounting principles or practices, financial statement disclosure, orauditing scope or procedure, which disagreements, if not resolved to thesatisfaction of PwC, would have caused PwC to make reference thereto in itsreports on our financial statements for such years. There were no “reportableevents” described in Item 304(a)(1)(v) of SEC Regulation S-K during ourfiscal years ended December 31, 2005 and 2004, and through June 22,2006, except for the existence of then previously reported material weaknessesin our internal control over financial reporting, which were described indetail in a Current Report on Form 8-K which we filed with the SECon June 28, 2006. We requested that PwC furnish us with a letter addressedto the SEC stating whether or not PwC agreed with the statements made by us asset forth in the Current Report on Form 8-K which we filed with theSEC on June 28, 2006 and, if not, stating the respects in which PwC didnot agree. We provided PwC with a copy of the disclosures in the Current Reporton Form 8-K and PwC furnished a letter addressed to the SEC dated June 28,2006, a copy of which was attached to the Form 8-K as Exhibit 16.1.

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**Audit, Audit-Related, Tax and Other Fees**

The following table presents the aggregate fees billedto us for professional services rendered by Ernst & Young LLP, ourcurrent independent registered public accounting firm, for the fiscal years ended December 31,2006 and December 31, 2005.

| ** **          | ** ** | **Aggregate Amount  Billed by Ernst & Young LLP** | ** ** |
|---------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** |
| Audit Fees(1)       |       | $                                                                                   | 1,350,973  |   | — |   |
| Audit-Related  Fees |       | —                                                                              |       | — |   |
| Tax Fees(2)         |       | 24,101                                                                              |       | — |   |
| All Other Fees(3)   |       | 1,500                                                                               |       | — |   |
|                     |            |                                                                                     |            |  |  |  |

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(1)          These fees consisted ofthe audit of our annual financial statements, review of our financial statementincluded in our quarterly reports on Form 10-Q and other servicesnormally provided in connection with our statutory and regulatory filings orengagements. Also includes fees for services related to the audit of internalcontrols over financial reporting under Section 404 of the Sarbanes-OxleyAct of 2002.

(2)          These fees consisted oftax compliance, tax advice and tax planning, including preparation of tax formsand some consulting for overseas and foreign tax matters. The audit committeeof our board of directors has considered whether the provision of theseservices is compatible with maintaining Ernst & Young LLP’sindependence and has determined that it is.

(3)          These fees consisted ofthe purchase of an on-line accounting research tool. The audit committee of ourboard of directors has considered whether the provision of these services iscompatible with maintaining Ernst & Young LLP’s independence and hasdetermined that it is.

The following table presents the aggregate fees billedto us for professional services rendered by PricewaterhouseCoopers LLP, ourprevious independent registered public accounting firm, for the fiscal years ended December 31,2006 and December 31, 2005.

| ** **             | ** ** | **Aggregate Amount  Billed by  PricewaterhouseCoopers LLP** | ** ** |
|------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                                                   | ** ** | **2005** | ** ** |
| Audit Fees(1)          |       | $109,327                                                                   |       | $ | 1,477,229 |   |
| Audit-Related  Fees(2) |       | 443,266                                                                    |       | 34,952 |   |
| Tax Fees(3)            |       | 21,250                                                                     |       | 279,838 |   |
| All Other Fees(4)      |       | —                                                                     |       | 6,500 |   |
|                        |            |                                                                            |            |  |  |  |

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(1)          These fees consisted ofthe audit of our annual financial statements, review of our financial statementincluded in our quarterly reports on Form 10-Q, review of ourForm S-1 registration statement in connection with our initialpublic offering and our Form S-4 registration statement inconnection with our acquisition of the minority interest of MicroTherapeutics, Inc. and other services normally provided in connection withour statutory and regulatory filings or engagements.

(2)          These fees consisted ofprimarily of research and consultation assistance in connection with theaccounting and reporting treatment of certain transactions, both historical andproposed, as required by generally accepted accounting principles in the UnitedStates. The audit committee of our board of directors has considered whetherthe provision of these services is compatible with maintainingPricewaterhouseCoopers LLP’s independence and has determined that it is.

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(3)          These fees consisted oftax compliance, tax advice and tax planning, including preparation of tax formsand some consulting for overseas and foreign tax matters. The audit committeeof our board of directors has considered whether the provision of theseservices is compatible with maintaining PricewaterhouseCoopers LLP’sindependence and has determined that it is.

(4)          Thesefees consisted primarily of preparation of Forms 5500 for our employee benefitplans. The audit committee of our board of directors has considered whether theprovision of these services is compatible with maintainingPricewaterhouseCoopers LLP’s independence and has determined that it is.

**Pre-Approval Policies and Procedures**

The audit committee of our boardof directors has adopted procedures pursuant to which all audit, audit-relatedand tax services, and all permissible non-audit services provided byErnst & Young LLP to us, are pre-approved by our audit committee. Allservices rendered by Ernst & Young LLP to us during 2006 werepermissible under applicable laws and regulations, and all such servicesprovided by Ernst & Young LLP to us during such time, other than deminimis non-audit services allowed under applicable law, were approved inadvance by our audit committee in accordance with the rules adopted by theSEC in order to implement requirements of the Sarbanes-Oxley Act of 2002.

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**PART IV**

**ITEM 15.**         EXHIBITS,FINANCIAL STATEMENT SCHEDULES

Our consolidated financial statements are included inItem 8 of Part II of this report.

The following financial statement schedule is includedin Item 8 of Part II of this report: Schedule II—Valuation and Qualifying Accounts. All other schedulesare omitted because the required information is inapplicable or the informationis presented in the consolidated financial statements or related notes.

The exhibits to this report are listed on the Exhibit Indexon pages 130 - 137. A copy of any of the exhibits listed or referredto above will be furnished at a reasonable cost, upon receipt from any suchperson of a written request for any such exhibit. Such request should be sentto ev3 Inc., 9600 54th Avenue North, Suite 100, Plymouth,Minnesota 55442, Attn:  StockholderInformation.

The following is alist of each management contract or compensatory plan or arrangement requiredto be filed as an exhibit to this annual report on Form 10-Kpursuant to Item 13(a):

A.             EmployeeConfidentiality/Restrictive Covenant Agreement, dated as of May 20, 2003,between ev3 Endovascular, Inc. (formerly known as ev3 Inc.) and James M.Corbett (incorporated by reference to Exhibit 10.4 to ev3’s RegistrationStatement on Form S-1 filed with the Securities and ExchangeCommission on April 5, 2005 (File No. 333-123851)).

B.              EmployeeConfidentiality/Restrictive Covenant Agreement, dated as of March 21,2005, between ev3 Endovascular, Inc. and Patrick D. Spangler (incorporatedby reference to Exhibit 10.6 to ev3’s Registration Statement on Form S-1filed with the Securities and Exchange Commission on April 5, 2005 (File No. 333-123851)).

C.              Offer Letter, datedas of March 31, 2005, between ev3 LLC, ev3 Inc. and Patrick D. Spangler(incorporated by reference to Exhibit 10.53 to ev3’s RegistrationStatement on Form S-1 filed with the Securities and ExchangeCommission on April 5, 2005 (File No. 333-123851)).

D.             Offer Letter, dated April 3,2006, between ev3 Inc. and Matthew Jenusaitis (incorporated by reference to Exhibit 10.4to ev3’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 2,2006 (File No. 000-51348)).

E.              EmploymentAgreement, dated April 3, 2006, between ev3 Inc. and Matthew Jenusaitis(incorporated by reference to Exhibit 10.4 to ev3’s Quarterly Report on Form 10-Qfor the fiscal quarter ended July 2, 2006 (File No. 000-51348)).

F.               ConsultingAgreement, dated as of November 22, 2004, by and between ev3 Endovascular, Inc.(formerly known as ev3 Inc.) and Dale A. Spencer (incorporated by reference to Exhibit 10.10to ev3’s Registration Statement on Form S-1 filed with theSecurities and Exchange Commission on April 5, 2005 (File No. 333-123851)).

G.            Change in ControlAgreement, dated September 19, 2006, among ev3 Inc., ev3 Endovascular, Inc.and James M. Corbett (incorporated by reference to Exhibit 10.2 to ev3’sQuarterly Report on Form 10-Q for the fiscal quarter ended October 1,2006 (File No. 000-51348)).

H.            Change in ControlAgreement, dated September 19, 2006, among ev3 Inc., ev3 Endovascular, Inc.and Dale A. Spencer (incorporated by reference to Exhibit 10.1 to ev3’sQuarterly Report on Form 10-Q for the fiscal quarter ended October 1,2006 (File No. 000-51348)).

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I.                  Form ofChange in Control Agreement among ev3 Inc., ev3 Endovascular, Inc. orMicro Therapeutics, Inc. and each of its executive officers (incorporatedby reference to Exhibit 10.3 to ev3’s Quarterly Report on Form 10-Qfor the fiscal quarter ended October 1, 2006 (File No. 000-51348)).

J.                 Form ofIndemnification Agreement for directors and officers of ev3 Inc. (incorporatedby reference to Exhibit 10.15 to ev3’s Amendment No. 4 toRegistration Statement on Form S-1 filed with the Securities andExchange Commission on June 2, 2005 (File No. 333-123851)).

K.             ev3 Inc. Amended andRestated 2005 Incentive Stock Plan (incorporated by reference to Exhibit 10.1to ev3’s Current Report on Form 8-K as filed with the Securities andExchange Commission on May 10, 2006 (File No. 000-51348)).

L.               Form of Non-StatutoryStock Option Grant Certificate under ev3 Inc. Amended and Restated 2005Incentive Stock Plan (incorporated by reference to Exhibit 10.2 to ev3’sCurrent Report on Form 8-K as filed with the Securities and ExchangeCommission on February 20, 2007 (File No. 000-51348)).

M.           Form of StockGrant Certificate under ev3 Inc. Amended and Restated 2005 Incentive Stock Plan(incorporated by reference to Exhibit 10.1 to ev3’s Current Report on Form 8-Kas filed with the Securities and Exchange Commission on January 26, 2007(File No. 000-51348)).

N.             Form of StockGrant Certificate under ev3 Inc. Amended and Restated 2005 Incentive Stock Planapplicable to French Participants (incorporated by reference to Exhibit 10.1to ev3’s Current Report on Form 8-K as filed with the Securities andExchange Commission on January 31, 2006 (File No. 000-51348)).

O.            ev3 LLC Amended andRestated 2003 Incentive Plan (incorporated by reference to Exhibit 10.2 toev3’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 2,2006 (File No. 000-51348)).

P.               Micro Therapeutics, Inc.1996 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7.1to Micro Therapeutics, Inc.’s Annual Report on Form 10-KSB forthe fiscal year ended December 31, 2002 (File No.000-06523)).

Q.            Micro Therapeutics, Inc.1993 Incentive Stock Option, Nonqualified Stock Option and Restricted StockPurchase Plan (incorporated by reference to Exhibit 10.6 to MicroTherapeutics, Inc.’s Registration Statement on Form SB-2 filedwith the Securities and Exchange Commission on December 5, 1996 (File No. 333-17345)).

R.             ev3 Inc. EmployeeStock Purchase Plan (incorporated by reference to Exhibit 10.24 to ev3’sAnnual Report on Form 10-K for the fiscal year ended December 31,2005 (File No. 000-51348)).

S.                ev3 Inc. ExecutivePerformance Incentive Plan (filed herewith).

T.              Agreement dated asof December 31, 2006 between ev3 Inc. and L. Cecily Hines (filedherewith).

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| Dated: March 14, 2007 | **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 financing and accounting officer)* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                             | **Name and Signature** | ** **                          | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------------|------------------------|-------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JAMES M. CORBETT        |                   | President, Chief  Executive Officer |       | March 14, 2007  |
| James M. Corbett            |                   | and Director                        |       |                 |
| /s/ JOHN K. BAKEWELL        |                   | Director                            |       | March 14, 2007  |
| John K. Bakewell            |                   |                                |       |                 |
| /s/ RICHARD B. EMMITT       |                   | Director                            |       | March 14, 2007  |
| Richard B. Emmitt           |                   |                                |       |                 |
| /s/ DOUGLAS W. KOHRS        |                   |                                |       |                 |
| Douglas W. Kohrs            |                   | Director                            |       | March 14,  2007 |
| /s/ DANIEL J. LEVANGIE      |                   |                                |       |                 |
| Daniel J. Levangie          |                   | Director                            |       | March 14,  2007 |
| /s/ DALE A. SPENCER         |                   |                                |       |                 |
| Dale A. Spencer             |                   | Director                            |       | March 14,  2007 |
| /s/ THOMAS E. TIMBIE        |                   |                                |       |                 |
| Thomas E. Timbie            |                   | Director                            |       | March 14,  2007 |
| /s/ ELIZABETH H. WEATHERMAN |                   |                                |       |                 |
| Elizabeth H. Weatherman     |                   | Director                            |       | March 14,  2007 |

 

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**ev3 INC.**

**EXHIBITINDEX TO ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2006**
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                | ** ** | **Method of Filing**                                                                                                                                                                                                    |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Merger, dated as of  April 4, 2005, by and between ev3 LLC and ev3 Inc.                                                                                                                         |       | Incorporated by reference to Exhibit 2.1 to  ev3’s Registration Statement on Form S-1 filed with the Securities  and Exchange Commission on April 5, 2005 (File No. 333-123851)                          |
| 2.2              |       | Contribution and  Exchange Agreement, dated as of April 4, 2005, by and among the  institutional stockholders listed on Schedule I thereto, ev3 LLC, ev3 Inc.  and Micro Therapeutics, Inc.                      |       | Incorporated by  reference to Exhibit 2.2 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                         |
| 2.3              |       | Note Contribution and  Exchange Agreement, dated as of April 4, 2005, by and among the  noteholders listed on Schedule I thereto and ev3 Inc.                                                                         |       | Incorporated by  reference to Exhibit 2.3 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                         |
| 2.4              |       | Agreement and Plan of  Merger, dated as of July 15, 2002, by and among Microvena Corporation,  Appriva Acquisition Corp. and Appriva Medical, Inc.                                                               |       | Incorporated by  reference to Exhibit 2.4 to ev3’s Registration Statement on Form S-1filed  with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                          |
| 2.5              |       | Asset Purchase  Agreement, dated as of September 29, 2004, among Edwards Lifesciences AG  and ev3 Santa Rosa, Inc., ev3 Technologies, Inc. and ev3  Endovascular, Inc. (formerly known as ev3 Inc.)(1) |       | Incorporated by  reference to Exhibit 2.5 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                         |
| 2.6              |       | Stock Purchase  Agreement, dated September 3, 2002, by and between Micro  Therapeutics, Inc. and the holders of the outstanding equity securities  of Dendron                                                    |       | Incorporated by  reference to Exhibit 2.2 to Micro Therapeutics, Inc.’s Current  Report on Form 8-K filed with the Securities and Exchange  Commission on October 10, 2002 (File No. 000-06523)     |
| 2.7              |       | Agreement and Plan of  Merger, dated November 14, 2005, by and between ev3 Inc., Micro  Investment, LLC and Micro Therapeutics, Inc.                                                                             |       | Incorporated by  reference to Exhibit 2.1 to ev3’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on November 14, 2005  (File No. 000-51348)                              |
| 3.1              |       | Amended and Restated  Certificate of Incorporation of ev3 Inc.                                                                                                                                                             |       | Incorporated by  reference to Exhibit 3.1 to ev3’s Amendment No. 5 to Registration  Statement on Form S-1 filed with the Securities and Exchange  Commission on June 14, 2005 (File No. 333-123851) |

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| 3.2 |   | Amendment to Amended and Restated Certificate of Incorporation  of ev3 Inc.                                                                                                                                                                                                                                                                                                                                       |   | Incorporated by reference to Exhibit 99.1 to  ev3’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on June 27, 2005 (File No. 000-51348)                                 |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.3 |   | Amended and Restated  Bylaws of ev3 Inc.                                                                                                                                                                                                                                                                                                                                                                          |   | Incorporated by reference  to Exhibit 3.3 to ev3’s Quarterly Report on Form 10-Q for the  fiscal quarter ended July 3, 2005 (File No. 000-51348)                                                        |
| 4.1 |   | Form of Stock  Certificate                                                                                                                                                                                                                                                                                                                                                                                   |   | Incorporated by  reference to Exhibit 4.1 to ev3’s Amendment No. 4 to Registration  Statement on Form S-1 filed with the Securities and Exchange  Commission on June 2, 2005 (File No. 333-123851) |
| 4.2 |   | Holders Agreement, dated  as of August 29, 2003, among the institutional investors listed on  Schedule I thereto, Dale A. Spencer, Paul Buckman, the individuals whose  names and addresses appear from time to time on Schedule II thereto, the  individuals whose names and addresses appear from time to time on Schedule  III thereto and ev3 LLC                                                        |   | Incorporated by  reference to Exhibit 4.2 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                        |
| 4.3 |   | Operating Agreement of  ev3 LLC, dated as of August 29, 2003, by and among ev3 LLC, Warburg,  Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I,  C.V., Warburg, Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus  Netherlands Equity Partners III, C.V., Vertical Fund I, L.P., Vertical Fund  II, L.P. and certain other persons party thereto                       |   | Incorporated by  reference to Exhibit 4.3 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                        |
| 4.4 |   | Amendment No. 1 to  Operating Agreement of ev3 LLC, dated as of March 1, 2005, by and among  ev3 LLC, Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands  Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II,  C.V., Warburg, Pincus Netherlands Equity Partners III, C.V., Vertical Fund I,  L.P., Vertical Fund II, L.P. and certain other persons party thereto |   | Incorporated by  reference to Exhibit 4.4 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                        |

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| 4.5  |   | Registration Rights  Agreement, dated as of June 21, 2005, by and among ev3 Inc., Warburg,  Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I,  C.V., Warburg, Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus  Netherlands Equity Partners III, C.V., Vertical Fund I, L.P., Vertical Fund  II, L.P. and certain other investors party thereto |   | Incorporated by  reference to Exhibit 4.2 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended July 3, 2005 (File No. 000-51348)                                                       |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |   | Lease Agreement, dated  May 3, 2002, by and between Liberty Property Limited Partnership and ev3  Endovascular, Inc. (formerly known as ev3 Inc.)                                                                                                                                                                                                                                 |   | Incorporated by  reference to Exhibit 10.1 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                      |
| 10.2 |   | First Amendment to the  May 3, 2002 Lease Agreement between Liberty Property Limited Partnership  and ev3 Endovascular, Inc. (formerly known as ev3 Inc.), effective as of  October 17, 2005                                                                                                                                                                                 |   | Filed herewith                                                                                                                                                                                                                  |
| 10.3 |   | Second Amendment to the  May 3, 2002 Lease Agreement between Liberty Property Limited Partnership  and ev3 Endovascular, Inc. (formerly known as ev3 Inc.), effective as of  October 1, 2005                                                                                                                                                                                 |   | Filed herewith                                                                                                                                                                                                                  |
| 10.4 |   | Lease Agreement dated  August 30, 2005 between Liberty Property Limited Partnership and ev3  Inc.                                                                                                                                                                                                                                                                                      |   | Incorporated by  reference to Exhibit 10.2 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended October 2, 2005 (File No. 000-51348)                                                   |
| 10.5 |   | First Amendment to the  August 30, 2005 Lease Agreement between Liberty Property Limited  Partnership and ev3 Inc., effective as of April 6, 2006.                                                                                                                                                                                                                                |   | Filed herewith                                                                                                                                                                                                                  |
| 10.6 |   | Second Amendment to the  August 30, 2005 Lease Agreement, between Liberty Property Limited  Partnership and ev3 Inc., effective as of February 8, 2007.                                                                                                                                                                                                                           |   | Filed herewith                                                                                                                                                                                                                  |
| 10.7 |   | Lease, dated  October 13, 2005, by and between Micro Therapeutics, Inc. and The  Irvine Company                                                                                                                                                                                                                                                                                   |   | Incorporated by  reference to Exhibit 10.53 to Micro Therapeutics, Inc.’s Current  Report on Form 8-K filed with the Securities and Exchange  Commission on October 18, 2005 (File No. 000-06523) |

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| 10.8  |   | Employee Confidentiality/Restrictive Covenant  Agreement, dated as of May 20, 2003, between ev3 Endovascular, Inc.  (formerly known as ev3 Inc.) and James M. Corbett |   | Incorporated by reference to Exhibit 10.4 to  ev3’s Registration Statement on Form S-1 filed with the Securities  and Exchange Commission on April 5, 2005 (File No. 333-123851)                          |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Employee  Confidentiality/Restrictive Covenant Agreement, dated as of March 21,  2005, between ev3 Endovascular, Inc. and Patrick D. Spangler                         |   | Incorporated by  reference to Exhibit 10.6 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File  No. 333-123851)                         |
| 10.10 |   | Employment Offer Letter,  dated as of March 31, 2005, between ev3 LLC, ev3 Inc. and Patrick D.  Spangler                                                                   |   | Incorporated by  reference to Exhibit 10.53 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)                        |
| 10.11 |   | Offer Letter, dated  April 3, 2006, between ev3 Inc. and Matthew Jenusaitis                                                                                                |   | Incorporated by  reference to Exhibit 10.4 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended July 2, 2006 (File No. 000-51348)                                                         |
| 10.12 |   | Employment Agreement,  dated April 3, 2006, between ev3 Inc. and Matthew Jenusaitis                                                                                        |   | Incorporated by  reference to Exhibit 10.5 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended July 2, 2006 (File No. 000-51348)                                                         |
| 10.13 |   | Consulting Agreement,  dated as of November 22, 2004, by and between ev3  Endovascular, Inc. (formerly known as ev3 Inc.) and Dale A. Spencer                         |   | Incorporated by  reference to Exhibit 10.10 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)                        |
| 10.14 |   | Change in Control  Agreement, dated September 19, 2006, among ev3 Inc., ev3  Endovascular, Inc. and James M. Corbett                                                  |   | Incorporated by  reference to Exhibit 10.2 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended October 1, 2006 (File No. 000-51348)                                                      |
| 10.15 |   | Change in Control  Agreement, dated September 19, 2006, among ev3 Inc., ev3  Endovascular, Inc. and Dale A. Spencer                                                   |   | Incorporated by  reference to Exhibit 10.1 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended October 1, 2006 (File No. 000-51348)                                                      |
| 10.16 |   | Form of Change in  Control Agreement among ev3 Inc., ev3 Endovascular, Inc. or Micro  Therapeutics, Inc. and each of its executive officers                      |   | Incorporated by  reference to Exhibit 10.3 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended October 1, 2006 (File No. 000-51348)                                                      |
| 10.17 |   | Form of  Indemnification Agreement for directors and officers of ev3 Inc.                                                                                                  |   | Incorporated by  reference to Exhibit 10.15 to ev3’s Amendment No. 4 to Registration  Statement on Form S-1 filed with the Securities and Exchange  Commission on June 2, 2005 (File No. 333-123851) |

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| 10.18 |   | ev3 Inc. Amended and Restated 2005 Incentive Stock  Plan                                                                          |   | Incorporated by reference to Exhibit 10.1 to  ev3’s Current Report on Form 8-K as filed with the Securities and  Exchange Commission on May 10, 2006 (File No. 000-51348)                                      |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19 |   | Form of ev3 Inc.  Amended and Restated 2005 Incentive Stock Plan Option Certificate                                          |   | Incorporated by  reference to Exhibit 10.2 to ev3’s Current Report on Form 8-K  as filed with the Securities and Exchange Commission on January 26, 2007  (File No. 000-51348)                                 |
| 10.20 |   | Form of Stock Grant  Certificate under ev3 Inc. Amended and Restated 2005 Incentive Stock Plan                               |   | Incorporated by  reference to Exhibit 10.1 to ev3’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on January 26,  2007(File No. 000-51348)                                     |
| 10.21 |   | 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 filed  with the Securities and Exchange Commission on January 31, 2006 (File  No. 000-51348)                                    |
| 10.22 |   | ev3 LLC Amended and  Restated 2003 Incentive Plan, as amended                                                                     |   | Incorporated by  reference to Exhibit 10.2 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended July 2, 2006 (File No. 000-51348)                                                              |
| 10.23 |   | Micro  Therapeutics, Inc. 1996 Stock Incentive Plan, as amended                                                              |   | Incorporated by  reference to Exhibit 10.7.1 to Micro Therapeutics, Inc.’s Annual  Report on Form 10-KSB for the fiscal year ended December 31,  2002 (File No. 000-06523)                                |
| 10.24 |   | Micro  Therapeutics, Inc. 1993 Incentive Stock Option, Nonqualified Stock  Option and Restricted Stock Purchase Plan         |   | Incorporated by  reference to Exhibit 10.6 to Micro Therapeutics, Inc.’s  Registration Statement on Form SB-2 filed with the Securities and  Exchange Commission on December 5, 1996 (File No. 333-17345) |
| 10.25 |   | ev3 Inc. Employee Stock  Purchase Plan                                                                                            |   | Incorporated by  reference to Exhibit 10.24 to ev3’s Annual Report on Form 10-K  for the fiscal year ended December 31, 2005 (File No. 000-51348)                                                              |
| 10.26 |   | ev3 Inc. Executive  Performance Incentive Plan                                                                                    |   | Filed herewith                                                                                                                                                                                                                          |
| 10.27 |   | Agreement dated as of  December 31, 2006 between ev3 Inc. and L. Cecily Hines                                           |   | Filed herewith                                                                                                                                                                                                                          |

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| 10.28 |   | Form of Subscription Agreement between ev3  Endovascular, Inc. (formerly known as ev3 Inc.) and Warburg, Pincus  Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,  Warburg, Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus  Netherlands Equity Partners III, C.V., Vertical Fund I, L.P., Vertical Fund  II, L.P. |   | Incorporated by reference to Exhibit 10.33 to  ev3’s Registration Statement on Form S-1 filed with the Securities  and Exchange Commission on April 5, 2005 (File No. 333-123851)                         |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.29 |   | Distribution Agreement,  dated as of June 30, 2004, between Invatec S.r.l. and ev3  Endovascular, Inc. (formerly known as ev3 Inc.)(1)                                                                                                                                                                                                                     |   | Incorporated by  reference to Exhibit 10.34 to ev3’s Amendment No. 4 to Registration  Statement on Form S-1 filed with the Securities and Exchange  Commission on June 2, 2005 (File No. 333-123851) |
| 10.30 |   | First Amendment to  Distribution Agreement, dated as of December 31, 2004, between Invatec  S.r.l. and ev3 Endovascular, Inc. (formerly known as ev3 Inc.)(1)                                                                                                                                                                                              |   | Incorporated by  reference to Exhibit 10.35 to ev3’s Amendment No. 4 to Registration  Statement on Form S-1 filed with the Securities and Exchange  Commission on June 2, 2005 (File No. 333-123851) |
| 10.31 |   | Distribution Agreement  between Invatec Technology Center GMBH and ev3 Endovascular, Inc. dated  February 15, 2007(2)                                                                                                                                                                                                                                      |   | Incorporated by  reference to Exhibit 10.2 to ev3’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on February 20, 2007  (File No. 000-51348)                              |
| 10.32 |   | Master License  Agreement, effective as of December 29, 1998, by and between  SurModics, Inc. and Microvena Corporation                                                                                                                                                                                                                                    |   | Incorporated by  reference to Exhibit 10.41 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on April 5,  2005 (File No. 333-123851)                        |
| 10.33 |   | Amendment to Master  License Agreement, dated July 5, 2000, by and between  SurModics, Inc. and Microvena Corporation(1)                                                                                                                                                                                                                                   |   | Incorporated by  reference to Exhibit 10.42 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)                        |
| 10.34 |   | Consent to Assignment  Agreement, effective as of September 6, 2002, by and between ev3  Endovascular, Inc. (formerly known as ev3 Inc.), Microvena Corporation  and SurModics, Inc.                                                                                                                                                                  |   | Incorporated by  reference to Exhibit 10.43 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)                        |
| 10.35 |   | SurModics-Modified  Product Agreement, dated as of February 21, 2002, between  SurModics, Inc. and Microvena Corporation                                                                                                                                                                                                                                   |   | Incorporated by  reference to Exhibit 10.44 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)                        |

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| 10.36 |   | Amendment to the February 21, 2002 SurModics-  Modified Product Agreement, effective March 31, 2003, between  SurModics, Inc. and ev3 Endovascular, Inc. (formerly known as ev3  Inc.) |   | Incorporated by reference to Exhibit 10.45 to  ev3’s Registration Statement on Form S-1 filed with the Securities  and Exchange Commission on April 5, 2005 (File No. 333-123851)   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37 |   | Amendment to the  February 21, 2002 SurModics- Modified Product Agreement, effective  July 31, 2004, between SurModics, Inc. and ev3  Endovascular, Inc. (formerly known as ev3 Inc.)  |   | Incorporated by  reference to Exhibit 10.46 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)  |
| 10.38 |   | Exclusive License  Agreement, dated June 29, 2001, by and between Microvena Corporation and  AGA Medical Corporation                                                                                  |   | Incorporated by  reference to Exhibit 10.49 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)  |
| 10.39 |   | Exclusive License  Agreement, dated June 29, 2001, by and between Microvena Corporation and  AGA Medical Corporation                                                                                  |   | Incorporated by  reference to Exhibit 10.50 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851), |
| 10.40 |   | Royalty Agreement, dated  June 29, 2001, by and between AGA Medical Corporation and Microvena  Corporation                                                                                            |   | Incorporated by  reference to Exhibit 10.51 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851)  |
| 10.41 |   | Separation Agreement,  dated April 3, 2006, by and between ev3 Inc. and Thomas C. Wilder III,  as amended                                                                                             |   | Incorporated by  reference to Exhibit 10.7 to ev3’s Quarterly Report on Form 10-Q  for the fiscal quarter ended July 2, 2006 (File No. 000-51348)                                   |
| 10.42 |   | Loan and Security  Agreement, dated as of June 28, 2006, among Silicon Valley Bank, ev3  Endovascular, Inc., ev3 International, Inc. and Micro  Therapeutics, Inc.                     |   | Incorporated by reference  to Exhibit 10.8 to ev3’s Quarterly Report on Form 10-Q for  the fiscal quarter ended July 2, 2006 (File No. 000-51348)                                   |
| 10.43 |   | License Agreement, dated  as of November 18, 1996, by and between STS Biopolymers, Inc. and  Micro Therapeutics, Inc. for Slip Coat for Ultra-Slip Coat                                     |   | Filed herewith                                                                                                                                                                                               |
| 10.44 |   | License Agreement, dated  as of November 18, 1996, by and between STS Biopolymers, Inc. and  Micro Therapeutics, Inc.                                                                       |   | Filed herewith                                                                                                                                                                                               |

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| 10.45 |   | Letter Agreement, dated as of May 16, 1998, by  and between STS Biopolymers, Inc. and Micro Therapeutics, Inc.                                                    |   | Filed herewith                                                                                                                                                                                              |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.46 |   | License Agreement, dated  as of December 9, 1999, by and between Biocoat, Inc. and Micro  Therapeutics, Inc.                                                      |   | Filed herewith                                                                                                                                                                                              |
| 10.47 |   | Amendment to License  Agreement, dated as of December 9, 1999, by and between  Biocoat, Inc. and Micro Therapeutics, Inc., effective as of  January 1, 2005. |   | Filed herewith                                                                                                                                                                                              |
| 10.48 |   | Corporate Opportunity  Agreement, dated as of April 4, 2005, by and between the institutional  stockholders listed on Schedule I thereto and ev3 Inc.                       |   | Incorporated by  reference to Exhibit 10.32 to ev3’s Registration Statement on  Form S-1 filed with the Securities and Exchange Commission on  April 5, 2005 (File No. 333-123851) |
| 21.1  |   | Subsidiaries of ev3 Inc.                                                                                                                                                         |   | Filed herewith                                                                                                                                                                                              |
| 23.1  |   | Consent of  Ernst & Young LLP                                                                                                                                           |   | Filed herewith                                                                                                                                                                                              |
| 23.2  |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                           |   | Filed herewith                                                                                                                                                                                              |
| 31.1  |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 and SEC Rule 13a-14(a)                                            |   | Filed herewith                                                                                                                                                                                              |
| 31.2  |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 and SEC Rule 13a-14(a)                                            |   | Filed herewith                                                                                                                                                                                              |
| 32.1  |   | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                    |   | Furnished herewith                                                                                                                                                                                          |
| 32.2  |   | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    |   | Furnished herewith                                                                                                                                                                                          |

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(1)          Confidential treatmentunder Rule 24b-2 of the Securities Exchange Act of 1934, as amended,has been granted with respect to designated portions of this document.

(2)          Confidential treatmentunder Rule 24b-2 of the Securities Exchange Act of 1934, as amended,is pending with respect to designated portions of this document. The omittedportions have been filed separately with the Commission.

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