**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**(Mark one)**

**x**                               ANNUAL REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31,2005**

**o**                                  TRANSITION REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from                  to                   .**

**Commissionfile number 000-51348**

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**ev3 Inc.**

(Exact name of registrantas specified in its charter)

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

 

**(763) 398-7000**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to section 12(b) of the Act: **None**

Securities registered pursuant to section 12(g) ofthe Act:

**CommonStock, par value $0.01 per share**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  YES o NO x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  YES o NO x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES x NO o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and larger accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

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

 

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

The aggregate market valueof the registrant’s common stock, excluding outstanding shares beneficiallyowned by affiliates, computed by reference to the closing sale price at whichthe common stock was last sold as of July 1, 2005 (the last business dayof the registrant’s second quarter) as reported by the NASDAQ National MarketSystem, was $119,157,990.

As of February 15,2006, 56,360,687 shares of common stock of the registrant were outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

None.

 

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**TABLE OF CONTENTS**
|                   | ** ** | ** **                                                                                                         | ** ** | **Page** | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |                                                                                                               |       |     |       |
| Item  1.          |       | Business                                                                                                           |       | 1        |       |
| Item 1A.          |       | Risk Factors                                                                                                       |       | 36       |       |
| Item 1B.          |       | Unresolved Staff Comments                                                                                          |       | 57       |       |
| Item 2.           |       | Properties                                                                                                         |       | 57       |       |
| Item 3.           |       | Legal Proceedings                                                                                                  |       | 58       |       |
| Item 4.           |       | Submission of Matters to a Vote of  Security Holders                                                               |       | 61       |       |
| **PART II**  |       |                                                                                                               |       |     |       |
| Item 5.           |       | Market for Registrant’s Common  Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |       | 62       |       |
| Item 6.           |       | Selected Financial Data                                                                                            |       | 63       |       |
| Item 7.           |       | Management’s Discussion and Analysis  of Financial Condition and Results of Operation                    |       | 65       |       |
| Item 7A.          |       | Quantitative and Qualitative  Disclosures About Market Risk                                                        |       | 82       |       |
| Item 8.           |       | Financial Statements and  Supplementary Data                                                                       |       | 84       |       |
| Item 9.           |       | Changes In and Disagreements With  Accountants on Accounting and Financial Disclosure                              |       | 85       |       |
| Item 9A.          |       | Controls and Procedures                                                                                            |       | 85       |       |
| Item 9B.          |       | Other Information                                                                                                  |       | 86       |       |
| **PART III** |       |                                                                                                               |       |     |       |
| Item 10.          |       | Directors and Executive Officers of  the Registrant                                                                |       | 87       |       |
| Item 11.          |       | Executive Compensation                                                                                             |       | 93       |       |
| Item 12.          |       | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                    |       | 105      |       |
| Item 13.          |       | Certain Relationships and Related  Transactions                                                                    |       | 108      |       |
| Item 14.          |       | Principal Accountant Fees and  Services                                                                            |       | 115      |       |
| **PART IV**  |       |                                                                                                               |       |     |       |
| Item 15.          |       | Exhibits, Financial Statement  Schedules                                                                           |       | 117      |       |

 

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*This annual reporton Form 10-K contains not only historical information, but alsoforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, and are subject to the safe harbor created by those sections.We refer you to the information under the heading “Part I. Item 1.Business—Forward-Looking Statements.”*

*As used in thisreport, references to “ev3,” the “company,” “we,” “our” or “us,” unless thecontext otherwise requires, refer to ev3 Inc. and its subsidiaries, includingwithout limitation Micro Therapeutics, Inc., which became a wholly owned subsidiaryof ev3 Inc. in January 2006. Prior to such time, Micro Therapeutics, Inc.was a majority owned subsidiary of ev3 Inc..*

*All trademarks ortrade names referred to in this report are the property of their respectiveowners.*

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**PART I**

**ITEM 1.**                BUSINESS

**Overview**

We are a leading global medical device company focusedon catheter-based, or endovascular, technologies for the minimally invasivetreatment of vascular diseases and disorders. We sell over 100 productsconsisting of over 1,000 SKUs in more than 50 countries through a direct salesforce in the United States, Canada, Europe and Japan, consisting of approximately210 sales professionals as of December 31, 2005, and through distributorsin certain other international markets. Our customers include a broad physicianbase consisting of cardiologists, radiologists, neuro-radiologists, vascularsurgeons, neurosurgeons and other endovascular specialists. During fiscal 2005and fiscal 2004, we generated net sales of $133.7 million and $86.3 million,respectively, from the products we manufacture and distribute.

Vascular diseasemay occur in any part of the body, and is generally manifested as an occlusionor rupture of a blood vessel. The endovascular devices market conventionally isdivided into three sub-markets defined by anatomic location:

·       **Peripheral vascular** market includesproducts used to treat vascular disease in the legs, kidney, neck and generallyall vascular anatomy other than that which occurs in the brain or the heart.

·       **Cardiovascular** market includes productsused to treat coronary artery disease, atrial fibrillation, the most commonform of irregularity in the force or rhythm of the heartbeat, and otherdisorders in the heart.

·       **Neurovascular** market includes products usedto treat vascular disease and disorders in the brain, including strokes causedby either vascular occlusion or rupture.

Our name signifies our commitment to, and engagementin, each of these three endovascular sub-markets.

Our corporate strategy is to be a global provider ofproducts for underserved and emerging opportunities within the endovasculardevice market. We believe that the markets for peripheral vascular andneurovascular devices, when compared to the cardiovascular market, have highergrowth potential with fewer entrenched, broad-line competitors. Therefore, ourstrategy in the peripheral vascular and neurovascular markets is to be a leaderin both markets by providing a portfolio of products that addresses a broadspectrum of physician needs and clinical indications. We believe thecardiovascular market is characterized by several large and entrenchedcompetitors with a broad range of products. Therefore, our strategy in thismarket is to target emerging therapeutic opportunities where we can establish aleadership position. In order to execute our strategies in each of theendovascular sub-markets, we have advanced and expanded the technologies andproduct lines acquired between 2000 and 2002. During 2005, we introduced over20 new products in either the U.S. or international markets, or both.

We believe that our commitment to establishing aglobal organization that is focused on underserved and emerging opportunitiesin the endovascular devices market represents a strategy that is uncommon inthe medical device industry. We believe that this unique strategy allows us tocompete effectively with smaller companies that have narrow product lines andlack an international sales force and infrastructure, and also with largercompanies that do not have our focus and agility.

Our peripheral vascular portfolio of products consistsof an offering of peripheral stents, embolic protection devices, a carotidstenting system, thrombectomy devices, balloon angioplasty catheters, foreignobject retrieval devices and guidewires. Our cardiovascular portfolio ofproducts includes embolic protection devices and thrombectomy devices whichleverage technology platforms that we also sell in the peripheral vascularmarket. Our neurovascular portfolio of products consists of embolic coils,liquid 

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embolics and a broad rangeof neurovascular access and delivery products consisting of micro catheters,occlusion balloon systems and guidewires.

We believe that international markets represent asignificant portion of the worldwide endovascular market, while alsorepresenting an opportunity for us to generate sales from our new productsbefore receiving U.S. Food and Drug Administration, or FDA, approval tocommence U.S. commercialization. Our global organization of approximately 880employees as of December 31, 2005 operates in the United States, Europe,Japan, Canada and the major markets of Asia Pacific and Latin America. As of December 31,2005, our sales and marketing infrastructure included a sales force ofapproximately 240 sales professionals.

We areorganized in two business segments: cardio peripheral and neurovascular. Wemanage our business and report our operations internally and externally on thisbasis. Our cardio peripheral segment contains products that are used in bothcardiovascular and peripheral vascular procedures by cardiologists,radiologists and vascular surgeons. Our neurovascular segment contains productsthat are used primarily by neuro-radiologists and neurosurgeons. Our salesactivities and operations are aligned closely with our business segments. Wehave dedicated cardio peripheral sales teams in the United States and Europethat target customers who often perform procedures in both anatomic areas(cardiovascular and peripheral vascular). We have separate, dedicatedneurovascular sales teams in the United States and Europe that are specificallyfocused on this customer base. The following represents net sales by our twobusiness segments as well as by geography during the periods indicated:

| ** **                              | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| **Net Sales by Segment** | ** ** | ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                      | ** ** |
| Cardio Peripheral                       |       | $                                                            | 79,881     |   | $ | 52,942 |   | $ | 45,431 |   |
| Neurovascular                           |       | 53,815                                                       |       | 33,392 |   | 22,208 |   |
| Total                                   |       | $                                                            | 133,696    |   | $ | 86,334 |   | $ | 67,639 |   |
|                                         |            |                                                              |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Net Sales by Geography** | ** ** | ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **(in thousands)**                                      | ** ** |
| United States                             |       | $                                                            | 71,848     |   | $ | 42,791 |   | $ | 37,616 |   |
| International                             |       | 61,848                                                       |       | 43,543 |   | 30,023 |   |
| Total                                     |       | $                                                            | 133,696    |   | $ | 86,334 |   | $ | 67,639 |   |
|                                           |            |                                                              |            |  |  |  |  |  |  |  |  |  |

 

For additional financialinformation regarding each of our segments and our foreign operations, see Note20 to our consolidated financial statements.

**Our History**

Beginning in 2000, Dale A. Spencer, an experiencedleader in the endovascular device industry, together with Warburg Pincus LLC, aglobal private equity firm, and The Vertical Group, L.P., an investmentmanagement and venture capital firm focused on the medical device industry,which we refer to collectively as our investor group, made a series ofstrategic investments and ultimately acquired a controlling interest in severalcompanies that were merged together to form ev3 Endovascular, Inc. Ourinvestor group’s goal was to build a global provider of products forunderserved and emerging opportunities in the endovascular device market.

Our investor group built our platform by acquiringtechnologies which we have developed into our current peripheral vascular andcardiovascular product portfolios. In 2000, our investor group made aninvestment in EndiCOR Medical, Inc., a developer of catheter-basedthrombectomy technology that provided the platform for our current X-Sizer® device. In 2001, this investor group made acontrolling 

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investment in MicrovenaCorporation, a developer of guidewires, foreign object retrieval devices andembolic protection technology, the latter of which is the platform for ourSpideRXTM embolic protection device. In addition, through a series ofinvestments beginning in 2001, Warburg Pincus and The Vertical Group togetheracquired a majority interest in Micro Therapeutics, Inc., or MTI. In 2001,our investor group also established ev3 Endovascular in order to exclusivelymarket the MTI neurovascular device portfolio in markets outside of the UnitedStates and Canada. During 2002, ev3 Endovascular acquired several companieswith innovative and early stage cardiovascular technologies, including ApprivaMedical, Inc., a developer of a technology to reduce stroke in patientswith atrial fibrillation which provided the platform for our Percutaneous LeftAtrial Appendage Transcatheter Occlusion device, or PLAATO® . Also in 2002, ev3 Endovascular acquiredIntraTherapeutics, Inc., an emerging competitor in the peripheral stentmarket whose product line included the predecessors to our current Protégé® , Protégé EverflexTM, ParaMountTM Mini andPRIMUSTM stent systems. In June 2004, ev3 Endovascular entered into adistribution agreement with Invatec S.r.l. for the exclusive distribution ofInvatec branded products in the United States. Invatec is a privately heldcompany located in Brescia, Italy with a broad line of endovascular products,including balloon angioplasty catheters. The Invatec product line expands ourparticipation in the peripheral vascular market and leverages our expandedcardio peripheral direct sales force in the United States.

ev3 LLC, our predecessor company prior to our initialpublic offering in June 2005, was formed in September 2003 to holdour investor group’s and our management’s interest in both ev3 Endovascular andMicro Investment, LLC, a specially formed limited liability company which helda majority interest in MTI. Immediately following the formation, ev3 LLC owned100% of ev3 Endovascular and, indirectly through our 100% interest in MicroInvestment, LLC, a majority interest in MTI. In addition, in 2002, MTI acquiredDendron GmbH, a German-based developer and manufacturer ofneurovascular-focused products, such as embolic coils for the treatment ofbrain aneurysms. Following the formation of ev3 LLC, Warburg Pincus and TheVertical Group purchased directly additional interests in MTI. In January 2005,ev3 Inc. was formed as a Delaware corporation and a subsidiary of ev3 LLC. In May 2005,Warburg Pincus and The Vertical Group contributed all of the shares of MTIcommon stock directly owned by them to ev3 LLC in exchange for commonmembership units. Immediately prior to the consummation of our initial publicoffering in June 2005, ev3 LLC merged with and into ev3 Inc., and ev3 Inc.became the holding company for all of ev3 LLC’s subsidiaries. On January 6,2006, we acquired the outstanding shares of MTI that we did not already ownthrough a merger of Micro Investment, LLC with and into MTI, with MTIcontinuing as the surviving corporation and a wholly owned subsidiary of ev3Inc. In connection with the merger, we issued approximately seven million newshares of our common stock to MTI’s public stockholders.

We have dedicatedsignificant capital and management effort to advance and broaden our productlines and technologies. In addition, we have hired a team of senior managerswith extensive experience in all aspects of the endovascular devices business.

**Endovascular Market Summary**

We estimate that vascular disease affects over 90million people in the United States and more than 1.0 billion people worldwide,and is the leading cause of death in the world. It may occur in any part of thebody, and is generally manifested as an occlusion or rupture of a blood vessel.Vascular disease is a progressive, pathological condition that leads most oftento blood vessel narrowing and obstruction, but can also lead to blood vesselwall weakening and rupture. These processes can occur in the blood vessels ofevery organ and anatomic area of the body, and can cause a range of symptomsincluding pain, functional impairment and death.

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The endovascular,or catheter-based, devices market addressing vascular diseases isconventionally divided into three sub-markets based on anatomic location:

·       **Peripheral vascular** market includesproducts that are used to treat vascular disease in the legs, kidney, neck(carotid) and generally all vascular anatomy other than that which occurs inthe brain or the heart. According to the American Heart Association, more than8.0 million people in the United States, and we estimate that more than 100million people worldwide, have peripheral vascular disease.

·       **Cardiovascular** market includes productsthat are used to treat coronary artery disease, atrial fibrillation and otherdisorders in the heart. The American Heart Association estimates that 70million people in the United States, and we estimate that more than 700 millionpeople worldwide, have cardiovascular disease.

·       **Neurovascular** market includes products thatare used to treat vascular disease and disorders in the brain, includinganeurysms and arterial-venous malformations, or AVMs. The leadingcomplication of neurovascular disease is stroke. The World Health Organizationestimates that there are approximately 15 million cases of stroke per year on aworldwide basis. According to the World Health Organization, 5.0 million ofthese people die from the stroke and an additional 5.0 million are left with apermanent disability.

In 2000, there were morethan 12,000 interventional cardiologists, interventional radiologists andperipheral vascular surgeons in the United States, who are generally trained inendovascular techniques.

**Peripheral Vascular Market**

We believe that peripheral vascular disease isunderdiagnosed and undertreated. According to the American Heart Association,peripheral vascular disease affects more than 8.0 million Americans, of whichapproximately 2.5 million are being treated. We estimate that more than 100million people worldwide have peripheral vascular disease. As with vasculardisease in general, peripheral vascular disease is characterized by thenarrowing or total occlusion of blood vessels, and can cause symptoms includingpain, loss of function and death. Mortality from peripheral vascular diseasecan occur as a result of stroke, kidney failure and diabetes related vascularcomplications.

Peripheral vascular disease is treated with medication,minimally invasive endovascular procedures, surgery or a combination of thesetherapies. Minimally invasive endovascular procedures consist primarily ofangioplasty and stenting. Angioplasty is a non-surgical procedure in whichnarrowed or blocked peripheral arteries are re-opened by placing a thin tubecalled a catheter with a deflated balloon on the tip into the narrowed artery. Theballoon catheter is then inflated to compress the plaque and to stretch theartery wall, thereby enlarging, or dilating, the opening of the vessel andrestoring blood flow. Stents, which are tubular mesh devices typicallyconsisting of interconnected metal struts, are then inserted inside the arteryto act as scaffolding in order to hold the vessel open. Peripheral vascular diseaserepresents a significant indication for both surgical and endovascularinterventions. We estimate that in 2004 there were over 800,000 endovascularprocedures for peripheral vascular disease. With over 100,000 lower extremityamputations in 2002 in the United States alone according to the Agency forHealthcare Research and Quality, we believe that there is a large number ofpatients that are still either untreated or inadequately treated.

The carotid arteries areone of the most common sites of peripheral vascular disease, affecting anestimated 1.5 million people in the United States alone. Carotid arteries arelocated on each side of the neck, together providing the primary blood supplyto the brain. In carotid artery disease, plaque accumulates in the arterywalls, narrowing the artery and disrupting the blood supply from the heart tothe brain. This disruption in blood supply together with plaque debris breakingoff the artery walls and 

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travelingto the brain are primary causes of stroke. The therapy required to treatcarotid artery disease generally depends on the degree of stenosis, or arterynarrowing. Patients with moderate stenosis are typically treated with drugs tokeep blood from clotting. However, patients with neurologic symptoms and highlynarrowed arteries typically undergo a surgical procedure known as a carotidendarterectomy. This procedure requires a surgeon to access the blocked carotidartery though an incision in the neck, and then to surgically remove the plaque.It is estimated that 160,000 patients each year in the United States undergo acarotid endarterectomy, which typically requires hospitalization for one to twodays. Endovascular techniques using stents and embolic protection systems havebeen developed and are in an early stage of adoption. This approach avoids opensurgery and we believe will expand the addressable patient population.

**Our Peripheral Vascular Business**

Our peripheral vascularmarket strategy is to provide a broad portfolio of products that includes theimportant devices used in frequently performed procedures and also innovativedevices for use in emerging therapies.

***OurPeripheral Vascular Product Offering***

| Category                       | ** ** | ** **                         | ** ** | **Product**                            | ** ** | **Key Features** | ** ** | **U.S.   Launch**         | ** ** | **Current   Markets**(1) |
|--------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|------------------|------------|---------------------------|------------|--------------------------|
| Stents—self-expanding     |       | Protégé GPS              |       | Enhanced placement accuracy            |       | 2003             |       | Worldwide                 |
|                           |       | Protégé Tapered          |       | Tapered                                |       | Planned          |       | International             |
|                           |       | Protégé Longs            |       | Expanded lengths                       |       | 2004             |       | U.S./Canada/International |
|                           |       | Protégé Rx               |       | Rapid exchange delivery                |       | Planned          |       | International             |
|                           |       | Protégé Bigs             |       | Enhanced diameters                     |       | 2005             |       | U.S./International        |
|                           |       | Protégé EverFlex Longs   |       | Reduced fracture risk                  |       | Planned          |       | International             |
| Stents—balloon expandable |       | ParaMount Mini                     |       | Visualization/placement  accuracy      |       | 2004             |       | U.S./Canada/International |
|                           |       | PRIMUS                             |       | Visualization/placement accuracy       |       | 2005             |       | U.S./Canada/International |
|                           |       | PRIMUS Long Catheter          |       | Longer catheter                        |       | 2005             |       | U.S./Canada/International |
| Embolic protection             |       | SpideRX                            |       | Compatible with wire of  choice        |       | 2006             |       | U.S./International        |
| Carotid stenting               |       | Protégé RX/ SpideRX |       | Carotid stent plus  embolic protection |       | Planned          |       | International             |
| Thrombectomy                   |       | X-Sizer                            |       | Self-contained thrombus  removal       |       | 2004             |       | U.S./Canada/International |
|                           |       | DiverTM C.E.(2)                |       | Rapid exchange aspiration              |       | 2005             |       | U.S.                      |
|                           |       | HelixTM                        |       | Effective thrombus removal             |       | Pre-2002         |       | U.S./Canada/International |

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| Balloon angioplasty catheters |   | SailorTM Plus(2)SubmarineTM Plus(2) |   | Complete 0.035”  portfolio  Broad 0.018” portfolio  |   | 2005  2005 |   | U.S.  U.S.                |
|-------------------------------|--------|---------------------------------------------|--------|---------------------------------------------------------------|--------|------------|--------|---------------------------|
|                          |   | AmphirionTM Deep(2)                     |   | Low profile 0.014” PTA  balloon broad portfolio of sizes |   | 2005       |   | U.S.                      |
| Foreign object retrieval      |   | The Goose Neck® /Microsnare  |   | Broad portfolio of sizes                                      |   | Pre-2002   |   | Worldwide                 |
| Guidewires                    |   | Nitrex®                                |   | Highly flexible/kink  resistant                               |   | 2003       |   | U.S./Canada/International |
|                          |   | AqWireTM                                |   | Enhanced deliverability                                       |   | 2004       |   | U.S./Canada/International |
|                          |   | SKIPPERTM                               |   | New coronary/peripheral guidewire                             |   | 2005       |   | U.S.                      |

 

***Our PeripheralVascular Products in Development***

| Category                           | ** ** | ** **                                 | ** ** | **Product**                                                  | ** ** | **Key Features** | ** ** | **Target Markets**(1) |
|------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------|------------|------------------|------------|-----------------------|
| Stents—self-expanding         |       | MarisTM(2)  Protégé EverFlex |       | New design  Reduce fracture risk                             |       | U.S.  Worldwide  |
|                               |       | Protégé EverFlex Small  Diameter |       | Reduce fracture risk                                         |       | Worldwide        |
| Stents—balloon  expandable    |       | ONDATM(2)ParaMount Mini                |       | Improved design  Expanded product range                      |       | U.S.  Worldwide  |
|                               |       | Primus                                     |       | Improved deliver systems                                     |       | Worldwide        |
| Embolic protection                 |       | SpideRX2  MO.MA® (2)             |       | Improved  deliverability  Occlusive cerebral protection      |       | Worldwide  U.S.  |
| Thrombectomy                       |       | Diver CE  Peripheral                       |       | Improved thrombus  removal                                   |       | Worldwide        |
| Balloon angioplasty catheters |       | Submarine Plus(2)Amphirion Deep(2)         |       | Expanded lengths  and diameters  Additional catheter lengths |       | U.S.  U.S.       |

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(1)          International indicatesthe Europe, Asia Pacific (excluding Japan), Middle East and Latin Americamarkets. Worldwide indicates the United States, Canada, International and Japanmarkets.

(2)          Invatec product that wedistribute or will distribute.

***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 ourbroad portfolio of self-expanding and balloon expandable stents isdifferentiated from our competitors’ offerings due primarily to the radiopacity(visibility under fluoroscopy), placement accuracy, deliverability and their strongclinical performance.

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*Protégé and Protégé EverFlex.*   Ourself-expanding stent portfolio includes the Protégé Self-Expanding Stent, a “shapememory” Nitinol stent that expands to a predetermined diameter upon deployment.Nitinol is a highly flexible metal with shape retention and fatigue resistanceproperties. We provide a number of sizes of our Protégé stent, as well as atapered configuration for use in the carotid arteries. We also manufacture andexpect to commercialize upon clearance from the FDA the Protégé EverFlex, aunique, self-expanding Nitinol coil stent that benefits from enhancedflexibility and resistance to fracture for superior performance in vesselssubjected to repeated bending.

*ParaMount Mini and PRIMUS Balloon ExpandableStents.*   Our balloon expandable stentportfolio includes the ParaMount Mini and PRIMUS stent systems, both of whichincorporate tantalum markers embedded in the stent to provide superiorvisualization of the stent using fluoroscopy during and after the procedure whichallows the physician to quickly confirm the correct placement of the stent. Theinclusion of markers is a unique feature in the balloon expandable stent market.Our balloon expandable stents demonstrate minimal movement upon deployment, atechnical advantage designed to improve accuracy of placement in the bloodvessel.

In the United States, our stent products are clearedfor use in the biliary duct, and the IntraCoil system is approved for use inthe superficial femoral artery and the femoropopliteal arteries. Outside of theUnited States and Japan, our stent products are approved for non-coronaryvascular indications, including carotid artery stenting and use in the biliaryduct, kidneys and iliac.

We are currentlydeveloping a number of new products to increase our market share penetrationwithin the global peripheral stent market. Our stent product development focusis on increasing the breadth of our product line by adding new lengths,diameters and catheter shaft line extensions as well as introducing new stentdesigns and platforms.

***Embolic Protection***

During peripheral vascular procedures, plaque anddebris may dislodge or embolize during the procedure, potentially blockingblood flow and damaging distal tissue. Embolic protection devices are intendedto trap plaque and debris. The primary market driver for peripheral embolicprotection is the adoption of carotid artery stenting.

*SpideRX Embolic Protection Devices.*   TheSpideRX family of embolic protection devices is a low-profile embolicprotection device featuring a unique braided Nitinol embolic filter compatiblewith most guidewires. Filter-based embolic protection devices allow blood tocontinue flowing in the artery while the filter traps the debris, minimizingdownstream tissue damage and improving clinical outcomes. We believe theSpideRX family has a significant competitive advantage because it permitsphysicians to use their guidewire of choice. We market the SpideRX in mostinternational markets for use during peripheral vascular procedures in whichembolic material is a risk. In February 2006, we received FDA 510(k) clearanceof our SpideRX embolic protection device for use in carotid artery stenting inconjunction with the Guidant RX ACCULINK stent. During 2005, we completedenrollment in a carotid stenting trial in the United States that used ouroriginal SpideRX embolic protection device. An additional arm was added to thistrial to evaluate the SpideRX for carotid indications and it also has completedenrollment. For a description of this trial, see “—Clinical Studies” below.

*MO.MA Cerebral Protection Device.*   TheMO.MA device is designed to treat patients with carotid artery disease who arenot candidates for devices that require the filter to be deployed beyond theblockage and, as a result, would likely not be eligible for carotid stenting. Wehave the exclusive right to market the MO.MA embolic protection device in theUnited States under the Invatec brand as part of our strategic relationshipwith Invatec and we are working to design and initiate a pivotal clinical trialto gain FDA approval in the United States, as described below in “—ClinicalStudies.”

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***Carotid Stenting***

Carotid artery stenting represents an emergingminimally invasive treatment for carotid artery disease and we believe it hasthe opportunity to become a significant alternative to carotid endarterectomy. Thecarotid stenting market is beginning to develop in the United States with thefirst system having received FDA approval in 2004. We believe that the approvalof additional systems, including our own, and the market development efforts currentlyunderway will help establish carotid stenting systems as a major newendovascular device market.

*SpideRX Embolic Protection System.*   Webelieve that our SpideRX embolic protection device enables us to offer asignificant differentiated filter for carotid artery interventions withmeaningful competitive advantages based on enhanced placement accuracy and theSpideRX’s compatibility with the physician’s guidewire of choice.

Our carotid stentingproduct offering (Protégé RX straight and tapered stents and SpideRX) isavailable in Europe and certain other countries. In February 2006, wereceived FDA 510(k) clearance of our SpideRX embolic protection device foruse in carotid artery stenting in conjunction with the Guidant RX ACCULINKstent. In support of our FDA pre-market approval submission, we conducted theCREATE pivotal clinical trial, which was designed to evaluate the use of ourcarotid stenting technology in patients who are high-risk candidates forcarotid endarterectomy. For a description of this trial, see “—ClinicalStudies.” The 30-day and one-year follow-up results demonstrated that theSpideRX embolic protection device was non-inferior to an objective performancecriterion.

***Thrombectomy***

Thrombectomy systems 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 peripheralthrombectomy tools that meet a broad spectrum of physician needs, including themechanical removal of thrombus and the delivery of peripheral blood clottherapies designed to help dissolve the clot.

*Diver C.E. Thrombectomy Device.*   Weobtained clearance from the FDA and in July 2005 launched the Diver C.E.in the United States. We believe that the Diver C.E. provides a simple andeffective tool for quickly aspirating fresh clot prior to or during atherapeutic intervention. We believe that the Diver C.E. device is distinctfrom competing aspiration catheters by offering multiple aspiration ports.

*X-Sizer Thrombectomy Catheter System.*   TheX-Sizer is a self-contained thrombus removal system that uses a rotating cuttercontained within the tip of an aspiration catheter to shear, capture and removethrombus. 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 thatavoids the need for capital equipment or a temporary pacing catheter. In theUnited 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.

*HelixTM Clot 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. Thrombus maceration is achieved through the use of an enclosed, rapidlyrotating compressed-air blade that creates a flow of fluid through sideholes inthe catheter.

We intend to develop anext-generation thrombus and debris removal system for the peripheral vascularmarket.

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***Balloon Angioplasty Catheters***

We offer a broad portfolio of peripheral vascularballoon angioplasty catheters. In early 2005, we began distributing in theUnited States a broad line of peripheral vascular balloon cathetersmanufactured by Invatec pursuant to our distribution agreement.

*Sailor Plus and Submarine Plus.*   TheSailor Plus is a general use balloon catheter that meets the needs of routineperipheral intervention. The Submarine Plus is a low-profile balloon catheterthat provides pushability and flexibility for improved physician control andaccess in tortuous vessels.

*Amphirion Deep.*   TheAmphirion Deep is a balloon catheter designed to treat diffuse disease in smalland hard to reach vessels below the knee and even below the ankle. We believethat the Amphirion Deep provides unique functional and competitivecharacteristics as the only small-diameter over-the-wire peripheral vascular ballooncatheter available in long lengths in the United States.

In the United States, ourballoon catheters are cleared for non-coronary dilatation of the vascularanatomy excluding the carotid arteries. We intend to introduce additionaldiameters and lengths into the Sailor Plus, Submarine Plus and Amphirion Deepproduct lines.

***Foreign Object Retrieval and Guidewires***

*The Goose Neck Microsnare.*   Foreignobjects can be retrieved from the vascular system by using snares and otherdevices. Examples of foreign objects that require retrieval include brokencatheter or guidewire tips, as well as stents that are dislodged from theirdelivery system and carried downstream within the artery. Our Goose NeckMicrosnare design incorporates a radiopaque (visible under fluoroscopy) loopmounted at the tip of a guidewire. The loop is deployed and retrieved through acatheter. We believe that our snares are unique because the loop remainspositioned at a 90 degree angle relative to the wire. This increases theability of the loop to encircle the foreign object, thereby improving the rateof success for retrieval.

*Nitrex Guidewires.*   Guidewiresare threaded through vessels as a first step in most endovascular procedures. Balloonand stent catheters are advanced over guidewires to the target treatment area. Forthis reason, they are an indispensable component in the catheterizationlaboratory. The Nitrex product line is characterized by both flexibility andkink resistance that is particularly useful when negotiating tortuous vascularanatomy. It is a versatile product line that is used in a broad range ofendovascular procedures.

**Cardiovascular Market**

According to the American Heart Association,cardiovascular disease is the leading cause of death for both men and women inthe United States today and claims more lives each year than the next fiveleading causes of death combined. The American Heart Association estimates thatcardiovascular disease affects over 70.0 million Americans. According to theAmerican Heart Association, one significant subgroup includes 13.0 millionAmericans with coronary artery disease that may result in impaired myocardialfunction.

Coronary artery disease is a progressive conditionthat leads to the obstruction of the blood vessels providing blood flow to theheart muscle. The American Heart Association estimates that 865,000 Americanshave new or recurrent heart attacks each year. Despite the effective outcomeswith angioplasty and stenting, there are clinical conditions such as saphenousvein grafts and acute coronary syndrome in which plaque and thrombus managementis considered beneficial to improve long-term clinical outcomes. This ispartially due to the characteristics of the plaque and debris that can developin these grafts, as they may be at high risk of dislodgement or embolization,potentially blocking blood flow and damaging distal tissue. When used as partof an endovascular procedure, embolic protection devices and coronarythrombectomy technologies can help reduce this risk.

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**Our Cardiovascular Business**

Our cardiovascularstrategy is focused on clinically meaningful technologies that we believeaddress large and currently underserved market opportunities. We do not seek tocompete in those markets, such as coronary stents, in which several largecompanies are firmly entrenched.

***Our CardiovascularProduct Offering***

| Category            | ** ** | ** **    | ** ** | **Product**                      | ** ** | **Key Features** | ** ** | **U.S. Launch**      | ** ** | **Current Markets** |
|---------------------|------------|---------------|------------|----------------------------------|------------|------------------|------------|----------------------|------------|---------------------|
| Embolic  protection |       | SpideRX       |       | Compatible with wire of  choice  |       | Planned          |       | Canada/International |
| Thrombectomy        |       | X-Sizer       |       | Self-contained  thrombus removal |       |             |       | International        |
|                |       | Diver C.E.(1) |       | Rapid exchange aspiration        |       | 2005             |       | U.S.                 |

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(1)          Invatecproduct that we distribute.

***Our CardiovascularProduct in Development***

| Category           | ** ** | ** ** | ** ** | **Product**             | ** ** | **Key Features** | ** ** | **Target Markets** |
|--------------------|------------|------------|------------|-------------------------|------------|------------------|------------|--------------------|
| Embolic protection |       | SpideRX2   |       | Improved deliverability |       | Worldwide        |

 

***Embolic Protection***

Similar to our peripheral vascular products, embolicprotection devices are intended to trap plaque and debris that dislodge orembolize during an endovascular procedure, potentially blocking blood flow anddamaging distal tissue.

*SpideRX Embolic Protection Devices.*   Weleverage the same technology platform for cardiovascular applications as wehave developed for the peripheral vascular market. In addition to the clinicalevaluation in peripheral applications as described above, embolic protectiondevices have been studied in clinical trials in the United States incardiovascular stenting procedures. For a description of the SpideRX System,see “—Our Peripheral Vascular Product Offering—Embolic Protection—SpideRXEmbolic Protection Devices.”

Outside of the United States, the SpideRX is approvedfor use during general vascular interventions, including peripheral, coronaryand carotid interventions. In the United States, we have conducted a trialdesigned to demonstrate the equivalence of SpideRX to other approved embolicprotection devices, when used in patients with an occluded saphenous vein graftfrom a prior coronary artery bypass surgery. These clinical trials aredescribed below in “—Clinical Studies.”

We are in the process ofcontinuing to expand the market penetration of our embolic protection systemthrough the introduction of the SpideRX2, a filter-based product currently indevelopment which is intended to improve the overall deliverability of thecurrent generation SpideRX.

***Thrombectomy***

Similar to our peripheral vascular products,thrombectomy systems for cardiovascular applications are designed to removeblood clots in order to re-establish blood flow or to prevent a clot frombreaking up and occluding smaller downstream vessels.

*Diver C.E. Thrombectomy Device.*   Weleverage the same technology platform for cardiovascular applications as we dofor the peripheral vascular market. The Diver C.E. provides a simple andeffective tool for quickly aspirating fresh clot prior to or during atherapeutic intervention, as described above under 

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“—Our PeripheralVascular Product Offering—Thrombectomy—Diver C.E. Thrombectomy Device.” Webelieve that it represents a strong complement to the X-Sizer by offering rapidexchange capability and a system for physicians who prefer a smaller deliveryplatform.

*X-Sizer Thrombectomy Catheter System.*   Weleverage the same technology platform for cardiovascular applications as wehave developed for the peripheral vascular market. The X-Sizer is a self-containedthrombus removal tool described above under “—Our Peripheral Vascular ProductOffering—Thrombectomy—X-Sizer Thrombectomy Catheter System.” Outside of theUnited States, the X-Sizer is approved for use in patients with thrombus innative coronary arteries and saphenous vein bypass grafts.

**Neurovascular Market**

According to the American Stroke Association, thereare approximately 700,000 strokes annually in the United States. This makesstroke the third leading cause of death and the leading cause of long-termdisability. Strokes consist of either blockages (ischemic stroke) or ruptures(hemorrhagic stroke) of vessels within or leading to the brain. Acute ischemicstroke affects approximately 616,000 patients annually while hemorrhagic strokeis a less common disorder, affecting approximately 84,000 patients per year inthe United States. While the treatment of acute ischemic stroke is asignificant clinical need and market opportunity, endovascular techniquescurrently are focused primarily on the treatment and prevention of hemorrhagicstroke. Two causes of hemorrhagic stroke are ruptures of cerebral aneurysms andarterio-venous malformations, or AVMs.

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 19,000 hemorrhagic stroke deaths inthe United States in 2004 were caused by ruptured cerebral aneurysms, autopsystudies have suggested that unruptured aneurysms may occur in approximately 3%to 6% of the general population over the age of 30 in the United States. Webelieve that with the development of new diagnostic and interventionaltechnologies, the pool of patients that may benefit from intervention willcontinue to expand to include increasing numbers of those with unrupturedaneurysms discovered in conjunction 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 16,000AVM cases were diagnosed worldwide in 2004.

Driven by rapid advances in device technology andresults from the International Subarachnoid Aneurysm Trial, the results ofwhich 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 40% of aneurysminterventions in the United States now are performed using endovasculartechniques.

The primary endovascularprocedure for treating both aneurysms and AVMs uses a repair technique calledembolization, the objective of which is to induce 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.

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**Our Neurovascular Business**

Our neurovascular marketstrategy is to provide a broad portfolio of products that includes theimportant devices used in frequently performed procedures and also innovativedevices for use in emerging therapies. We market and sell our neurovascularportfolio of products in the United States through a direct sales force of 22sales representatives as of December 31, 2005. We market and sell ourneurovascular product portfolio in Europe, Japan, Canada and the Asia Pacificand Latin America. As of December 31, 2005, we had 17 international salesrepresentatives dedicated to selling our neurovascular products in Europe, andan additional 19 sales representatives in Europe and Japan who sell ourperipheral vascular and cardiovascular products as well as our neurovascularproducts.

***Our NeurovascularProduct Offering***

| Category                   | ** ** | ** **          | ** ** | **Product**                                | ** ** | **Key Features** | ** ** | **U.S. Launch**                               | ** ** | **Current Markets** |
|----------------------------|------------|---------------------|------------|--------------------------------------------|------------|------------------|------------|-----------------------------------------------|------------|---------------------|
| Embolic coils              |       | SapphireTM      |       | Platinum-iridium coil                      |       | 2004             |       | Distributor Territories                       |
|                       |       | NXTTM           |       | Improved coil detachment                   |       | 2004             |       | U.S./Canada/  Europe/ Distributor Territories |
|                       |       | NexusTM         |       | Surface-modified coils                     |       | 2005             |       | U.S./Canada/  Europe/ Distributor Territories |
| Liquid embolics            |       | Onyx® AVM |       | Controlled delivery                        |       | 2005             |       | U.S./Canada/  Europe/ Distributor Territories |
|                       |       | Onyx Aneurysm       |       | Targets large/complex  aneurysms           |       | Planned          |       | Europe/Canada/  Distributor Territories       |
| Microcatheters             |       | EchelonTM       |       | Nitinol-based                              |       | 2004             |       | Worldwide                                     |
|                       |       | Pre-Shaped  Echelon |       | Extension of Echelon  catheter family      |       | 2005             |       | Worldwide                                     |
|                       |       | UltraFlowTM     |       | Flow-directed                              |       | 2002             |       | Worldwide                                     |
|                       |       | MarathonTM      |       | Nitinol-based  flow-directed microcatheter |       | 2005             |       | Worldwide                                     |
| Occlusion balloon  systems |       | HyperFormTM     |       | Highly compliant  balloon                  |       | 2002             |       | Worldwide                                     |
|                       |       | HyperGlideTM    |       | Highly compliant balloon                   |       | 2002             |       | Worldwide                                     |
| Guidewires                 |       | MirageTM        |       | Distal navigability                        |       | 2002             |       | Worldwide                                     |

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(1)          Europeexcludes the Eastern Europe markets. Distributor Territories indicates the AsiaPacific (excluding Japan), Eastern Europe, Middle East and Latin Americamarkets.

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***Our NeurovascularProducts in Development***

| Category        | ** ** | ** **    | ** ** | **Product**                            | ** ** | **Key Features** | ** ** | **Target Markets** |
|-----------------|------------|---------------|------------|----------------------------------------|------------|------------------|------------|--------------------|
| Embolic coils   |       | NXT           |       | Improved coil detachment               |       | Japan            |
|            |       | Nexus         |       | Surface-modified coil                  |       | Japan            |
|            |       | Sapphire      |       | Platinum-iridium coil                  |       | Japan            |
|            |       | 3G            |       | Third-generation coil                  |       | Worldwide        |
| Liquid embolics |       | Onyx AVM      |       | Controlled  delivery                   |       | Japan            |
|            |       | Onyx Aneurysm |       | Targets large/complex  aneurysms       |       | U.S. (HDE)       |
| Neuro stents    |       | Solo          |       | Retrievable, detachable  Nitinol stent |       | Worldwide        |

 

***Embolic Coils***

We estimate that embolic coils represent one of thelargest category of products in the neurovascular device market and are used inapproximately 50,000 procedures worldwide on an annual basis. Embolic coils areused in virtually all endovascular treatments of aneurysms and a small numberof AVMs. Our embolic coil products are delivered using a combination ofour minimally invasive guidewires, microcatheters and balloons. During ananeurysm procedure, small coils attached to a wire are passed through a deliverycatheter and into the aneurysm space. The coil is then detached from thedelivery wire, the wire is removed and the next coil is advanced through thecatheter. This process is repeated until approximately 35-45% of thevolume of the aneurysm is filled with coils.

*Sapphire and NXT Embolic Coils.*   Welaunched the Sapphire coil family in Europe in December 2002 and, in July 2003,received FDA 510(k) clearance to initiate United States commercialization.We replaced the Sapphire coil with the launch of our NXT embolic coils inEurope in early 2004. We commenced commercialization of the NXT coils in theUnited States in December 2004. The NXT and Sapphire coils are sold in abroad range of shapes and configurations. A key feature of the NXT and Sapphirelines is the incorporation of Nitinol into the design of many of the coils. Nitinolis a highly flexible metal with shape retention and fatigue resistanceproperties. We believe this use of Nitinol technology provides our coils withgreater resistance to compaction potentially leading to better outcomes for ourphysician customers.

*Nexus Embolic Coils.  *Wecommenced the introduction of our new Nexus line of coils in the United Statesand Europe in September 2005. The Nexus line consists of framing, fillingand finishing coil offerings, thereby allowing physicians to treat a wide rangeof aneurysm shapes and sizes. All Nexus coils incorporate a Nitinol filament,which offers improved shape retention and increased resistance to coilcompaction. Nexus also incorporates a bioactive microfilament technology to enhanceaneurysm healing.

We are expanding our lineof neurovascular embolic coils. Our third generation coil, 3G, is indevelopment, and includes a new detachment system. In addition, we intend tointroduce the Sapphire coil into the Japanese market.

***Liquid Embolics***

We estimate that liquid embolics are used inapproximately 16,000 worldwide neurovascular procedures annually, including themajority of AVM and some aneurysm procedures. The most widely used embolizationtechnique for AVMs is the injection of acrylic-based glue. However, we believethat glues have multiple drawbacks, such as lack of controlled delivery andextreme adhesion to all surfaces, including that of the delivery catheter. Gluesolidifies upon contact with blood, which reduces physician 

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control during filling andnecessitates very rapid withdrawal of the delivery catheter in order to avoidhaving it permanently glued in place.

*Onyx Liquid Embolic.*   Onyxis our proprietary biocompatible copolymer which is delivered, in liquid form,through proprietary microcatheters to blood vessels in the brain, where itfills a vascular defect and transforms into a solid polymer cast. Onyx offers aunique form, fill and seal approach to the interventional treatment ofaneurysms and AVMs associated with hemorrhagic stroke. Because Onyx isnon-adhesive, and solidifies over a few minutes’ time, the injection andfilling of the vascular defect can take place in a very controlled manner. Whenthe vascular defect is completely filled with the Onyx polymer cast, thedelivery catheter is removed.

We currently market Onyxin Europe, Canada and in the Asia Pacific (excluding Japan) and Latin Americaregions for the treatment of both AVMs and cerebral aneurysms. In the UnitedStates, we completed enrollment in our clinical trial for Onyx to treat AVMs,and in the United States for the treatment of AVMs and received FDA panelrecommendation for approval in August 2003. In November 2003, wereceived a Humanitarian Use Device designation from the FDA for the use of Onyxto treat large and wide-necked aneurysms. We believe that this was asignificant development in the process of seeking a Humanitarian DeviceExemption, which is a necessary step toward commercialization in the UnitedStates. We received FDA 510(k) clearance of Onyx in July 2005.

***Microcatheters***

We market a line of products that are intended toallow access to, and treatment in, difficult-to-reach anatomical locations,such as the remote vessels in the brain or other challenging vascularstructures. In addition to their use with our embolic coils and liquidembolics, these products are compatible with, and are often used with,competitors’ products.

*Echelon and Pre-shaped Echelon Microcatheters.*   Ourmost recently introduced microcatheter is the Echelon. Using a unique blend ofmaterials and construction, the Echelon provides what we believe is one of thelargest inner channel in our class while still enabling the physician to accessdifficult anatomy and deliver a wide range of coils. The pre-shaped Echeloncatheters represent a key line extension for our Echelon family of products,and offer improved navigation, deliverability and stability. The pre-shapedEchelon catheters were introduced in the United States and Europe in the firstquarter of 2005.

*UltraFlow and MarathonFlow-Directed Microcatheters.*   Launched in 2002, theUltraFlow Flow-Directed Microcatheter is specially designed to enable access todistal locations and to allow super-selective vessel positioning. The Marathonis an improved flow-directed microcatheter that contains both a Nitinol braidand a stainless steel helical wire, which improves navigability while retainingpushability and tip softness. We believe that both the UltraFlow and Marathonmicrocatheters provide excellent trackability over a wire. We commencedcommercialization of Marathon in the United States and Europe during the firstquarter of 2005.

***Occlusion Balloon Systems***

*HyperForm and HyperGlideOcclusion Balloon Systems.*   Our HyperForm andHyperGlide Occlusion Balloon Systems 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.

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***Guidewires***

*Mirage Hydrophilic Guidewire.*   Ourportfolio of neurovascular guidewires includes the Mirage Hydrophilic Guidewire.This guidewire is designed for precise torque control and is compatible withseveral sizes of flow-directed and over-the-wire microcatheters. It assists thephysician in microcatheter navigation and remote vessel access while providinga flexible and shapeable tip.

***Neuro Stents***

Stenting is of increasingimportance in the neurovascular market, and includes applications inintracranial stenotic disease as well as parent vessel remodeling and coil retentionin aneurysmal disease. We are developing the Solo platform, a self-expandingNitinol stent that is fully retrievable and detachable, which allows for moreprecise placement. The Solo has optimized radial force for aneurysm neckcoverage and coil retention.

**Sales and Marketing**

***Structure and Strategy***

We have dedicated substantial resources to establish adirect sales capability in the United States, Europe and Japan, as well as toestablish distribution networks in other markets. We believe our global presenceenables us to capitalize on the market for endovascular devices that existsoutside of the United States. In addition, our global presence enables us tocommercialize emerging technologies internationally while pursuing regulatoryapproval in the United States, increasing near-term sales from these emergingtechnologies and helping us refine our commercialization strategies inanticipation of product launches in the United States. As of December 31,2005, our sales and marketing infrastructure included a sales force of 209sales professionals in the United States, Europe and Japan who generally havesubstantial medical device experience and market our products directly to avariety of specialists engaged in endovascular therapies. These direct salesrepresentatives provided 87% and 86% of our net sales in fiscal 2005 and fiscal2004, respectively, with the balance generated by independent distributors whorepresent us internationally through stocking distributorships.

As of December 31, 2005, our global endovascularmarketing team was comprised of 30 individuals covering product management,corporate communications and programs, and education and training.

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 use. For example, although ourstent products are approved in the United States for use in the biliary duct,as are most competing peripheral stent systems in the United States, somephysicians choose to use the stents in peripheral vessels.

***United States***

As of December 31,2005, we had 109 sales professionals who focus on selling our products in theUnited States, many of whom have previously worked at Boston ScientificCorporation, Cordis Corporation (a Johnson & Johnson company), GuidantCorporation, Medtronic, Inc. or Novoste Inc.

***Europe, Japan and Canada***

In 2002, we launched a direct selling organization inEurope with a direct presence in Austria, Belgium, Denmark, Finland, France,Germany, Italy, Luxembourg, the Netherlands, Norway, Spain, 

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Sweden, Switzerland andthe United Kingdom. As of December 31, 2005, our European sales team had80 sales professionals, managers and support staff comprised of 32 sellingour peripheral vascular and cardiovascular products, 17 selling ourneurovascular products and nine selling both. As of December 31, 2005, oursales force in Europe was supervised by a sales director of cardio peripheral,one vice president of cardio peripheral and one vice president ofneurovascular.

In 2003, we launched direct operations in Japan,including a direct sales force. As of December 31, 2005, our sales forcein Japan consisted of 10 sales professionals that sell our neurovasculardelivery catheters and occlusion balloons, peripheral stents, foreign objectretrieval devices and guidewires.

We also sell our productsin Canada through a client sales force of four sales professionals as of December 31,2005.

***Other International***

In the major markets ofAsia Pacific (excluding Japan), Latin America, Eastern Europe and the MiddleEast, we have distributor relationships through which we sell our products. Wehave entered into distributor relationships in which our distributors areinvolved in product launch planning, education and training, physician supportand clinical trial management. Through dedicated distributors and 10 salesprofessionals as of December 31, 2005, we have a sales presence in certainemerging markets, including Brazil, Argentina and China.

**Competition**

We competeprimarily on the basis of our ability to treat vascular diseases and disorderssafely and effectively, with ease and predictability of product use, adequatethird-party reimbursement, brand name recognition and cost. We believe wecompete favorably with respect to these factors, although there can be noassurance that we will be able to continue to do so in the future or that newproducts that perform better than those we offer will not be introduced. Webelieve our continued success depends on our ability to:

·       continueto innovate and maintain scientifically advanced technology;

·       applyour technology across product lines and markets;

·       developproprietary products;

·       attractand retain skilled scientific and sales personnel;

·       obtainand maintain regulatory approvals; and

·       cost-effectivelymanufacture and successfully market our products.

The markets in which we compete are highlycompetitive, subject to change and significantly affected by new productintroductions and other activities of industry participants. Several of ourcompetitors have significant financial and human capital resources and haveestablished reputations with our target physician customers, as well asworldwide distribution channels that are more effective than ours. Thesecompetitors include Abbott Laboratories, Boston Scientific Corporation, CookIncorporated, Cordis Corporation (a Johnson & Johnson company),Guidant Corporation and Medtronic, Inc., which compete with our businessin one or more of our product groups. We also compete against smallermanufacturers within at least one of the three markets we target. In theperipheral vascular and cardiovascular market, we compete against, amongothers: C.R. Bard, Inc.; FoxHollow Technologies, Inc.; Possis Medical, Inc.;and Spectranetics Corporation. In the neurovascular market, we compete againstsmaller manufacturers of embolic coils and related devices, including BaltExtrusion, MicroVention, Inc., Micrus Corporation and 

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Terumo Medical Corporation.In addition, we compete against existing drug therapy treatments manufacturedby many major pharmaceutical companies.

Our competitors dedicate,and we believe they will continue to dedicate, significant resources to promotetheir products aggressively. New product developments that could compete withus more effectively are likely because the vascular disease market ischaracterized by extensive research efforts and technological progress. Competitorsmay develop technologies and products that are safer, more effective, easier touse or less expensive than ours. To compete effectively, we will need tocontinue to demonstrate that our products are attractive alternatives to otherdevices and treatments by differentiating our products on the basis of safety,efficacy, performance, ease of use, brand and name recognition, reputation andprice. We have encountered and expect to continue to encounter potentialphysician customers who, due to existing relationships with our competitors,are committed to or prefer the products offered by these competitors.

**StrategicRelationship with Invatec**

In June 2004, we entered into a strategicrelationship with Invatec to become the exclusive distributor of Invatecproducts under the Invatec brand in the United States. This arrangementprovided us with a broad portfolio of commercially competitive products thatcomplemented our existing portfolio. The addition of the Invatec portfolio alsosupported our strategic decision to significantly expand our sales force in2004.

Invatec manufactures and markets a broad line ofendovascular products for the peripheral vascular and cardiovascular markets inEurope, South America and Asia. Invatec has a broad line of balloon catheters,stents, guidewires and procedure support accessories. The Invatec products wedistribute include the Sailor, Submarine and Amphirion percutaneoustranscatheter angioplasty catheters. In addition, we are developing withInvatec technologies in the emerging markets of embolic protection andthrombectomy, including Invatec’s ONDA, a self-expanding stent, Maris, aballoon expandable stent, and MO.MA, an embolic protection device, forcommercial launch in the United States. The MO.MA embolic protection deviceprovides a unique occlusive approach for carotid stenting procedures. TheInvatec name represents a well-established brand internationally and theInvatec organization has been able to achieve a growing presence outside of theUnited States, including in Germany and Japan.

Although our contract with Invatec gives us theexclusive right to market Invatec’s products using the Invatec brand in theUnited States, Invatec retained the right to sell its products into the UnitedStates under other brands, which it currently does. For a description of therisks associated with this provision, see “Item 1A. Risk Factors—If there is adisruption in the supply of the products of Invatec S.r.l. that we distributeor if our relationship with Invatec is impaired, our net sales and results ofoperations would be adversely impacted.”

Our agreement with Invatecrequires us to provide the necessary resources to achieve U.S. regulatory approvaland minimum annual purchase targets for certain Invatec products. The term ofthe agreement extends until December 31, 2007 and is automatically renewedfor one two-year increment and for further two-year increments if certaincontractual conditions are achieved, including us meeting certain minimumannual purchase targets. The agreement may be terminated early by us or Invatecupon the occurrence of certain events, including by Invatec upon a change ofcontrol of our company involving a competitor of Invatec or if we fail toachieve certain minimum annual purchase requirements. In the event Invatecterminates the agreement upon the occurrence of certain events, including achange of control of us involving a competitor of Invatec, we may be requiredto pay to Invatec liquidated damages of $5 million or $15 million, depending onthe event causing the termination. In lieu of terminating the agreement for ourfailure to meet certain minimum annual purchase requirements, Invatec mayrequire us to pay an indemnification amount to it equal to 80% of thedifference between the aggregate minimum annual value 

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ofpurchases required under the agreement and the total actual purchases ofproducts by us during the same period.

**Research and Development**

Our research efforts are directed towards thedevelopment of new endovascular products that expand the therapeuticalternatives available to physicians or improvements to and extensions of ourexisting product offerings.

As of December 31, 2005, our research and developmentstaff consisted of approximately 58 full-time engineers and technicians, mostof whom have substantial experience in medical device development. Approximately37 individuals are based in Plymouth, Minnesota and are primarily focused oncardiovascular and peripheral endovascular technologies. The remaining staffmembers 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 utilized when additionalspecialized expertise is required.

Our research anddevelopment team has a demonstrated record of new product initiatives andsignificant product improvements. Since January 1, 2005, we haveintroduced over 20 new products in our peripheral vascular, cardiovascular andneurovascular businesses in either the U.S. or international markets, or both. Specificproduct improvement initiatives have included:

·       broadeningacquired technologies in order to address a larger share of the target markets,including introducing new peripheral vascular stent systems (benefiting fromimproved delivery, expanded lengths and diameters, and new shapes) thatcomplement those that we acquired from IntraTherapeutics;

·       incorporatingimportant features which we believe appeal to the physicians who use ourproducts, including optimizing the Microvena embolic filter technology into amore easily deployable system with improved functional characteristics; and

·       leveragingcore technologies to develop new product platforms and enter new markets,including consolidating a newly introduced peripheral vascular stent and theoptimized Microvena embolic filter to develop a carotid stenting system that webelieve offers meaningfully superior performance to competing systems.

Our research anddevelopment expenditures were $39.3 million, $38.9 million and $45.1 million in2005, 2004 and 2003, respectively.

**Clinical Studies**

We support many of our new product initiatives withscientific clinical studies in order to obtain regulatory approval and providemarketing data. As of December 31, 2005, our clinical and regulatoryinfrastructure included approximately 37 individuals focused on developing thenecessary clinical data to achieve regulatory clearance and expandedindications for our existing and emerging products around the world, althoughthe number of individuals fluctuates from time to time depending on the numberof ongoing clinical trials. Currently, we are conducting long-term follow-up inour clinical trials for our Protégé Carotid Stent and our PLAATO StrokeReduction Device, the latter of which we discontinued development andcommercialization. In addition, we are conducting three post-market clinicaltrials outside of the United States.

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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 entire populations of patients based on clinicalsimilarities to patients in the clinical trials.

The following tablessummarize our material clinical trials to date and those currently planned forthe future.

**CAROTIDSTENTING SYSTEM TRIALS**

| Trial                                               | ** ** | ** **                                                                                | ** ** | **Product**                                                                                                                                                                                                   | ** ** | **Study Design**                         | ** ** | **Status** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------|
| PROCAR Carotid Study (Europe)                  |       | Protégé GPS                                                                     |       | 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 Feasibility (U.S.)              |       | Protégé GPS with  Spider Embolic Protection Device                              |       | Prospective,  multicenter, single-arm study to estimate major adverse cardiovascular event  rate at 30 days in patients at high risk for carotid endarterectomy, to  support initiation of U.S. pivotal trial |       | Enrollment  completed; follow-up ongoing |
| CREATE Carotid Pivotal Trial (U.S.)            |       | Protégé GPS with  Spider Embolic Protection Device                              |       | Prospective,  multicenter single-arm non-inferiority study                                                                                                                                                    |       | Enrollment  completed; follow-up ongoing |
|                                                |       |                                                                                      |       | Primary endpoint  of major adverse cardiovascular and cerebral event rate                                                                                                                                     |       |                                     |
| CREATE Carotid Pivotal-SpideRX Arm (U.S.) |       | SpideRX Embolic  Protection Device, with commercially available Guidant RX ACCULINK Stent |       | Prospective,  multicenter 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                    |
| MO.MA Carotid (U.S.)                                |       | Invatec MO.MA Embolic  Protection Device                                                  |       | Prospective, multicenter  single-arm study                                                                                                                                                                    |       | Developing protocol                      |

 

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**STROKE REDUCTION TRIALS**

In September 2005,we decided to discontinue the development and commercialization of our PLAATOdevice. Although we recently had obtained conditional approval from the FDA foran investigational device exemption, or IDE, clinical trial for our PLAATOdevice, we determined that, due to the time, cost and risk of enrollment, thetrial design ultimately mandated by the FDA was not commercially feasible forus at such time.

| Trial                                       | ** ** | ** **                                                   | ** ** | **Product**                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Study Design**                                                                                                                                                                                                                                        | ** ** | **Status** |
|---------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| PLAATO Feasibility Trial  (Europe and U.S.) |       | PLAATO Left Atrial  Appendage Transcatheter Occlusion Device |       | Prospective,  multi-center, single-arm study to assess the performance of the PLAATO system  in high risk patients with atrial fibrillation who are not candidates for  long-term warfarin therapy                                                                                                                                                                     |       | Enrollment completed  Follow-up completed in Europe, ongoing in U.S.  Results were presented to American College of Cardiology in March 2005  supported safety of PLAATO device and estimated a 43% reduction in expected  annual stroke risk |
| PLAATO Registry  (Europe)                   |       | PLAATO                                                       |       | Prospective,  multi-center, single-arm registry to demonstrate safe and effective use of  PLAATO device for left atrial appendage closure in high risk patients with  atrial fibrillation who are not candidates for long-term warfarin therapy                                                                                                                        |       | Enrollment  completed; follow-up ongoing                                                                                                                                                                                                                |
| PLAATO Pivotal Trial  (U.S.)                |       | PLAATO                                                       |       | Prospective,  multicenter, randomized study to establish safe and effective of use of  PLAATO device for left atrial appendage closure in high risk patients with  atrial fibrillation who are not candidates for long-term warfarin therapy,  compared to best medical therapy  Primary endpoint of reduction in rate of ischemic stroke and systemic embolic  events |       | Investigational device  exemption approved                                                                                                                                                                                                              |

 

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**THROMBECTOMY TRIALS**

| Trial                            | ** ** | ** **                   | ** ** | **Product**                                                                                                                                                                                            | ** ** | **Study Design**                                                                                                                                                                                                     | ** ** | **Status** |
|----------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| X-TRACT Cardio (U.S. and Canada) |       | X-Sizer Thrombectomy Device  |       | Prospective, multicenter, randomized trial to prove  safety and efficacy with major adverse cardiovascular events as the primary  clinical endpoint                                                    |       | Enrollment and follow-up completed  Subanalyses demonstrated significant reduction in rate of large myocardial  infarctions in patients with angiographically confirmed thrombus, although  primary endpoint not met |
| X-AMINE ST Cardio  (Europe)      |       | X-Sizer  Thrombectomy Device |       | Prospective,  multicenter, randomized trial to determine the effect of thrombectomy on  myocardial reperfusion in acute myocardial infarction patients                                                 |       | Enrollment and  follow-up completed  Primary endpoint met                                                                                                                                                            |
| TEXAS (Europe)                   |       | X-Sizer Thrombectomy  Device |       | Prospective,  multicenter, registry to monitor product use (placement, retrieval, thrombus  removal) when used to remove thrombus in patients with acute myocardial  infarction or elevated ST segment |       | Enrollment and follow-up  ongoing                                                                                                                                                                                    |

 

**EMBOLICPROTECTION TRIALS**

| Trial                  | ** ** | ** **                        | ** ** | **Product**                                                                                                                                                                                                                                                                                              | ** ** | **Study Design**                                                                                                 | ** ** | **Status** |
|------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|
| SIMPLE  Cardio(Europe) |       | Spider  Embolic Protection Device |       | Prospective,  multicenter, single-arm trial to evaluate safety and performance of device  when used in patients undergoing saphenous vein graft procedures with  percutaneous transcatheter angioplasty catheters  Primary endpoint of major adverse cardiovascular event within 30 days  post-procedure |       | Enrollment  and follow-up completed  Results established a 30-day major adverse cardiovascular event rate of  4% |

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| PROTECT Carotid (Europe)                  |   | Spider Embolic Protection Device  |   | Prospective, multicenter, single-arm trial to  evaluate the safety and performance of the device when used in a carotid  stent procedure  Primary endpoint of major adverse neurological event within 30 days  post-procedure                                                   |   | Enrollment and follow-up completed  Results established a 30-day major adverse neurological event rate of  6.8% |
|-------------------------------------------|--------|-----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|
| SPIDER SVG Trial Cardio (U.S. and Canada) |   | SpideRX Embolic Protection Device |   | Prospective, multicenter, randomized,  non-inferiority trial comparing SpideRX to commercially available embolic  protection devices during percutaneous saphenous vein graft procedures  Primary endpoint of major adverse cardiovascular event within 30 days  post-procedure |   | Enrollment and follow-up completed  Met primary endpoint                                                        |
| PREMIAR Cardio (Argentina, Chile, Israel) |   | SpideRX Embolic Protection Device |   | Prospective, multicenter, randomized trial to assess  the effectiveness of embolic protection in improving myocardial reperfusion  in patients with acute myocardial infarction  Primary endpoint of ST—segment resolution post-procedure                                  |   | Enrollment completed; follow-up ongoing                                                                         |

 

**PERIPHERALVASCULAR STENT TRIALS**

| Trial            | ** ** | ** **                 | ** ** | **Product**                                                                                                                                                                                                                               | ** ** | **Study Design**                                                                                                                                                                       | ** ** | **Status** |
|------------------|------------|----------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| SFA Study (U.S.) |       | IntraCoil® Stent |       | Prospective, multicenter, randomized trial comparing  stent to percutaneous transcatheter angioplasty catheter alone in superficial  femoral arteries  Primary endpoints included restenosis rate and major cardiovascular adverse  event |       | Enrollment and follow-up completed  Stents had equivalent primary endpoints and superior 30-day  complication rates compared to percutaneous transcatheter angioplasty  catheter alone |

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| Iliac Study (U.S.)          |   | IntraStent® DS (predecessor to PRIMUS) |   | Prospective,  multicenter, randomized non-inferiority trial, comparing IntraStent to  commercially available stents (Wallsternt, Palmaz) on stent patency at nine  months post-procedure |   | Enrollment and follow-up  completed  Primary endpoints met |
|-----------------------------|--------|--------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|
| Restore Renal Study  (U.S.) |   | ParaMountTM XS  DoubleStrutTM Stent      |   | Prospective,  multicenter, single-arm trial to establish safety and effectiveness of stent  in renal procedures  Primary endpoint of patency at nine months post-procedure               |   | Enrollment and follow-up  completed  Primary endpoint met  |

 

We continually evaluatethe potential financial benefits and costs of our clinical trials and theproducts being evaluated in them. If we determine that the costs associatedwith attaining 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. For example, in September 2005,we decided to discontinue the development and commercialization of our PLAATOdevice. Although we recently had obtained conditional approval from the FDA foran investigational device exemption, or IDE, clinical trial for our PLAATOdevice, we determined that, due to the time, cost and risk of enrollment, thetrial design ultimately mandated by the FDA was not commercially feasible forus at such time.

**Government Regulation**

***United States***

Our products areregulated in the United States as medical devices by the FDA and otherregulatory bodies. FDA regulations govern, among other things, the followingactivities:

·       pre-clinicaltesting;

·       clinicaltesting;

·       productdesign and development;

·       pre-marketclearance or approval;

·       advertisingand promotion;

·       labeling;

·       manufacturing;

·       productimport/export;

·       storage;

·       recordkeeping;

·       reportingof adverse events;

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·       correctiveactions and removals;

·       recalls;and

·       distribution.

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 FDAclassifies medical devices into one of three classes, depending on the degreeof risk associated with each medical device and the extent of controls that areneeded to ensure safety and effectiveness. Devices deemed to pose the leastrisk are placed in class I. Intermediate risk devices are placed in class II,which, in most instances, requires the manufacturer to submit to the FDA apre-market notification requesting authorization for commercial distribution,known as “510(k) clearance,” and may subject the device to specialcontrols such as performance standards, guidance documents specific to thedevice or post-market surveillance. Most class I and some low-risk class IIdevices are exempted from this 510(k) requirement. Devices deemed by theFDA to pose the greatest risk, such as life-sustaining, life-supporting orimplantable devices, or a device deemed to be not substantially equivalent to apreviously cleared 510(k) device, are placed in class III. In general, aclass III device cannot be marketed in the United States unless the FDAapproves the device after submission of a pre-market approval application. TheFDA can also impose restrictions on the sale, distribution or use of devices atthe time of their clearance or approval, or subsequent to marketing.

*510(k) Clearance Pathway.*   Whenwe are required to obtain 510(k) clearance for devices which we wish tomarket, we must submit a pre-market notification to the FDA demonstrating thatthe device is substantially equivalent to a previously cleared 510(k) deviceor a device that was in commercial distribution before May 28, 1976 (or toa pre-1976 class III device for which the FDA has not yet called for thesubmission of pre-market approval applications). The FDA attempts to respond toa 510(k) pre-market notification within 90 days of submission of thenotification, but the response may be a request for additional information ordata, sometimes including clinical data. As a practical matter, pre-marketclearance can take significantly longer than 90 days, including up to one yearor more. If the FDA determines that the device, or its intended use, is notsubstantially equivalent to a previously-cleared device or use, the FDA willplace the device, or the particular use of the device, into class III.

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. The FDA requires each manufacturer tomake this determination initially, but the FDA can review any such decision andcan disagree with a manufacturer’s determination. If the FDA disagrees with amanufacturer’s determination that a new clearance or approval is not requiredfor a particular modification, the FDA can require the manufacturer to ceasemarketing and/or recall the modified device until 510(k) clearance orpre-market approval is obtained. Also, in these circumstances, we may be subjectto significant regulatory fines or penalties. We have made and plan to continueto make additional product enhancements to some of our devices that we believedo not require new 510(k) clearances. The FDA has an abbreviated reviewprocess for certain types of modifications to 510(k) clearance devices;such 510(k)s are known as “special 510(k)s.” We have filed special 510(k)s forobtaining FDA clearance of products that have undergone qualifyingmodifications.

*Pre-market Approval Pathway.*   Apre-market approval application must be submitted if the device cannot becleared through the 510(k) process. The pre-market approval process ismuch more demanding than the 510(k) pre-market notification process. Apre-market approval 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.

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After the FDA determines that a pre-market approvalapplication is complete, the FDA accepts the application and begins an in-depthreview of the submitted information. The FDA, by statute and regulation, has180 days to review an accepted pre-market approval application, although thereview generally occurs over a significantly longer period of time, and cantake up to several years. During this review period, the FDA may requestadditional information or clarification of information already provided. Alsoduring the review period, an advisory panel of experts from outside the FDA maybe convened to review and evaluate the application and provide recommendationsto the FDA as to the approvability of the device. In addition, the FDA willconduct a preapproval inspection of the manufacturing facility to ensurecompliance with the Quality System Regulations. New pre-market approvalapplications or supplemental pre-market approval applications are required forsignificant modifications to the manufacturing process, labeling, use anddesign of a device that is approved through the pre-market approval process. Pre-marketapproval supplements often require submission of the same type of informationas a pre-market approval, except that the supplement is limited to informationneeded to support any changes from the device covered by the originalpre-market approval application, and may not require as extensive clinical dataor the convening of an advisory panel.

*Clinical Trials.*   Aclinical trial is almost always required to support a pre-market approvalapplication and is sometimes required for a 510(k) pre-market notification.Clinical trials for a “significant risk” device require submission of anapplication for an investigational device exemption to the FDA. Theinvestigational device exemption application must be supported by appropriatedata, such as animal and laboratory testing results, showing that it is safe totest the device in humans and that the testing protocol is scientifically sound.Clinical trials for a significant risk device may begin once the application isapproved by the FDA and the Institutional Review Board, or IRB, overseeing theclinical trial. If the product is deemed a “non-significant risk” device underFDA regulations, only the abbreviated investigational device exemptionrequirements apply. Clinical trials must be monitored by the study sponsor andare subject to extensive record keeping and reporting requirements andabbreviated investigational device exemption regulations apply. Our clinicaltrials must be conducted under the oversight of an IRB at the relevant clinicaltrials site and in accordance with applicable regulations and policiesincluding, but not limited to, the FDA’s good clinical practice, or GCP,requirements. We, the FDA or the IRB at each site at which a clinical trial isbeing performed may suspend a clinical trial at any time for various reasons,including a belief that the risks to study subjects outweigh the anticipatedbenefits. The FDA may inspect our clinical investigations and, if it determinesthat we fail to comply with the FDA regulations governing clinicalinvestigations, it may issue a warning letter to or take other enforcementaction against us as the study sponsor, the clinical investigation site or theprincipal investigation. The results of clinical testing may not be sufficientto obtain approval of the product.

*Humanitarian Device Exemptions.*   AHumanitarian Device Exemption, or HDE, authorizes the marketing of ahumanitarian use device for a limited patient population. Humanitarian usedevice designation is based on the FDA’s determination that a device isintended for the treatment and diagnosis of a disease or condition that affectsfewer than 4,000 individuals in the United States per year. Once a humanitarianuse device designation has been obtained, an applicant may seek marketingapproval under an HDE. While the HDE application is similar to a pre-marketapproval application and requires a showing of safety, unlike a pre-marketapproval application, an HDE does not require a showing of effectiveness. TheFDA will grant an HDE based on a determination that the device would nototherwise be available, that there is no comparable pre-market approvalapplication-approved or 510(k)-cleared device available to treat the disease orcondition, and that the potential benefit of the device outweighs the risk forthose suffering from the disease or condition.

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Certain limitations apply to the sale and use ofdevices under an HDE. A holder of an HDE must submit periodic reports on theuse of its humanitarian use devices, including information about the number ofdevices that have been shipped or sold. If the number exceeds 4,000, thecompany must explain to the FDA the number of devices used per patient. Inaddition, the amount charged for these devices is not to exceed the cost ofresearch, development, fabrication and distribution. A humanitarian use devicecan only be administered at a facility with an IRB, and the IRB must approvethe use of the device for the HDE indication.

The FDA may suspend or withdraw an HDE if any of thecriteria for exemption are no longer met, such as if it is determined that thecondition affects more than 4,000 individuals per year.

*ContinuingFDA Regulation.*   After a device is placed on themarket, numerous regulatory requirements apply. These include:

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

·       labelingregulations, which govern product labels and labeling, prohibit the promotionof products for unapproved or “off-label” uses and impose other restrictions onlabeling 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 medical device reporting regulations require thatwe report to the FDA any incident in which our product may have caused orcontributed to a death or serious injury, or in which our product malfunctionedand, if the malfunction were to recur, it would likely cause or contribute to adeath or serious injury. We report such incidents pursuant to these regulations.During 2005, we reported 79 medical device reports to the FDA. Twenty-oneincidents reported to the FDA were associated with the X-SizerThrombectomy Catheter System. These incidents involved off-label uses of theX-Sizer. One of the incidents reported involved a patient death when thepatient refused further treatment after vessel perforation occurred during acoronary procedure and the other report noted that a patient died four daysafter a procedure from neurological causes. We conducted a root cause analysiswhich indicated the reports were not related to manufacturing or improper functioningof the device, but were potentially related to device misuse. We have takenaction to communicate potential issues related to device misuse to ourphysician customers and clinical study sites. Off-label use or misuse of ourproducts may not be safe or effective and may result in unfavorable outcomes topatients. Two X-Sizer related reports were due to device motor operation whilenot actively aspirating. There were four reports of guidewire tip detachmentand three reports of the X-Sizer device being caught on a stent. One report ofstent breakage while using the X-Sizer device was also received.

Forty-eight of the reports made in 2005 wereassociated with our stent products. Thirty of these were associated withimproper stent deployment, with reports related to Protégé, Paramount Mini,IntraCoil and Primus stent devices. There were nine reports associated withstent fractures related to Protégé, Paramount Mini, IntraCoil and Primus stentdevices. There were seven reports of stent movement during placement and onereport of a balloon rupture associated with the Primus device. Additionally,five medical device reports were associated with the use of our guidewireproducts and five medical device reports were isolated incidences associatedwith our PLAATO device, which occurred outside the United States, one of whichincluded a patient death. The physician indicated the patient death was due toa side effect of sedation.

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Advertising and promotion of medical devices are alsoregulated by the Federal Trade Commission, or FTC, and by state regulatory andenforcement authorities. Recently, some promotional activities forFDA-regulated products have been the subject of enforcement actions broughtunder health care reimbursement laws and consumer protection statutes. Inaddition, under the federal Lanham Act, competitors and others can initiatelitigation relating to advertising claims. Violation of these laws can resultin criminal conviction, civil fines and penalties, and significantadministrative sanctions.

We have registeredwith the FDA as a medical device manufacturer. Compliance with regulatoryrequirements is tested through periodic, pre-scheduled or unannounced facilityinspections by the FDA and these inspections may include the manufacturingfacilities of our subcontractors. Failure to comply with applicable regulatoryrequirements can result in enforcement action by the FDA, which may include anyof the following sanctions:

·       warningletters or untitled letters;

·       fines,injunctions, and civil penalties;

·       recallor seizure of our products;

·       physiciannotification, or orders for repair, replacement or refund;

·       operatingrestrictions, partial suspension or total shutdown of production;

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

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

·       criminalprosecution.

Our manufacturing facility located at 4600 Nathan LaneNorth, Plymouth, Minnesota was last inspected by the FDA in December 2005.This inspection was conducted to assess the effectiveness of Quality Systemsapplied to the design and manufacturing of medical devices via a QSR/QSIT auditand to assess process changes, validations and controls associated with movinga PMA controlled product from our New Brighton, Minnesota facility. Theinspection resulted in the issuance of a Form FDA-483 listing oneinspectional observation. The corrective and preventative actions associatedwith the inspectional finding have since been completed.

In November 2005, the FDA conducted an inspectionof our clinical control activities in our Plymouth, Minnesota facilityassociated with a pre-market approval application. The inspection was completedwithout issuance of any Form FDA-483 observations.

*CurrentPre-market Approvals and 510(k) Pre-market Clearances.*   Wehave received pre-market approval to market our IntraCoil Self-ExpandingPeripheral Stent and our IntraStent DoubleStrut lliac Stent. We have received510(k) clearances to market our Big EasyTM Rotating Y-Connector,SequelTMRotating Double Y-Connector, AqWire Hydrophilic Guidewire, Nitrex Guidewire,BabywireTMGuidewire, Amplatz THE GOOSE NECK Snares and Microsnares, PLAATO Sheath Kit,Protégé GPS Self-Expanding Nitinol Biliary Stent System, Protégé 6 Fr. 0.035Long Biliary Stent System, Protégé 6 Fr. 0.035 BIGS Biliary Stent System,Protégé RX GPS Straight Biliary Stent Systems, IntraCoil Self-ExpandingPeripheral Stent, PRIMUS Pre-Mounted Biliary Stent System, ParaMount MiniPre-Mounted Biliary Stent System, ParaMount DoubleStrut Pre-Mounted Biliary StentSystem, ParaMount XS Double Strut Pre-Mounted Biliary Stent System, IntraStentBiliary Stent, IntraStent DoubleStrut Biliary Stent, IntraStent XS DoubleStrutBiliary Stent, IntraStent LD Mega Biliary Stent, IntraStent LD Max BiliaryStent, IntraStent LD DoubleStrut Biliary Stent, Helix ClotBuster ThrombectomyDevice, X-Sizer Catheter System, SUBMARINE PLUS PTA balloon and SAILOR PLUS PTAballoon products, AMPHIRION DEEP PTA balloon catheter (1.5-2.0), AMPHIRION DEEPPTA Balloon (2.5-4.0), DIVER C.E. Clot 

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ExtractionCatheter, Diver C.E. Clot Extraction Kit, SKIPPER Guidewires, SilverSpeed® Guidewire, X-CeleratorTMGuidewire, X-PedionTMGuidewires, Mirage Guidewires, HyperGlide Balloon Catheter, HyperForm BalloonCatheter, UltraFlow Flow Directed Microcatheter, Marathon Flow DirectedMicrocatheter, Rebar® Microcatheter, NauticaTMMicrocatheter, Echelon Microcatheter, Cragg-McNamara Infusion Catheter,MicroMewi Infusion Catheter, Prostream® Infusion Wire, CadenceTMPrecision Injector, Sapphire Detachable Neurovascular Coils, NXT DetachableNeurovascular Coils, Castaneda Thrombolytic Brush, Pulse Spray Pack, IntroducerSheaths products, Nexus Coils, ONYX AVM and SpideRX Embolic Protection Devicefor use in carotid artery stenting applications None of our products are class I devices under FDA regulations, andexempt from the pre-market notification requirements. All of our products areeither class II or class III devices. Products presently under submission for510(k) clearance or pre-market approval include the Protégé EverFlexSelf-Expanding Nitinol Stent System, the SpideRX Embolic Protection Device foruse in saphenous vein grafts and the Protégé GPS Self-Expanding Nitinol StentSystem for carotid stenting applications.

***European Union***

Our products are regulated in the European Union asmedical devices per the European Union Directive (93/42/EEC), also known as theMedical Device Directive. An authorized third party, notified body, mustapprove our products for CE marking. Our Big Easy Rotating Y-Connector, SequelRotating Double Y-Connector, SpideRX Embolic Protection Device, AqWireHydrophillic Guidewire, Nitrex Guidewire, Babywire Guidewire, PLAATO LAAOcclusion System, PLAATO Sheath Kit, Amplatz THE GOOSE NECK Snares andMicrosnares, Protégé GPS Self-Expanding Nitinol Stent System, Protégé EverFlexSelf-Expanding Stent System, IntraCoil Self-Expanding Peripheral Stent, PRIMUSPre-Mounted Stent System, ParaMount Mini Pre-Mounted Stent System, ParaMountDoubleStrut Pre-Mounted Stent System, ParaMount XS Double Strut Pre-MountedStent System, IntraStent Stent, IntraStent DoubleStrut Stent, IntraStent XSDoubleStrut Stent, IntraStent LD Mega Stent, IntraStent LD Max Stent,IntraStent LD DoubleStrut Stent, Helix ClotBuster Thrombectomy Device, X-SizerCatheter System, SilverSpeed Guidewire, X-Celerator Guidewire, X-PedionGuidewires, Mirage Guidewires, HyperGlide Balloon Catheter, HyperForm BalloonCatheter, UltraFlow Flow Directed Microcatheter, Marathon Flow DirectedMicrocatheter, Rebar Microcatheter, Nautica Microcatheter, EchelonMicrocatheter, Cragg-McNamara®  InfusionCatheter, MicroMewi® Infusion Catheter, Prostream Infusion Wire,Cadence Precision Injector, ONYX AVM Liquid Embolic System, ONYX AneurysmLiquid Embolic System, Sapphire Detachable Neurovascular Coils, NXT DetachableNeurovascular Coils, NEXUS Detachable Neurovascular Coils and TopazNeurovascular Micro Coils products are CE marked. We cannot assure you that wewill be able to obtain the CE mark approval for new products in the future. TheCE mark is contingent upon our continued compliance to the applicableregulations and the Quality System Requirements of ISO 13485 standard.

The European Community has regulations similar to thatof the FDA for the advertising and promotion of medical devices, clinicalinvestigations, and adverse events. Recognizing that our business continues toexpand internationally, we intend to review our compliance with Europeanmedical device regulations and update or enhance our procedures and practices.

In particular, medical device regulations in theEuropean Union require that we report incidents of serious deterioration in healthor situations in which the incident might have led to death or seriousdeterioration in health. In addition to the medical device reports listedabove, in 2005 we reported eight medical vigilance reports. Two of thesereports were patient deaths associated with the use of our PLAATO device. Inboth cases, there was an embolization of the PLAATO device. One of these tworeports was associated with a perforation that may have occurred during aPLAATO device implant procedure. The other report was investigated anddetermined not to be due to device malfunction. Two of the remaining vigilancereports were associated with fracture of a stent device, one of which wasassociated 

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with the difficultdeployment of a Protégé device. The remaining two reports were associated withmovement of a Primus stent during placement, and the fracture of a capture wireof the SpideRX device.

Certification of ourquality system for product distribution in the European Union is performed bySociété Générale de Surveillance, located in the United Kingdom. The lastinspection performed by Société Générale de Surveillance was completed in September 2005.The audit resulted in the identification of one minor non-conformance and nomajor non-conformances. The identified non-conformance was addressed inaccordance with Société Générale de Surveillance requirements.

***Japan***

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 which 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 our 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. Failure to comply with applicable regulatory requirements canresult in enforcement action by the MHLW, which may include fines, injunctions,and civil penalties; recall or seizure of our products; operating restrictions;partial suspension or total shutdown of sales in Japan; or criminal prosecution.

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. Prior to 2005, the regulationsseparated medical devices into four classes, which are based on the deviceclassification of the Global Harmonization Task Force. Devices that wereformerly Class III and Class IV are now designated highly controlledmedical devices. These products are highly regulated and require marketingapproval by MHLW. Most of our devices fall into the highly controlled medicaldevice category. The revised law also abolishes the in-country caretaker systemand replaces it with the “marketing authorization holder” system. As an interimmeasure, an in-country caretaker licensed under the PAL in effect prior to April 1,2005 will be deemed as the marketing authorization holder under the revised PALif that in-country caretaker had a license to import and distribute therelevant medical devices which was applied for and obtained under the old PAL.

In April 2004, in preparation for theimplementation of these revisions, several administrative agencies were mergedto form a consolidated organization, the Pharmaceutical and Medical DevicesAgency, which is charged with regulation of pharmaceuticals, biologicals andmedical devices. The Pharmaceutical and Medical Devices Agency is nowresponsible for the review of all highly controlled medical device (formerly Class IIIand Class IV) pre-market approval applications. The Pharmaceutical andMedical Devices Agency also will collect and analyze reports on defectivemedical devices and is responsible for developing standards for reviewingmedical devices.

Review times for our device applications under the newPAL range from one year if clinical data is not required to up to two years ifclinical data is required. These review times are expected to be reduced to six

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months and one year,respectively, as performance standards are released for various productcategories. Standards for biliary stents, neurovascular catheters and balloons,guidewires and thrombectomy devices are scheduled for publication in the firsthalf of 2006.

We do not believe that thenew PAL regulations will impact the regulatory status of currently approvedproducts, or products with approvals pending prior to April 1, 2005. Thenew PAL regulations do not impact the existing reimbursement of devices inJapan, which is managed by a separate agency, although reimbursement prices arere-evaluated for all products on a bi-annual basis.

***Other regions***

Most major markets have different levels of regulatoryrequirements for medical devices. Modifications to the approved productsrequire a new regulatory submission in all major markets. The regulatoryrequirements, and the review time vary significantly from country to country. Ourproducts can also be marketed in several other countries that have minimalrequirements for medical devices.

You should read theinformation set forth under “Item 1A. Risk Factors—Our products and facilitiesare subject to extensive regulation with which compliance is costly and whichexposes us to penalties for non-compliance. We may not be able to obtainrequired regulatory approvals for our products in a cost-effective manner or atall, which could adversely affect our business 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 in significant criminal, civil, and administrative penalties,including imprisonment of individuals, fines and penalties and exclusion ordebarment from federal and state health care and other programs. Many privatehealth insurance companies also prohibit payment to entities that have beensanctioned, excluded, or debarred by federal agencies.

*Anti-Kickback Statute.*   Thefederal health care program Anti-Kickback Statute prohibits persons fromknowingly and willfully soliciting, offering, receiving or providingremuneration, directly or indirectly, in exchange for or to induce either thereferral of an individual, or the furnishing, arranging for or recommending ofa good or service, for which payment may be made in whole or part under afederal health care program such as the Medicare and Medicaid programs. Thedefinition of “remuneration” has been broadly interpreted to include anythingof value, including for example gifts, discounts, the furnishing of supplies orequipment, credit arrangements, payments of cash and waivers of payments. Severalcourts have interpreted the statute’s intent requirement to mean that if anyone purpose of an arrangement involving remuneration is to induce referrals orotherwise generate business involving goods or services reimbursed in whole orin part under federal health care programs, the statute has been violated. Penaltiesfor violations include criminal penalties and civil sanctions such as fines,imprisonment and possible exclusion from Medicare, Medicaid and other federalhealth care programs. In addition, some kickback allegations have been claimedto violate the Federal False Claims Act, discussed in more detail below.

The Anti-Kickback Statute is broad and prohibits manyarrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and maytechnically prohibit many innocuous or beneficial arrangements, the Office ofInspector General of Health and Human Services, or OIG, has issued a series ofregulations, known as the “safe harbors,” beginning in July 1991. Thesesafe harbors set forth provisions that, if all their applicable requirementsare met, will assure health care providers and other parties that they will notbe prosecuted under the 

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Anti-KickbackStatute. The failure of a transaction or arrangement to fit precisely withinone or more safe harbors does not necessarily mean that it is illegal or thatprosecution will be pursued. However, conduct and business arrangements that donot fully satisfy each applicable safe harbor may result in increased scrutinyby government enforcement authorities such as the OIG. Many states have adoptedlaws similar to the Anti-Kickback Statute. Some of these state prohibitionsapply to referral of patients for health care items or services reimbursed byany source, not only the Medicare and Medicaid programs.

Government officials have focused recent enforcementefforts on marketing of health care services, among other activities, andrecently have brought cases against individuals or entities with salespersonnel who allegedly offered unlawful inducements to potential or existingphysician customers in an attempt to procure their business.

*False Claims Laws.*   Federalfalse claims laws prohibit any person from knowingly presenting, or causing tobe presented, a false claim for payment to the federal government or knowinglymaking, or causing to be made, a false statement to get a false claim paid. Recently,several health care companies have been prosecuted under the false claims lawsfor allegedly providing free product to physician customers with theexpectation that the physician customers would bill federal programs for theproduct. The majority of states also have statutes or regulations similar tothe federal false claims laws, which apply to items and services reimbursedunder Medicaid and other state programs, or, in several states, applyregardless of the payer. Sanctions under these federal and state laws mayinclude civil monetary penalties, exclusion of a manufacturer’s products fromreimbursement under government programs, criminal fines, and imprisonment.

*Fraudon a Health Benefit Plan and False Statements.*   TheHealth Insurance Portability and Accountability Act of 1996, or HIPAA, createdtwo new federal crimes: health care fraud and false statements relating tohealth care matters. The health care fraud statute prohibits knowingly andwillfully executing a scheme to defraud any health care benefit program,including private payors. A violation of this statute is a felony and mayresult in fines, imprisonment or exclusion from government sponsored programs. Thefalse statements statute prohibits knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false,fictitious or fraudulent statement in connection with the delivery of orpayment for health care benefits, items or services. A violation of thisstatute is a felony and may result in fines or imprisonment.

***Privacy and Security***

HIPAA requires certain “covered entities” to complywith established standards regarding the privacy and security of protectedhealth information and to use standardized code sets when conducting certainelectronic transactions. HIPAA further requires that covered entities enterinto 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. In the course of our business operations, we may becomethe business associate of one or more covered entities. Accordingly, we mayincur compliance related costs in meeting HIPAA-related obligations underbusiness associates agreements to which we become a party. Moreover, if we failto meet our contractual obligations under such agreements, we may incursignificant liability.

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 withthese standards and update or enhance our procedures and practices.

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***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. Auniform policy of reimbursement does not exist among all these payors. Therefore,reimbursement can be quite different from payor to payor. We believe thatreimbursement 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. Reimbursementalso depends on our ability to demonstrate the short-term and long-termclinical and cost-effectiveness of our products from the results we obtain fromclinical experience and formal clinical trials. We present these results atmajor scientific and medical meetings and publish them in respected,peer-reviewed medical journals.

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 nationalcoverage policy, which provides for the diagnosis and treatment of vasculardisease in Medicare beneficiaries. We estimate that more than 50% of vascularprocedures are performed on patients covered by Medicare. Commercial payorcoverage for vascular 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,encouragement of healthier lifestyles and exploration of more cost-effectivemethods of delivering health care. These types of programs and legislativechanges to reimbursement policies could potentially limit the amount whichhealth care providers may be willing to pay for medical devices.

***International Trade***

The sale and shipment of our products and servicesacross international borders, as well as the purchase of components andproducts from international sources, subject us to extensive governmental traderegulations. A variety of laws and regulations, both in the United States andin the countries in which we transact business, apply to the sale, shipment andprovision of goods, services and technology across international borders. Becausewe are subject to extensive regulations in the countries in which we operate,we are subject to the risk that laws and regulations could change in a way thatwould expose us to additional costs, penalties or liabilities.

As a result of the varying legal and regulatoryrequirements to which our cross-border activities are subject, we cannot assureyou that we are in compliance with these requirements in all respects. Thereare risks related to our international trading activities. You should read theinformation set forth under “Item 1A. Risk Factors—The risks inherent inoperating 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.”  Recognizing that our business continues toexpand internationally, in 2005 we reviewed our trade compliance activities aspart of our ongoing commitment to further enhance our compliance policies andprocedures. As part of this review, we identified instances in which we mayhave incorrectly reported information about certain shipments imported into theUnited States and Europe. We have disclosed these potential reporting errors tocustoms regulators in the countries of importation in the United States andEurope, and while we believe that no monies are owed 

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to any government as aresult of these potential reporting errors other than processing fees of animmaterial amount or value added taxes otherwise due, we may incur penalties,additional fees, value added taxes, interest and duty payments if the customsregulators disagree with our assessment. For example, we are currently indiscussions with customs regulators in the United Kingdom concerning whethervalue added taxes may be owed on certain imports from 2004 and 2005.

Existing laws and regulations significantly affectcross-border transactions and shipments. These laws and regulations govern, amongother things, the following activities:

*Importing Activities.*   Weengage in the importation of raw materials, components and finished productsinto the countries in which we transact business.  We act as importer in many instances, but wealso sell and ship goods to third parties who are themselves responsible for complyingwith applicable trade laws and regulations.

Many countries, including the United States, haveoverlapping legal and regulatory regimes concerning the importation of goods. Theimportation of a medical device, for example, may trigger laws and regulationsrelated to a variety of interests, including the collection of duties, healthand safety standards, intellectual property rights and national security. Thismeans that in addition to customs laws and regulations, the importation ofproducts can be delayed or denied entry for a variety of reasons, some of whichare outside the control of the importer of record and some of which may resultfrom failure to comply with existing legal and regulatory regimes.

In our role as importer, we are directly responsiblefor complying with customs laws and regulations concerning the importation ofour raw materials, components and finished products. If third parties violatecustoms laws and regulations when engaging in cross-border transactionsinvolving our products, we may be subject to varying degrees of liabilitydepending on our participation in the transaction. In addition, the activitiesof third parties may cause supply chain disruptions and delays in thedistribution of our products that impact our business activities.

*Exporting Activities.*   Weare responsible for compliance with applicable export control and economicsanctions laws and regulations with respect to our export of goods, technologyand services to customers and end-users located in countries in which wetransact business. We also sell and provide goods, technology and services toagents, representatives and distributors who may export such items to customersand end-users. If third parties violate applicable export control and economicsanctions laws and regulations when engaging in transactions involving ourproducts, we may be subject to varying degrees of liability dependent upon ourparticipation in the transaction. The activities of third parties may causedisruption or delays in the distribution and sales of our products, or resultin restrictions being placed upon our international distribution and sales ofproducts that may materially impact our business activities.

Many countries, including the United States, controlthe export and reexport of goods, technology and services for reasons includingnational security, regional stability, antiterrorism policies and thenonproliferation of nuclear, chemical and biological weapons. In certaincircumstances, approval from governmental authorities may be required beforegoods, technology or services are exported or reexported to certaindestinations, to certain end-users and for certain end-uses. In addition,governments, including the United States, may impose economic sanctions againstcertain countries, persons and other entities that may restrict or prohibittransactions involving such countries, persons and entities. Because exportcontrol and economic sanctions laws and regulations are complex and constantlychanging, we cannot assure you that laws and regulations may not be enacted,amended, enforced or interpreted in a manner materially impacting our abilityto sell or distribute products.

*Antiboycott Laws.*   UnderUnited States laws and regulations, U.S. companies and their controlled-in-factforeign subsidiaries and affiliates are prohibited from participating oragreeing to participate in unsanctioned foreign boycotts in connection withcertain business activities, including the sale, purchase, 

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transfer, shipping orfinancing of goods or services within the United States or between the UnitedStates and a foreign country. Currently, the United States considers the ArabLeague boycott of Israel to constitute an unsanctioned foreign boycott.

We are responsible for ensuring we comply with therequirements of U.S. antiboycott laws for all transactions in which we areinvolved. If we or third parties violate U.S. antiboycott laws and regulationswhen engaging in transactions involving our products, we may be subject tovarying degrees of liability dependent upon the nature of the transaction andour participation in the transaction. Penalties for any violations ofantiboycott laws and regulations could include criminal penalties and civilsanctions such as fines, imprisonment, debarment from government contracts,loss of export privileges and the denial of certain tax benefits, includingforeign tax credits, foreign subsidiary deferrals, Foreign Sales Corporationbenefits and Interest Charge-Domestic International Sales Corporation benefits.

*AntibriberyLaws.*   Many of the countries in which we transactbusiness have domestic laws that restrict the offer or payment of anything ofvalue to government officials or other persons with the intent of gainingbusiness or favorable government action. Moreover, some of the transactions inwhich we and our officers, directors, employees and agents engage may begoverned by the legal obligations and standards set forth under the ForeignCorrupt Practices Act and, at times, other laws modeled on the OECD Conventionfor Combating Bribery of Foreign Public Officials in International BusinessTransactions. In addition to prohibiting certain bribery-related activity withforeign officials and other persons, these laws provide for recordkeeping andreporting obligations. Penalties for any violations of these anti-bribery lawscould include criminal penalties and civil sanctions, such as fines,imprisonment, debarment from government contracts and loss of import and exportprivileges.

**Employees**

As of December 31,2005, we had approximately 880 employees. From time to time, we also employindependent contractors to support our operations.

**Manufacturing**

We currently have onemanufacturing facility located in Plymouth, Minnesota and one manufacturingfacility located in Irvine, California. We manufacture our products in acontrolled environment and have implemented quality control systems as part ofour manufacturing processes. The control systems materially comply with UnitedStates FDA Quality System Regulations. We believe we are in material compliancewith FDA Quality System Regulations for medical devices, with ISO 9001 qualitystandards and applicable medical device directives promulgated by the EuropeanUnion and Canada and ISO/EN 13485, which facilitates entry of our productsinto the European Union and Canada. The FDA and European Union competentauthorities have recently inspected our manufacturing facilities. We rely onindependent manufacturers for certain product components and processes.

**Intellectual Property 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.

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We have developed a patent portfolio internally, aswell as through acquisitions, that covers many aspects of our product offeringsin the peripheral vascular, neurovascular and cardiovascular markets. As ofDecember 31, 2005, we had 208 issued patents and over 361 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 material trademarksor trade names that we use in conjunction with the sale of our products.

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 being generated.

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,which has its own proprietary and patented technology.

While we believe 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 product offering. To protect that value, we have institutedpolicies and procedures, as well as a requirement that, as a condition ofemployment, all employees execute a confidentiality agreement relating toproprietary information and the assignment of intellectual property rights tous.

We also rely on unpatented proprietary technology. Weseek to protect our trade secrets and proprietary know-how, in part, withconfidentiality agreements with consultants, vendors and employees, although wecannot be certain that the agreements will not be breached, or that we willhave adequate remedies 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,the resolution of which could have a material adverse effect on our businessand results of operations” and “Item 1A. Risk Factors—If our patents and otherintellectual property rights do not adequately protect our products, we maylose market share to our competitors and be unable to operate our businessprofitably.”

**Forward-Looking Statements**

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, and Section 21Eof the Securities Exchange Act of 1934, as amended, and are subject to the safeharbor created by those sections. In addition, we or others on our behalf maymake forward-looking statements from time to time in oral presentations,including telephone conferences and/or web casts open to the public, in pressreleases or reports, on our Internet web site or otherwise. All statementsother than statements of historical facts included in this report that addressactivities, events or developments that we expect, believe or anticipate willor may occur in the future are forward-looking statements including, inparticular, the statements about our plans, objectives, strategies andprospects regarding, among other things, our financial condition, results ofoperations and business. We have identified some of these forward-lookingstatements 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 termsof similar meaning. These forward-looking statements may be contained in thenotes to our consolidated financial statements and elsewhere in this report,including 

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under the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

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 arepredictions of future results, which may not occur as anticipated. Actualresults could differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed under the heading “Item 1A. Risk Factors” below, as well as othersthat we may consider immaterial or do not anticipate at this time. Although webelieve that the expectations reflected in our forward-looking statements arereasonable, we do not know whether our expectations will prove correct. Ourexpectations reflected in our forward-looking statements can be affected byinaccurate assumptions we might make or by known or unknown risks anduncertainties, including those described below under the heading “Item 1A.Risk Factors.”  The risks anduncertainties described under the heading “Item 1A. Risk Factors” below are notexclusive and further information concerning us and our business, includingfactors that potentially could materially affect our financial results orcondition, may emerge from time to time. We assume no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements. We advise you, however, toconsult any further disclosures we make on related subjects in our quarterlyreports on Form 10-Q and current reports on Form 8-K wefile with or furnish to the Securities and Exchange Commission.

**Available Information**

Our principal executive offices are located at 9600 54th Avenue North, Suite 100, Plymouth,Minnesota 55442. Our telephone number is (763) 398-7000, and ourInternet web site address is *www.ev3.net*.The information contained on our web site or connected to our website is notincorporated by reference into and should not be considered part of thisreport.

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 to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the Securities and Exchange Commission. We also make available,free of charge and through our Internet web site under the Investor Relations—CorporateGovernance section, to any stockholder who requests, the charters of our boardcommittees and our Code of Business Conduct and Code of Ethics for SeniorExecutive and Financial Officers. Requests for copies can be directed toInvestor 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.

***We have a history of operating losses and negativecash flow.***

Our operations to datehave consumed substantial amounts of cash, and we expect this condition tocontinue. We had an accumulated deficit of $562.2 million at December 31,2005. Our ability to achieve cash flow positive operations will be influencedby many factors, including the extent and duration of our future operatinglosses, the level and timing of future sales and expenditures, marketacceptance of new 

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products,the results and scope of ongoing research and development projects, competingtechnologies, market and regulatory developments and the future course ofintellectual property litigation. If adequate cash flow is not available to us,our business will be negatively impacted.

***Some of our products are emerging technologies or havebeen recently introduced into the market and may not achieve market acceptanceonce they are introduced into their markets, which could adversely affect ourbusiness.***

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 beneficial. However,even if customers accept our products, this acceptance may not translate intosales if our competitors have developed similar products that our customersprefer. If our products do not gain market acceptance or if our customersprefer our competitors’ products, our business could be adversely affected.

***Delays in product introductions could adversely affectour 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. We mayexperience delays in any phase of a product launch, including during researchand development, clinical trials, manufacturing, marketing and the educationprocess. In addition, our suppliers of products that we do not manufacture cansuffer similar delays, which could cause delays in our product introductions. Ifwe suffer delays in product introductions, our net sales could be adverselyaffected.

***If third parties claim that we infringe upon theirintellectual property rights, we may incur liabilities and costs and may haveto redesign or discontinue selling the affected 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 patentsobtained by our competitors could threaten a product’s continued life in themarket even after it has already been introduced.

***We are currently a party to a number of intellectualproperty claims, the resolution of which could have a material adverse effecton our business 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 2005,Medtronic, Inc. contacted us to express its view that our Protégé stentsinfringe on one or more of its patents. We informed Medtronic that we disagreewith Medtronic’s assertions, and have since had several discussions withMedtronic. No lawsuit with respect to this matter has been filed. We alsoreceived notice from an individual regarding our Percutaneous Left AtrialAppendage Transcatheter Occlusion device, or PLAATO, which is designed toreduce the risk of stroke by occluding the left atrial appendage, a smallpocket attached to the heart’s left upper chamber that has limited functionaluse and is the location of a majority of blood clots in the heart. Theindividual claims that he believes the PLAATO device infringes on two of hispatents. We have informed this individual that we do not believe that ourPLAATO device infringes on these patents. We have also informed this individualof our decision to discontinue the development and commercialization of thePLAATO device. In March 2005, we were served with a complaint by BostonScientific Corporation and one of our affiliates which claims that some of ourproducts, including our SpideRX Embolic Protection Device, infringe on certainof Boston Scientific’s patents. Boston Scientific is seeking monetary damagesfrom us and to enjoin us from the alleged infringement. We have answered thecomplaint and intend to vigorously defend this action. In addition, bothparties have asked the court to allow additional claims in to the case. BostonScientific is seeking to add a trade secret misappropriation claim, and we areseeking to counterclaim for infringement of two of our own patents. Prior toMTI’s acquisition of Dendron GmbH, Dendron became involved in litigation inEurope involving patents covering certain of our products, which litigation isstill active. Concurrent with MTI’s acquisition of Dendron, MTI initiated aseries of legal actions in the Netherlands and the United Kingdom with theprimary 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.

Because these matters are in early or mid-levelstages, we cannot estimate the possible loss or range of loss, if any,associated with their resolution. However, there can be no assurance that theultimate resolution of these matters will not result in a material adverseeffect on our business, financial condition or results of operations. If ourproducts were found to infringe on any proprietary rights of a third party, wecould be required to pay significant damages or license fees to the third partyor cease production, marketing and distribution of those products, which couldin turn have a material adverse effect on our business, financial condition andresults of operations. Litigation may also be necessary to enforce patentrights we hold or to protect trade secrets or techniques we own. See “Item 3.Legal Proceedings” and Note 18 to our consolidated financial statementsincluded in this report.

We may also be subject todisputes as to the ownership of patents that we may develop with othercompanies. Such disputes could result in the enjoining of sales of our productsor us being required to pay 

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commerciallyunreasonable licensing fees. If this occurs, our net sales or the cost ofselling the infringing product, and therefore our results of operations, wouldbe negatively affected.

***If there is a disruption in the supply of the productsof Invatec S.r.l. that we distribute or if our relationship with Invatec isimpaired, our net sales and results of operations would be adversely impacted.***

We have entered into anagreement with Invatec S.r.l., or Invatec, an Italian manufacturer ofendovascular medical devices which prior to our arrangement have not beenmarketed or sold under the Invatec brand in the United States, to distributeInvatec’s branded products throughout the United States. Although our contractwith Invatec gives us the exclusive right to market Invatec’s products usingthe Invatec brand in the United States, Invatec retained the right to sell itsproducts into the United States under other brands, which it currently does. Weincreased our U.S. cardio peripheral sales force by adding 40 new salesrepresentatives in 2004 partially in reliance on this agreement and haveinvested significantly in regulatory, intellectual property and clinicalactivities to support the introduction and ongoing sales/marketing of Invatec’sproducts in the United States. Our success in marketing the Invatec products isdependent on our sales personnel being proficient in the product line, buildingphysician relationships and executing sales orders. If we are unable to marketInvatec’s products successfully or if our agreement with Invatec is terminated,our net sales and results of operations would suffer. If we do not meet ourperformance requirements under the agreement, the agreement may be terminatedby Invatec and we may be obligated to make substantial payments to Invatec. Inaddition, even if we market Invatec’s products successfully, if Invatec isunable to produce enough of its products to meet our demands, including ifInvatec sells its inventory to our competitors rather than to us for marketingunder their own brands, we may not be able to meet our customers’ demands andour net sales and results of operations may suffer. We also may not besuccessful in managing the larger inventory and greater variety of productofferings that we experience in connection with our Invatec relationship andour net sales and results of operations may be adversely impacted.

***If our patents and other intellectual property rightsdo not adequately protect our products, we may lose market share to ourcompetitors and be unable to operate our business profitably.***

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 

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information in the eventof unauthorized use or disclosure or other breaches of the agreements or in theevent that our competitors discover or independently develop similar or identicaldesigns or other proprietary information. In addition, we rely on the use ofregistered trademarks with respect to the brand names of some of our products. Wealso rely on common law trademark protection for some brand names, which arenot protected to the same extent as our rights in the use of our registeredtrademarks.

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 utilize certain technologies used in thedesign and manufacturing of some of our products. The loss of such licenseswould prevent us from manufacturing, marketing and selling these products,which could harm our business.

***We manufacture our products at single locations. Anydisruption in these manufacturing facilities or any patent infringement claimswith respect to our manufacturing process could adversely affect our businessand results of operations.***

We have relied to dateprincipally on our manufacturing facilities in Plymouth, Minnesota and inIrvine, California and our former facility in New Brighton, Minnesota. Weclosed our New Brighton, Minnesota manufacturing facility in July 2005 andmoved our operations to our Plymouth facility. In addition, in October 2005,we entered into a lease for new space in Irvine, California to which we willrelocate our existing Irvine operations, including our manufacturing facility. ThePlymouth and Irvine facilities and the manufacturing equipment we use toproduce our products would be difficult to replace and could requiresubstantial lead-time to repair or replace. Our facilities may be affected bynatural or man-made disasters. In the event one of our two facilities wasaffected by a disaster, we would be forced to rely on third-party manufacturersif we could not shift production to our other manufacturing facility. In thecase of a device with a pre-market approval application we may be required toobtain prior U.S. Food and Drug Administration, or FDA, or notified bodyapproval of an alternate manufacturing facility, which could delay or preventour marketing of the affected product until such approval is obtained. Althoughwe believe we possess adequate insurance for damage to our property and thedisruption of our business from casualties, such insurance may not besufficient to cover all of our potential losses and may not continue to beavailable to us on acceptable terms, or at all. It is also possible that one ofour competitors could claim that our manufacturing process violates an existingpatent. If we were unsuccessful in defending such a claim, we may be forced tostop production at one or both of our manufacturing facilities in the UnitedStates and to seek alternative facilities. Even if we are able to identify suchalternative facilities, we may incur additional costs and may experience adisruption in the supply of our products until those facilities are available. Anydisruption in our manufacturing capacity could have an adverse impact on ourability to produce sufficient inventory of our products or may require us toincur additional expenses in order to produce sufficient inventory, and thereforemay adversely affect our net sales and results of operations. Any disruption ordelay at our manufacturing facilities could impair our ability to meet thedemand of our customers and these customers may cancel orders or purchaseproducts from our competitors, which could adversely affect our business andresults of operations.

***If we lose the services of our chief executive officeror other key personnel, we may not be able to manage our operations and meetour 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 insurance 

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withrespect 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 keymanagerial, scientific, sales and technical personnel, as well as our abilityto continue to attract and retain additional highly qualified personnel,especially experienced medical device sales personnel. We compete for such personnelwith other companies, academic institutions, government entities and otherorganizations. Any loss or interruption of the services of our other keypersonnel or any employee slowdowns, strikes or similar actions could alsosignificantly reduce our ability to effectively manage our operations and meetour strategic objectives because we cannot assure you that we would be able tofind appropriate replacement 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 material and components used in our products could adverselyaffect our results of operations.***

We rely on a limited number of suppliers for the rawmaterials and components used in our products. Our raw materials and componentsare generally acquired through purchase orders placed in the ordinary course ofbusiness, and we do not have any guaranteed or contractual supply arrangementswith many of our key or single source suppliers. In addition, we also rely onindependent contract manufacturers for some of our products. Independentmanufacturers have possession of and in some cases hold title to molds forcertain manufactured components of our products. Our dependence on third-partysuppliers involves several risks, including limited control over pricing,availability, quality and delivery schedules, as well as manufacturing yieldsand costs. Suppliers of raw materials and components may decide, or berequired, for reasons beyond our control to cease supplying raw materials andcomponents to us. Shortages of raw materials, quality control problems,production capacity constraints or delays by our contract manufacturers couldnegatively affect our ability to meet our production obligations and result inincreased prices for affected parts. Any such shortage, constraint or delay mayresult in delays in shipments of our products or components, which couldadversely affect our net sales and results of operations.

In addition, the FDA, andforeign regulations 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.

***Our inability to successfully grow throughacquisitions, our failure to integrate any acquired businesses successfullyinto our existing operations or our discovery of previously undisclosedliabilities could negatively affect our business and results of operations.***

In order to buildour core technology platform, we have acquired several businesses since ourinception. Most recently, in January 2006, we completed our acquisition ofthe outstanding shares of MTI that we did not already own and are in theprocess of integrating certain of MTI’s operations into our operations. Weexpect to actively pursue additional acquisitions in the future as a componentof our business strategy. Our ability to grow through acquisitions depends uponour ability to identify, negotiate, complete and integrate attractivecandidates on favorable terms and to obtain any necessary financing. Our 

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inabilityto complete one or more acquisitions could impair our ability to develop ourproduct lines and to compete against many industry participants, many of whomhave product lines broader than ours. Our previous acquisitions, including ourmost recent acquisition of the remaining ownership interest of MTI, and anyfuture acquisitions 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 could materially impair our operating results and liquidity bycausing us to incur debt or reallocate amounts of capital from other operatinginitiatives or requiring us to amortize acquisition expenses and acquiredassets or incur non-recurring charges as a result of incorrect estimates madein the accounting for acquisitions. We may also discover deficiencies ininternal controls, data adequacy and integrity, product quality, regulatorycompliance and product liabilities which we did not uncover prior to ouracquisition of such businesses, which could result in us becoming subject to penaltiesor other liabilities. Any difficulties in the integration of acquiredbusinesses or unexpected penalties or liabilities in connection with suchbusinesses could have a material adverse effect on our results of operationsand financial condition. These risks could be heightened if we complete severalacquisitions within a relatively short period of time.

***We may require additional capital in the future, whichmay not be available or may be available only on unfavorable terms. Inaddition, any equity financings may be dilutive to our stockholders.***

Our capital requirementsdepend on many factors, including the amount of expenditures on intellectualproperty and technologies, the number of clinical trials which we conduct, newproduct development and new product acquisition. To the extent that ourexisting capital is insufficient to meet these requirements and cover anylosses, we will need to raise additional funds through financings or borrowingsor curtail our growth and reduce our assets. From time to time we may also sella given technology 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 historically reliedon financing from Warburg Pincus and The Vertical Group, but there can be noassurance that Warburg Pincus, The Vertical Group or other investors willprovide such financing in the future. Any equity or debt financing, ifavailable at all, may be on terms that are not favorable to us. Equityfinancings could result in dilution to our stockholders, and the securitiesissued in future financings as well as in any future acquisitions may haverights, preferences and privileges that are senior to those of our common stock.If our need for capital arises because of significant losses, the occurrence ofthese losses may make it more difficult for us to raise the necessary capital.

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***Our sales would decline if our customers or ourpatients cannot obtain third party reimbursement for their purchases of ourproducts.***

Sales of our products depend in part on thereimbursement by governmental and private health care payors to our physiciancustomers or their patients for the purchase and use of our products. In the UnitedStates, health care providers that purchase our products generally rely onthird-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 most markets,there are private 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 could have amaterial adverse effect on our business. In addition, if the reimbursementpolicies of domestic or foreign governmental or private health care payors wereto change, our customers would likely change their purchasing patterns and/orthe frequency of their purchases of the affected products. Additionally, payorscontinue to review their coverage policies carefully for existing and newtherapies and can, without notice, deny coverage for treatments that includethe use of our products. Our business would be negatively impacted to theextent any such changes reduce reimbursement for our products.

In addition, some health care providers in the UnitedStates have adopted or are considering a managed care system in which theproviders contract to provide comprehensive health care for a fixed cost perperson. Health care providers may attempt to control costs by authorizing fewerelective surgical procedures or by requiring the use of the least expensivedevices possible, which could adversely affect the demand for our products orthe price at which we can sell our products.

We also sell a number of ourproducts to physician customers who may elect to use these products 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.

***Our products and facilities are subject to extensiveregulation with which compliance is costly and which exposes us to penaltiesfor non-compliance. We may not be able to obtain required regulatory approvalsfor our products in a cost-effective manner or at all, which could adverselyaffect our business and results of operations.***

The production andmarketing of our products and our ongoing research and development, preclinicaltesting and clinical trial activities are subject to extensive regulation andreview by numerous governmental authorities both in the United States andabroad. U.S. and foreign regulations applicable to medical devices arewide-ranging and govern, among other things, the testing, marketing andpre-market review of new medical devices, in addition to regulatingmanufacturing practices, reporting, advertising, exporting, labeling and recordkeeping procedures. We are required to obtain FDA approval or clearance beforewe can market our products in the United States and certain foreign countries. Theregulatory process requires significant time, effort and expenditures to bringour products to market, and we cannot assure that any of our products will beapproved for sale. Any failure to obtain regulatory approvals or clearancescould prevent us from successfully marketing our products, which couldadversely affect our business and results of operations. Our failure to complywith applicable regulatory requirements could result in governmental agencies:

·       imposingfines and penalties on us;

·       preventingus from manufacturing or selling our products;

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·       bringingcivil or criminal charges against us;

·       delayingthe introduction of our new products into the market;

·       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.

Even if regulatory approval or clearance of a productis granted, the approval or clearance could limit the uses for which theproduct may be labeled and promoted, which may limit the market for ourproducts. Further, for a marketed product, our manufacturers and manufacturingfacilities are subject to periodic reviews and inspections by FDA and foreignregulatory authorities. Subsequent discovery of problems with a product,manufacturer or facility may result in restrictions on the product,manufacturer or facility, including withdrawal of the product from the marketor other enforcement actions. In addition, regulatory agencies may not agreewith the extent or speed of corrective actions relating to product ormanufacturing problems.

We are currently conducting clinical studies of someof our products under an investigational device exemption. Clinical studies mustbe conducted in compliance with regulations of the FDA and those of regulatoryagencies in other countries in which we conduct clinical studies. The datacollected from these clinical investigations will ultimately be used to supportmarket clearance for these products. There is no assurance that regulatorybodies will accept the data from these clinical studies or that they willultimately allow market clearance for these products.

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.

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 

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trials and obtain approvalfrom appropriate regulatory bodies, which could be time-consuming and costly. Inaddition, off-label use may not be safe or effective and may result inunfavorable outcomes to patients, resulting in potential liability to us. Penaltiesor liabilities stemming from off-label use could have a material adverse effecton our results of operations. In addition, if physicians cease or lessen theiruse of products for other than FDA-approved indications, sales of our productscould decline, which could materially adversely affect our net sales andresults of operations.

If additional regulatory requirements are implementedin the foreign countries in which we sell our products, the cost of developingor selling our products may increase. For example, in Japan, new regulationsbecame effective on April 1, 2005 which increase the regulatory andquality assurance requirements for both our manufacturing facilities and ouroffices located in Japan in order to obtain and maintain regulatory approval tomarket our products there. While parts of new regulations are still beingdefined, we expect that these new regulations will result 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. Forexample, we are highly dependent on distributors in emerging markets such asChina 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. Ifour 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.

In addition, our business,properties and products are subject to foreign, federal, state and local lawsand regulations relating to the protection of the environment, natural resourcesand worker 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 ofoperations.

***A number of our products are in clinical trials. Ifthese trials are unsuccessful, or if the FDA or other regulatory agencies donot accept the results of such trials, these products may not successfully cometo market and our business prospects may suffer.***

Several of our productsare in the early stages of development. Some of our products only recentlyemerged from clinical trials and others have not yet reached the clinical trialstage. Our current trials include the CREATE trial designed to evaluate the useof our SpideRX Embolic Protection Devices and our Protégé Self-Expanding StentSystem in carotid artery stenting procedures in patients who are high riskcandidates for carotid endarterectomy. We cannot assure you that we will besuccessful in reaching the endpoints in these trials or, if we do, that the FDAor other regulatory agencies will accept the results and approve the devicesfor sale. Further, we continually evaluate the potential financial benefits andcosts of our clinical trials and the products being evaluated in them. If wedetermine that the costs associated with attaining regulatory approval of aproduct exceed the potential financial benefits of that product or if theprojected development timeline is inconsistent with our investment horizon, wemay choose to stop a clinical trial and/or the development of a product. Forexample, in September 2005, we decided to discontinue the development andcommercialization of our PLAATO device. Although we recently had obtainedconditional approval from the FDA for an investigational device exemption, orIDE, clinical trial 

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for ourPLAATO device, we determined that, due to the time, cost and risk ofenrollment, the trial design ultimately mandated by the FDA was notcommercially feasible for us at such time.

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

***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 significantportion of our net sales from operations in international markets. For theyears ended December 31, 2005 and December 31, 2004, 46.3% and 50.4%of our net sales, respectively, were derived from our international operations.Our international distribution system consisted of eight direct sales officesand approximately 44 stocking distribution partners as of December 31,2005. In addition, we purchase some components and products from internationalsuppliers. The sale and shipping of our products and services acrossinternational borders, as well as the purchase of components and products frominternational sources, subject us to extensive U.S. and foreign governmentaltrade regulations. Compliance with such regulations is costly and exposes us topenalties for non-compliance. In 2005, we reviewed our trade control practicesas part of our ongoing commitment to further enhance our compliance policiesand procedures. As part of this review, we identified instances in which we mayhave incorrectly reported information about certain shipments imported into theUnited States and Europe. We have disclosed these potential reporting errors tocustoms regulators in the countries of importation in the United States andEurope, and while we believe that no monies are owed to any government as aresult of these potential reporting errors other than processing fees of animmaterial amount or value added taxes otherwise due, we may incur penalties,additional fees, value added taxes, interest and duty payments if the customsregulators disagree with our assessment. For example, we are currently indiscussions with customs regulators in the United Kingdom concerning whethervalue added taxes may be owed on certain imports from 2004 and 2005. Anyfailure to comply with applicable legal and regulatory obligations could impactus in a variety of ways that include, but are not limited to, significantcriminal, civil and administrative penalties, including imprisonment ofindividuals, fines and penalties, denial of export privileges, seizure ofshipments, restrictions on certain business activities, and exclusion ordebarment from government contracting. Also, the failure to comply withapplicable legal and regulatory obligations could result in the disruption ofour shipping and sales activities.

Inaddition, many of the countries in which we sell our products are, to somedegree, subject to political, economic and/or social instability. Ourinternational sales operations expose us and our representatives, agents anddistributors to risks inherent in operating in foreign jurisdictions. Theserisks include:

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

·       theimposition of costly and lengthy new export licensing requirements;

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·       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, penalties andadditional 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 predominatelyin Europe. In Europe, health care regulation and reimbursement for medicaldevices vary significantly from country to country. This changing environmentcould adversely 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.***

Because the majority ofour international sales are denominated in local currencies and not in U.S. dollars,our reported net sales and earnings are subject to fluctuations in foreignexchange rates. Our international net sales were unfavorably affected by theimpact of foreign currency fluctuations totaling $203 thousand in 2005 andfavorably affected by $2.7 million in 2004. We cannot assure you that we willbenefit from the impact of foreign currency fluctuations in the future andforeign currency fluctuations in the future may adversely affect our net salesand earnings. At present, we do not engage in hedging transactions to protectagainst uncertainty in future exchange rates between particular foreigncurrencies and the U.S. dollar. If we engage in hedging activities in thefuture, such activities may not limit our underlying exposure from currencyfluctuations or minimize our net sales and earnings volatility associated withforeign currency exchange rate changes. In addition, our hedging activities mayalso involve some risk.

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***We may become obligated to make large milestonepayments that are not currently reflected in our financial statements incertain circumstances, which would negatively impact our cash flows fromoperations.***

Pursuant to the acquisition agreements relating to ourpurchase of MitraLife and Appriva Medical, Inc. in January 2002 and August 2002,respectively, we agreed to make certain additional payments to the sellers ofthese businesses in the event that we achieve contractually defined milestones.Generally, in each case, these milestone payments become due upon thecompletion 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.

On September 29, 2004, we sold substantially allof the assets constituting the MitraLife business to Edwards Lifesciences andwe are no longer pursuing commercialization of the product line acquired in theMitraLife transaction. As of the date that we sold these assets to EdwardsLifesciences, none of the milestones set forth in our agreement with thesellers of MitraLife had been met. We have determined that we have no currentobligations in respect of these milestone payments, and we do not believe thatit is likely that we will have obligations with respect to these milestones inthe future. Although we do not believe it is likely that these milestonepayment obligations will become due in the future, it is possible that theformer stockholders of MitraLife could disagree and make a claim for suchpayments. Any such dispute could be costly, result in payments in such amountsbeing made and divert our management’s time and attention away from ourbusiness.

The Appriva acquisitionagreement contains four milestones to which payments relate. The firstmilestone was required by our terms to be achieved by January 1, 2005 inorder to trigger a payment equal to $50 million. We have determined that thefirst milestone was not achieved by January 1, 2005 and that the firstmilestone is not payable. On May 20, 2005, Michael Lesh, as an individualseller of Appriva stock and purporting to represent certain other sellers ofAppriva stock, filed a complaint in the Superior Court of the State of Delawarewith individually specified damages aggregating $70 million and otherunspecified damages for several allegations, including that we, along withother defendants, breached the acquisition agreement and an implied covenant ofgood faith and fair dealing by willfully failing to take the steps necessary tomeet the first milestone under the agreement, and thereby also failing to meetcertain other milestones, and further that one milestone was actually met. Thecomplaint also alleges fraud, negligent misrepresentation and violation ofstate securities laws in connection with the negotiation of the acquisitionagreement. We believe these allegations are without merit and intend tovigorously defend this action. However, the defense and resolution of this orany similar dispute could be costly and may divert our management’s time andattention away from our business. On or about November 21 2005, a secondlawsuit was filed in Delaware Superior Court relating to the acquisition ofAppriva Medical, Inc. The named plaintiff is Appriva ShareholderLitigation Company, LLC, which according to the complaint was formed for thepurpose of pursuing claims against us. The complaint alleges that Erik van derBurg and three unidentified institutional investors, have assigned their claimsas former shareholders of Appriva to Appriva Shareholder Litigation Company,LLC. The complaint alleges specified damages in the form of the secondmilestone payment ($25 million), which is claimed to be due and payable andfurther alleges unspecified damages to be proven at trial. The complaintalleges the following claims: misrepresentation, breach of contract, breach ofthe implied covenant of good faith and fair dealing and declaratory relief. Webelieve these allegations and claims are without merit and intend to vigorouslydefend this action. On September 27, 2005, we announced our decision todiscontinue the development and commercialization of our PLAATO device, whichis the technology we acquired in the Appriva transaction. While we do notbelieve that it is likely that we will have obligations with respect to thefirst or other milestones, as discussed above, it is possible that a courtcould disagree and require us to make such payments. The defense of theoutstanding litigation related to our Appriva acquisition will be costly andtime-consuming. In the event any such milestone payments become due and/or anyother damages become payable, our 

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costswould increase correspondingly which would negatively impact our cash flow fromoperations, as well as divert our management’s time and attention away from ourbusiness.

***We rely on our independent sales distributors andsales associates to market and sell our products outside of the United States,Canada, Europe and Japan.***

Sales of our products inlocations outside of the United States, Canada, Europe and Japan represented13% of our net sales in both fiscal 2005 and 2004. Our success outside of theUnited States, Canada, Europe and Japan 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, Europe and Japaninitially 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, Europe and Japan, or our failure to recruit andretain additional skilled independent sales distributors and sales associatesin these locations, could have an adverse effect on our operations. We haveexperienced turnover with some of our independent distributors in the past thathas adversely affected our short-term financial results while we transitionedto new independent distributors. Similar occurrences could happen in thefuture.

***If physicians do not recommend and endorse ourproducts, our sales may decline or we may be unable to increase our sales.***

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

***If we fail to comply with the U.S. FederalAnti-Kickback Statute and similar state laws, we could be subject to criminaland civil penalties and exclusion from the Medicare and Medicaid programs,which could have a material adverse effect on our business and results ofoperations.***

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,purchasing or leasing of items or services payable by Medicare, Medicaid or anyother federal health care program. The Federal Anti-Kickback Statute is verybroad in scope and many of our provisions have not been uniformly ordefinitively interpreted by existing case law or regulations. In addition, mostof the states in which our products are sold have adopted laws similar to theFederal Anti-Kickback Statute, and some of these laws are even broader than theFederal Anti-Kickback Statute in that their prohibitions are not limited toitems or services paid for by a federal health care program but, instead, applyregardless of the source of payment. Violations of the Federal Anti-KickbackStatute may result in substantial civil or criminal penalties and exclusionfrom participation in federal health care 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 

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FederalAnti-Kickback Statute and similar state laws. However, we cannot assure youthat we will not be subject to investigations or litigation alleging violationsof these laws, which could be time-consuming and costly to us and could divertmanagement’s attention from operating our business, which could have a materialadverse effect on our business. In addition, if our arrangements were found toviolate the Federal Anti-Kickback Statute or similar state laws, it could havea material adverse effect on our business and results of operations.

***Our business strategy relies on assumptions about themarket for our products, which, if incorrect, would adversely affect ourbusiness prospects and profitability.***

We are focused on themarket for endovascular devices used to treat vascular diseases and disorders. Webelieve that the aging of the general population and increasingly inactivelifestyles will continue and that these trends will increase the need for our products.However, the projected demand for our products could materially differ fromactual demand if our assumptions regarding these trends and acceptance of ourproducts by the medical community prove to be incorrect or do not materializeor if drug therapies gain more widespread acceptance as a viable alternativetreatment, which in each case would adversely affect our business prospects andprofitability.

***If we experience a delay in the proposed relocation ofour existing manufacturing facility in Irvine, California, the production ofour neurovascular products may be delayed.***

In October 2005, weentered into a lease for approximately 96,400 square feet of new office,manufacturing and research facilities located in Irvine, California. We expectto occupy the new facilities and vacate our existing facilities in Irvine in April 2006.Our new facilities, which include expanded manufacturing capacity compared toour current facility in Irvine, will need to be qualified by regulatoryagencies, including the FDA, prior to us being able to manufacture products atthe new location. If we are not able to complete our relocation in a timelymanner, the production of our neurovascular products may be delayed and our netsales and business could be materially adversely affected.

***Our business, net sales and results of operations maysuffer if we do not pass the required regulatory inspections for our locationsfor manufacturing peripheral stents and our neurovascular products.***

We closed our NewBrighton, Minnesota manufacturing facility in July 2005 and are still inthe process of integrating our manufacturing operations formerly located in NewBrighton, Minnesota, where we manufactured our peripheral stent product line,with our manufacturing operations in Plymouth, Minnesota. In addition, weintend to relocate our existing Irvine, California operations, including ourmanufacturing facility for our neurovascular products, to the new space we haveleased in Irvine. We are required to pass regulatory inspections of the FDA,and possibly other regulatory agencies of countries in which we sell ourproducts, anytime we transfer manufacturing operations to a new location. If wedo not pass these inspections or do not pass them on our expected schedule, wemay not have sufficient inventory of various products, which may result in abacklog of orders, customer dissatisfaction and a reduction in sales. Consequently,our business, net sales and results of operations may suffer. In addition, weare required to submit a pre-market approval supplement application to the FDAfor approval of the change in manufacturing facilities for any devices marketedunder a pre-market approval application. If we do not obtain timely approval ofany required supplement application, our business, net sales and results ofoperations may also be negatively impacted.

***One of our families of products generates a largeportion of our net sales. Our net sales and business prospects would beadversely affected if sales of this product were to decline.***

We are dependent on our Protégé GPS family of stents,which generated approximately 20% of our net sales in fiscal 2005 and more than10% of our net sales in fiscal 2004. If our Protégé GPS stents were to 

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no longer be available forsale in any key market because of regulatory, intellectual property or anyother reason, our net sales from these products and from products thattypically constitute ancillary purchases would significantly decline. Asignificant decline in our net sales could also negatively impact our productdevelopment activities and therefore our business prospects.

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

***We are exposed to product liability claims that couldhave an adverse effect on our business and results of operations.***

The manufacture and saleof medical devices exposes us to significant risk of product liability claims,some of which may have a negative impact on our business. Our existing productswere developed relatively recently and defects or risks that we have not yetidentified may give rise to product liability claims. In addition, we haverecently initiated a new quality control system and a new manufacturing modelwhich has not been in effect long enough for us to have the confidence that anyerrors or mistakes in implementation have been corrected. Our existing productliability insurance coverage may be inadequate to protect us from anyliabilities we may incur or we may not be able to maintain adequate productliability insurance at acceptable rates. If a product liability claim or seriesof claims is brought against us for uninsured liabilities or in excess of ourinsurance coverage and it is ultimately determined that we are liable, ourbusiness could suffer. Additionally, we could experience a material design ormanufacturing failure in our products, a quality system failure, other safetyissues or heightened regulatory scrutiny that would warrant a recall of some ofour products. A recall of some of our products could also result in increasedproduct liability claims. Further, while we train our physician customers onthe proper usage of our products, we cannot ensure that they will implement ourinstructions accurately. If our products are used incorrectly by our customers,injury may result and this could give rise to product liability claims againstus. Any losses that we may suffer from any liability claims, and the effectthat any product liability litigation may have upon the reputation andmarketability of our products, may divert management’s attention from othermatters and may have a negative impact on our business and our results ofoperations.

***Our net sales could decline significantly ifdrug-eluting stents become a dominant therapy in the peripheral vascular stentmarket and we are not able to develop or acquire a drug-eluting stent to marketand 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 to continue to develop and market newproducts and technologies, we may experience a decrease in demand for ourproducts or our products could become obsolete, and our business would suffer.***

We are continually engagedin product development and improvement programs, and new products represent asignificant component of our growth rate. We may not be able to competeeffectively with our competitors unless we can keep up with existing or newproducts and technologies in the endovascular device market. If we do notcontinue to introduce new products and technologies, or if our new products 

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andtechnologies are not accepted, we may not be successful and our business wouldsuffer. Moreover, many of our clinical trials have durations of several yearsand it is possible that competing therapies, such as drug therapies, may beintroduced while our products are still undergoing clinical trials. This couldreduce the potential demand for our products and negatively impact our businessprospects. Additionally, our competitors’ new products and technologies maybeat our products to market, may be more effective or less expensive than ourproducts or render our products obsolete.

***The marketing of our products requires a significantamount of time and expense and we may not have the resources to successfullymarket our products, which would adversely affect our business and results ofoperations.***

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 withphysicians who are not expanding their practice areas. We may not have adequateresources to market our products successfully against larger competitors whichhave more resources than we do. If we cannot market our products successfully,our business and results of operations would be adversely affected.

***We face competition from other companies, many ofwhich have substantially greater resources than we do and may be able todevelop more effective products or offer their products at lower prices than wecan, which could adversely impact our business, net sales and results ofoperations. Consolidation in the medical technology industry would exacerbatethese risks.***

The markets in which we compete are highlycompetitive, subject to change and significantly affected by new productintroductions and other activities of industry participants. The markets forour products are also dominated by a small number of large companies, and weare a much smaller company relative to our primary competitors. Our productscompete with other medical devices, including Invatec manufactured productssold in the United States under other brand names, surgical procedures andpharmaceutical products. A number of the companies in the medical technologyindustry, including manufacturers of peripheral vascular, cardiovascular andneurovascular products, have substantially greater capital resources, largercustomer bases, broader product lines, larger sales forces, greater marketingand management resources, larger research and development staffs and largerfacilities than ours and have established reputations with our targetcustomers, as well as worldwide distribution channels that are more effectivethan ours. In addition, the industry has recently experienced someconsolidation. Consolidation could make the competitive environment moredifficult for smaller companies. Because of the size of the vascular diseasemarket opportunity, competitors and potential competitors have historicallydedicated and will continue to dedicate significant resources to aggressivelypromote their products. New product developments that could compete with usmore effectively are likely because the vascular disease market ischaracterized by extensive research efforts and technological progress. Competitorsmay develop technologies and products that are safer, more effective, easier touse, less expensive or more readily accepted than ours. Their products couldmake our technology and products obsolete or noncompetitive. Our competitorsmay also be able to achieve more efficient manufacturing and distributionoperations than we can and may offer lower prices than we could offerprofitably. We expect that as our products mature, we will be able to produceour products in a more cost effective manner and therefore be able to competemore effectively, but it is possible that we may not achieve such costreductions. Any of these competitive factors could adversely impact ourbusiness, net sales and results of operations.

We also compete with othermanufacturers of medical devices for clinical sites to conduct human trials. Ifwe are not able to locate clinical sites on a timely or cost-effective basis,this could impede our 

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abilityto conduct trials of our products and, therefore, our ability to obtainrequired regulatory clearance or approval.

***We rely on our management information systems forinventory management, distribution and other functions and to maintain ourresearch and development and clinical data. If our information systems fail toadequately perform these functions or if we experience an interruption in theiroperation, our business and results of operations 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;

·       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.

***If we become profitable, we cannot assure you that ournet operating losses will be available 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 initial public offering and in ourrecent transaction with MTI may be sufficient, taking into account prior orfuture shifts in our ownership over a three-year period, to cause us to undergoan ownership change. As a result, our ability to use our existing net operatinglosses that are not currently subject to limitation to offset U.S. federaltaxable income if we become profitable may also become subject to substantiallimitations. Further, the amount of our net operating losses could be reducedif any tax deductions taken by us are limited or disallowed by the InternalRevenue Service. All of these limitations could potentially result in increasedfuture tax liability for us.

***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 February 15, 2006, Warburg Pincusbeneficially owned approximately 66.6% of our outstanding common stock. Thisconcentration of ownership may have the effect of delaying, preventing ordeterring a change in control of our company, could deprive our stockholders ofan opportunity to receive a premium for their common stock as part of a sale ormerger of our company and may negatively affect the market price of our commonstock. Transactions that could be affected by this concentration of ownershipinclude proxy contests, tender offers, mergers or other purchases of commonstock that could give our stockholders the opportunity to realize a premiumover the then-prevailing market price for shares of our common stock.

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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.***

Certain of ourprincipal stockholders, including Warburg Pincus, may make investments incompanies and from time to time acquire and hold interests in businesses thatcompete 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 principal stockholdersmay also pursue acquisition opportunities that may be complementary to ourbusiness and, as a result, those acquisition opportunities may not be availableto us. Furthermore, these principal stockholders may have an interest in uspursuing acquisitions, divestitures, financings or other transactions that, intheir judgment, could enhance their equity investment, even though suchtransactions might involve risks to our stockholders. In addition, theseprincipal stockholders’ rights to vote or dispose of equity interests in us arenot subject to restrictions in favor of us other than as may be required byapplicable law.

***We are a “controlled company” within the meaning ofthe NASDAQ National Market listing requirements and, as a result, are exemptfrom certain corporate governance requirements.***

Because Warburg Pincuscontrols more than 50% of the voting power of our common stock, we areconsidered to be a “controlled company” for the purposes of the NASDAQ listingrequirements. As such, we are permitted, and have elected, to opt out of NASDAQlisting requirements that would otherwise require our board of directors tohave a majority of independent directors, our board nominations to be selected,or recommended for the board’s selection either by a nominating committeecomprised entirely of independent directors or by a majority of our independentdirectors and our compensation committee to be comprised entirely ofindependent directors. Accordingly, you may not have the same protectionsafforded to stockholders of companies that are subject to all of the NASDAQcorporate governance requirements.

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

Provisions in our amended and restated certificate ofincorporation and amended and restated bylaws may discourage, delay or preventa merger or acquisition involving our company that our stockholders mayconsider favorable. For example, our amended and restated certificate ofincorporation authorizes our board of directors to issue up to 100 millionshares of “blank check” preferred stock. Without stockholder approval, theboard of directors has the authority to attach special rights, including votingand dividend rights, to this preferred stock. With these rights, preferredstockholders could make it more difficult for a third party to acquire ourcompany. In addition, our amended and restated certificate of incorporationprovides for a staggered board of directors, whereby directors serve for threeyear terms, with approximately one third of the directors coming up forreelection each year. Having a staggered board makes it more difficult for athird party to obtain control of our board of directors through a proxycontest, which may be a necessary step in an acquisition of our company that isnot favored by our board of directors.

We are also subject to theanti-takeover provisions of Section 203 of the Delaware GeneralCorporation Law. Under these provisions, if anyone becomes an “interestedstockholder,” we may not enter into a “business combination” with that personfor three years without special approval, which could discourage a third partyfrom making a takeover offer and could delay or prevent a change of control. Forpurposes of Section 203, “interested stockholder” means, generally,someone owning 15% or more of our outstanding voting stock or an affiliate ofour company that owned 15% or more of our outstanding voting stock during thepast three years, subject to certain exceptions as described in Section 203.Under one such exception, Warburg Pincus does not constitute an “interestedstockholder.”

***The requirements of being a public company may strainour resources and distract management.***

As a public company, weare subject to the reporting requirements of the Securities Exchange Act of1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, orthe Sarbanes-Oxley Act. These requirements may place a strain on our personnel,systems and resources. The Exchange Act requires, among other things, that wefile annual, quarterly and current reports with respect to our business andfinancial condition. The Sarbanes-Oxley Act requires, among other things, thatwe maintain effective disclosure controls and procedures and internal controlover financial reporting. In order to improve the effectiveness of ourdisclosure controls and procedures and internal control over financialreporting, significant resources and management oversight are required. Thismay divert management’s attention from other business concerns, which couldhave a material adverse effect on our business, financial condition, results ofoperations and cash flows.

***We incur increased costs as a result of being a publiccompany.***

As a public company, weincur significant legal, accounting and other expenses that we did not incur asa private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequentlyimplemented by the Securities and Exchange Commission, or SEC, and NASDAQ, haverequired changes in our corporate governance practices. These rules andregulations have increased our legal and financial compliance costssignificantly and make some activities more time-consuming and costly. Forexample, in anticipation of becoming a public company, we created additionalboard committees and adopted policies regarding internal controls anddisclosure controls and procedures. In addition, we incur additional costsassociated with our public company reporting requirements. We also expect theserules and regulations to make it more difficult and more expensive for usto obtain director and officer liability insurance and we may be required toaccept reduced policy limits and coverage or incur substantially higher coststo obtain the same or similar coverage. As a result, it may be more difficultfor us to attract and retain qualified persons to serve on our board ofdirectors or as executive officers.

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***If we are unable to successfully address the materialweakness in our internal controls, our ability to report our financial resultson a timely and accurate basis may be adversely affected.***

As of December 31, 2005, we did not maintaineffective controls over the preparation, review and presentation and disclosureof our consolidated statement of cash flows. Specifically, we incorrectlyreported an interest payment on demand notes payable as a financing cashout-flow instead of an operating cash out-flow in accordance with generallyaccepted accounting principles. This control deficiency resulted in the restatementof our consolidated financial statements for the quarters ended July 3,2005 and October 2, 2005. Accordingly, management determined that thiscontrol deficiency constitutes a material weakness in our internal control overfinancial reporting as of December 31, 2005. A material weakness is acontrol deficiency or a combination of control deficiencies that results inmore than a remote likelihood that a material misstatement of the annual orinterim consolidated financial statements will not be prevented or detected. Althoughwe have taken steps to remediate the material weakness that existed as of December 31,2005, we cannot assure that this control deficiency will not result in amisstatement in the future. These steps include a thorough review of theclassification requirements of each component line item and the individualelements that comprise each line item of the statement of cash flows, inaccordance with generally accepted accounting principles.

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

Our management and auditcommittee agreed that the conditions identified by our independent registeredpublic accounting firm in their audits of the consolidated financial statementsfor the years ended December 31, 2003 and 2004 constituted a materialweakness. We developed a plan to address this material weakness that includedthe addition of a new chief financial officer, a director of external reportingand additional professional accounting personnel. On an interim basis, weengaged two senior financial consultants in the fourth quarter of 2004 toprovide an immediate expansion in our technical finance and accountingresources. These individuals were retained through June 2005 to ensureadequate time for transition to our new full-time employees. Effective April 2005,we hired a new chief financial officer, who has 19 years of experience in themedical device manufacturing industry working for both public and privatecompanies. We also hired a new controller in April 2005, who came to usfrom a Big Four public accounting firm and has significant experience in bothpublic and private accounting. Our controller oversees external reporting withassistance from a newly hired senior analyst. Our prior controller, who hasbeen with us for approximately four years, has become our Director ofInternational Finance. In May 2005, we added an additional senior stafflevel accounting position. With the addition of these individuals, we believethat we have a sufficient number of skilled personnel to reasonably ensure thatwe have the ability to produce financial statements free from materialmisstatements.****We have alsoengaged a consulting firm to assist us in assessing our internal control overfinancial reporting and remediating any control deficiencies. As a result ofthese measures, we have concluded that the material weakness identified by ourindependent registered public accounting firm in connection with their auditsof our consolidated financial statements for the years ended December 31,2003 and 2004 was fully remediated as of October 2, 2005. However, we willcontinue to assess the adequacy and appropriateness of our financial staff andadjust accordingly as changes in our business warrant.

Wecannot be certain that additional material weaknesses in our internal controlover financial reporting will not be discovered in the future. Any failure toremediate the unremediated material 

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weakness described above or any future materialweaknesses or to implement required new or improved controls, or difficultiesencountered in their implementation, could harm our operating results, cause usto fail to meet our reporting obligations or result in material misstatementsin our consolidated financial statements. Any such failure also could adverselyaffect the results of the periodic management evaluations and annual auditorattestation reports regarding the effectiveness of our “internal control overfinancial reporting” that will be required when the Securities andExchange Commission’s rules under Section 404 of the Sarbanes-OxleyAct become applicable to us beginning with our annual report on Form 10-Kfor the year ending December 31, 2006 to be filed in early 2007. Inadequate internal control over financialreporting could also cause investors to lose confidence in our reportedfinancial information, which could cause our stock price to decline.

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

Changing laws, regulationsand standards relating to corporate governance and public disclosure, includingthe Sarbanes-Oxley Act and related regulations implemented by the SEC andNASDAQ, are creating uncertainty for public companies, increasing legal andfinancial compliance costs and making some activities more time consuming. Wewill be evaluating our internal control over financial reporting to allowmanagement to report on, and our independent registered public accounting firmto attest to, our internal control over financial reporting. We will beperforming the system and process evaluation and testing (and any necessaryremediation) required to comply with the management certification and auditorattestation requirements of Section 404 of the Sarbanes-Oxley Act. Whilewe anticipate being able to fully implement the requirements of Section 404by our December 31, 2006 deadline, we cannot be certain as to the timingof completion of our evaluation, testing and remediation actions or the impactof the same on our operations since there is presently no precedent availableby which to measure compliance adequacy. If we are not able to implement therequirements of Section 404 in a timely manner or with adequatecompliance, we may be subject to sanctions or investigation by regulatoryauthorities, including the SEC or NASDAQ. This type of action could adverselyaffect our financial results or investors’ confidence in us and our ability toaccess capital markets, and could cause our stock price to decline. Inaddition, the controls and procedures that we will implement may not complywith all of the relevant rules and regulations of the SEC and NASDAQ. Ifwe fail to develop and maintain effective controls and procedures, we may beunable to provide the required financial information in a timely and reliablemanner.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

Not applicable.

**ITEM 2.**                PROPERTIES

Our corporate headquarters is located in Plymouth,Minnesota. Our peripheral vascular and cardiovascular businesses areheadquartered 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 is primarily located in Irvine, California. Outside the United States,our European headquarters is in Paris, France, and includes our sales andmarketing, and administrative activities. Our European warehouse facilities arelocated 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. In the Pacific Rim, we havesales and distribution facilities in Tokyo, Japan.

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Our manufacturing,research and development functions operate from a 64,000 square feet facilityin Plymouth, Minnesota. The Plymouth property is subject to a lease thatextends to October 31, 2009. In August 2005, we entered into a leasefor approximately 31,718 square feet of additional space for our corporateheadquarters in Plymouth, Minnesota. This lease has a term of 52 monthscommencing on November 1, 2005. We also occupy an approximately 43,000square feet facility in Irvine, California, which is subject to amonth-to-month lease. In October 2005, we entered into a lease forapproximately 96,400 square feet of space in Irvine, California to which weintend to relocate the manufacturing and research and development functionsassociated with our neurovascular business in April 2006. The lease has aterm of five years commencing on the date that the landlord substantiallycompletes certain improvements to the premises, and we will have the option toextend the lease for an additional six years. Our distribution center in theUnited States is located in Brooklyn Park, Minnesota and occupies 16,000 squarefeet. Our European warehouse facility in Maastricht, Netherlands occupies 6,900square feet and we also have a smaller warehouse facility 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. Theopposition proceedings with the EPO on the one patent are complete, and the EPOhas rejected the opposition and has upheld the validity of the one patent. Dendronretains the right to file a nullity action in Germany against the patent. Allthree Appeal proceedings are currently stayed on the basis of the validitychallenges 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 hasnow filed a domestic German nullity action against that patent. Theinfringement case is under appeal. The appeal has been stayed pending theoutcome of the nullity action filed against the patent.

An accrual for the matters discussed above was includedin the balance sheet of Dendron as of the date of its acquisition by MTI. As ofDecember 31, 2005, approximately $800 thousand was recorded in accruedliabilities in our consolidated financial statements included in this annualreport on Form 10-K. Dendron ceased all activities with respect tothe EDC I coil device prior to MTI’s October 2002 acquisition of Dendron.

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Concurrent with its acquisition of Dendron, MTIinitiated a series of legal actions related to its 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 MTI’s 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, MTI has been enjoined from engaging in infringingactivities related to the Sapphire coils in most countries within the EuropeanUnion, and may be liable for then-unspecified monetary damages for activitiesengaged in by MTI since September 27, 2002. In February 2005, MTIreceived an initial claim from the patent holders with respect to monetarydamages, amounting to €3.6 million, orapproximately $4.3 million as of December 31, 2005, with which we disagree.Court hearings will be held regarding these claims. MTI has filed an appealwith the Dutch court, and believes that since the date of injunction in eachseparate country it is in compliance with the Dutch court’s injunction and MTIintends to continue such compliance. Because we believe that MTI has validlegal grounds for appeal, we have determined that a loss is not probable atthis time as defined by SFAS 5, 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, MTI initiated a legal action inthe English Patents Court seeking a declaration that a patent held by the patentholders related to delivery catheters was invalid, and that MTI’s products didnot infringe this patent. The patent in question was the U.K. designation ofthe same patent that was found by the Dutch court in October 2003 to beinvalid, as discussed above. The patent holders counterclaimed for allegedinfringement by MTI. In February 2005, the court approved an interimsettlement between the parties under which the patent holders are required tosurrender such patent to the U.K. Comptroller of Patents, and to pay MTI’scosts associated with the legal action, including interest. As a result, MTIreceived interim payments from the patent holders aggregating £500 thousand(equivalent to approximately $900 thousand based on the dates of receipt),which MTI recorded as a reduction of litigation expense upon receipt of suchfunds in February and March 2005. The parties intend to continuediscussions regarding payment by the patent holders of the remaining costsincurred by MTI in such litigation and a court hearing on these costs isexpected in June 2006. As a result of the interim settlement, weanticipate that MTI will no longer be involved in litigation on this matter inthe United Kingdom, although no assurance can be given that no other litigationinvolving MTI may arise in the United Kingdom.

In the United States, concurrent with the FDA’smarketing clearance of the Sapphire line of embolic coils received in July 2003,MTI initiated a declaratory judgment action against the patent holders in theUnited States District Court for the Western District of Wisconsin. The actionincluded assertions of non-infringement by MTI and invalidity of a rangeof patents held by the patent holders related to detachable coils and certaindelivery catheters. In October 2003, the court dismissed MTI’s 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 MTI in the United States District Court for theNorthern District of California alleging infringement by MTI with respect to arange of patents held by the University of California related to detachablecoils and certain delivery systems. MTI filed a counterclaim against theUniversity of California asserting non-infringement by MTI, invalidity of thepatents and inequitable conduct in the procurement of certain patents. Inaddition, MTI filed a claim against the University of California and BostonScientific Corporation for violation of federal antitrust 

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laws, with the result thatthe court has subsequently decided to add Boston Scientific as a party to thelitigation. Cross-motions for summary judgment on MTI’s inequitable conductclaim have been briefed and are pending before the court. A trial date has notbeen set. Because these matters are in early stages, we cannot estimate thepossible loss or range of loss, if any, associated with their resolution. However,there can be no assurance that the ultimate resolution of these matters willnot result in a material adverse effect on our business, financial condition orresults of operations.

In March 2005, Medtronic, Inc. contacted usto express its view that our Protégé stents infringe on one or more of itspatents. We informed Medtronic that we disagreed with Medtronic’s assertions,and subsequently had several discussions with Medtronic. No lawsuit withrespect to this matter has been filed.

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. Wehave answered the complaint and now both parties are seeking to introduce newclaims into the case. Boston Scientific is seeking to add a claim formisappropriation of trade secrets, and we are seeking to add counterclaims forpatent infringement of two of our own patents. We intend to vigorously defendthis action. Because these matters are in early stages, we cannot estimate thepossible loss or range of loss, if any, associated with their resolution. However,there can be no assurance that the ultimate resolution of these matters willnot result in a material adverse effect on our business, financial condition orresults of operations.

The acquisition agreement relating to our acquisitionof Appriva Medical, Inc. contains four milestones to which payments relate.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 and otherunspecified damages for several allegations, including that we, along withother defendants, breached the acquisition agreement and an implied covenant ofgood faith and fair dealing by willfully failing to take the steps necessary tomeet the first milestone under the agreement, and thereby also failing to meetcertain other milestones, and further that one milestone was actually met. Thecomplaint also alleges fraud, negligent misrepresentation and violation ofstate securities laws in connection with the negotiation of the acquisitionagreement. We believe these allegations are without merit and intend tovigorously defend this action. We filed a motion to dismiss the complaint. Ahearing was held on this motion in January 2006 after which the court tookthe motion under advisement. Theparties have not engaged in any discovery.

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 asformer shareholders 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 have filed a motion to dismiss the complaint, which is scheduled fora hearing on March 27, 2006. The parties have not engaged in anydiscovery.

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 

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that the ultimateresolution of these matters will not result in a material adverse effect on ourbusiness, financial condition or results of operations.

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 the transaction with MTI. We believe this lawsuit is without meritand plan to defend it vigorously. 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, 2005.

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**PART II**

**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 NASDAQNational Market under the symbol “EVVV.” Our common stock has traded on the NASDAQ National Market since the dateof our initial public offering on June 16, 2005.

Thefollowing table sets forth, in dollars and cents (in lieu of fractions), thehigh and low daily sales prices for our common stock, as reported by the NASDAQNational Market, for each fiscal quarter on which our common stock was listedfor trading on NASDAQ.

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

 

**Number of Record Holders; Dividends**

As of February 15,2006, there were 68 record holders of our common stock. To date, we have notdeclared or paid any cash dividends on our common stock.

**RecentSales of Unregistered Equity Securities**

During the fourth quarterended December 31, 2005, we did not issue or sell any equity securitieswithout registration under the Securities Act of 1933, as amended.

**Use of Proceeds**

On June 15, 2005, our registration statement on Form S-1(Registration No. 333-123851) was declared effective. Our initialpublic offering resulted in gross proceeds to us of $167.6 million. Expensesrelated to the initial public offering were as follows:  approximately$8.4 million for underwriting discounts and commissions and approximately $4.2million for other expenses, for total expenses of approximately $12.6 million. Noneof the offering expenses resulted in direct or indirect payments to any of ourdirectors, officers or their associates, to persons owning 10% or more of ourcommon stock or to any of our affiliates. All of the offering expenses werepaid to others.

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-allotment option.As of December 31, 2005, the proceeds from our initial public offering andavailable cash were used as follows:  $36.5 million of the net proceedswere used to repay a portion of the accrued and unpaid interest on demand notes,$47.2 million for general corporate purposes and the remaining net proceedswere invested in short-term, investment-grade, interest bearing securities. Wecannot predict whether the proceeds will yield a favorable return. Other than$36.5 million of the net proceeds used to repay a portion of the accrued andunpaid interest on demand notes held by Warburg Pincus, which is our majoritystockholder, and Vertical Group, which is one of our stockholders, none of thenet proceeds from our initial public offering have resulted in direct orindirect payments to directors, officers or their associates, to persons whoowned 10% or more of our common stock or to any of our affiliates.

We expect to use theremaining $71.2 million in net proceeds from our initial public offering forgeneral corporate purposes. Our management has broad discretion as to the useof the net proceeds. We may use a portion of the net proceeds for theacquisition of, or investment in, technologies or products that 

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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.

**IssuerPurchases of Equity Securities**

We did not purchase anyshares of our common stock or other equity securities of ours registeredpursuant to Section 12 of the Securities Exchange Act of 1934, as amended,during the fourth quarter ended December 31, 2005. Our Board of Directorshas not authorized any repurchase plan or program for purchase of our shares ofcommon stock or other equity securities on the open market or otherwise, otherthan in connection with the cashless exercise of outstanding stock options.

**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,**                                                   | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                      | ** ** | **(dollars in thousands, except per unit and per share amounts)** | ** ** |
| **Results of Operations:**                                      |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Net sales                                                       |       | $                                                                                                              | 133,696    |   | $ | 86,334 |   | $ | 67,639 |   | $ | 37,084 |   | $ | 13,318 |   |
| Operating expenses:                                             |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                              |       | 55,094                                                                                                         |       | 39,862 |   | 30,218 |   | 16,930 |   | 5,797 |   |
| Sales, general and administrative                               |       | 130,427                                                                                                        |       | 103,031 |   | 82,479 |   | 48,139 |   | 15,773 |   |
| Research and development                                        |       | 39,280                                                                                                         |       | 38,917 |   | 45,145 |   | 32,994 |   | 9,609 |   |
| Amortization of intangible assets                               |       | 10,673                                                                                                         |       | 9,863 |   | 12,078 |   | 17,370 |   | 2,287 |   |
| (Gain) loss on sale of assets, net                              |       | 200                                                                                                            |       | (14,364 | ) | 14 |   | — |   | — |   |
| Acquired in-process research and development                    |       | 868                                                                                                            |       | — |   | 488 |   | 104,192 |   | 16,668 |   |
| Total operating expenses                                        |       | 236,542                                                                                                        |       | 177,309 |   | 170,422 |   | 219,625 |   | 50,134 |   |
| Loss from  operations                                           |       | (102,846                                                                                                       | )          | (90,975 | ) | (102,783 | ) | (182,541 | ) | (36,816 | ) |
| Other (income) expense:                                         |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Gain on sale of investments, net                                |       | (4,611                                                                                                         | )          | (1,728 | ) | (3,409 | ) | (7,386 | ) | — |   |
| Interest (income) expense, net                                  |       | 9,916                                                                                                          |       | 25,428 |   | 12,673 |   | 1,123 |   | — |   |
| Equity loss of investee                                         |       | —                                                                                                         |       | — |   | — |   | 2,160 |   | 8,363 |   |
| Minority interest in loss of subsidiary                    |       | (2,013                                                                                                         | )          | (13,846 | ) | (3,808 | ) | (13,258 | ) | (6,516 | ) |
| Other (income) expense, net                                     |       | 3,360                                                                                                          |       | (1,752 | ) | (1,606 | ) | (172 | ) | 353 |   |
| Loss before  income taxes                                       |       | (109,498                                                                                                       | )          | (99,077 | ) | (106,633 | ) | (165,008 | ) | (39,016 | ) |
| Income tax  expense (benefit)                                   |       | 526                                                                                                            |       | 196 |   | 303 |   | 172 |   | (1,222 | ) |
| Net loss                                                        |       | (110,024                                                                                                       | )          | (99,273 | ) | (106,936 | ) | (165,180 | ) | (37,794 | ) |
| Accretion of  preferred membership units to redemption value(1) |       | 12,061                                                                                                         |       | 23,826 |   | 7,651 |   | — |   | — |   |
| Net loss  attributable to common unit/share holders             |       | $                                                                                                              | (122,085   | ) | $ | (123,099 | ) | $ | (114,587 | ) | $ | (165,180 | ) | $ | (37,794 | ) |
| Net loss per common  unit/share(2):                             |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                               |       | $                                                                                                              | (4.48      | ) | $ | (57.44 | ) | $ | (130.67 | ) | $ | (224.49 | ) | $ | (68.46 | ) |
| Weighted average  units/shares outstanding:                     |       |                                                                                                           |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                               |       | 27,242,712                                                                                                     |       | 2,142,986 |   | 876,894 |   | 735,786 |   | 552,086 |   |

 

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| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                        | ** ** | **(dollars in thousands)**  | ** ** |
| **Balance Sheet Data:**                                           | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                        |       | $                                     | 69,592     |   | $ | 20,131 |   | $ | 23,625 |   | $ | 4,174 |   | $ | 44,690 |   |
| Short-term  investments                                           |       | 12,000                                |       | — |   | — |   | — |   | — |   |
| Current assets                                                    |       | 151,675                               |       | 68,609 |   | 58,687 |   | 24,565 |   | 54,345 |   |
| Total assets                                                      |       | 296,828                               |       | 212,046 |   | 207,023 |   | 184,397 |   | 112,360 |   |
| Current  liabilities excluding  demand notes                      |       | 37,671                                |       | 36,025 |   | 32,379 |   | 32,513 |   | 13,958 |   |
| Demand notes  payable-related parties                             |       | —                                |       | 299,453 |   | 213,033 |   | 108,199 |   | — |   |
| Total liabilities                                                 |       | 38,523                                |       | 336,180 |   | 250,676 |   | 141,706 |   | 14,577 |   |
| Preferred  membership units                                       |       | —                                |       | 254,028 |   | 230,202 |   | 204,513 |   | 94,216 |   |
| Total members’ and  stockholders’ equity (deficit) |       | 245,455                               |       | (394,472 | ) | (285,672 | ) | (183,015 | ) | (26,998 | ) |
|                                                                   |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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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 the right to receiveone share of our common stock and did not receive any additional rights withrespect to the liquidation preference. As a result, no further accretionrelated to these preferred units will be recorded.

(2)          Net loss per commonunit/share and number of units/shares used in per unit/share calculationsreflect our June 21, 2005 one for six reverse stock split for all periodspresented.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

This Management’sDiscussion and Analysis provides material historical and prospectivedisclosures intended to enable investors and other users to assess our financialcondition and results of operations. Statements that are not historical areforward-looking and involve risks and uncertainties discussed under the heading“Item 1. Business—Forward-Looking Statements” of this report. The followingdiscussion of our results of operations and financial condition should be readin conjunction with our financial statements and the related notes theretoincluded elsewhere in this report.

**Overview**

We are a global medical device company focused oncatheter-based, or endovascular, technologies for the minimally invasivetreatment of vascular diseases and disorders. Our broad product portfolio isfocused on applications in each of the three sub-markets of the endovasculardevice market: peripheral vascular, cardiovascular and neurovascular. We sellover 100 products consisting of over 1,000 SKUs in these markets. From 2000 to2002, our investor group acquired certain of the assets in our cardioperipheral division to build the foundation of our current peripheral andcardiovascular product portfolios. During this period, our investor group alsopurchased certain neurovascular assets to expand our neurovascular productportfolio and, through a series of investments, obtained a controllinginvestment in Micro Therapeutics, Inc., or MTI. MTI was previously ourmajority owned subsidiary, with the remaining shares being publicly held. In January 2006,we acquired the shares of MTI’s common stock not owned by us, as a result ofwhich MTI became our wholly owned subsidiary. (See Note 23 in the notes to theconsolidated financial statements). We have dedicated significant capital andmanagement effort to advance our acquired technologies and broaden our productlines in order to execute our strategies.

We have corporate infrastructure and direct salescapabilities in the United States, Canada, Europe and Japan and haveestablished distribution relationships in other large international markets. 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 primaryoffices are in Paris, France and Tokyo, Japan. During the year ended December 31,2005, approximately 46.3% of our net sales were generated outside of the UnitedStates, as a result of which we are sensitive to risks related to fluctuationin exchange rates, which could affect our business results in the future.

Since our inception, we have focused on building ourU.S. and international direct sales and marketing infrastructure that includesa worldwide sales force of approximately 210 representatives, including thoseof MTI, as of December 31, 2005 in the United States, Canada, Europe andJapan. Our direct sales representatives accounted for approximately 87% of ournet sales during the year ended December 31, 2005, with the balancegenerated by independent distributors. In 2004, we increased our U.S. directsales force from 56 to 94. In 2005, our U.S. direct sales force grew to 99. Inorder to drive sales growth, we have invested heavily throughout our history innew product development, clinical trials to obtain regulatory approvals and theexpansion of our global distribution system. As a result, our costs andexpenses have significantly exceeded our net sales, resulting in an accumulateddeficit of $562.2 million at December 31, 2005. Consequently, we havefinanced our operations through debt and equity offerings. We expect tocontinue to generate operating losses for at least the next 12 months.

Our cash, cash equivalents and short-term investmentsavailable to fund our current operations were $81.6 million at December 31,2005. 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 and commissions 

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and offering expenses. Weused $36.5 million of these net proceeds to repay a portion of the accrued andunpaid interest on certain demand notes held by Warburg, Pincus Equity Partners,L.P. and certain of its affiliates, which we refer to collectively as WarburgPincus, and The Vertical Group L.P. and certain of its affiliates, which werefer 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 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. We expect our cash balances to decrease as we continue to usecash to fund our operations. We do not have any debt for borrowed money. Webelieve our cash, cash equivalents and short-term investments will besufficient to meet our liquidity requirements through at least the next 12months.

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 to originatethese new products primarily through our internal research and development andclinical efforts, but we may supplement them with acquisitions or otherexternal collaborations. Additionally, our growth has been, and will continueto be, impacted by our expansion into new geographic markets and the expansionof our direct sales organization in existing geographic markets.

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 cardiovascular and peripheral vascular procedures bycardiologists, radiologists and vascular surgeons. Our neurovascular segmentcontains products that are used primarily by neuro-radiologists andneurosurgeons. Our sales activities and operations are aligned closely with ourbusiness segments. We generally have dedicated cardio peripheral sales teams inthe United States and Europe that target customers who often perform proceduresin both anatomic areas (cardiovascular and peripheral vascular). We generallyhave separate, dedicated neurovascular sales teams in the United States andEurope that are specifically focused on this customer base. Our neurovascularoperations are substantially comprised of our interest in MTI, which was amajority-owned subsidiary of ours as of December 31, 2005 and subsequentlybecame our wholly owned subsidiary, as described below. We consolidate MTI foraccounting purposes. Approximately 41.9% of our net sales and 6.0% of our netlosses in 2005 were attributable to MTI.

ev3 LLC was formed in September 2003 to hold theownership interests of Warburg Pincus and The Vertical Group in both ev3Endovascular, Inc. and Micro Investment, LLC, a specially formed limitedliability company which then held the majority interest in MTI. Immediatelyfollowing the formation, ev3 LLC owned 100% of ev3 Endovascular and, indirectlythrough its 100% interest in Micro Investment, LLC, a majority interest in MTI.Following the formation of ev3 LLC, Warburg Pincus and The Vertical Grouppurchased directly additional interests in MTI that constituted 20.0% of MTI’scommon stock. On January 28, 2005, we were formed as a subsidiary of ev3 LLC.On May 26, 2005, Warburg Pincus and The Vertical Group contributed all of theshares of MTI common stock directly owned by them to ev3 LLC in exchange forcommon membership units. Immediately prior to the consummation of ev3 Inc.’sinitial public offering on June 21, 2005, ev3 LLC merged with and into us, andwe became the holding company for all of ev3 LLC’s subsidiaries.

As the controlling stockholder of both ev3 LLC andMTI, the contribution to ev3 LLC of the MTI shares by Warburg Pincus,representing a 15.7% interest in MTI as of May 26, 2005, was accounted foras a transfer of assets between entities under common control resulting in theretention of historical based accounting. Our consolidated financial statementsincluded in this report give effect to the contribution of MTI shares owned byWarburg Pincus as though such contribution occurred in 2003 and 2004 when 

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Warburg Pincus acquiredits interest in MTI. The contribution to ev3 LLC of the MTI shares owned by TheVertical Group was accounted for under the purchase method of accounting on thecontribution date. The following results of operations data include thefinancial results of MTI, which we consolidate for accounting purposes but wasnot wholly owned as of December 31, 2005. The consolidation of MTI foraccounting purposes results in all of MTI’s assets and liabilities beingincluded in our consolidated balance sheets.

Immediately prior to the consummation of our initialpublic offering, we completed a one-for-six reverse stock split of ouroutstanding common stock. All share and per share amounts for all periodspresented in this report reflect this split.

On January 6, 2006,we acquired the outstanding shares of MTI that we did not already own through amerger of Micro Investment, LLC, our wholly owned subsidiary, with and intoMTI, with MTI continuing as the surviving corporation and a wholly ownedsubsidiary of ev3 Inc. In connection with the merger, we issued approximately7.0 million new shares of our common stock to MTI’s public stockholders andassumed all of the outstanding options to purchase MTI common stock under MTI’sstock option plans. See Note 23 to our consolidated financial statementsincluded elsewhere in this report.

**Sales and Expense Components**

The following is a description of the primary componentsof 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 rather than at shipment. We charge our customers forshipping and record shipping income as part of net sales.

*Cost of goods sold.*   Wemanufacture a substantial majority of the products that we sell. Our cost ofgoods sold consists primarily of direct labor, allocated manufacturingoverhead, raw materials, components and royalties and excludes amortization ofintangible assets, which is presented as a separate component of operatingexpenses.

*Sales, general and administrative expenses.*   Ourselling and marketing expenses consist primarily of sales commissions andsupport costs for our global, direct distribution system, royalty and consultingexpenses associated with our medical advisors, marketing costs, freight expensethat we pay to ship products to customers and facility costs, including anycosts related to closing facilities. General and administrative expensesconsist primarily of salaries and benefits, compliance systems, accounting,finance, legal, information technology and human resources.

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

*Amortization of intangible assets.*   Intangibleassets, such as purchased completed technology, distribution channels,intellectual property, including trademarks and patents, are amortized overtheir estimated useful lives. Intangible assets are amortized over periodsranging from 5 to 8 years.

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

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*Acquired in-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.

*Gain on sale or disposal of investments, net.*   Gainon sale 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 fromour principal investors, Warburg Pincus and The Vertical Group, and interestearned on investments in investment-grade, interest-bearing securities.

*Minority interest 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 ofcertain other expenses.

*Income tax expense.*   Incometax expense is generated in certain of our European subsidiaries. Due to our historyof operating losses, we have not recorded a provision for U.S. income taxesthrough 2005.

*Accretionof preferred membership 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 of Operations**

The following table setsforth, for the periods indicated, our results of operations expressed as dollaramounts (in thousands), and the changes between the specified periods expressedas percent increases or decreases:

| ** **                                                            | ** ** | **For the Year Ended**December 31, | ** ** | **Percent** | ** ** | **For the Year Ended**December 31, | ** ** | **Percent** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------|------------|--------------------------------------------------------|------------|-------------|------------|
| **Results of Operations:**                                  | ** ** | ** **                                             | ** ** | **2005**    | ** ** | **2004**                                               | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                                                      | 133,696    |        | $          | 86,334                                                 |       |        | 54.9       | % |   | $ | 86,334 |   | $ | 67,639 |   |   | 27.6 | % |   |
| Operating expenses:                                                   |       |                                                   |       |        |       |                                                   |       |        |       |   |   |   |   |   |   |   |   |
| Cost of goods sold                                                    |       | 55,094                                                 |       | 39,862      |       |                                                   | 38.2       | %           |       | 39,862 |   | 30,218 |   |   | 31.9 | % |   |
| Sales, general and  administrative                                    |       | 130,427                                                |       | 103,031     |       |                                                   | 26.6       | %           |       | 103,031 |   | 82,479 |   |   | 24.9 | % |   |
| Research and development                                              |       | 39,280                                                 |       | 38,917      |       |                                                   | 0.9        | %           |       | 38,917 |   | 45,145 |   |   | (13.8 | )% |   |
| Amortization of  intangible assets                                    |       | 10,673                                                 |       | 9,863       |       |                                                   | 8.2        | %           |       | 9,863 |   | 12,078 |   |   | (18.3 | )% |   |
| (Gain) loss on sale of  assets, net                                   |       | 200                                                    |       | (14,364     | )          |                                                   | NM         |        |       | (14,364 | ) | 14 |   |   | NM |   |   |
| Acquired in-process  research and  development                   |       | 868                                                    |       | —      |       |                                                   | NM         |        |       | — |   | 488 |   |   | NM |   |   |
| Total operating expenses                                              |       | 236,542                                                |       | 177,309     |       |                                                   | 33.4       | %           |       | 177,309 |   | 170,422 |   |   | 4.0 | % |   |
| Loss from operations                                                  |       | (102,846                                               | )          | (90,975     | )          |                                                   | 13.0       | %           |       | (90,975 | ) | (102,783 | ) |   | (11.5 | )% |   |
| Other (income) expense:                                               |       |                                                   |       |        |       |                                                   |       |        |       |   |   |   |   |   |   |   |   |
| Gain on sale of  investments, net                                     |       | (4,611                                                 | )          | (1,728      | )          |                                                   | 166.8      | %           |       | (1,728 | ) | (3,409 | ) |   | (49.3 | )% |   |
| Interest expense, net                                                 |       | 9,916                                                  |       | 25,428      |       |                                                   | (61.0      | )%          |       | 25,428 |   | 12,673 |   |   | 100.6 | % |   |
| Minority interest in  loss of subsidiary                         |       | (2,013                                                 | )          | (13,846     | )          |                                                   | NM         |        |       | (13,846 | ) | (3,808 | ) |   | NM |   |   |
| Other (income) expense,  net                                          |       | 3,360                                                  |       | (1,752      | )          |                                                   | NM         |        |       | (1,752 | ) | (1,606 | ) |   | 9.1 | % |   |
| Loss before income taxes                                              |       | (109,498                                               | )          | (99,077     | )          |                                                   | 10.5       | %           |       | (90,077 | ) | (106,633 | ) |   | (7.1 | )% |   |
| Income tax expense                                                    |       | 526                                                    |       | 196         |       |                                                   | 168.4      | %           |       | 196 |   | 303 |   |   | (35.3 | )% |   |
| Net loss                                                              |       | (110,024                                               | )          | (99,273     | )          |                                                   | 10.8       | %           |       | (99,273 | ) | (106,936 | ) |   | (7.2 | )% |   |
| Accretion of preferred  membership units  to redemption value(1) |       | 12,061                                                 |       | 23,826      |       |                                                   | NM         |        |       | 23,826 |   | 7,651 |   |   | NM |   |   |
| Net loss attributable to  common unit/share  holders             |       | $                                                      | (122,085   | )           | $          | (123,099                                               | )          |        | (0.8       | )% |   | $ | (123,099 | ) | $ | (114,587 | ) |   | 7.4 | % |   |
|                                                                       |            |                                                        |            |             |            |                                                        |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The accretion of preferredmembership units to redemption value presented above is based on the rights towhich the Class A and Class B preferred membership unit holders ofev3 LLC were entitled related to a liquidation, dissolution or winding up ofev3 LLC. Notwithstanding this accretion right, in connection with the merger ofev3 LLC with and into us, each membership unit representing a preferred equityinterest in ev3 LLC was converted into the right to receive one share of ourcommon stock and did not receive any additional rights with respect to theliquidation preference. As a result, no further accretion related to thesepreferred units will be recorded.

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

| ** **                              | ** ** | **For the Year Ended  December 31,** | ** ** | **Percent** | ** ** | **For the Year Ended  December 31,** | ** ** | **Percent** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|----------------------------------------------------------|------------|-------------|------------|
| **NET SALES BY SEGMENT** | ** ** | ** **                                               | ** ** | **2005**    | ** ** | **2004**                                                 | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| Cardio Peripheral                       |       | $                                                        | 79,881     |        | $          | 52,942                                                   |       |        | 50.9       | % |   | $ | 52,942 |   | $ | 45,431 |   |   | 16.5 | % |   |
| Neurovascular                           |       | 53,815                                                   |       | 33,392      |       |                                                     | 61.2       | %           |       | 33,392 |   | 22,208 |   |   | 50.4 | % |   |
| Total                                   |       | $                                                        | 133,696    |        | $          | 86,334                                                   |       |        | 54.9       | % |   | $ | 86,334 |   | $ | 67,639 |   |   | 27.6 | % |   |
|                                         |            |                                                          |            |             |            |                                                          |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                | ** ** | **For the Year Ended**December 31 | ** ** | **Percent** | ** ** | **For the Year Ended**December 31 | ** ** | **Percent** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-------------|------------|-------------------------------------------------------|------------|-------------|------------|
| **NET SALES BY GEOGRAPHY** | ** ** | ** **                                            | ** ** | **2005**    | ** ** | **2004**                                              | ** ** | **Change**  | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
| United States                             |       | $                                                     | 71,848     |        | $          | 42,791                                                |       |        | 67.9       | % |   | $ | 42,791 |   | $ | 37,616 |   |   | 13.8 | % |   |
| International                             |       |                                                  |       |        |       |                                                  |       |        |       |   |   |   |   |   |   |   |   |
| Before foreign exchange impact            |       | 62,051                                                |       | 43,543      |       |                                                  | 42.5       | %           |       | 40,835 |   | 30,023 |   |   | 36.0 | % |   |
| Foreign exchange impact                   |       | (203                                                  | )          | —      |       |                                                  | —     |        |       | 2,708 |   | — |   |   | — |   |   |
| Total                                     |       | 61,848                                                |       | 43,543      |       |                                                  | 42.0       | %           |       | 43,543 |   | 30,023 |   |   | 45.0 | % |   |
| Total                                     |       | $                                                     | 133,696    |        | $          | 86,334                                                |       |        | 54.9       | % |   | $ | 86,334 |   | $ | 67,639 |   |   | 27.6 | % |   |
|                                           |            |                                                       |            |             |            |                                                       |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

*Net sales.*   Netsales increased 54.9% to $133.7 million in 2005 compared to $86.3 million in2004, primarily as a result of new product introductions and the expansion ofour distribution system during 2005. Our U.S. direct sales force was increasedfrom 56 persons at the beginning of 2004 to 94 persons at the beginning of2005, 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. We expect our cardio peripheral net sales to increase in2006 as a result of market growth, further market penetration by productslaunched during 2005, as well as the introduction of new products during 2006.

*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. 

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Also contributing are theFDA approval and United States launch of the Onyx liquid embolic system for thetreatment of brain AVMs in July 2005 and volume increases in the Onyxliquid embolics internationally. Sales of our neuro access and deliveryproducts increased 50.7% to $31.3 million in 2005 compared to 2004 largely as aresult of volume increases across multiple product lines, including the Echelonmicrocatheters, the Marathon microcatheter, and the HyperForm and HyperGlideocclusion balloon systems. Sales of our embolic products increased 78.5% to$22.5 million in 2005 compared to 2004 primarily due to the July 2005 U.S.launch of the Onyx liquid embolics for the treatment of brain AVMs, volumeincreases in the Onyx liquid embolics internationally and volume increases inthe NXT family of embolic coils. We expect our neurovascular sales to increasein 2006 due to market growth and additional market penetration by productslaunched during 2005.

*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 millionwhich represented 51.1% of the total international net sales growth, with theremainder coming from our distribution operations in the Asia Pacific marketand our direct sales force operations in Japan. The sales growth in ourinternational markets was primarily a result of new product introductions andincreased penetration.

*Cost of goods sold.*   Costof goods sold increased 38.2% to $55.1 million in 2005 compared to $39.9million in 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. We expect cost of goodssold as a percentage of net sales to continue to decline during 2006 due tohigher volume in our manufacturing facilities, the continued benefit ofbringing certain stent component manufacturing in-house and efficiencyimprovements from manufacturing initiatives.

*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. We expect sales, general and administrative expenses to increaseslightly but continue to decline as a percentage of net sales as we believethat our current infrastructure can support a higher level of sales.

*Research and development.*   Researchand development expense increased 1.0% 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. We expect research anddevelopment spending to decline in both 

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gross dollars and asa percentage of net sales as the enrollment in several clinical trials wascompleted during 2005.

*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. We expect the amortization of intangibles assets toincrease during 2006 as a result of an estimated $8.0 million of amortizationrelated to intangibles capitalized in conjunction with our acquisition of thepublic minority stake in MTI.

*(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 $14.5 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 5 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. In2006, we expect to incur a charge of an estimated $2.0 million for acquiredin-process research and development as a result of our acquisition of thepublic minority stake in MTI.

*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 $900 thousandmilestone payment related to our 2002 sale of our investment in Enteric MedicalTechnologies, Inc. In 2004, we received a $1.7 milestone payment relatingto our 2002 sale of our investment in Enteric Medical Technologies, Inc.

*Interest(income) expense, net.*   Interest (income)expense, net is 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. During2004, we recorded a $6.8 million charge related to beneficial conversionfeatures arising from the minority interests’ participation in two financingsof MTI during 2004 which did not re-occur during 2005. Our outstanding debtbalance was converted into common stock in connection with our initial publicoffering in June 2005, which caused the remaining decrease in interestexpense. We also generated approximately $2.5 million of interest income during2005 from investing the net proceeds of our initial 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 related to certain of our Europeansales offices. We recorded no provision for U.S. income taxes in 2005 or in2004 due to our history of operating losses.

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*Accretionof preferred membership units to redemption value.*   Accretionof preferred membership units to redemption value decreased 49.4% to $12.1million in 2005 compared to $23.8 million in 2004 due to the conversion of thepreferred membership units into common membership units, and subsequently intoshares of common stock, on June 21, 2005 in connection with the merger ofev3 LLC with and into us immediately prior to our initial public offering.

***Comparison of the Year Ended December 31, 2004 tothe Year Ended December 31, 2003***

*Net sales.*   Netsales increased 27.6% to $86.3 million in 2004 compared to $67.6 million in2003, primarily as a result of new product introductions and the expansion ofour distribution system during 2004. We increased our U.S. direct sales forcefrom 56 persons at the beginning of 2004 to 94 persons at the end of 2004 withmost of the growth occurring in the fourth quarter of 2004. The sales forceexpansion is primarily to support new product introductions that began in late2004. We introduced a total of four new products from October 1, 2004 to December 31,2004 in either the U.S. or international markets.

*Net sales of cardio peripheral products.*   Netsales of cardio peripheral products increased 16.5% to $52.9 million in 2004compared to $45.4 million in 2003. This sales growth was primarily the resultof new product introductions and the expansion of our U.S. sales force in thefourth quarter as described above, partially offset by sales declines in oldergeneration products. Key new product launches during the year included theProtégé and ParaMountTM MiniTM stents, SpideRX embolic protection system, X-Sizerthrombectomy catheter system and AqWireTM guidewires.

Net sales in our stent product line increased 26.5% to$20.5 million in 2004 compared to $16.2 million in 2003. This increase isattributable to the introduction of the Protégé and ParaMount Mini families ofstents into the U.S. and international markets during 2004, partially offset bysales declines in older generation products. Net sales of our thrombectomy andembolic protection devices increased $2.2 million in 2004 largely due to theintroduction of the SpideRX internationally and the introduction of the X-Sizerin the United States in late 2004. The introduction of our AqWire guidewireduring 2004 and the expansion of our sales force helped drive a $1.0 millionincrease in net sales of our procedural support products in 2004.

*Net sales of neurovascular products.*   Netsales of our neurovascular products increased 50.4% to $33.4 million in2004 compared to $22.2 million in 2003, primarily as a result of increasedpenetration of existing products, a full year of sales in the United States ofthe Sapphire family of embolic coils and the worldwide introduction of theEchelon microcatheter.

We experienced a $4.3 million increase in net sales ofour embolic products in 2004 primarily due to a full year of sales of ourSapphire family of embolic coils in the United States, which were introduced inmid-2003. We also introduced the NXT embolic coil family in Europe inearly 2004. Sales of our neuro access and delivery products increased $6.9million in 2004 due primarily to the introduction of the Echelon family ofmicrocatheters in 2004. We have strengthened our product offering in this areawith the introduction during the first quarter of 2005 of additional Echelonproducts.

*Net sales by geography.*   Netsales in the United States increased 13.8% to $42.8 million in 2004 compared to$37.6 million in 2003. International net sales increased 45.0% to $43.5 millionin 2004 compared to $30.0 million in 2003 and represented 50.4% of company-widesales in 2004 compared to 44.4% in 2003. Our 2004 international net salesinclude a favorable currency impact of approximately $2.7 million principallyresulting from the 2004 performance of the Euro against the U.S. dollar. Ourdirect sales force operations in Europe and our distribution operations in theAsia Pacific markets each contributed approximately half of our sales growth ininternational markets as a result of new product introductions and increasedpenetration.

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*Cost of goods sold.*   Cost ofgoods sold increased 31.9% to $39.9 million in 2004 compared to $30.2 millionin 2003 as a result increased sales, as discussed above. As a percentage of netsales, cost of goods sold increased to 46.2% of net sales in 2004 compared to44.7% of net sales in 2003. This increase was primarily attributable toproduction scrap and other start-up costs related to the introduction of newproducts in both our cardio peripheral and neurovascular segments. In ourcardio peripheral segment, cost of goods sold as a percentage of net salesincreased to 48.1% in 2004 compared to 46.2% in 2003 and in our neurovascularsegment, cost of goods sold as a percentage of net sales increased to 43.1% in2004 compared to 41.6% in 2003 for the reasons described above.

*Sales, general and administrative expense.*   Sales,general and administrative expenses increased 24.9% to $103.0 million in 2004compared to $82.5 million in 2003. Sales and marketing expenses increased $17.8million in 2004 to support increased sales in Europe and to prepare for asignificant number of new product introductions planned for early 2005 in theUnited States. During the fourth quarter of 2004, we more than doubled our U.S.sales force to support our cardio peripheral products. In 2004, we alsoexpanded into new geographic regions and increased our sales force in Europe. Thebalance of the increase in sales, general and administrative expense relatesprimarily to increased legal costs associated with our embolic coil litigation.We also incurred approximately $2.9 million in costs primarily related to theconsolidation of our neurovascular manufacturing facility in Germany into ourMTI operations in Irvine, California. This was similar to the level of facilityclosure costs incurred in 2003 related to the consolidation of two U.S.facilities.

*Research and development.*   Researchand development expense decreased 13.8% to $38.9 million in 2004 compared to$45.1 million in 2003. Approximately half of this reduction was due to areduction in clinical and regulatory affairs trial expenses due to thecompletion of certain trials primarily at MTI, and the remainder was due tosavings in research and development related to facility consolidations in 2003and the elimination of research and development spending on an asset we sold inSeptember 2004.

*Amortization of intangible assets.*   Amortizationof intangible assets decreased 18.3% to $9.9 million in 2004 compared to $12.1million in 2003. In 2003, we recorded an impairment charge of $2.4 millionrelated to intangible assets acquired in connection with our acquisitions ofMitraLife and Appriva Medical, Inc. The remainder of the amortizationexpense in 2003 and 2004 relates primarily to amortization of developedtechnology from the IntraTherapeutics, Inc. and Dendron GmbH acquisitionsin 2002, and as a result of step acquisition accounting related to ourinvestment in MTI.

*(Gain) loss on sale of assets, net*.   Gainon sale of assets was $14.4 million in 2004 and resulted from the sale ofintellectual property obtained in the MitraLife acquisition.

*Acquired in-process research and development.*   Wedid not incur charges for acquired in-process research and development expensein 2004. In 2003, we incurred $0.5 million in acquired in-process research anddevelopment as a result of acquisition accounting related to our additionalinvestments in MTI.

*Gain on sale of investments, net.*   Gainon sale of investments, net was $1.7 million in 2004 compared to $3.4 millionin 2003. In 2004, we received a $1.7 million milestone payment relating to the2002 sale of an investment in Enteric Medical Technologies, Inc. In 2003,these milestone payments totaled $14.6 million and were partially offset by an$11.2 million loss recorded from other than temporary declines in investmentsaccounted for on a cost basis.

*Interest expense, net.*   Interestexpense increased 100.6% to $25.4 million in 2004 compared to $12.7 million in2003. In 2004, we incurred a $6.7 million charge related to a beneficialconversion feature arising from the minority interests’ participation in twofinancings during the year, as more fully discussed in Note 12 to ourconsolidated financial statements included elsewhere in this report. Theremainder of the increase was primarily as a result of an additional $68million of debt financing from our investors.

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*Minority interest in loss of subsidiary.*   Minorityinterest in loss of subsidiary was $13.8 million in 2004 and $3.8 million in2003 and represents the portion of MTI’s losses allocated to minority investors.In 2004, the minority interest in loss of subsidiary includes $6.7 million ofinterest expense related to a beneficial conversion feature arising from theminority interests’ participation in two financings during the year. Inaddition, MTI’s losses were lower in 2003 primarily due to a gain of $14.6million recorded by MTI related to a sale of an investment.

*Other income, net.*   Otherincome, net was $1.8 million in 2004 compared to $1.6 million in 2003 and wasprimarily related to foreign exchange gains in both years.

*Income tax expense.*   Weincurred modest levels of income tax in 2003 and 2004 related to certainEuropean sales offices. We recorded no provision for U.S. income taxes in 2003or 2004 due to our history of operating losses.

*Accretion of preferred membershipunits to redemption value.*   Accretion of preferredmembership units to redemption value was $23.8 million in 2004 compared to $7.7million in 2003. The increase was primarily due to a full year of accretion in2004 compared to four months of accretion in 2003. The accretion represents theincrease in carrying value of preferred membership units based on the rights towhich the Class A and Class B preferred membership unit holders wereentitled related to a liquidation, dissolution or winding up of ev3 LLC. Theaccretion began when the preferred membership units were first issued at thetime of the formation of ev3 LLC.

**Liquidityand Capital Resources**

| ** **                                                   | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| **Balance Sheet Data**                             | ** ** | ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(dollars in thousands)**  | ** ** |
| Cash and cash  equivalents                                   |       | $                                     | 69,592     |   | $ | 20,131 |   |
| Short term  investments                                      |       | 12,000                                |       | — |   |
| Total current  assets                                        |       | 151,675                               |       | 68,609 |   |
| Total assets                                                 |       | 296,828                               |       | 212,046 |   |
| Total current  liabilities, excluding demand notes           |       | 37,671                                |       | 36,025 |   |
| Demand notes  payable—related parties                   |       | —                                |       | 299,453 |   |
| Total liabilities                                            |       | 38,523                                |       | 336,180 |   |
| Preferred  membership units                                  |       | —                                |       | 254,028 |   |
| Total members’ and  stockholders’ equity (deficit) |       | 245,455                               |       | (394,472 | ) |
|                                                              |            |                                       |            |  |  |  |  |  |  |

 

*Contractualcash obligations.*   At December 31, 2005, we hadcontractual cash obligations and commercial commitments as follows: 

| ** **               | ** ** | **Payments Due by Period** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **Total**                                 | ** ** | **Less than**1 Year | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than**5 Years | ** ** |
| ** **               | ** ** | **(dollars in thousands)**      | ** ** |
| Purchase  commitments(1) |       | $                                         | 47,405     |   |   | $ | 17,755 |   |   | $ | 29,650 |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases(2)      |       | 12,323                                    |       |   | 3,527 |   |   | 5,194 |   |   | 3,282 |   |   |   | 320 |   |   |
| Total                    |       | $                                         | 59,728     |   |   | $ | 21,282 |   |   | $ | 34,844 |   |   | $ | 3,282 |   |   |   | $ | 320 |   |   |

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(1)          Represents commitmentsfor minimum inventory purchases related to our distribution agreement withInvatec S.r.l. We do not have any other significant purchase obligations forthe delivery of goods or services or other commercial commitments.

(2)          The amounts reflected inthe table above for operating leases represent future minimum lease paymentsunder non-cancelable operating leases primarily for certain office space,warehouse space, 

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computers and vehicles. Portionsof these payments are denominated in foreign currencies and were translated inthe tables above based on their respective U.S. dollar exchange rates at December 31,2005. These future payments are subject to foreign currency exchange rate risk.In accordance with U.S. generally accepted accounting principles, or GAAP, ouroperating leases are not recognized in our consolidated balance sheet.

*Financing history.*   We havegenerated significant operating losses since our inception. These operatinglosses, including cumulative non-cash charges for acquired in-process researchand development of $127.0 million, have resulted in an accumulated deficit of$562.2 million as of December 31, 2005.

*Cash, cash equivalents and short-term investments.*   Ourcash, cash equivalents and short-term investments available to fund currentoperations were $81.6 million and $20.1 million at December 31, 2005 and December 31,2004, respectively. We completed an initial public offering of our common stockon June 21, 2005 in which we sold 11,765,000 shares of our common stock at$14.00 per share, resulting in net proceeds to us of approximately $152.7million, after deducting underwriting discounts and commissions and offeringexpenses. We used $36.5 million of these net proceeds to repay a portion of theaccrued and unpaid interest on certain demand notes held by Warburg Pincus andThe Vertical Group in connection with our initial public offering. In addition,on July 20, 2005, we sold 205,800 shares of common stock pursuant to anover-allotment option granted to the underwriters which resulted in netproceeds to us of $2.2 million, after deducting underwriting discounts andcommissions and offering expenses. We invested the remaining portion of the netproceeds in short-term, investment-grade, interest bearing securities. We haveused these funds for general corporate purposes since our initial publicoffering and expect to continue to do so. We expect our cash balances todecrease as we continue to use cash to fund our operations. We do not have anydebt for borrowed money. We believe our cash, cash equivalents and short-terminvestments will be sufficient to meet our liquidity requirements through atleast the next 12 months.

*Operating activities.*   Cashused in operations during the year ended December 31, 2005 was $131.8million, reflecting primarily our net losses, the change in accrued interestresulting from our payment of$36.5 million of accrued and unpaid interest on our demand notes payable inconjunction with the completion of our initial public offering on June 21,2005, and increased working capitalrequirements during the period. These uses of cash were partially offsetby non-cash charges for depreciation and amortization. In addition, our netloss also reflected $4.6 million of gain recognized on the sale of investments,as discussed below. The increases in accounts receivable and inventories duringthe year ended December 31, 2005 were related to increases in sales volumeduring the period. We expect that operations will continue to use cash duringthe year ending December 31, 2006.

*Investing activities.*   Cashused in investing activities during the year ended December 31, 2005 was$25.3 million primarily due to the investment of $12.0 million in short-terminvestment-grade securities, the purchase of $13.2 million of property andequipment, a $3.7 million milestone payment related to a previous acquisitionand $1.9 million in merger related costs. The net use of cash from investingactivities was reduced by the receipt of $3.7 million from the sale of certainassets by Genyx Medical, Inc., in which MTI holds a minority interest, thereceipt of a $900 thousand milestone payment related to the 2002 sale of aninvestment in Enteric Medical Technologies, Inc. and the receipt of $2.1million related to the return of acquisition consideration resulting from asettlement of an acquisition dispute. Historically, our capital expenditureshave consisted of purchased manufacturing equipment, research and testingequipment, computer systems and office furniture and equipment. We expect tocontinue to make investments in property and equipment and to incur $12 millionin capital expenditures during 2006.

*Financing activities.*   Cashprovided by financing activities was $206.7 million during the year ended December 31,2005, consisting of $154.9 million of net proceeds received from our initialpublic offering of 

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our common stock,inclusive of the underwriters’ exercise of their over-allotment option on July 20,2005, and proceeds of $49.1 million from the issuance of demand notes.

On October 13, 2005, MTI entered into a lease fornew office, research and manufacturing space. In order to provide MTI withfinancing to support planned facility improvements and anticipated movingexpenses, we agreed to provide MTI up to $2.3 million in an unsecured loan andev3 Endovascular, Inc., our wholly owned subsidiary, has entered into a$1.0 million letter of credit with LaSalle Bank N.A., with MTI’s landlord asbeneficiary. The term of the lease is approximately five years commencing onthe date that the landlord substantially completes improvements to the premisesas set forth in the lease. The lease also provides MTI an option to extend the termof the lease for an additional six years. The basic rental amount for theleased space is initially $68 thousand per month and increases annually overthe term of the lease up to a maximum of $93 thousand per month.

On October 13, 2005, we and MTI finalized theterms of the unsecured term note and MTI executed it. Under the note, MTI maymake draw downs from time to time in an aggregate amount not to exceed $2.3million. Each draw down under the note will bear interest at a floating primerate plus 2.3% and will be due and payable in 36 consecutive monthlyinstallments of principal, each in an amount equal to the amount of such drawdown divided by 36, plus accrued interest, each due and payable on the firstbusiness day of each calendar month commencing on the later of November 1,2005 or the first day of the month following the draw down made under the note,and continuing on the first business day of each succeeding month thereafterfor 36 consecutive months, at which time the unpaid amount of the draw down andall accrued and unpaid interest will be due and payable in full. MTI has theright to prepay the outstanding principal balance and accrued and unpaidinterest thereon prior to maturity, without premium or penalty. The noteevidencing the loan contains customary events of default, including, withoutlimitation, payment defaults with cure periods, bankruptcy and involuntaryproceedings, monetary judgment defaults in excess of specified amounts,cross-defaults to other agreements and certain changes of control. For certainevents of default related to insolvency and receivership, the entireoutstanding unpaid principal balance of the note and all accrued and unpaidinterest thereon will automatically become immediately due and payable. In theevent of other defaults by MTI, we may declare the entire outstanding unpaidprincipal balance of the note and all accrued and unpaid interest thereon to beimmediately due and payable. Upon an event of default, we may also exercise allrights and remedies under any other instrument, document, or agreement betweenMTI and us, enforce all rights and remedies under any applicable law, andoffset any and all balances, credits, deposits, accounts, or monies of MTI thenor thereafter with us, or any our obligations to MTI arising under anyagreement or arrangement between us and MTI, against any amounts due to us fromMTI arising under the note.

ev3 Endovascular has provided MTI with a $1.0 millionstandby irrevocable letter of credit in favor of MTI’s landlord to provide MTIwith additional financing to support our planned improvements. The letter ofcredit expires on September 15, 2006, but will be automatically extendedfor successive one-year periods thereafter, unless LaSalle Bank N.A. notifiesthe parties that it does not intend to renew the letter of credit for anadditional year at least 30 days prior to the expiration date, as suchexpiration date may be extended.

As of December 31, 2005, MTI had not drawn on theloan or letter of credit.

*Other liquidity information.  *Theacquisition agreements relating to our purchase of MitraLife, Appriva Medical, Inc.and Dendron GmbH require us to make additional payments to the sellers of thesebusinesses if certain milestones related to regulatory steps in the productcommercialization process are achieved. The potential milestone payments total$25.0 million, $175.0 million and $15.0 million with respect to the MitraLife,Appriva and Dendron acquisitions, respectively, during the period of 2003 to2009. We do not believe it is likely that we will have obligations with respectto the MitraLife milestones in the future. We have determined that the firstmilestone with respect to the Appriva agreement was not achieved by the January 1,2005 milestone date and that the first milestone is not payable. On 

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September 27, 2005,we announced that we had decided to discontinue the development andcommercialization of our PLAATO device, which is the technology we acquired inthe Appriva transaction. Although we recently had obtained conditional approvalfrom the FDA for an IDE clinical trial for the PLAATO device, we determinedthat, due to the time, cost and risk of enrollment, the trial design ultimatelymandated by the FDA was not commercially feasible for us at such time. Wecontinue to keep all of our options open with regard to the future of thePLAATO technology, which may include a sale or licensing of the technology tothird parties. Under the terms of the stock purchase agreement we entered intoin connection with our acquisition of Dendron, we may be required to makeadditional payments which are contingent upon Dendron products achievingcertain revenue targets between 2003 and 2008. In 2003, the $4.0 millionrevenue target for sales of Dendron products during 2003 was met. Accordingly,an additional payment to the former Dendron stockholders of $3.75 million wasmade in 2004. In 2004, the $5.0 million revenue target for sales of Dendronproducts during 2004 was met. Accordingly, a payment to the former Dendronstockholders of $3.75 million was accrued in 2004 and was paid during thesecond quarter of 2005. We may be required to make a final payment of $7.5million, which is contingent upon Dendron products achieving annual revenues of$25 million in any year during the period between 2003 and 2008. Any such finalpayment would be due in the year following the year of target achievement.

Our future liquidity and capital requirements will beinfluenced by numerous factors, including clinical research and productdevelopment programs, receipt of and time required to obtain regulatoryclearances and approvals, sales and marketing programs and continuingacceptance of our products in the marketplace. We believe that the resourcesgenerated from our initial public offering are sufficient to meet our liquidityrequirements through at least the next 12 months; however, if we requireadditional working capital, but are not able to raise additional funds, we maybe required to significantly curtail or cease ongoing operations.

On May 6, 2005, MTI entered into an asset-basedcredit agreement with a bank that, subject to customary covenants, can provideup to $3.0 million of cash funding based on MTI’s U.S. accounts receivable andinventory balances. The loan is collateralized by substantially all of MTI’sassets and expires in May 2007.

MTI has received a support letter from Warburg Pincuspursuant to which Warburg Pincus has agreed to provide additional funding, upto $5.0 million, to MTI if needed to fund MTI’s operations. The Warburg Pincuscommitment is effective through July 4, 2006 and will be reduced to theextent of proceeds, if any, that become available from a third party lender,including amounts available under the credit facility described above, or anyamounts raised in a third party financing. We have negotiated an agreement withWarburg Pincus pursuant to which we have the first right to negotiate aninvestment in MTI to further fund MTI’s operations, if necessary. Pursuant tothis agreement, we have agreed with MTI to provide the unsecured loan andletter of credit described above.

In the event that werequire 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. Our future liquidity and capitalrequirements will be influenced by numerous factors, including the extent andduration of future operating losses, the level and timing of future sales andexpenditures, market acceptance of new products, the results and scope ofongoing research and development projects, competing technologies, market andregulatory 

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developments,and the future course of intellectual property litigation. See “Item 3. LegalProceedings” and Note 5 and Note 18 to our consolidated financial statementsincluded elsewhere in this report.

**CriticalAccounting Policies and Estimates**

We have adopted various accounting policies to prepareour consolidated financial statements in accordance with U.S. GAAP. Our mostsignificant accounting policies are described in Note 3 to our consolidatedfinancial statements included elsewhere in this report. The preparation of ourconsolidated financial statements in conformity with U.S. GAAP requires us tomake estimates and assumptions that affect the amounts reported in ourconsolidated financial statements and accompanying notes. Our estimates andassumptions, including those related to bad debts, inventories, intangibleassets, sales returns and discounts, and income taxes are updated asappropriate.

Certain of our more critical accounting policiesrequire the application of significant judgment by management in selecting theappropriate assumptions for calculating financial estimates. By their nature,these judgments are subject to an inherent degree of uncertainty. Thesejudgments are based on our historical experience, terms of existing contracts,our observance of trends in the industry, information provided by our physiciancustomers and information available from other outside sources, as appropriate.Different, reasonable estimates could have been used in the current period. Additionally,changes in accounting estimates are reasonably likely to occur from period toperiod. Both of these factors could have a material impact on the presentationof our financial condition, changes in financial condition or results ofoperations.

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. Managementhas discussed the development, selection and disclosure of our most criticalfinancial estimates with the audit committee of our board of directors and ourindependent registered public accounting firm. The judgments about thosefinancial estimates are based on information available as of the date of ourconsolidated financial statements. Those financial estimates include:

***Revenue Recognition***

We recognize revenue in accordance with SEC StaffAccounting Bulletin No. 101, Revenue Recognition in Financial Statements,which requires that four basic criteria must be met before sales can berecognized: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services have been rendered; (3) the price is fixed ordeterminable and (4) collectibility is reasonably assured. These criteriaare met at the time of shipment when risk of loss and title passes to thecustomer or distributor, unless a consignment arrangement exists. Sales fromconsignment arrangements are recognized upon written acknowledgement that theproduct has been used by the customer indicating that a sale is complete. Ourterms of sale for regular sales are typically FOB shipping point, net 30 days. Regularsales include orders from customers for replacement of customer stock,replenishment of customer consignment product, orders for a scheduledcase/surgery and stocking orders.

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 both by distribution channel and by geography and is recorded as areduction of sales. Historically, our return experience has been low withreturn rates approximating 3.0% of our net sales.

***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 review 

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of all significantoutstanding account balances and the overall quality and age of those balancesnot specifically reviewed. In determining the provision for invoices notspecifically reviewed, we analyze historical collection experience and currenteconomic trends. If the historical data used to calculate the allowanceprovided for doubtful accounts does not reflect our future ability to collectoutstanding receivables or if the financial condition of customers were todeteriorate, resulting in impairment of their ability to make payments, anincrease in the provision for doubtful accounts may be required. We maintain alarge customer base that mitigates the risk of concentration with one customer.However, if the overall condition of the health care industry were todeteriorate, resulting in an impairment of our customers’ ability to makepayments, significant additional allowances could be required.

Our accounts receivablebalance was $28.5 million and $19.0 million, net of accounts receivableallowances, comprised of both allowances for doubtful accounts and salesreturns of $3.6 million and $2.7 million, at December 31, 2005 and December 31,2004, 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 $4.0 million and $3.7 million at December 31,2005 and December 31, 2004, respectively.

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

When we acquire another company, the purchase price isallocated, as applicable, between acquired in-process research and development,other identifiable intangible assets, tangible net assets and goodwill asrequired by U.S. GAAP. In-process research and development is defined as thevalue assigned to those projects for which the related products have notreceived regulatory approval and have no alternative future use. Determiningthe portion of the purchase price allocated to in-process research anddevelopment and other intangible assets requires us to make significantestimates that may change over time. During the year ended December 31,2005, we recorded an in-process research and development charge of $868thousand related to the step acquisition of an additional interest in MTI.

The income approach was used to determine the fairvalues of the acquired in-process research and development. This approachestablishes fair value by estimating the after-tax cash flows attributable tothe in-process project over our useful life and then discounting theseafter-tax cash flows back to the present value. Revenue estimates were based onrelative market size, expected market growth rates and market share penetration.Gross margin estimates were based on the estimated cost of the product at thetime of introduction and historical gross margins for similar products offeredby us or by competitors in the marketplace. The estimated selling, general andadministrative expenses were based on historical operating expenses of theacquired company as well as long-term expense levels based on industrycomparables. The costs to complete each project were based on estimated directproject expenses as well as the remaining labor hours and related overheadcosts. In arriving at the value of acquired in-process research and developmentprojects, we considered the project’s stage of completion, the complexity ofthe work to be completed, the costs already incurred, the remaining costs tocomplete the project, the contribution of core technologies, the expectedintroduction date and the estimated useful life of the 

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technology. The discountrate used to arrive at the present value of acquired in-process research anddevelopment as of the acquisition date was based on the time value of money andmedical technology investment risk factors. The discount rates used ranged from15% to 34%. 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 the excess of the aggregatepurchase price over the fair value of net assets, including in-process researchand development, of the acquired businesses. Goodwill is tested for impairmentannually, or more frequently if changes in circumstance or the occurrence ofevents suggest an impairment exists. The test for impairment requires us to makeseveral estimates about fair value, most of which are based on projected futurecash flows. Our estimates associated with the goodwill impairment tests areconsidered critical due to the amount of goodwill recorded on our consolidatedbalance sheets and the judgment required in determining fair value amounts,including projected future cash flows. Goodwill was $94.5 million at December 31,2005 and December 31, 2004.

Other intangible assets consist primarily of purchaseddeveloped technology, patents, customer relationships and trademarks and areamortized over their estimated useful lives, ranging from 5 to 8 years. Wereview these intangible assets for impairment annually during our fourth fiscalquarter or as changes in circumstance or the occurrence of events suggest theremaining value may not be recoverable. Other intangible assets, net ofaccumulated amortization, were $26.2 million and $31.9 million at December 31,2005 and December 31, 2004, 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 being evaluated.These assumptions require significant judgment and actual results may differfrom assumed or estimated amounts.

***Accounting for Income 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. Thesedifferences result in deferred tax assets and liabilities, which are includedon our consolidated balance sheets. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and, to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance or increase thisallowance in a period, we must reflect this increase as an expense within thetax provision in our consolidated statement of operations.

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 $176.1 million and $144.3million as of December 31, 2005 and 2004, respectively.

**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.

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**Off-Balance Sheet Arrangements**

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 Accounting Pronouncements**

In November 2004, the Financial AccountingStandards Board, or FASB, issued Statement of Financial Accounting Standards,or SFAS, 151, Inventory Costs, An Amendment of Accounting Research Bulletin No. 43,Chapter 4, which adopts wording from the International Accounting StandardsBoard’s, or IASB, IAS 2 Inventories in an effort to improve the comparabilityof cross-border financial reporting. The new standard indicates that abnormalfreight, handling costs and wasted materials (spoilage) are required to betreated as current period charges rather than as a portion of inventory cost. Additionally,the standard clarifies that fixed production overhead should be allocated basedon the normal capacity of a production facility. The statement is effective forus beginning in 2006. Our adoption of SFAS 151 is not expected to have amaterial impact on our results of operations, financial position or cash flows.

On December 16, 2004,the FASB issued SFAS 123(R), Share-Based Payment, which is a revision of SFAS123, Accounting for Stock-Based Compensation, and supersedes APB Opinion 25,Accounting for Stock Issued to Employees. SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theapplicable vesting period and is effective for us on January 1, 2006. Wedo not expect the adoption of SFAS 123(R) to have a material impact on ourconsolidated results of operations, financial position or cash flows.

**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. Wedo not enter into derivatives or other financial instruments for trading orspeculative purposes.

**Interest Rate Risk**

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

**Foreign Currency Exchange Rate Risk**

Fluctuations in the rate of exchange between the U.S.dollar and foreign currencies could adversely affect our financial results. Infiscal 2005 and in fiscal 2004, approximately 34% and 37%, respectively, of ournet sales were denominated in foreign currencies. We expect that foreigncurrencies will continue to represent a similarly significant percentage of ournet sales in the future. Selling, marketing and administrative costs related tothese sales are largely denominated in the same respective currency, therebylimiting our transaction risk exposure. We, therefore, believe that the risk ofa significant impact on our operating income from foreign currency fluctuationsis minimal. However, for sales not denominated in U.S. dollars, if there is anincrease in the rate at which a foreign currency is exchanged for U.S. dollars,it will require more of the foreign currency to equal a specified amount ofU.S. dollars than before the rate increase. In such cases and if we price ourproducts in the foreign currency, we will receive less in U.S. dollarsthan we did before the rate increase went into effect. If we price our productsin U.S. dollars and competitors price their products in local currency, anincrease in the relative strength of the 

82

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U.S. dollar couldresult in our price not being competitive in a market where business istransacted in the local currency.

Approximately 68% and 72%, respectively, of our netsales denominated in foreign currencies in fiscal 2005 and fiscal 2004 werederived from European Union countries and were denominated in the Euro. Additionally,we have significant intercompany receivables from our foreign subsidiaries,which are denominated in foreign currencies, principally the Euro. Ourprincipal exchange rate risk therefore exists between the U.S. dollar and theEuro. Fluctuations from the beginning to the end of any given reporting periodresult in the remeasurement of our foreign currency-denominated receivables andpayables, generating currency transaction gains or losses that impact ournon-operating income/expense levels in the respective period and are reportedin other (income) expense, net in our consolidated financial statements. Werecorded a $3.6 million foreign currency transaction loss in 2005 and a $1.9million foreign currency transaction gain in 2004 related to the translation ofour foreign denominated net receivables into U.S. dollars. We do notcurrently hedge our exposure to foreign currency exchange rate fluctuations. Wemay, however, hedge such exposure to foreign currency exchange rates in thefuture.

83

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**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA
| Description                                                                                                                                       | ** ** | ** **      | ** ** |  | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|--|------------|----------|------------|
| Report  of Independent Registered Public Accounting Firm                                                                                          |       | F-1             |       |
| Consolidated Balance Sheets as of  December 31, 2005 and 2004                                                                                |       | F-2             |       |
| Consolidated  Statements of Operations for the years ended December 31, 2005, 2004 and 2003                                             |       | F-3             |       |
| Consolidated  Statements of Members’ and Stockholders’ Equity (Deficit) for the years  ended December 31, 2005, 2004 and 2003 |       | F-4             |       |
| Consolidated Statements of Cash Flows  for the years ended December 31, 2005, 2004 and 2003                                             |       | F-5 – F-6  |       |
| Notes  to the Consolidated Financial Statements for the years ended  December 31, 2005, 2004 and 2003                              |       | F-7 – F-36 |       |
| Schedule  II—Valuation and Qualifying Accounts                                                                                               |       | F-37            |       |

 

 

84

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**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Stockholders of ev3Inc.:

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects, thefinancial position of ev3 Inc. and its subsidiaries at December 31, 2005and December 31, 2004, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America. In addition, in our opinion, the financial statement schedulelisted in the accompanying index** **presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits. We conducted our audits of these statements in accordance with thestandards of the PublicCompany Accounting Oversight Board (United States). Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.
| /s/ PRICEWATERHOUSECOOPERS  LLP |   |
|---------------------------------|--------|
| Minneapolis, Minnesota          |
| March 3, 2006              |

 

F-1

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

| ** **                                                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                                                                            |       |                  |       |   |   |
| ***Current assets***                                                                                                                                                                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                            |       | $                     | 69,592     |   | $ | 20,131 |   |
| Short-term investments                                                                                                                                                                                                |       | 12,000                |       | — |   |
| Accounts receivable,  less allowance of $3,607 and $2,694 respectively                                                                                                                                                |       | 28,519                |       | 18,956 |   |
| Inventories                                                                                                                                                                                                           |       | 32,987                |       | 22,500 |   |
| Prepaid expenses and  other assets                                                                                                                                                                                    |       | 7,042                 |       | 4,576 |   |
| Other receivables                                                                                                                                                                                                     |       | 1,535                 |       | 2,446 |   |
| *Total  current assets*                                                                                                                                                                                               |       | 151,675               |       | 68,609 |   |
| Restricted cash                                                                                                                                                                                                       |       | 3,102                 |       | 2,638 |   |
| Property and equipment,  net                                                                                                                                                                                          |       | 17,877                |       | 9,130 |   |
| Goodwill                                                                                                                                                                                                              |       | 94,456                |       | 94,514 |   |
| Other intangible assets,  net                                                                                                                                                                                         |       | 26,230                |       | 31,851 |   |
| Other assets                                                                                                                                                                                                          |       | 3,488                 |       | 5,304 |   |
| *Total  assets*                                                                                                                                                                                                       |       | $                     | 296,828    |   | $ | 212,046 |   |
| **Liabilities and members’ and stockholders’  equity (deficit)**                                                                                                                                            |       |                  |       |   |   |
| ***Current liabilities***                                                                                                                                                                                             |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                      |       | $                     | 11,716     |   | $ | 8,931 |   |
| Accrued compensation and  benefits                                                                                                                                                                                    |       | 14,612                |       | 9,523 |   |
| Accrued liabilities                                                                                                                                                                                                   |       | 11,343                |       | 13,821 |   |
| Accrued acquisition  consideration                                                                                                                                                                                    |       | —                |       | 3,750 |   |
| Total current  liabilities                                                                                                                                                                                            |       | 37,671                |       | 36,025 |   |
| Demand notes  payable—related parties                                                                                                                                                                            |       | —                |       | 299,453 |   |
| Other long-term  liabilities                                                                                                                                                                                          |       | 852                   |       | 702 |   |
| *Total  liabilities*                                                                                                                                                                                                  |       | 38,523                |       | 336,180 |   |
| Class A preferred  membership units, stated value $3.56, 24,040,718 units authorized,  issued and outstanding (liquidation value of zero and $95,105 as of  December 31, 2005 and 2004, respectively)  |       | —                |       | 95,105 |   |
| Class B preferred  membership units, stated value $3.56, 41,077,336 units authorized, issued and  outstanding (liquidation value of zero and $178,502 as of  December 31, 2005 and 2004, respectively) |       | —                |       | 158,923 |   |
| Minority interest                                                                                                                                                                                                     |       | 12,850                |       | 16,310 |   |
| ***Members’ and stockholders’  equity (deficit)***                                                                                                                                                          |       |                  |       |   |   |
| Members’ capital                                                                                                                                                                                                 |       | —                |       | 47,927 |   |
| Common stock, $0.01 par  value, 100,000,000 shares authorized, 49,350,647 shares issued and outstanding  as of December 31, 2005                                                                            |       | 493                   |       | — |   |
| Additional paid in  capital                                                                                                                                                                                           |       | 807,032               |       | — |   |
| Accumulated deficit                                                                                                                                                                                                   |       | (562,207              | )          | (440,705 | ) |
| Accumulated other  comprehensive income (loss)                                                                                                                                                                        |       | 137                   |       | (1,694 | ) |
| *Total  members’ and stockholders’ equity (deficit)*                                                                                                                                                        |       | 245,455               |       | (394,472 | ) |
| *Total liabilities and members’ and stockholders’  equity (deficit)*                                                                                                                                        |       | $                     | 296,828    |   | $ | 212,046 |   |

 

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

F-2

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

| ** **                                                   | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                                    |       | $                                                             | 133,696    |   | $ | 86,334 |   | $ | 67,639 |   |
| Operating  expenses:                                         |       |                                                          |       |   |   |   |   |
| Cost of goods sold                                           |       | 55,094                                                        |       | 39,862 |   | 30,218 |   |
| Sales, general and administrative                            |       | 130,427                                                       |       | 103,031 |   | 82,479 |   |
| Research and development                                     |       | 39,280                                                        |       | 38,917 |   | 45,145 |   |
| Amortization of intangible assets                            |       | 10,673                                                        |       | 9,863 |   | 12,078 |   |
| (Gain) loss on sale of assets, net                           |       | 200                                                           |       | (14,364 | ) | 14 |   |
| Acquired in-process research and development                 |       | 868                                                           |       | — |   | 488 |   |
| Total operating expenses                                     |       | 236,542                                                       |       | 177,309 |   | 170,422 |   |
| Loss from operations                                         |       | (102,846                                                      | )          | (90,975 | ) | (102,783 | ) |
| Other (income)  expense:                                     |       |                                                          |       |   |   |   |   |
| Gain on sale of investments, net                             |       | (4,611                                                        | )          | (1,728 | ) | (3,409 | ) |
| Interest (income) expense, net                               |       | 9,916                                                         |       | 25,428 |   | 12,673 |   |
| Minority interest in loss of subsidiary                      |       | (2,013                                                        | )          | (13,846 | ) | (3,808 | ) |
| Other (income) expense, net                                  |       | 3,360                                                         |       | (1,752 | ) | (1,606 | ) |
| Loss before income taxes                                     |       | (109,498                                                      | )          | (99,077 | ) | (106,633 | ) |
| Income tax expense (benefit)                                 |       | 526                                                           |       | 196 |   | 303 |   |
| Net loss                                                     |       | (110,024                                                      | )          | (99,273 | ) | (106,936 | ) |
| Accretion of  preferred membership units to redemption value |       | 12,061                                                        |       | 23,826 |   | 7,651 |   |
| Net loss attributable to common holders                      |       | $                                                             | (122,085   | ) | $ | (123,099 | ) | $ | (114,587 | ) |
| Net loss per common unit/share (basic  and diluted)(a)  |       | $                                                             | (4.48      | ) | $ | (57.44 | ) | $ | (130.67 | ) |
| Weighted average  units/shares outstanding(a)                |       | 27,242,712                                                    |       | 2,142,986 |   | 876,894 |   |

----

(a)           Net loss per common unit/share attributableto common holders and the weighted average common shares outstanding reflectthe June 21, 2005 1-for-6 reverse stock split for all periodspresented.

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

F-3

----

**ev3 Inc.**

**CONSOLIDATED STATEMENTS OF MEMBERS’ ANDSTOCKHOLDERS’ EQUITY (DEFICIT)**

**(Dollars in thousands, except per unit/share 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, 2003**                          | ** ** | **4,921,558**  | ** ** |              | **$**      | **23,688**            | ** ** |        | **—**     | ** **                            |       | **$**                  | **—** | ** **                                                    |       | **$** | **—** | ** ** |   | **$** | **79** | ** ** |   |   | **$** | **(206,782** | **)** |   |   | **$** | **(183,015** | **)** |   |
| Repurchase of  members’ interests                           |       | (703,092       | )          |              | (2,502     | )                     |       | **—**  | ** **     |                                  | **—** | ** **             |       | **—**                                                    |       |   | — |   |   |   | — |   |   |   | (2,502 | ) |   |
| Accretion of  preferred membership units                         |       | —         |       |              | —     | ** **            |       | **—**  | ** **     |                                  | **—** | ** **             |       | **—**                                                    |       |   | — |   |   |   | (7,651 | ) |   |   | (7,651 | ) |   |
| Compensation  expense on unit options                            |       | —         |       |              | 2,214      | ** **            |       | **—**  | ** **     |                                  | **—** | ** **             |       | **—**                                                    |       |   | — |   |   |   | — |   |   |   | 2,214 |   |   |
| Exercise of unit  options                                        |       | 182,262        |       |              | 28         | ** **            |       | **—**  | ** **     |                                  | **—** | ** **             |       | **—**                                                    |       |   | — |   |   |   | — |   |   |   | 28 |   |   |
| Members’  contribution                                      |       | 5,825,468      |       |              | 11,700     | ** **            |       | **—**  | ** **     |                                  | **—** | ** **             |       | **—**                                                    |       |   | — |   |   |   | — |   |   |   | 11,700 |   |   |
| Comprehensive loss:                                              |       |           |       |              |       | ** **            |       | ** **  | ** **     |                                  | ** ** | ** **             |       | ** **                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                         |       |           | ** ** |              | ** ** | ** **            |       | ** **  | ** **     |                                  | ** ** |                   |       |                                                          |       |   | — |   |   |   | (106,936 | ) |   |   | (106,936 | ) |   |
| Cumulative  translation adjustment                               |       |           |       |              |       | ** **            |       | ** **  | ** **     |                                  | ** ** | ** **             |       | ** **                                                    |       |   | (1,030 | ) |   |   | — |   |   |   | (1,030 | ) |   |
| Gain on change in  ownership percentage of MTI              |       | —         |       |              | —     | ** **            |       | **—**  | ** **     |                                  | **—** | ** **             |       | **—**                                                    |       |   | — |   |   |   | 1,520 |   |   |   | 1,520 |   |   |
| Comprehensive loss                                               |       |           |       |              |       | ** **            |       | ** **  | ** **     |                                  | ** ** | ** **             |       | ** **                                                    |       |   | (1,030 | ) |   |   | (105,416 | ) |   |   | (106,446 | ) |   |
| **Balance  as of December 31, 2003**                        | ** ** | **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                                               |       |           |       |              |       | ** **            |       | ** **  |           |                                  |       |                   |       |                                                          |       |   | (743 | ) |   |   | (97,030 | ) |   |   | (97,773 | ) |   |
| **Balance  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                                               |       |           |       |              |       |                  |       |        |           |                                  |       |                   |       |                                                          |       |   | 1,831 |   |   |   | (109,441 | ) |   |   | (107,610 | ) |   |
| **Balance  December 31, 2005**                              | ** ** | **—**     | ** ** |              | **$**      | **—**            | ** ** |        | **49,350,647** | ** **                            |       | **$**                  | **493**    | ** **                                                    |       | **$** | **807,032** | ** ** |   | **$** | **137** | ** ** |   |   | **$** | **(562,207** | **)** |   |   | **$** | **245,455** | ** ** |   |

 

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

F-4

----

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

| ** **                                                                   | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating activities**                                                     |       |                                                          |       |   |   |   |   |
| Net loss                                                                     |       | $                                                             | (110,024   | ) | $ | (99,273 | ) | $ | (106,936 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities  |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                                |       | 14,816                                                        |       | 15,112 |   | 16,169 |   |
| Provision for bad debts                                                      |       | 650                                                           |       | 1,163 |   | 211 |   |
| Provision for inventory obsolescence                                         |       | 4,037                                                         |       | 1,403 |   | 2,100 |   |
| Acquired in-process research and development                                 |       | 868                                                           |       | — |   | 488 |   |
| (Gain) loss on disposal of assets                                            |       | 200                                                           |       | (14,354 | ) | 12 |   |
| Amortization of beneficial conversion feature and  non-cash interest expense |       | —                                                        |       | 6,885 |   | 37 |   |
| Gain on sales of investments                                                 |       | (4,611                                                        | )          | (1,728 | ) | (3,409 | ) |
| Stock compensation expense                                                   |       | 4,873                                                         |       | 2,732 |   | 2,298 |   |
| Minority interest in loss of subsidiary                                      |       | (2,013                                                        | )          | (13,846 | ) | (3,808 | ) |
| Change in operating  assets and liabilities:                                 |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                          |       | (10,477                                                       | )          | (3,688 | ) | (5,325 | ) |
| Inventories                                                                  |       | (14,712                                                       | )          | (5,169 | ) | (10,857 | ) |
| Prepaids and other assets                                                    |       | 4,177                                                         |       | (8,643 | ) | (1,264 | ) |
| Accounts payable                                                             |       | 3,804                                                         |       | 885 |   | (3,727 | ) |
| Accrued expenses and other liabilities                                       |       | 882                                                           |       | (344 | ) | (1,418 | ) |
| Change in accrued  interest on demand notes payable                          |       | (24,319                                                       | )          | 18,736 |   | 12,551 |   |
| Net cash used in operating activities                                        |       | (131,849                                                      | )          | (100,129 | ) | (102,878 | ) |
| **Investing  activities**                                                    |       |                                                          |       |   |   |   |   |
| Purchase of short-term investments                                           |       | (12,000                                                       | )          | — |   | — |   |
| Purchase of property and equipment                                           |       | (13,216                                                       | )          | (3,172 | ) | (4,190 | ) |
| Purchase of patents and licenses                                             |       | (1,677                                                        | )          | (1,327 | ) | (1,227 | ) |
| Proceeds from sale of assets                                                 |       | 17                                                            |       | 15,317 |   | 18 |   |
| Proceeds from sale of investments                                            |       | 4,611                                                         |       | 1,728 |   | 14,647 |   |
| Investments                                                                  |       | —                                                        |       | — |   | (3,802 | ) |
| Proceeds from purchase price adjustments                                     |       | —                                                        |       | — |   | 3,595 |   |
| Acquisitions, net of cash acquired                                           |       | (5,703                                                        | )          | (3,750 | ) | — |   |
| Return of acquisition consideration                                          |       | 2,124                                                         |       | — |   | — |   |
| Change in restricted cash                                                    |       | (266                                                          | )          | (209 | ) | (280 | ) |
| Other                                                                        |       | 841                                                           |       | — |   | (116 | ) |
| Net cash (used  in) provided by investing activities                         |       | (25,269                                                       | )          | 8,587 |   | 8,645 |   |
|                                                                              |            |                                                               |            |  |  |  |  |  |  |  |

 

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

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

 

| ** **                                                                                             | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Financing activities**                                                                               |       |                                                          |       |   |   |   |   |
| Proceeds from initial public offering, net                                                             |       | $                                                             | 154,946    |   | $ | — |   | $ | — |   |
| Issuance of demand notes payable                                                                       |       | 49,100                                                        |       | 67,684 |   | 92,283 |   |
| Payments on capital lease obligations                                                                  |       | (29                                                           | )          | — |   | — |   |
| Members equity contributions                                                                           |       | —                                                        |       | 10,000 |   | 11,700 |   |
| Proceeds from issuance of notes payable, net of  costs                                                 |       | —                                                        |       | 11,008 |   | 5,300 |   |
| Proceeds from exercise of stock options                                                                |       | 1,090                                                         |       | 88 |   | 28 |   |
| Proceeds from issuance of subsidiary stock to  minority shareholders                                   |       | 1,041                                                         |       | 424 |   | 1,228 |   |
| Proceeds from term financing                                                                           |       | 600                                                           |       | — |   | — |   |
| Net proceeds from issuance of Series A  preferred units                                           |       | —                                                        |       | — |   | 18,102 |   |
| Other                                                                                                  |       | —                                                        |       | (1,243 | ) | (482 | ) |
| Payments for redeemable equity                                                                         |       | —                                                        |       | — |   | (11,381 | ) |
| Payments for the redemption of membership units                                                        |       | —                                                        |       | — |   | (2,567 | ) |
| Net cash provided by financing activities                                                              |       | 206,748                                                       |       | 87,961 |   | 114,211 |   |
| Effect of exchange rate changes on cash                                                                |       | (169                                                          | )          | 87 |   | (527 | ) |
| Net (decrease) increase in cash and cash equivalents                                                   |       | 49,461                                                        |       | (3,494 | ) | 19,451 |   |
| Cash and cash  equivalents, beginning of period                                                        |       | 20,131                                                        |       | 23,625 |   | 4,174 |   |
| Cash and cash equivalents, end of period                                                               |       | $                                                             | 69,592     |   | $ | 20,131 |   | $ | 23,625 |   |
| Cash paid during period for interest                                                                   |       | $                                                             | 36,581     |   | $ | 87 |   | $ | 19 |   |
| Cash paid during  period for income taxes                                                              |       | $                                                             | 24         |   | $ | 74 |   | $ | 208 |   |
| Supplemental non-cash  disclosure:                                                                     |       |                                                          |       |   |   |   |   |
| Reclassification  of demand notes from current liabilities to long-term debt                      |       | $                                                             | —     |   | $ | 299,453 |   | $ | — |   |
| Net assets  acquired in conjunction with MTI step acquisition (see Note 5)                             |       | $                                                             | 8,404      |   | $ | — |   | $ | — |   |
| Contribution of  demand notes payable upon initial public offering (see Note 12)                       |       | $                                                             | 324,230    |   | $ | — |   | $ | — |   |
| Preferred membership  units converted to common stock upon initial public offering (see Note  14) |       | $                                                             | 266,089    |   | $ | — |   | $ | — |   |

 

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

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**ev3 Inc.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (Dollars in thousands, except per unit/share amounts)**

**1.**                 Descriptionof Business

ev3 Inc. (“we,” “our” or “us”)is a global medical device company focused on catheter-based, or endovascular,technologies for the minimally invasive treatment of vascular diseases anddisorders. We develop, manufacture and market a wide range of products thatinclude stents, embolic protection devices, thrombectomy devices, balloonangioplasty catheters, foreign object retrieval devices, guidewires, emboliccoils, liquid embolics, microcatheters and occlusion balloon systems. We marketour products in the United States, Europe, Canada and Japan through a directsales force, and through distributors in certain other international markets.

**2.**                 Basisof Presentation

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

Prior to the consummation of our initial publicoffering on June 21, 2005, we amended and restated our certificate ofincorporation to authorize 100,000,000 shares of common stock, par value $0.01per share, and 100,000,000 shares of preferred stock, par value $0.01 pershare. On June 21, 2005, immediately prior to our initial public offering,we completed a one-for-six reverse stock split of our outstanding common stock.All share and per share amounts for all periods presented in these consolidatedfinancial statements reflect this split.

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

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.

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At December 31, 2005,there was a minority interest of 30% in MTI. As described in Note 23, on January 6,2006, we acquired the outstanding shares of MTI that we did not already ownthrough a merger of MII with and into MTI. MTI was the surviving entity and, asa result of this merger, became our wholly owned subsidiary.

**3.**                 Summary ofSignificant Accounting Policies

*Principles of Consolidation*

The consolidated financialstatements include the our accounts and the accounts of our wholly ownedsubsidiaries and other subsidiaries in which we maintain a controlling interest.All significant intercompany balances and transactions have been eliminated. AtDecember 31, 2005, there was a minority interest of 30% in MTI. Theminority shareholders of MTI had the right to receive their proportionate shareof MTI’s equity and in turn absorb a proportionate 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, whichapproximates fair 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 todeteriorate, resulting in impairment of their ability to make payments, anincrease in the provision for doubtful accounts may be required.

*Inventories*

Inventories are stated atthe lower of standard cost or market value, determined on a first-in, first-outbasis.

*Restricted Cash*

Restricted cash consistsof various deposits supporting credit arrangements.

*Property and Equipment*

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 

F-8

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on astraight-line basis over the estimated lives of the related assets or the lifeof the lease, whichever is shorter, and generally ranges from three to sevenyears. Machinery and other equipment are depreciated over three to ten years,computer hardware and software are depreciated over three to five years,furniture and fixtures over five to seven years and leasehold improvements areamortized over the life of the lease. Construction in process is not depreciateduntil 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 in various stages of development and accountfor these investments under the cost method of accounting. The valuation ofinvestments accounted for under the cost method is based on all availablefinancial information related to the investee, including valuations based onrecent third party equity investments in the investee. If an unrealized loss onany investment is considered to be other than temporary, the loss is recognizedin the period the determination is made. All investments are reviewed forchanges in circumstances or occurrence of events that suggest our investmentmay not be recoverable.

*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; delivery has occurred; the salesprice is fixed or determinable; and collectibility is reasonably assured. Thesecriteria are met at the time of shipment when the risk of loss and title passesto the customer or distributor, unless a consignment arrangement exists. Revenuefrom consignment arrangements is recognized based on product usage indicatingthat the sale is complete. We record estimated sales returns, discounts andrebates as a reduction of net sales in the same period revenue is recognized.

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 

F-9

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distribution agreements,where there is no culmination of a separate earnings process, are deferred and amortizedover the term of the distribution agreement or the expected period ofperformance, 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, 2005, 2004 and 2003 wereapproximately $2,231, $1,623 and $1,172, respectively.

*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. Wedefine IPR&D as the value assigned to those projects for which the relatedproducts have not received regulatory approval and have no alternative futureuse. Determining the portion of the purchase price allocated to IPR&Drequires us to make significant estimates. The amount of the purchase priceallocated to IPR&D is determined by estimating the future cash flows ofeach 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 isdesignated as the functional currency for our international operations.Accordingly, assets and liabilities are translated into U.S. Dollars atyear-end exchange rates, and revenues and expenses are translated at averageexchange rates prevailing during the year. Currency translation adjustmentsresulting from fluctuations in exchange rates are recorded in othercomprehensive income. Gains and losses on foreign currency transactions areincluded in “other (income) expense” in the consolidated statements ofoperations. Foreign currency transactions resulted in transaction losses of$3,595 for the year ended December 31, 2005 and transaction gains of$1,876 and $1,618 for the years ended December 31, 2004 and 2003,respectively.

*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 

F-10

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financialreporting amounts at each year end, based on enacted tax laws and statutory taxrates applicable to the periods in which the differences are expected to affecttaxable earnings. Valuation allowances are established when necessary to reducedeferred tax assets to the amount that is more likely than not to be realized. Theeffect of changes in tax rates is recognized in the period in which the ratechange occurs.

*Loss Per MembershipUnit / Share*

Basic loss per membershipunit / share (referred to as “share” hereafter) is computed based on theweighted average number of common shares outstanding. Diluted loss per share iscomputed based on the weighted average number of common shares outstandingadjusted by the number of additional shares that would have been outstandinghad the potentially dilutive common shares been issued and reduced by thenumber of shares we could have repurchased with the proceeds from thepotentially dilutive shares. Potentially dilutive shares include share optionsand other share-based awards granted under share-based compensation plans. Forthe years ended December 31, 2005, 2004 and 2003, all potential commonshares were anti-dilutive. Accordingly, diluted loss per share is equivalent tobasic loss per share.

*Comprehensive Loss*

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

*Concentrations ofCredit Risk*

Financial instruments that potentially subject us tocredit risk consist principally of accounts receivable and cash. We have acredit policy and perform ongoing credit evaluations of our customers. We donot generally require collateral or other security and maintain an allowancefor potential credit losses. Management believes this risk is limited due tothe large number and diversity of hospitals and distributors who comprise ourcustomer 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.

*Unit andStock-Based Compensation*

Effective January 1,2003, we adopted fair value recognition provisions of SFAS 123, Accountingfor Stock-Based Compensation. We selected the modified prospective method ofadoption described in SFAS 148.

*Accounting forStock-Based Compensation-Transition and Disclosure.*

Thefair value of options and other equity-based awards, including shares of commonstock sold under the Employee Stock Purchase Plan of MTI, are estimated at thedate of grant using the Black-Scholes option pricing model with the weightedaverage assumptions listed below. The fair value of stock granted to employeesis based upon the closing market value of our common stock on the date ofgrant.

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **               | ** ** | **ev3 Inc.**                          | ** ** | **MTI** | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** |
| Risk free  interest rate |       | 3.8                                        | %          | 4.0 | % | 3.5 | % | 3.7 | % | 2.8 | % | 2.8 | % |
| Expected dividend  yield |       | 0.0                                        | %          | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
| Expected  volatility     |       | 50.0                                       | %          | 56.0 | % | — |   | 63.0 | % | — |   | 63.0 | % |
| Expected option term     |       | 4 years                                    |       | 4 years |   | 5 years |   | 4 years |   | 5 years |   | 4 years |   |

 

F-11

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We used the minimum value pricing model for measuringthe fair value of our options granted in the first quarter of 2005 and in theyears ended December 31, 2004 and 2003, which does not take intoconsideration volatility. In accordance with SFAS 123, subsequent to April 5,2005, the date of our initial filing of the registration statement relating toour initial public offering with the Securities and Exchange Commission, weused the Black-Scholes method, including an estimated volatility assumption, toestimate the fair value of all option grants. Forfeitures and cancellations arerecognized as they occur. Expense previously recognized related to options thatare cancelled or forfeited prior to vesting is reversed in the period of the cancellationor forfeiture.

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

Thefollowing table summarizes the stock-based compensation expense for employeesand non-employees recognized in the income statement for each period:

| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Stock Based Compensation  Charges:**  |       |                                       |       |   |   |   |   |
| Cost of goods  sold                     |       | $                                          | 653        |   | $ | 223 |   | $ | 208 |   |
| Sales, general  and administrative      |       | 3,141                                      |       | 1,883 |   | 1,361 |   |
| Research and  development               |       | 1,079                                      |       | 626 |   | 729 |   |
| Total Stock Based  Compensation Charges |       | $                                          | 4,873      |   | $ | 2,732 |   | $ | 2,298 |   |

 

*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 AccountingPronouncements*

In November 2004, the FASB issued SFAS 151,Inventory Costs, An Amendment of Accounting Research Bulletin No. 43,Chapter 4, which adopts wording from the International Accounting StandardsBoard’s (“IASB”) IAS 2 Inventories in an effort to improve the comparability ofcross-border financial reporting. The new standard indicates that abnormalfreight, handling costs and wasted materials (spoilage) are required to betreated as current period charges rather than as a portion of inventory cost.Additionally, the standard clarifies that fixed production overhead should beallocated based on the normal capacity of a production facility. The statementis effective for us beginning in 2006. Adoption is not expected to have amaterial impact on our consolidated earnings, financial position or cash flows.

On December 16, 2004,the FASB issued SFAS 123(R), Share-Based Payment, which is a revision ofSFAS 123 and supersedes APB Opinion 25. SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theapplicable vesting period and is effective for us on January 1, 2006. Wedo not expect the adoption of SFAS 123(R) to have a material impacton our consolidated earnings, financial position or cash flows.

**4.**                 Liquidityand Capital Resources

Since inception, we have generated significantoperating losses. Historically, the liquidity needs of our two principalsubsidiaries have been met separately. Endovascular has been funded through aseries of 

F-12

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preferred investments andby demand notes payable issued by Warburg Pincus and Vertical. MTI has beenfunded through equity private placements and the issuance of promissory notes.

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

Our future liquidity and capital requirements will beinfluenced by numerous factors, including clinical research and productdevelopment programs, receipt of and time required to obtain regulatoryclearances and approvals, sales and marketing programs and the continuingacceptance of our products in the marketplace. We believe that currentresources are sufficient to cover our liquidity requirements through December 31,2006. However, there is no assurance that additional funding beyond thecommitments discussed above will not be needed. Further, if additional fundingwere needed, there is no assurance that such funding will be available to us orour subsidiaries on acceptable terms, or at all. If we require additionalworking capital but are not able to raise additional funds, we may be requiredto significantly curtail or cease ongoing operations.

We made a milestonepayment during 2005 of $3,750 related to MTI’s previous acquisition of Dendron.

**5.**                 MTIStep Acquisition

We, through our wholly owned subsidiary, MII, haveacquired a controlling interest in MTI in various step investments commencingin 2001. MTI is a publicly held Delaware corporation that develops,manufactures and markets minimally invasive medical devices for diagnosis andtreatment primarily of neurovascular diseases. We held an approximate interestin MTI of 70.0%, 66.0% and 69.3% at December 31, 2005, 2004 and 2003,respectively.

We made additional investments in MTI in 2005 and 2003.The investments were accounted for using the step acquisition method prescribedby ARB 51, Consolidated Financial Statements. Step acquisition accountingrequires the allocation of the excess purchase price to the fair value of netassets acquired. The excess purchase price is determined as the differencebetween the cash paid and the historical book value of the interest in netassets acquired.

On May 26, 2005, the shares of MTI’s common stockdirectly held by Warburg Pincus and Vertical were contributed to ev3 LLC inexchange 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 

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statements give effect tothe contribution by Warburg Pincus as though such contributions occurred in2003 and 2004 when Warburg Pincus acquired its interest in MTI. Shares of MTIcontributed by Vertical, representing a 4.3% interest, have been accounted forunder the purchase method of accounting at the date of the contribution byVertical.

The number of membershipunits of ev3 LLC issued in exchange for the MTI shares directly held by WarburgPincus and Vertical was determined based on fair value. Fair value of the MTIshares contributed was measured as the average closing price per share of MTI’scommon stock on the NASDAQ National Market System for the twenty trading daysfrom and including the date our Registration Statement with respect to ourinitial public offering was first filed with the Securities and ExchangeCommission. Fair value of ev3 LLC’s equity issued in exchange for the MTIshares was based on the midpoint of the range of estimated initial publicoffering prices per share, after consideration of the reverse stock split.

*The following table presents the purchase price foradditional investments in 2005 and 2003:*

| ** **                                         | ** ** | **2005** | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Fair value of  shares issued                       |       | $        | 8,404      |     | $          | — |   |
| Cash paid                                          |       | —   |       | 21,101   |       |
| Interest acquired  in historical book value of MTI |       | (2,021   | )          | (16,036  | )          |
| Excess purchase price  over historical book values |       | $        | 6,383      |     | $          | 5,065 |   |

 

*The following summarizes the allocation of the excesspurchase price over historical book values arising from the additionalinvestments:*

| ** **                                    | ** ** | **2005** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Inventory                                     |       | $        | 104        |     | $          | 153 |   |
| Developed  technology                         |       | 2,043    |       | 2,271    |       |
| Customer  relationships                       |       | 894      |       | 1,702    |       |
| Trademarks and  tradenames                    |       | 458      |       | 350      |       |
| Acquired  in-process research and development |       | 868      |       | 488      |       |
| Goodwill                                      |       | 2,066    |       | 101      |       |
| Accrued  liabilities                          |       | (50      | )          | —   |       |
| Total                                         |       | $        | 6,383      |     | $          | 5,065 |   |

 

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 permitted by Staff Accounting Bulletin (“SAB”) 5H. Change ofinterest gains recorded in equity were $583, $2,243 and $1,520 in the yearsended December 31, 2005, 2004 and 2003, respectively.

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In 2005, we incurred$1,942 of acquisition related costs associated with the purchase of theoutstanding shares of MTI that we did not already own (see Note 23).

**6.**                 Short-terminvestments

Short-term investments consist of debt securities ofcorporations, which have investment grade credit ratings. The debt securitiesare classified and accounted for as available-for-sale and are reported at fairvalue with unrealized gains and losses excluded from earnings and reported inother comprehensive income. Management determines the appropriateclassification of its investments in securities at the time of purchase andreevaluates such determination at each balance sheet date. The short terminvestments consist of floating rate taxable municipal bonds with maturitiesfrom 2019 to 2027. We have the option to put the bonds to the remarketing agentwho is obligated to repurchase the bonds at par. As of December 31, 2005,our cost approximated fair value related to these investments.

**7.**                 Inventories

*Inventory consists of the following:*

| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Raw materials     |       | $                     | 5,823      |   | $ | 6,874 |   |
| Work-in-progress  |       | 1,944                 |       | 1,832 |   |
| Finished goods    |       | 29,195                |       | 17,481 |   |
|              |       | 36,962                |       | 26,187 |   |
| Inventory reserve |       | (3,975                | )          | (3,687 | ) |
| Inventory, net    |       | $                     | 32,987     |   | $ | 22,500 |   |

 

**8.**                 Propertyand Equipment

*Property and equipment consists of the following:*

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Machinery and  equipment                   |       | $                     | 14,222     |   | $ | 11,214 |   |
| Office furniture  and equipment            |       | 10,669                |       | 10,323 |   |
| Leasehold  improvements                    |       | 6,596                 |       | 4,239 |   |
| Construction in  progress                  |       | 2,916                 |       | 647 |   |
|                                       |       | 34,403                |       | 26,423 |   |
| Less:                                      |       |                  |       |   |   |
| Accumulated  depreciation and amortization |       | (16,526               | )          | (17,293 | ) |
| Property and equipment,  net               |       | $                     | 17,877     |   | $ | 9,130 |   |

 

Depreciation andamortization expense for property and equipment for the years endedDecember 31, 2005, 2004 and 2003 was $4,143, $4,220 and $3,856,respectively.

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**9.**                 Goodwilland Other Intangible Assets

*The changes in the carrying amount of goodwill byoperating segment for the years ended December 31, 2004 and 2005 were asfollows:*

| ** **                                                 | ** ** | **Cardio  Peripheral** | ** ** | **Neuro-  vascular** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
| Balance as of  January 1, 2004                        |       |                   | $          | 73,431               |       |      | $          | 17,333 |   | $ | 90,764 |   |
| Contingent  consideration related to acquisition milestone |       |                   | —     |                 |       | 3,750     |       | 3,750 |   |
| Balance as of December 31, 2004                       |       |                   | 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 |   |

 

*Other intangible assets consist of the following:*

| ** **                       | ** ** | ** **                                     | ** ** | **December 31,**       | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Weighted**                                   | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **average  useful life  (in years)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Patents and  licenses            |       |                                           | 5.0        |                        |       | $ | 8,390 |   |   | $ | (3,300 | ) |   | $ | 5,090 |   | $ | 6,971 |   |   | $ | (2,793 | ) |   | $ | 4,178 |   |   |
| Developed  technology            |       |                                           | 6.0        |                        |       | 48,068 |   |   | (29,951 | ) |   | 18,117 |   | 46,025 |   |   | (21,654 | ) |   | 24,371 |   |   |
| Trademarks and  tradenames  |       |                                           | 5.0        |                        |       | 3,093 |   |   | (1,721 | ) |   | 1,372 |   | 2,635 |   |   | (1,049 | ) |   | 1,586 |   |   |
| Customer  relationships          |       |                                           | 5.0        |                        |       | 6,131 |   |   | (4,480 | ) |   | 1,651 |   | 5,237 |   |   | (3,521 | ) |   | 1,716 |   |   |
| Other intangible  assets         |       |                                           |       |                        |       | $ | 65,682 |   |   | $ | (39,452 | ) |   | $ | 26,230 |   | $ | 60,868 |   |   | $ | (29,017 | ) |   | $ | 31,851 |   |   |
|                                  |            |                                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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.

Total amortization of intangible assets was $10,673,$9,863 and $12,078 for the years ended December 31, 2005, 2004 and 2003,respectively. In 2003, we recorded an impairment charge of $2,370 related toMitraLife and Appriva intangible assets. During 2003, we decided to reorganizethe operations acquired and determined that the intangible assets acquired inthe acquisitions no longer had value. These impairment charges are included inamortization of intangible assets in the consolidated statements of operations.

*Based on the intangible assets in service as of December 31,2005, estimated amortization expense for the next five years ending December 31is as follows:*

| 2006 |   | $     | 9,442  |   |
|------|--------|-------|--------|--------|
| 2007 |   | 7,173 |   |
| 2008 |   | 3,857 |   |
| 2009 |   | 1,390 |   |
| 2010 |   | 287   |   |

 

**10.**          Investments

As partial consideration for entering into a licensingagreement, we received shares in Enteric Medical Technologies (“Enteric”). Pursuantto the terms of the sale of Enteric in 2002, we recorded a gain 

F-16

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of $7,400 in considerationfor our sale of Enteric shares. In addition, the Enteric sale agreementprovided for contingent cash consideration and in 2003 we realized and recordedan additional gain of $14,647 related to the achievement of a definedmilestone.

We invested $8,070 for approximately 13% interest inAlsius Corporation (“Alsius”) in 2002. An additional investment in the amountof $606 was made in 2003. We recorded an other than temporary decline in valueof investments in the amount of $11,200 during the year ended December 31,2003, of which $8,070 related to Alsius and the remaining $3,130 related toother investments that were impaired.

We had a licensingagreement and an approximate 14% interest in Genyx Medical, Inc. (“Genyx”).The carrying value of our investment in Genyx was $0 as of December 31,2004 and we had no obligation to fund Genyx’s operations. In January 2005,we sold our interest in Genyx and recorded a gain of $3,733.

**11.**          AccruedLiabilities

*Accrued liabilities consist of the following:*

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Accrued  professional services |       | $                     | 1,043      |   | $ | 3,591 |   |
| Accrued clinical  studies      |       | 3,633                 |       | 1,580 |   |
| Office closure                 |       | 391                   |       | 2,698 |   |
| Accrued other                  |       | 6,276                 |       | 5,952 |   |
| Total accrued  liabilities     |       | $                     | 11,343     |   | $ | 13,821 |   |

 

**12.**          NotesPayable

*Notes payable consist of the following:*

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Non-current notes payable:**                  |       |                  |       |   |   |   |   |
| Endovascular  notes payable—Warburg Pincus |       |                  | $          | — |   |   | $ | 283,931 |   |
| Endovascular notes  payable—Vertical       |       |                  | —     |   |   | 15,522 |   |
| Total non-current  notes payable                |       |                  | $          | — |   |   | $ | 299,453 |   |

 

*Endovascular NotesPayable*

Endovascular issued demand notes to Warburg Pincus andVertical in order to obtain the necessary funds to complete acquisitions, meetworking capital requirements and fund operating losses. Demand notes totaling$49,100, $67,684 and $92,283 were issued during the years ended December 31,2005, 2004 and 2003, respectively. At June 21, 2005, the closing date ofour initial public offering, Endovascular had outstanding $315,962 aggregateprincipal amount of demand notes plus $44,743 of accrued and unpaid interestthereon. These notes were payable to Warburg Pincus, our majority stockholder,and Vertical, our second largest stockholder. Immediately prior to our initialpublic offering, we issued 21,964,815 and 1,194,489 shares of common stock toWarburg Pincus and Vertical, respectively, in exchange for their contributionof $324,230 principal amount of the demand notes and a portion of the accruedand unpaid interest thereon. Upon successful consummation of our initial publicoffering, we utilized $36,475 of the net proceeds to reduce our financingbalance to zero at June 21, 2005.

The notes provided for interest at 8% per annum andinterest expense totaled $12,152, $18,736 and $12,551, and for the years ended December 31,2005, 2004 and 2003, respectively. We made no interest payments on the demandnotes and accrued interest of $32,591 and $13,855 is included in the balance ofnotes payable at December 31, 2004 and 2003, respectively.

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In March 2005,Warburg Pincus and Vertical agreed not to call the demand notes includinginterest for payment before July 4, 2006. Consequently the balance of thenotes at December 31, 2004, including accrued and unpaid interest thereon,has been classified as a long term obligation in the December 31, 2004consolidated balance sheet.

*MTI Promissory NotePayable—December 2003*

In December 2003, MTI entered into a notepurchase agreement with certain accredited institutional investors, under whichMTI issued $17,000 aggregate principal amount of unsecured exchangeablepromissory notes that bore interest at 7% per annum.

The note purchase agreement was executed with anexchange price of $2.73 per share when the closing market price of MTI stockwas $3.74 per share. This difference totaling $1,970 was recorded against thenotes as a discount representing a beneficial conversion feature arising fromthe minority interests’ participation in the financing.

In January 2004, theaggregate principal amount of the notes and related accrued interest wereexchanged for MTI common stock. Upon conversion, the discount on the notes wasfully amortized and recorded in the statement of operations as interestexpense. As this expense related solely to the minority interests’participation in the financing, it was allocated to the minority interest inloss of subsidiary in the statement of operations.

*MTI Promissory NotePayable—June 2004*

In June 2004, MTI entered into a note purchaseagreement with certain accredited institutional investors under which MTIissued $21,000 aggregate principal amount of unsecured exchangeable promissorynotes that bore interest at 7% per annum. The amount of intercompanyparticipation in the financing of $10,000 has been eliminated in consolidationof our interest in MTI.

The note purchaseagreement was executed with an exchange price of $3.10 per share when theclosing market price of MTI stock was $4.45 per share. This difference totaling$4,793 was recorded against the notes as a discount representing a beneficialconversion feature arising from the minority interests’ participation in thefinancing. In August 2004, the aggregate principal amount of the notes andrelated accrued interest were exchanged for MTI common stock. Upon conversion,the discount on the notes was fully amortized and recorded in the statement ofoperations as interest expense. As this expense related solely to the minorityinterests’ participation in the financing, it was allocated to the minorityinterest in loss of subsidiary in the statement of operations.

*MTI Loan andSecurity Agreement*

On May 6, 2005, MTIentered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”),which will expire on May 6, 2007. Pursuant to the terms of the Agreement,MTI may borrow up to the lesser of (i) $3,000 or (ii) the sum of (a) 80%of MTI’s eligible accounts receivable, which exclude among other thingsaccounts receivable relating to international sales, and (b) the lesser of(1) 30% of MTI’s eligible inventory, which excludes among other thingsinventory located outside of the United States, (2) 50% of outstandingloans under (a) above or (3) $750. All outstanding amounts under theAgreement bear interest at a variable rate equal to SVB’s prime rate plus 2%. TheAgreement also contains customary covenants regarding operations of MTI’sbusiness and financial covenants relating to minimum tangible net worth. As of December 31,2005, MTI had no borrowings under the Agreement.

F-18

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*MTI Loan and Letterof Credit—Related Parties*

On October 13, 2005,MTI entered into a lease for approximately 96,400 square feet of new office,research and manufacturing space. In order to provide MTI with financing tosupport planned improvements and anticipated moving expenses, which arepreliminarily estimated to be approximately $2,300, we agreed to provide MTIwith an unsecured loan up to $2,300 and ev3 Endovascular issued a $1,000standby irrevocable letter of credit in favor of the landlord. MTI may drawdown amounts under the loan from time to time up to an aggregate of $2,300. Theamounts drawn down under the loan will bear interest at a floating prime rateplus 2.3% and will be payable in 36 consecutive monthly installments, plusaccrued interest. The letter of credit expires on September 15, 2006, butwill be automatically extended for successive one-year periods thereafter,unless LaSalle Bank N.A. notifies the parties that it does not intend to renewthe letter of credit for an additional year at least 30 days prior to theexpiration date, as such expiration date may be extended.

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

Interestincome and interest expense for the years ended December 31, 2005, 2004and 2003 are as follows:

| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income              |       | $        | (2,475     | )        | $          | (388     | )          | $ | (230 | ) |
| Interest expense             |       | 12,391   |       | 25,816   |       | 12,903   |       |
| Interest (income)  / expense |       | $        | 9,916      |     | $          | 25,428   |       | $ | 12,673 |   |

 

**14.**          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.

*RedeemableConvertible Preferred 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 Preferred unitswere entitled to vote on all matters along with the holders of Common units onan as-if converted basis. The Preferred units were convertible into Commonunits on a 1:6 basis, subject to an adjustment for any interest, splits,distribution, or other actions.

The liquidation value of the Class A unitsincreased at the rate of 8% per annum, compounded semi-annually. Theliquidation value of the Class B units increased at the rate of 18% perannum until the first annual anniversary and 8% per annum, thereafter, bothcompounded semiannually. At December 31, 2004, the liquidation value was$3.96 per unit for Class A units and $4.35 per unit for Class B units.Aggregate liquidation value at December 31, 2004 was $95,105 for Class Aunits and $178,502 for Class B units.

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 $98,687 and 41,077,336 Class B preferred membershipunits of ev3 LLC with a carrying value of $167,402 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 2).

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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.

**15.**          EquityBased Compensation Plans

We, along with ourpublicly traded subsidiary, MTI, offer various equity based award plans to ouremployees, officers, directors and consultants.

*ev3 LLC Unit-BasedIncentive Plan*

The Board approved the 2003 incentive plan (the “2003Plan”) that allowed for the grant of up to 2,216,609 units for option awardsrelated to ev3 LLC common units. The 2003 Plan amended an existing Endovascularplan. The option holders under the original plan exchanged their options toacquire shares in Endovascular for options to acquire units in ev3 LLC upon thedate of ev3 LLC’s formation as described in Note 2. The exchange wasaccounted for as a modification of options under SFAS 123 and resulted inadditional compensation expense of $68 and $304 for the years ended December 31,2004 and 2003.

Options, other than those granted to outsideconsultants, vest over a four-year period and expire within a period of notmore than ten years from the date of grant. Vested options expire ninety daysafter termination of employment. Options granted to outside consultantsgenerally vest over the term of their consulting contract. The exercise priceper unit for each option was set by the Board at the time of grant, providedthat the exercise price per unit is not less than 85% of the fair value perunit on the grant date.

The 2003 Plan also allowedfor the Board to issue restricted units and other unit-based awards, such asappreciation rights, phantom units, bargain purchase units and unit bonuses, toany eligible person under the plan. No such awards have been issued. Uponconsummation of our initial public offering, the ev3 LLC 2003 Incentive Planwas terminated with respect to options available for grant that were notgranted prior to the offering. During the year ended December 31, 2005,options to purchase 573,416 shares of ev3 LLC common membership units weregranted under the ev3 LLC 2003 Incentive Plan. In connection with the merger ofev3 LLC with and into us, these options were converted into options to purchasean equivalent number of shares of our common stock.

*2005 IncentiveStock Plan*

Upon consummation of ourinitial public offering, the ev3 Inc. 2005 Incentive Stock Plan becameeffective. Subject to adjustment as provided in the plan, 2,000,000 shares ofour common stock are available for issuance under the plan. Under the plan,eligible employees, outside directors and consultants may be awarded options,stock grants, stock units or stock appreciation rights. The terms andconditions of an option, stock grant, stock unit or stock appreciation right(including any vesting or forfeiture conditions) are set forth in thecertificate evidencing the grant. During the year ended December 31, 2005,options to purchase 1,729,646 shares of our common stock were granted under theev3 Inc. 2005 Incentive Stock Plan. On December 29, 2005, we also issued185,000 shares of restricted stock under the ev3 Inc. 2005 Incentive StockPlan. These shares of restricted stock were measured at the market price of ourstock on the grant date. Accordingly, $2,716 will be recorded as compensationexpense over the vesting period of approximately four years.

F-20

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*A summary of activity for the 2003 and 2005 Plans isas follows:*

| ** **                                         | ** ** | **Units/Shares  Outstanding** | ** ** | **Weighted-Average  Exercise Price Per**Unit/Share | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------|------------|
| Balance at  January 1, 2003                   |       |                          | 1,230,705  |                                                         |       |   | $ | 8.04 |   |   |
| Granted:                                           |       |                          |       |                                                         |       |   |   |   |   |
| Exercise price above market at date of grant(1)    |       |                          | 774,034    |                                                         |       |   | $ | 8.82 |   |   |
| Exercised                                          |       |                          | (30,377    | )                                                            |       |   | $ | 1.08 |   |   |
| Canceled                                           |       |                          | (438,941   | )                                                            |       |   | $ | 7.86 |   |   |
| Balance at December 31, 2003                  |       |                          | 1,535,421  |                                                         |       |   | $ | 8.64 |   |   |
| Granted:                                           |       |                          |       |                                                         |       |   |   |   |   |
| Exercise price above market at date of grant(2)    |       |                          | 385,473    |                                                         |       |   | $ | 8.82 |   |   |
| Exercise price below market at date of grant(3)    |       |                          | 75,750     |                                                         |       |   | $ | 8.82 |   |   |
| Exercised                                          |       |                          | (14,711    | )                                                            |       |   | $ | 6.00 |   |   |
| Canceled                                           |       |                          | (348,540   | )                                                            |       |   | $ | 7.26 |   |   |
| Balance at December 31, 2004                  |       |                          | 1,633,393  |                                                         |       |   | $ | 9.00 |   |   |
| Granted:                                           |       |                          |       |                                                         |       |   |   |   |   |
| Restricted stock                                   |       |                          | 185,000    |                                                         |       |   | $ | — |   |   |
| Exercise price equal to market at date of grant(4) |       |                          | 1,729,923  |                                                         |       |   | $ | 13.97 |   |   |
| Exercise price below market at date of grant(5)    |       |                          | 573,139    |                                                         |       |   | $ | 9.19 |   |   |
| Exercised                                          |       |                          | (132,879   | )                                                            |       |   | $ | 8.18 |   |   |
| Canceled                                           |       |                          | (165,267   | )                                                            |       |   | $ | 9.39 |   |   |
| Balance at December 31, 2005                  |       |                          | 3,823,309  |                                                         |       |   | $ | 11.41 |   |   |
| Options exercisable at December 31, 2003      |       |                          | 468,461    |                                                         |       |   | $ | 9.00 |   |   |
| Options exercisable at December 31, 2004      |       |                          | 683,814    |                                                         |       |   | $ | 9.36 |   |   |
| Options  exercisable at December 31, 2005     |       |                          | 1,021,559  |                                                         |       |   | $ | 9.45 |   |   |

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(1)          The weighted average fair value for optionsissued above market was $0.36.

(2)          The weighted average fair value for optionsissued above market was $0.24.

(3)          The weighted averagefair value for options issued below market was $4.68.

(4)          The weighted averagefair value for options issued at market was $6.05.

(5)          The weighted averagefair value for options issued below market was $5.05.

*For options outstanding and exercisable at December 31,2005, the exercise price ranges and average remaining lives were as follows:*

| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Exercise Price Per Unit** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Per Unit  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise Price  Per Unit** | ** ** |
| $0.36-$3.54                                |       |                         | 60,594     |                         |       |   | $ | 2.72 |   |   |   | 5.9 years |   |   | 60,466 |   |   | $ | 2.72 |   |   |
| $8.82-$21.36                               |       |                         | 3,568,321  |                         |       |   | $ | 11.35 |   |   |   | 8.7 years |   |   | 951,699 |   |   | $ | 9.10 |   |   |
| $80.34-$96.06                              |       |                         | 9,306      |                         |       |   | $ | 86.54 |   |   |   | 3.4 years |   |   | 9,306 |   |   | $ | 86.54 |   |   |
| $229.02                                    |       |                         | 88         |                         |       |   | $ | 229.02 |   |   |   | 1.5 years |   |   | 88 |   |   | $ | 229.02 |   |   |
|                                       |       |                         | 3,638,309  |                         | ** ** | ** ** | $ | 11.41 |   |   |   | 8.7 years |   |   | 1,021,559 |   |   | $ | 9.45 |   |   |
|                                            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***MTI Stock-Based Incentive Plans***

*1993 Stock OptionPlan*

The 1993 Incentive Stock Option, Nonqualified StockOption and Restricted Stock Purchase Plan (the “1993 Plan”) provides for thedirect sale of shares and the grant of options to purchase up to 650,000 sharesof MTI’s common stock to its employees, officers, consultants and directors. The1993 Plan expired by its terms in 2003 and no further options, rights orrestricted stock awards may be granted under such plan.

The 1993 Plan included incentive stock options (“ISOs”)and nonqualified stock options (“NSOs”) for which the option prices could notbe less than the fair market value of the shares of MTI’s common stock on thedate of the grant. For ISOs, the exercise price per share could not be lessthan 110% of the fair market value of a share of MTI’s common stock on thegrant date for any individual possessing more than 10% of the total outstandingcommon stock of MTI.

Options, other than thosegranted to outside consultants, generally vest over a four-year period whengranted. The 1993 Plan provides for the possible acceleration of vesting ofgranted options upon the occurrence of certain events, among them a change ofcontrol of MTI. Options granted to outside consultants generally vest over theterm of their consulting contract. Options expire within a period of not morethan ten years from the date of grant and expire ninety days after termination ofemployment.

*1996 StockIncentive Plan*

The 1996 Stock Incentive Plan (the “1996 Plan”)provides for options to purchase up to 6,750,000 shares of MTI’s common stockand restricted common stock grants. The 1996 Plan includes NSOs and ISOs andmay include grants to MTI’s directors, officers, employees and consultants,except that incentive stock options may not be granted to non-employeedirectors or consultants. In addition, the 1996 Plan, as amended, provides thateach of MTI’s non-employee directors be granted an option consisting of 16,000shares of common stock, which vest and become exercisable at the rate of 25%immediately and 25% on the anniversary of such director’s initial electionduring the three-year period following the grant date. Such directors shallalso automatically be granted options for an additional 4,000 shares each yearthereafter, subject to an aggregate stock ownership limitation of 1% ofoutstanding shares and options as defined in the 1996 Plan.

Options, other than those granted to the non-employeedirectors as described above or outside consultants, generally vest over afour-year period when granted. The 1996 Plan provides for the possibleacceleration of vesting of granted options upon the occurrence of certainevents, among them a change of control of MTI. Options expire within a periodof not more than ten years from the date of grant. Options expire generallythirty days after termination of employment.

F-22

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*A summary of stock option activity for the 1993 and1996 Plans is as follows:*

| ** **                                         | ** ** | **Shares  Outstanding** | ** ** | **Weighted-Average  Exercise Price Per  Share** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|
| Balance at  January 1, 2003                   |       |                    | 3,858,224  |                                                      |       |   | $ | 5.30 |   |   |
| Granted(1)                                         |       |                    | 791,000    |                                                      |       |   | $ | 3.74 |   |   |
| Exercised                                          |       |                    | (113,698   | )                                                         |       |   | $ | 4.72 |   |   |
| Canceled                                           |       |                    | (589,741   | )                                                         |       |   | $ | 5.89 |   |   |
| Balance at  December 31, 2003                 |       |                    | 3,945,785  |                                                      |       |   | $ | 4.91 |   |   |
| Granted(2)                                         |       |                    | 296,500    |                                                      |       |   | $ | 3.95 |   |   |
| Exercised                                          |       |                    | (29,200    | )                                                         |       |   | $ | 1.92 |   |   |
| Canceled                                           |       |                    | (240,414   | )                                                         |       |   | $ | 4.75 |   |   |
| Balance at  December 31, 2004                 |       |                    | 3,972,671  |                                                      |       |   | $ | 4.87 |   |   |
| Granted:                                           |       |                    |       |                                                      |       |   |   |   |   |
| Exercise price equal to market at date of grant(3) |       |                    | 1,779,000  |                                                      |       |   | $ | 4.19 |   |   |
| Exercise price below market at date of grant(4)    |       |                    | 10,000     |                                                      |       |   | $ | 3.62 |   |   |
| Exercised                                          |       |                    | (154,410   | )                                                         |       |   | $ | 3.46 |   |   |
| Canceled                                           |       |                    | (462,895   | )                                                         |       |   | $ | 4.13 |   |   |
| Balance at December 31,  2005                 |       |                    | 5,144,366  |                                                      |       |   | $ | 4.74 |   |   |
| Options exercisable at December 31, 2003      |       |                    | 2,185,204  |                                                      |       |   | $ | 6.06 |   |   |
| Options  exercisable at December 31, 2004     |       |                    | 2,687,567  |                                                      |       |   | $ | 5.54 |   |   |
| Options exercisable at  December 31, 2005     |       |                    | 3,339,093  |                                                      |       |   | $ | 5.14 |   |   |

----

(1)          The weighted average fair value for optionsgranted was $1.87.

(2)          The weighted average fair value for optionsgranted was $2.02.

(3)          The weighted average fair value for optionsissued at market was $1.95.

(4)          The weighted averagefair value for options issued below market was $1.86

*For options outstanding and exercisable atDecember 31, 2005, 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** | ** ** |
| $0.46-  3.58                      |       |                         | 1,297,977  |                         |       |   | $ | 2.59 |   |   |   | 7.1 years |   |   | 914,312 |   |   | $ | 2.50 |   |   |
| $3.62-  4.00                      |       |                         | 1,594,978  |                         |       |   | $ | 3.88 |   |   |   | 8.4 years |   |   | 604,178 |   |   | $ | 3.93 |   |   |
| $4.11-  6.29                      |       |                         | 1,316,080  |                         |       |   | $ | 5.34 |   |   |   | 6.1 years |   |   | 983,251 |   |   | $ | 5.42 |   |   |
| $6.30-11.00                                 |       |                         | 935,331    |                         |       |   | $ | 8.36 |   |   |   | 4.4 years |   |   | 837,352 |   |   | $ | 8.57 |   |   |
|                                        |       |                         | 5,144,366  |                         |       |   | $ | 4.74 |   |   |   | 6.8 years |   |   | 3,339,093 |   |   | $ | 5.14 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Other Plans*

The Employee Stock Purchase Plan (the “Purchase Plan”)covers an aggregate of 400,000 shares of MTI common stock and was designed toqualify as a non-compensatory plan under Section 423 of the InternalRevenue Code. The Purchase Plan permits an eligible employee of MTI to purchaseMTI common stock through payroll deductions not to exceed 20% of the employee’scompensation. An employee’s participation is limited also if such participationresults in the employee (a) owning shares or 

F-23

----

options to purchase sharesof stock possessing 5% or more of the total combined voting power or value ofall classes of stock of MTI, (b) having the right to purchase shares underall employee stock purchase plans of MTI which exceeds $25 thousand of fairmarket value of such shares for any calendar year in which the right isoutstanding at any time, or (c) having the right on the last day of anyoffering period (described below) to purchase in excess of 2,500 shares.

The price of the MTI common stock purchased under thePurchase Plan is 85% of the lower of the fair market value of the common stockat the beginning of the six-month offering period (January 1 or July 1)or on the applicable purchase date (June 30 or December 31). Employeesmay end their participation in the offering at any time during the offeringperiod, and participation ends automatically on termination of employment. Unlessterminated earlier by MTI, the Purchase Plan will terminate in 2007. For theyears ended December 31, 2005, 2004 and 2003, purchases by employees underthe Purchase Plan resulted in the issuance of 151,316, 122,521 and 105,005shares of MTI common stock, respectively, and in proceeds to MTI of $496thousand, $368 thousand and $242 thousand, respectively. Compensation expenserecorded for the plan in the consolidated statements of operations for theyears ended December 31, 2005, 2004 and 2003 was $168 thousand, $65thousand and $98 thousand, respectively. Compensation expense has beendetermined using the assumptions for MTI as disclosed in Note 3, exceptfor the expected option term, which is six months.

The outstanding options issued under the 1993 and 1996Plans were converted into options to purchase shares of ev3 common stock andthe Purchase Plan was terminated effective January 6, 2006 in conjunctionwith the merger of MII with and into MTI as discussed in Note 23.

Warburg Pincus and certain of our employees anddirectors entered into loan agreements in order for certain employees anddirectors to buy ownership interests in us. In January 2004, one of theloans was settled for less than the total outstanding balance. We haverecognized compensation expense of $937 thousand associated with the settlementof the loan.

As a result of thesettlement of the loan, the remaining outstanding loans are now considered tobe a part of a stock compensation arrangement. Modifications are measured forcompensation expense. Additional compensation expense, if any, is recognizedover the remaining life of the loan. The total outstanding loan balance betweenWarburg and our employees and directors, including accrued interest, at December 31,2005 and 2004 was $5,244 and $5,076, respectively.

*Non-EmployeeEquity-Based Compensation*

For the years ended December 31,2005, 2004 and 2003, we recognized consulting expense, included in research anddevelopment expense in the accompanying consolidated statements of operationsof $30 thousand, $121 thousand and $240 thousand, respectively, relating to thefair value of 373,897 MTI options granted to consultants under MTI’s 1993 and1996 Plans. The assumptions and methodology to determine fair value are thesame as those used by MTI described in Note 3.

**16.**   DefinedContribution Plans

Endovascular offers substantially all 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 $1,347, $716 and $729 for the years ended December 31,2005, 2004 and 2003, respectively.

F-24

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MTI administers a 401(k) Savings Plan on behalfof qualified employees. MTI may, at its option, contribute to the plan, but hasnot done so since the plan’s inception.

Expenses to administer theplans are borne by us and have amounted to approximately $13 thousand, $24thousand and $38 thousand for the years ended 2005, 2004 and 2003, respectively.

**17.**   Income Taxes

As a limited liability company, ev3 LLC was notsubject to taxation. The resulting change to a C corporation does not have animpact on our consolidated financial statements.

Ouroperating subsidiaries have been C corporations since inception. Following is areconciliation of the U.S. Federal statutory rate to our effective tax rate:

| ** **                       | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S. Federal  statutory tax rate |       | (34.0                                                     | )%         | (34.0 | )% | (34.0 | )% |
| Meals and  entertainment         |       | 0.3                                                       | %          | 0.2 | % | 0.2 | % |
| Losses of foreign  subsidiaries  |       | 3.1                                                       | %          | 2.4 | % | 1.8 | % |
| State income  taxes              |       | (5.4                                                      | )%         | (4.4 | )% | (4.7 | )% |
| Tax credits                      |       | (0.1                                                      | )%         | (0.1 | )% | (0.3 | )% |
| Non-deductible  expenses         |       | —                                                    |       | 3.1 | % | 0.8 |   |
| Change in  valuation allowance   |       | 35.9                                                      | %          | 32.5 | % | 35.6 | % |
| Other, net                       |       | 0.9                                                       | %          | 0.5 | % | 1.1 | % |
| Effective tax rate               |       | 0.7                                                       | %          | 0.2 | % | 0.5 | % |

 

*The components of ev3 Inc.’s provision for incometaxes are as follows:*

| ** **           | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------|------------|-----------------------------------------------------------|------------|
| ** **           | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:             |       |                                                      |       |   |   |   |   |
| Foreign              |       | $                                                         | 525        |   | $ | 194 |   | $ | 301 |   |
| Total Current        |       | 525                                                       |       | 194 |   | 301 |   |
| Total tax  provision |       | $                                                         | 525        |   | $ | 194 |   | $ | 301 |   |

 

*ev3 Inc.’s effective income tax rate varies from theU.S. Federal statutory rate as follows:*

| ** **                       | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S. Federal  statutory tax rate |       | (34.0                                                     | )%         | (34.0 | )% | (34.0 | )% |
| Meals and  entertainment         |       | 0.3                                                       | %          | 0.2 | % | 0.1 | % |
| Losses of foreign  subsidiaries  |       | 2.7                                                       | %          | 3.0 | % | 2.0 | % |
| State income  taxes              |       | (5.5                                                      | )%         | (5.5 | )% | (5.4 | )% |
| Change in  valuation allowance   |       | 36.7                                                      | %          | 36.5 | % | 36.3 | % |
| Non-deductible  expenses         |       | —                                                    |       | — |   | 0.9 | % |
| Other, net                       |       | 0.3                                                       | %          | — |   | 0.4 | % |
| Effective tax rate               |       | 0.5                                                       | %          | 0.2 | % | 0.3 | % |

 

F-25

----

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

| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Inventories                         |       | $                     | 1,070      |   | $ | 980 |   |
| Intangible assets                   |       | (6,710                | )          | (5,491 | ) |
| Tax credit  carryforwards           |       | 1,562                 |       | 1,561 |   |
| Unrealized losses  on investments   |       | 3,267                 |       | 3,267 |   |
| Property and  equipment             |       | 774                   |       | 117 |   |
| Net operating  loss carryforwards   |       | 125,528               |       | 91,832 |   |
| Other reserves  and accruals        |       | 1,305                 |       | 1,271 |   |
| Other                               |       | 2,716                 |       | 1,784 |   |
| Valuation allowance                 |       | (129,512              | )          | (95,321 | ) |
| Net deferred tax asset  (liability) |       | $                     | —     |   | $ | — |   |

 

Many of our foreign subsidiaries have generatedforeign net operating losses, for which the benefit is not recorded in thedeferred assets above. The benefit of these losses, if recorded would have acomplete valuation allowance established against them.

Wehave established a complete valuation allowance against our net deferred taxassets because it was determined by management at the balance sheet date thatit was more likely than not that such deferred tax assets would not be realized.In future years if the deferred tax assets are determined by management to bemore likely than not to be realized, the recognized tax benefits relating tothe reversal of the valuation allowance as of December 31, 2005 will berecorded as follows:

| Income tax  benefit from continuing operations |   | $      | 111,470 |   |
|------------------------------------------------|--------|--------|---------|--------|
| Goodwill and  intangibles                      |   | 18,042 |    |
| Total                                          |   | $      | 129,512 |   |

 

At December 31, 2005, ev3 Inc. had net operatingloss carryforwards for federal purposes of $313,820 (net of $29,934 expected toexpire before utilization due to the Internal Revenue Code (“IRC”) Section 382limitation). Endovascular has research and experimentation credit carryforwardsfor federal and California purposes of approximately $1,047 and $496,respectively (collectively net of $1,094 expected to expire before utilizationdue to the IRC Section 382 limitation). Endovascular also has amanufacturer’s investment credit carryforward for California tax reporting purposesof approximately $19 (net of $20 limited under California law).

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. It is also possible thatEndovascular may have experienced an ownership change or that its subsidiariesmay have undergone ownership changes prior to the acquisitions by Endovascularin 2001 and 2002. These possible changes would further limit the availabilityof the acquired company’s attributes. Furthermore, subsequent changes in equitycould further limit the utilization of the federal net operating loss andcredit carryforwards. Such limitations could result in expiration ofcarryforward periods prior to utilization of the net operating loss and creditcarryforwards. Our initial public offering during 2005 did not result in anownership change pursuant to IRC Section 382.

The net operating lossesof certain subsidiaries acquired in prior years are subject to the separatereturn limitation year (“SRLY”) provisions of the Treasury Regulations. Netoperating loss carryforwards from these acquisitions may only be used to offsetfuture taxable income generated by these subsidiaries.

F-26

----

*The carryforwards available as of December 31,2005 have expiration periods and limitations for federal tax purposes asfollows:*

|        | ** ** | **NOL     Carryforward   ** | ** ** | **Federal Credit  Carryforward** | ** ** | **State Credit  Carryforward** | ** ** | **Federal Carryforward  Expiration Period** | ** ** | **Type of  Attribute  Limitation** | ** ** |
|--------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------|------------|
|        |       |                                                      | $          | 243                                   | *          |                                |       | $                                                     | —     |                                    |       |   | $ | — |   |   |   | 2010-2011 |   |   |   | None |   |   |
|   |       |                                                      | 8,364      | *                                     |       |                                | —     |                                                  |       |                                    | —     |   |   |   | 2011-2022 |   |   |   | § 382 |   |   |
|        |       |                                                      | 2,896      | *                                     |       |                                | 137        |                                                  |       |                                    | 103        |   |   |   | 2020-2022 |   |   |   | SRLY |   |   |
|   |       |                                                      | 18,009     | *                                     |       |                                | 360        |                                                  |       |                                    | 393        |   |   |   | 2019-2022 |   |   |   | § 382 |   |   |
|        |       |                                                      | 24,249     | *                                     |       |                                | 550        |                                                  |       |                                    | —     |   |   |   | 2019-2022 |   |   |   | § 382 |   |   |
|   |       |                                                      | 5,996      | *                                     |       |                                | —     |                                                  |       |                                    | —     |   |   |   | 2021-2023 |   |   |   | SRLY |   |   |
|        |       |                                                      | 254,063    | **                                    |       |                                | —     |                                                  |       |                                    | —     |   |   |   | 2021-2023 |   |   |   | None |   |   |
|   |       |                                                      | $          | 313,820                               |       |                                |       | $                                                     | 1,047      |                                    |       |   | $ | 496 |   |   |   |   |   |   |   |   |   |   |

----

****                    Theseamounts represent the net operating losses and credit carryforwards acquiredduring 2001 and 2002 net of amounts expected to expire before utilization dueto the IRC §382 limitations or SRLY limitations.*

*****             AllNOL’s are available for utilization on the consolidated federal income tax returnof ev3 Inc..*

*The components of MTI’s provision for income taxes areas follows:*

| ** **           | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------|------------|-----------------------------------------------------------|------------|
| ** **           | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:             |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| U.S. State           |       |                                                      | $          | 2 |   |   |   | $ | 2 |   |   |   | $ | 2 |   |   |
| Total Current        |       |                                                      | 2          |   |   |   | 2 |   |   |   | 2 |   |   |
| Total tax  provision |       |                                                      | $          | 2 |   |   |   | $ | 2 |   |   |   | $ | 2 |   |   |

 

*MTI’s effective income tax rate varies from the U.S.Federal statutory rate as follows:*

| ** **                       | ** ** | **For the Years Ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S. Federal  statutory tax rate |       | (34.0                                                     | )%         | (34.0 | )% | (34.0 | )% |
| State income  taxes              |       | (6.0                                                      | )%         | — |   | — |   |
| Meals and  entertainment         |       | 1.0                                                       | %          | 0.2 | % | 0.6 | % |
| Stock issuance  costs            |       | —                                                    |       | — |   | 2.6 | % |
| Losses of foreign  subsidiaries  |       | 12.3                                                      | %          | — |   | — |   |
| Tax credits                      |       | (3.4                                                      | )%         | (0.6 | )% | (2.7 | )% |
| Change in  valuation allowance   |       | 31.4                                                      | %          | 17.7 | % | 33.4 | % |
| Non deductible  expenses         |       | —                                                    |       | 16.4 | % | — |   |
| Other, net                       |       | (1.3                                                      | )%         | 0.3 | % | 0.1 | % |
| Effective tax rate               |       | 0.0                                                       | %          | 0.0 | % | 0.0 | % |

 

F-27

----

*MTI had the following deferred tax assets andliabilities as of:*

| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Capitalized  research and development costs |       | $                     | 8,827      |   | $ | 10,619 |   |
| Intangibles                                 |       | 253                   |       | 854 |   |
| Tax credit  carryforwards                   |       | 3,926                 |       | 4,188 |   |
| Net operating  loss carryforwards           |       | 30,611                |       | 30,092 |   |
| Other reserves  and accruals                |       | 1,471                 |       | 1,643 |   |
| Other                                       |       | 1,542                 |       | 1,544 |   |
| Valuation  allowance                        |       | (46,630               | )          | (48,940 | ) |
| Net deferred tax asset                      |       | $                     | —     |   | $ | — |   |

 

MTIhas established a complete valuation allowance against its deferred tax assetsbecause it was determined by management that it was more likely than not at thebalance sheet date that such deferred tax assets would not be realized. Infuture years if the deferred tax assets are determined by management to be morelikely than not to be realized, the recognized tax benefits relating to thereversal of the valuation allowance as of December 31, 2005 will berecorded as follows:

| Income tax  benefit from continuing operations |   | $     | 40,557 |   |
|------------------------------------------------|--------|-------|--------|--------|
| Goodwill and  intangibles                      |   | 6,073 |   |
| Total                                          |   | $     | 46,630 |   |

 

When we complete the acquisition of MTI as disclosedin Note 23, we will include MTI in our consolidated U.S. tax return. Inconnection with the purchase accounting related to the step acquisition of MTI,deferred tax liabilities will be recorded on intangible assets arising from theacquisition which will reduce the valuation allowance of ev3 Inc. At December 31,2005, MTI had net operating loss carryforwards for federal and state purposesof approximately $81,554 and $49,449, respectively. MTI has research andexperimentation credit carryforwards for federal and state purposes ofapproximately $2,402 and $2,309, respectively. MTI also has a manufacturer’sinvestment credit carryforward for state purposes of approximately $145.

At December 31, 2005, Dendron had foreign netoperating loss carryforwards of approximately $16,800. The losses carry overindefinitely, unless certain changes in business operations, as defined, occurduring the carryover period. We have established a full valuation allowanceagainst these deferred tax assets since management does not believe it is morelikely than not that this foreign subsidiary’s German net operating losscarryforwards will be fully utilized. Upon realization, a portion of thebenefit from the net operating loss carryforward will reduce goodwillrecognized upon Dendron’s acquisition.

The closing of a July 2001 financing transactionwith MII resulted in a change in ownership as defined by Section 382 ofthe Internal Revenue Code and similar state provisions, which resulted in alimitation on our ability to utilize our net operating loss carryforwardsduring any year to offset future taxable income in excess of $5,800.

German taxing authoritieshave not audited the income tax returns of Dendron since MTI’s acquisition ofDendron in October 2002. While we believe that Dendron has made its taxfilings in conformity with German tax regulations, we are unable to predictwhat, if any, areas of inquiry might be pursued by German tax authorities inconnection with an audit in general, or specifically in connection with eitherMTI’s acquisition of Dendron or the subsequent closure of MTI’s Germanmanufacturing facility or whether, or to what extent, Dendron will be subjectto additional liability or tax.

F-28

----

**18.**   Commitments andContingencies

*Operating Leases*

We lease various manufacturing and office facilitiesand certain equipment under operating leases.

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

| **Years ending December 31:** |   |   |   |
|------------------------------------|--------|--------|--------|
| 2006                               |   | $      | 3,527  |   |
| 2007                               |   | 2,963  |   |
| 2008                               |   | 2,231  |   |
| 2009                               |   | 2,059  |   |
| 2010                               |   | 1,223  |   |
| Thereafter                         |   | 320    |   |
|                               |   | $      | 12,323 |   |

 

Rent expense related to non-cancelable operatingleases for the years ended December 31, 2005, 2004 and 2003 was $3,923,$3,752 and $3,364, 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 31,2005. 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:** |   |   |   |
|------------------------------------|--------|--------|--------|
| 2006                               |   | $      | 17,755 |   |
| 2007                               |   | 29,650 |   |
|                               |   | $      | 47,405 |   |

 

These payments aredenominated in Euros and were translated at the respective exchange rate at December 31,2005. These future payments are subject to foreign currency exchange rate risk.The agreement 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 $5,000 or $15,000, depending on the event causing thetermination. In lieu of terminating the agreement for our failure to meetcertain minimum annual purchase requirements, Invatec may require us to pay anindemnification amount equal to 80% of the difference between the aggregateminimum annual value of purchases required under the agreement and the totalactual purchases of products during the same contractual year.

*Letters of Credit*

As of December 31,2005, we had $3,102 of outstanding letters of credit. These outstandingcommitments are fully collateralized by restricted cash.

F-29

----

*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$1,658, $1,588 and $1,680 in connection with royalty and licensing agreements,for the years ended December 31, 2005, 2004 and 2003, respectively.

*Other*

We closed redundantoffices in 2004 and 2003 to consolidate our operations into two main facilitiesin Irvine, California and Plymouth, Minnesota. In connection with the officeclosures, we recorded employee and contractual termination costs ofapproximately $2,929 and $3,333, which are included in selling, general andadministrative expenses on the consolidated statements of operations for theyears ended December 31, 2004 and 2003, respectively. Unpaid costs relatedto these closures of $391 thousand and $2,559 at December 31, 2005 and2004, respectively, are included in accrued liabilities on the consolidatedbalance sheet.

*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. Theopposition proceedings with the EPO on the one patent are complete, and the EPOhas rejected the opposition and has upheld the validity of the one patent. Dendronretains the right to file a nullity action in Germany against the patent. Allthree Appeal proceedings are currently stayed on the basis of the validitychallenges 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 hasnow filed a domestic German nullity action against that patent. Theinfringement case is under appeal. The appeal has been stayed pending theoutcome of the nullity action filed against the patent.

An accrual for the matters discussed above wasincluded in the balance sheet of Dendron as of the date of its acquisition byMTI. As of December 31, 2005, approximately $800 thousand was recorded in 

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accrued liabilities in ourconsolidated balance sheet. Dendron ceased all activities with respect to theEDC I coil device prior to MTI’s October 2002 acquisition of Dendron.

Concurrent with its acquisition of Dendron, MTIinitiated a series of legal actions related to its 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 MTI’s 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, MTI has been enjoined from engaging in infringingactivities related to the Sapphire coils in most countries within the EuropeanUnion, and may be liable for then-unspecified monetary damages for activitiesengaged in by MTI since September 27, 2002. In February 2005, MTIreceived an initial claim from the patent holders with respect to monetarydamages, amounting to €3.6 million, orapproximately $4.3 million as of December 31, 2005, with which we disagree.Court hearings will be held regarding these claims. MTI has filed an appealwith the Dutch court, and believes that since the date of injunction in eachseparate country it is in compliance with the Dutch court’s injunction and MTIintends to continue such compliance. Because we believe that MTI has validlegal grounds for appeal, we have determined that a loss is not probable atthis time as defined by SFAS 5, 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, MTI 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 MTI’sproducts did not infringe this patent. The patent in question was the U.K.designation of the same patent that was found by the Dutch court in October 2003to be invalid, as discussed above. The patent holders counterclaimed foralleged infringement by MTI. In February 2005, the court approved aninterim settlement between the parties under which the patent holders arerequired to surrender such patent to the U.K. Comptroller of Patents, and topay MTI’s costs associated with the legal action, including interest. As aresult, MTI received interim payments from the patent holders aggregating £500thousand (equivalent to approximately $900 thousand based on the dates ofreceipt), which MTI recorded as a reduction of litigation expense upon receiptof such funds in February and March 2005. The parties intend tocontinue discussions regarding payment by the patent holders of the remainingcosts incurred by MTI in such litigation and a court hearing on these costs isexpected in June 2006. As a result of the interim settlement, weanticipate that MTI will no longer be involved in litigation on this matter inthe United Kingdom, although no assurance can be given that no other litigationinvolving MTI may arise in the United Kingdom.

In the United States, concurrent with the FDA’smarketing clearance of the Sapphire line of embolic coils received in July 2003,MTI initiated a declaratory judgment action against the patent holders in theUnited States District Court for the Western District of Wisconsin. The actionincluded assertions of non-infringement by MTI and invalidity of a range ofpatents held by the patent holders related to detachable coils and certaindelivery catheters. In October 2003, the court dismissed MTI’s 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 MTI in the United States District Court for theNorthern District of California alleging infringement by MTI with respect to arange of patents held by the University of California related to detachablecoils and certain delivery systems. MTI filed a counterclaim against theUniversity of California asserting non-infringement by MTI, invalidity of 

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the patents andinequitable conduct in the procurement of certain patents. In addition, MTIfiled 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. Cross-motions for summary judgment on MTI’s inequitable conductclaim have been briefed and are pending before the court. A trial date has notbeen set. Because these matters are in early stages, we cannot estimate thepossible loss or range of loss, if any, associated with their resolution. However,there can be no assurance that the ultimate resolution of these matters willnot result in a material adverse effect on our business, financial condition orresults of operations.

In March 2005, Medtronic, Inc. contacted usto express its view that our Protégé stents infringe on one or more of itspatents. We informed Medtronic that we disagreed with Medtronic’s assertions,and subsequently had several discussions with Medtronic. No lawsuit withrespect to this matter has been filed.

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. Wehave answered the complaint and now both parties are seeking to introduce newclaims into the case. Boston Scientific is seeking to add a claim formisappropriation of trade secrets, and we are seeking to add counterclaims forpatent infringement of two of our own patents. We intend to vigorously defendthis action. Because these matters are in early stages, we cannot estimate thepossible loss or range of loss, if any, associated with their resolution. However,there can be no assurance that the ultimate resolution of these matters willnot result in a material adverse effect on our business, financial condition orresults of operations.

The acquisition agreement relating to our acquisitionof Appriva Medical, Inc. contains four milestones to which payments relate.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 the complaint.A hearing was held on this motion in January 2006 after which the courttook the motion under advisement. The parties have not engaged in anydiscovery.

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 asformer shareholders 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 have filed a motion to dismiss the complaint, which is scheduled fora hearing on March 27, 2006. The parties have not engaged in any discovery.

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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 our 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 our transaction with MTI. We believe this lawsuit is without meritand plan to defend it vigorously. 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.

**19.**   Related PartyTransactions

Our wholly-ownedsubsidiary, Endovascular, is a party to several agreements with our majorityowned subsidiary, MTI. Pursuant to these agreements, Endovascular is adistributor of certain MTI products, provides inventory management andadministrative services for certain finished goods inventory of MTIneurovascular products, provides MTI with marketing, sales solicitation,accounting, invoicing, collection and administrative services in certaincountries other than the United States and Canada. All significant intercompanybalances and transactions have been eliminated and all minority interestamounts are reported in the consolidated statements of operations.

**20.**   Segmentand Geographic Information

We operate in two operating segments: cardioperipheral and neurovascular.

The cardio peripheral operating segment includescardiovascular products which are used to treat coronary artery disease, atrialfibrillation and other disorders in heart and peripheral vascular productswhich are used to treat vascular disease in legs, kidney (or renal), neck (orcarotid), and generally all vascular diseases other than in the brain or theheart.

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, Europe and Japan as well as through distributors inother international markets. Our customers include a broad physician baseconsisting of cardiologists, radiologists, neuro-radiologists, vascularsurgeons, neurosurgeons and other endovascular specialists.

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*The following is segment information:*

| ** **                               | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Net  sales**                           |       |                                                          |       |   |   |   |   |
| **Cardio  Peripheral:**                  |       |                                                          |       |   |   |   |   |
| Stents                                   |       | $                                                             | 37,871     |   | $ | 20,484 |   | $ | 16,196 |   |
| Thrombectomy and embolic protection |       | 12,869                                                        |       | 9,119 |   | 6,892 |   |
| Procedural support and other        |       | 29,141                                                        |       | 23,339 |   | 22,343 |   |
| Total Cardio Peripheral                  |       | $                                                             | 79,881     |   | $ | 52,942 |   | $ | 45,431 |   |
| **Neurovascular**                        |       |                                                          |       |   |   |   |   |
| Embolic products                         |       | 22,463                                                        |       | 12,583 |   | 8,269 |   |
| Neuro access and delivery products  |       | 31,352                                                        |       | 20,809 |   | 13,939 |   |
| Total Neurovascular                      |       | $                                                             | 53,815     |   | $ | 33,392 |   | $ | 22,208 |   |
| Total net sales                          |       | $                                                             | 133,696    |   | $ | 86,334 |   | $ | 67,639 |   |
| **Gross profit**                         |       |                                                          |       |   |   |   |   |
| Cardio Peripheral                        |       | $                                                             | 41,329     |   | $ | 27,477 |   | $ | 24,461 |   |
| Neurovascular                            |       | 37,273                                                        |       | 18,995 |   | 12,960 |   |
| Total                                    |       | $                                                             | 78,602     |   | $ | 46,472 |   | $ | 37,421 |   |
| **Total assets**                         |       |                                                          |       |   |   |   |   |
| Cardio Peripheral                        |       | $                                                             | 239,255    |   | $ | 146,722 |   | $ | 135,610 |   |
| Neurovascular                            |       | 57,573                                                        |       | 65,324 |   | 71,413 |   |
| Total                                    |       | $                                                             | 296,828    |   | $ | 212,046 |   | $ | 207,023 |   |
| Gross profit(1)                          |       | $                                                             | 78,602     |   | $ | 46,472 |   | $ | 37,421 |   |
| Operating expense                        |       | 181,448                                                       |       | 137,447 |   | 140,204 |   |
| Loss from operations                     |       | $                                                             | (102,846   | ) | $ | (90,975 | ) | $ | (102,783 | ) |

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(1)          Gross profit for internal measurementpurposes is defined as net sales less cost of goods sold.

For the years ended December 31, 2005, 2004 and2003, 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** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Net Sales**            |       |       |       |     |       |
| United States            |       | $          | 71,848     |     | $          | 42,791   |       |
| International            |       | 61,848     |       | 43,543   |       |
| Total net sales          |       | $          | 133,696    |     | $          | 86,334   |       |
| **Long-lived Assets**    |       |       |       |     |       |
| United States            |       | $          | 17,198     |     | $          | 8,174    |       |
| International            |       | 679        |       | 956      |       |
| Total long-lived  assets |       | $          | 17,877     |     | $          | 9,130    |       |

 

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**21.**   QuarterlyFinancial Data (Unaudited)

| ** **     | ** ** | **Net Sales** | ** ** | **Loss from  Operations** | ** ** | **Net Loss** | ** ** | **Net Loss  Attributable to  Common  Share Holders** | ** ** | **Loss Per  Share** | ** ** |
|----------------|------------|--------------------|------------|--------------------------------|------------|-------------------|------------|---------------------------------------------------------------------|------------|--------------------------|------------|
| 2004           |       |               |       |                           |       |              |       |                                                                |       |                     |       |   |   |   |   |
| First Quarter  |       | $                  | 20,580     |                           |       | $                 | (24,351    | )                                                                   |       | $                        | (26,649    | ) |   | $ | (32,584 | ) |   | $ | (19.08 | ) |
| Second Quarter |       | 20,569             |       |                           | (25,354    | )                 |       | (26,975                                                             | )          |                     | (32,844    | ) |   | (18.29 | ) |
| Third Quarter  |       | 19,654             |       |                           | (12,177    | )                 |       | (15,282                                                             | )          |                     | (21,270    | ) |   | (8.35 | ) |
| Fourth Quarter |       | 25,531             |       |                           | (29,093    | )                 |       | (30,367                                                             | )          |                     | (36,401    | ) |   | (14.28 | ) |
| 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 | ) |

 

Loss per unit/share foreach quarter is required to be computed independently. As a result, the sum ofthe quarterly loss per unit/share calculation does not equal the total yearbasic loss per unit/share.

**22.**   Loss Per Share

*The following outstanding convertible preferred units,convertible demand notes, redeemable common units, and options were excludedfrom the computation of diluted loss per membership unit/share as they had anantidilutive effect:*

| ** **                                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Convertible  preferred stock class A(assuming conversion using thecontractual conversion ratio tocommon  units) |       | —                                     |       | 4,006,786 |   | 4,006,786 |   |
| Convertible  preferred stock class B(assuming conversion using thecontractual conversion ratio tocommon  units) |       | —                                     |       | 6,846,222 |   | 6,846,222 |   |
| Demand notes  (assuming conversionat stated value into common units)                                            |       | —                                     |       | 14,019,335 |   | 9,973,455 |   |
| Options                                                                                                         |       | 3,638,309                                  |       | 1,633,393 |   | 1,535,420 |   |
|                                                                                                            |       | 3,638,309                                  |       | 26,505,736 |   | 22,361,883 |   |

 

**23.**   Subsequent Event(Unaudited)

On January 6, 2006, we completed the previouslydisclosed acquisition of the outstanding shares of MTI that we did not alreadyown through the merger of MII with and into MTI, with MTI continuing as thesurviving corporation and a wholly owned subsidiary of ev3 Inc. As a result ofthe merger, each share of common stock of MTI outstanding at the effective timeof the merger was automatically converted into the right to receive 0.476289 ofa share of our common stock (the “Exchange Ratio”) and cash in lieu of anyfractional share of our common stock. We issued approximately 7.0 million newshares of our common stock to MTI’s public stockholders in the merger, bringingour total outstanding shares to approximately 56.3 million as of the date ofthe merger. In addition, each outstanding option to purchase shares of MTIcommon stock was converted into an option to purchase shares of our commonstock on the same terms and conditions (including vesting) as were applicableunder such MTI option. The exercise price and 

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number of shares for whicheach such MTI option is (or will become) exercisable was adjusted based on theExchange Ratio.

The following tables summarize the preliminarypurchase price and the resulting allocation of the excess purchase price overhistorical book values acquired:

*The following table presents the purchase price foradditional investments in 2006:*

| ** **                                         | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| Fair value of  shares/options issued               |       | $        | 95,350     |   |
| Interest acquired  in historical book value of MTI |       | (12,850  | )          |
| Excess purchase price  over historical book values |       | $        | 82,500     |   |

 

*The following summarizes the allocation of the excesspurchase price over historical book values arising from the additionalinvestments:*

| ** **                                    | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|
| Inventory                                     |       | $        | 668        |   |
| Developed technology                          |       | 16,759   |       |
| Customer  relationships                       |       | 10,175   |       |
| Trademarks and  tradenames                    |       | 2,211    |       |
| Acquired  in-process research and development |       | 1,999    |       |
| Goodwill                                      |       | 52,888   |       |
| Accrued  liabilities                          |       | (2,200   | )          |
| Total                                         |       | $        | 82,500     |   |

 

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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, 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 |   |   |
| Year ended  December 31, 2003                      |       |       |       |                                           |       |                                                       |       |                 |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Reserve for  deferred income tax asset                  |       |       | $          | 72,660                                         |       |                                                       |       | $                    | 36,293     |           |       |                                         | $          | — |   |   |   | $ | — |   |   |   | $ | 108,953 |   |   |
| Accounts receivable  allowances                         |       |       | 2,698      |                                           |       |                                                       | 838        |                 |       |           | 141        | (a)                                          |       |   | (2,103 | ) |   |   | 1,574 |   |   |
| Reserve for inventory  obsolescence                     |       |       | 5,508      |                                           |       |                                                       | 2,100      |                 |       |           | —     |                                         |       |   | (3,415 | ) |   |   | 4,193 |   |   |

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(a)—other additions related to acquisitions.

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**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Evaluationof Disclosure 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 ofour Chief Executive Officer and Chief Financial Officer, the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered in this annual report on Form 10-K. Basedon this evaluation and because of the material weakness related to our controlsover the preparation, review and presentation and disclosure of ourconsolidated statements of cash flows as described below, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were not effective as of the end of the period covered in thisannual report on Form 10-K. To address the material weaknessdescribed below, we have expanded our disclosure controls and procedures toinclude additional analysis and other procedures over the preparation of thefinancial statements included in this report. Accordingly, our management hasconcluded that the financial statements included in this report fairly presentin all material respects our financial position, results of operations and cashflows for the periods presented in conformity with generally acceptedaccounting principles.

**Changein Internal Control Over Financial Reporting**

A material weakness is a control deficiency or acombination of control deficiencies that results in more than a remotelikelihood that a material misstatement of the annual or interim consolidatedfinancial statements will not be prevented or detected. Our management has concludedthat as of December 31, 2005 we did not maintain effective controls overthe preparation, review and presentation and disclosure of our consolidatedstatements of cash flows. Specifically, we incorrectly reported an interestpayment on demand notes payable as a financing cash out-flow instead of anoperating cash out-flow, in accordance with generally accepted accountingprinciples. This control deficiency resulted in the restatement of ourconsolidated financial statements for the quarters ended July 3, 2005 and October 2,2005. Additionally, this control deficiency could result in a misstatement ofthe presentation and disclosure of our operating and financing cash flows inour consolidated financial statements that would result in a material misstatementin our annual or interim consolidated financial statements that would not beprevented or detected. Accordingly, management determined that this controldeficiency constitutes a material weakness in our internal control overfinancial reporting.

Exceptas described herein, there was no change in our internal control over financialreporting that occurred during our quarter ended December 31, 2005 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

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**Plan for Remediation of MaterialWeakness**

Management is taking stepsto remediate the material weakness in our internal control over financialreporting relating to the presentation of our cash flows. These steps include athorough review of the classification requirements of each component line itemand the individual elements that comprise each line item of the statement ofcash flows in accordance with generally accepted accounting principles. Managementbelieves the additional control procedures designed, and when implemented, willfully remediate the material weakness. Although we are uncertain when thematerial weakness will be fully remediated, we will need a period of time overwhich to demonstrate that these controls are functioning appropriately and toconclude that we have adequately remediated the material weakness.

**ITEM 9B.**       OTHERINFORMATION

Not applicable.

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**PART III**

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

**Directors,Executive Officers, Promoters and Control Persons**

Our directors andexecutive officers, their ages and positions held, as of February 15,2006, are as follows:
| Name                                                                                                  | ** ** | ** ** | ** ** | **Age**                                           | ** ** | **Position** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|--------------|
| James M. Corbett                                                                                      |       | 47         |       | President and Chief Executive Officer             |
| Patrick D. Spangler                                                                                   |       | 50         |       | Chief Financial Officer and Treasurer             |
| Stacy Enxing Seng                                                                                     |       | 41         |       | President, Cardio Peripheral Division             |
| Pascal E.R. Girin                                                                                     |       | 46         |       | President, International                          |
| L. Cecily Hines                                                                                  |       | 55         |       | Vice President, Secretary and Chief Legal Officer |
| Gregory Morrison                                                                                      |       | 42         |       | Vice President, Human Resources                   |
| Jeffrey J. Peters               |       | 37         |       | Chief Technology Officer                          |
| Thomas C. Wilder III                                                                                  |       | 41         |       | President, Neurovascular Division                 |
| Haywood D. Cochrane(1)                                                                                |       | 57         |       | Director                                          |
| Richard B. Emmitt(1)(2)                                                                               |       | 61         |       | Director                                          |
| Douglas W. Kohrs(1)(2)                                                                                |       | 48         |       | Director                                          |
| Dale A. Spencer                                                                                  |       | 60         |       | Director                                          |
| Thomas E. Timbie                                                                                      |       | 48         |       | Director                                          |
| Elizabeth H. Weatherman(2)                                                                            |       | 45         |       | Director                                          |

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(1)          Member of auditcommittee

(2)          Member of compensationcommittee

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 directors orexecutive officers.

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

*James M. Corbett* is a director of our company and hasserved as our President and Chief Executive Officer since January 2004 andwas a member of the board of managers of ev3 LLC from August 2003 throughthe date 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 directors ofMTI from January 2002 to January 2006 and as its Acting President andChief Executive Officer from April 2002 through October 2002. From February 2001to January 2002, Mr. Corbett worked as an independent medical deviceconsultant. From January 1999 to February 2001, Mr. Corbett wasPresident and Chief Executive Officer of Home Diagnostics, Inc., a medicaldevice company. Prior to that, he served as Senior Vice President and thenPresident for International of Boston Scientific Corporation, which followedhis tenure as Vice President of International at SCIMED Life Systems, Inc.Mr. Corbett has a Bachelor of Science in Business Administration fromKansas University.

*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 

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Bachelor of Science inAccounting from the University of Minnesota, a Master of Business Administrationfrom University of Chicago and a Master of Business Taxation from theUniversity of Minnesota.

*Stacy Enxing Seng*has served as our President, Cardio Peripheral Division since March 2005and previously served as our Vice President, Marketing and New BusinessDevelopment. Ms. Enxing Seng has served in various positions since April 2001.From March 1999 to April 2001, she served as Vice President ofMarketing for the cardiology division at Boston Scientific/SCIMED. Ms. EnxingSeng has a Bachelor of Arts in Public Policy from Michigan State University anda Master of Business Administration from Harvard University.

*Pascal E.R. Girin*has served as our President, International since July 2005 and previouslyserved as our General Manager, Europe from September 2003 to July 2005.From September 1998 to August 2003, Mr. Girin served in variouscapacities at BioScience Europe Baxter Healthcare Corporation, most recently asVice President. Mr. Girin received an Engineering Education at the FrenchEcole des Mines.

*L. Cecily Hines*has served as our Vice President, Secretary and Chief Legal Officer since January 2002and was a consultant to us from July 2001 to January 2002. Ms. Hineshas a Bachelor of Arts in Government from Smith College, a Master in Public Administrationfrom New York University and a Juris Doctorate with distinction from DukeUniversity School of Law.

*Gregory Morrison***has served as our Vice President, Human Resources since March 2002.From March 1999 to February 2002, Mr. Morrison served as VicePresident 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.

*Jeffery J. Peters*has served as our Chief Technology Officer since February 2005. Hepreviously served as Vice President, Research and Development, CardioPeripheral Division and Chief Technology Officer from December 2003 to February 2005and Vice President of Business Development from September 2001 to December 2003.From September 1996 to September 2001, Mr. Peters was a medicaltechnology equity research analyst for RBC Dain Rauscher Wessels. Mr. Petershas a Bachelor of Science in Mechanical Engineering and a Master of BusinessAdministration from the University of Minnesota.

*Thomas C. Wilder III*has served as our President, Neurovascular Division since June 2005. Heserved as President of MTI from September 2002 and Chief Executive Officerof MTI from October 2002. From December 2004 to January 2006, healso served as Acting Chief Financial Officer of MTI. From August 1991until August 2002, he served at Medtronic, Inc., a medical devicecompany, most recently as the Vice President and the General Manager of itsendovascular stent grafts division from January 2001 until August 2002.From August 1991 until December 2000 while at Medtronic, he held avariety of finance, business development and operations positions at U.S. andinternational locations, including Hong Kong, Belgium and The Netherlands. Heearned a Bachelor of Arts in Economics from Stanford University and a Master inManagement from Northwestern University’s J.L. Kellogg Graduate School ofManagement.

*Haywood D. Cochrane*has served as one of our directors since June 2005. Mr. Cochrane wasa member of the board of managers of ev3 LLC from March 2005 through thedate of the merger of ev3 LLC with and into ev3 on June 21, 2005. Mr. Cochraneserved as Chief Executive Officer of CHD Meridian Corporate Healthcare, aspecialized medical management company, from February 1997 to April 2004.Mr. Cochrane serves as Vice Chairman and director of I-Trax, Inc., apublicly held company, and serves as lead director and the chairman of theaudit committee of the board of directors of Tripath Imaging, Inc., apublicly held company. Mr. Cochrane also serves as a director of AmericanEsoteric Laboratories, Inc., a privately held company.

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*Richard B. Emmitt*has served as one of our directors since June 2005. Mr. Emmitt 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 on June 21, 2005.Since 1989, Mr. Emmitt has been a Managing Director of The Vertical Group,L.P., an investment management and venture capital firm focused on the medicaldevice industry. Mr. Emmitt currently serves on the Board of Directors ofAmerican Medical Systems Holdings, Inc. and Wright Medical Group, Inc.,all publicly held companies, as well as of Axya Medical, Inc., BioSET, Inc.,Incumed, Inc, OsteoBiologics, Inc., Solarant Medical, Inc., Spondylogix, Inc.,Tepha, Inc. and SPMR, Inc., all privately held companies.

*Douglas W. Kohrs*has served as one of our directors since June 2005. Mr. Kohrs was amember of the board of managers of ev3 LLC from March 2005 through thedate of the merger of ev3 LLC with and into ev3 on June 21, 2005. Mr. Kohrsserved as Chief Executive Officer of American Medical Systems Holdings, Inc.from April 1999 until January 2005. He has served on the Board ofDirectors of American Medical Systems Holdings since 1999, and has beenChairman of the Board since March 2004. Mr. Kohrs currently serves asa director of Kyphon Inc., a publicly held company, as well as Disc DynamicsInc., Pioneer Surgical Technologies and AxioMed Spine Corporation, allprivately held companies.

*Dale A. Spencer*hasserved as one of our directors since June 2005 and also serves as aconsultant to us. Mr. Spencer was a member of the board of managers of ev3LLC from August 2003 through the date of the merger of ev3 LLC with andinto ev3 on June 21, 2005. Mr. Spencer served as President, ChiefExecutive Officer and Chairman of the Board of Directors of SCIMED Life SystemsInc. prior to its merger with Boston Scientific Corporation in 1995. At BostonScientific, Mr. Spencer served as Executive Vice President in the Officeof the Chairman from 1995 to 1997 and was a member of the Board of Directorsfrom 1995 to 1999. Since that time, Mr. Spencer has been a privateinvestor, primarily in the medical device industry. Mr. Spencer currentlyserves on the Board of Directors of Anulex, Inc., CVRx, Inc.,Northstar Neurosciences, Inc. and Optobionics Corporation, all privatelyheld companies.

*Thomas E. Timbie*has served as one of our directors since June 2005. Mr. Timbie servedas a 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 wasthe Interim 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. Mr. Timbiehas a Bachelor of Science in Accounting from the University of Florida and aMaster of Business Administration from Stetson University.

*ElizabethH. 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 currentlyserves on the Board of Directors of American Medical Systems Holdings, Inc.,Kyphon Inc. and Wright Medical Group, Inc., all publicly held companies,as well as of Bacchus Vascular, Inc. and Solarant Medical, Inc., bothprivately held companies.

**Termof Directors and Composition of the Board of Directors**

Our board ofdirectors consists of seven members and is divided into three staggered classesof directors of the same or nearly the same number. At each annual meeting ofstockholders, a class of directors will be elected for a three year term tosucceed the directors of the same class whose terms are then expiring. The 

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term of thedirectors will expire upon election and qualification of successor directors ofthe Annual Meeting of Stockholders to be held during the years 2006 for the Class Idirectors, 2007 for the Class II directors and 2008 for the Class IIIdirectors.

·       OurClass I directors are Messrs. Corbett and Timbie.

·       OurClass II directors are Messrs. Cochrane, Emmitt and Spencer.

·       OurClass III directors are Mr. Kohrs and Ms. Weatherman.

Our amended and restated certificate of incorporationand amended and restated bylaws provide that the number of our directors shallbe fixed from time to time by a resolution of the majority of our board ofdirectors. Any additional directorships resulting from an increase in thenumber of directors will be distributed among the three classes so that, asnearly as possible, each class shall consist of one third of the directors. Thedivision of our board of directors into three classes with staggered three yearterms may delay or prevent a change of our management or a change in control.

We and certain of our stockholders, including WarburgPincus, The Vertical Group and certain members of our management, are partiesto a holders agreement that includes terms relating to the composition of ourboard of directors. The holders agreement requires us to nominate and use ourbest efforts to have elected to our board of directors:

·       twopersons designated by Warburg, Pincus Equity Partners, L.P., Warburg, PincusNetherlands Equity Partners I, C.V., a Netherlands Commanditaire Vennootschap,Warburg, Pincus Netherlands Equity Partners II, C.V., a NetherlandsCommanditaire Vennootschap, and Warburg, Pincus Netherlands Equity PartnersIII, C.V., a Netherlands Commanditaire Vennootschap, which we refer tocollectively as the Warburg Entities, and Vertical Fund I, L.P. and VerticalFund II, L.P., which we refer to together as the Vertical Funds, if the WarburgEntities, the Vertical Funds and their affiliates collectively beneficially own20% or more of our common stock; or

·       oneperson designated by the Warburg Entities and the Vertical Funds if the WarburgEntities, the Vertical Funds and their affiliates collectively beneficially ownat least 10% but less than 20% of our common stock.

Mr. Emmitt and Ms. Weatherman were theinitial designees under the holders agreement. In the event any directordesignated by the Warburg Entities and the Vertical Funds is unable to serve oris removed or withdraws from our board of directors, the Warburg Entities andthe Vertical Funds will have the right to designate a substitute for suchdirector. We and certain of our stockholders, including certain members of ourmanagement party to the holders agreement, have agreed to take all actionwithin our or their respective power, including the voting of shares of commonstock owned by us or them as is necessary to cause the election of thesubstitute director designated by the Warburg Entities and the Vertical Fundsor to, upon the written request of the Warburg Entities and the Vertical Funds,remove with or without cause a director previously designated by suchinstitutional investors.

**Board Committees**

Our board of directors has an audit committee and acompensation committee, each of which has the composition and responsibilitiesdescribed below. Our board of directors mayfrom time to time establish other committees to facilitate the management ofour company and may change the composition and the responsibilities of ourexisting committees.

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 rules of NASDAQ. Pursuant to thisexception, we are exempt from the rules that 

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require our board ofdirectors to be comprised of a majority of “independent directors.” We are alsoexempt from the rules that require our board of director nominations to beeither selected, or recommended for the board’s selection, either by anominating committee comprised solely of independent directors or by a majorityof the independent directors and the rules that require the compensationof our chief executive officer and other executive officers to be determined,or recommended to the board of directors for determination, either by acompensation committee comprised solely of independent directors or by amajority of the independent directors. The “controlled company” exception doesnot, however, modify the independence requirements for audit committees, and wecurrently comply with the requirements of the Sarbanes Oxley Act of 2002 andNASDAQ rules which require that our audit committee be comprised of atleast three independent directors.

*Audit Committee.* Our audit committeeoversees a broad range of issues surrounding our accounting and financial reportingprocesses and audits of our financial statements. Our audit committee:

·       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

·       willprepare the audit committee report that the SEC rules require be includedin our annual proxy statement or annual report on Form 10-K.

The members of our audit committee are Messrs. Cochrane,Emmitt and Kohrs. Mr. Cochrane is our audit committee financial expertunder the SEC rules implementing Section 407 of the Sarbanes OxleyAct. We believe that the composition of our audit committee meets therequirements for independence under the current requirements of the SarbanesOxley Act, NASDAQ and SEC rules and regulations.

*Compensation Committee.* Ourcompensation committee reviews and recommends policy relating to compensationand benefits of our officers and employees, including reviewing and approvingcorporate goals and objectives relevant to compensation of our chief executiveofficer and other senior officers, evaluating the performance of these officersin light of those goals and objectives and setting compensation of theseofficers based on such evaluations. The compensation committee reviews andevaluates, at least annually, the performance of the compensation committee andits members, including compliance of the compensation committee with itscharter. The members of our compensation committee are Mr. Emmitt, Mr. Kohrsand Ms. Weatherman. As mentioned above, as a “controlled company” underthe listing requirements of NASDAQ, we are permitted, and have elected, to optout of the NASDAQ listing requirements that would otherwise require ourcompensation committee to be comprised entirely of independent directors.

**Section 16(a) Beneficial Ownership ReportingCompliance**

Section 16(a) of theSecurities 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 Securities and ExchangeCommission initial reports of ownership and reports of changes in ownership ofour common stock. Executive officers, directors and greater than 10% beneficialowners are also required to furnish us with copies of all Section 16(a) formsthey file. To our knowledge, based on review of the copies of such reports andamendments to such reports furnished to us 

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withrespect to the year ended December 31, 2005, and based on writtenrepresentations by our directors and executive officers, all required Section 16reports under the Securities Exchange Act of 1934, as amended, for ourdirectors, executive officers and beneficial owners of greater than 10% of ourcommon stock were filed on a timely basis during the year ended December 31,2005.

**Code of Ethics**

Our Code of Business Conduct applies to all of ouremployees, officers and directors, including our principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions, and meets the requirements of theSecurities and Exchange Commission. We also have a Code of Ethics for SeniorExecutive and Financial Officers that applies to our Chief Executive Officer,Chief Financial Officer, Presidents, and any other senior executive orfinancial officers performing similar functions and so designated from time totime by the Chief Executive Officer. We make available, free of charge andthrough our Internet web site under the Investor Relations—Corporate Governancesection, to any stockholder who requests, our Code of Business Conduct and Codeof Ethics for Senior Executive and Financial Officers. Requests for copies canbe directed to Investor Relations at (763) 398-7000. We intend todisclose any amendments to and any waivers from a provision of our Code ofBusiness Conduct and Code of Ethics for Senior Executive and Financial Officerson a current report on Form 8-K filed with the SEC.

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**ITEM 11.**         EXECUTIVECOMPENSATION

**Summaryof Cash and Other Compensation**

The following tableprovides summary information concerning cash and non-cash compensation paid toor earned by our Chief Executive Officer and our four other most highlycompensated executive officers, who received or earned cash and non-cash salaryand bonus of more than $100,000 for the fiscal year ended December 31,2005. We refer to these individuals in this report as our “named executiveofficers.”

**SUMMARYCOMPENSATION TABLE**

| ** ** | ** ** | ** ** | ** ** | ** **                      | ** ** | **Long-Term**Compensation | ** ** | ** **     | ** ** |
|------------|------------|------------|------------|---------------------------------|------------|---------------------------|------------|----------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                      | ** ** | **Restricted**            | ** ** | **Securities** | ** ** | **All Other** | ** ** |
| ** ** | ** ** | ** ** | ** ** | **Annual Compensation(1)** | ** ** | **Stock**                 | ** ** | **Underlying** | ** ** | **Compensation** | ** ** |

| **Name and Principal Position**       | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Bonus ($)(2)** | ** ** | **Awards ($)**(3) | ** ** | **Options/SARs (#)** | ** ** | **($)(4)** | ** ** |
|------------------------------------------------------|------------|----------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|---------------------------|------------|------------|------------|
| James M. Corbett                                     |       | 2005     |       |                | $          | 357,000               |       |                   |       | $                         | 180,000    |       |       |   | $ | 1,468,000 |   |   |   | 352,083 |   |   |   | $ | — |   |   |
| *President and Chief Executive  Officer*             |       | 2004     |       |                | 340,000    |                  |       |                   | 153,000    |                      |       |       | —     |   |   |   | 41,666 |   |   |   | — |   |   |
| Pascal E.R. Girin                                    |       | 2005     |       |                | 305,807    | (5)                   |       |                   | 115,573    | (5)                       |       |       | —     |   |   |   | 94,666 |   |   |   | 63,283 | (5) |   |
| *President,  International*                          |       | 2004     |       |                | 341,232    |                  |       |                   | 29,858     |                      |       |       | —     |   |   |   | 5,000 |   |   |   | — |   |   |
| Thomas C. Wilder III.                                |       | 2005     |       |                | 276,770    | (6)                   |       |                   | 121,433    |                      |       |       | —     |   |   |   | 119,071 | (7) |   |   | — |   |   |
| *President, Neurovascular  Division*                 |       | 2004     |       |                | 265,939    |                  |       |                   | 53,250     |                      |       |       | —     |   |   |   | — |   |   |   | — |   |   |
| Stacy Enxing Seng.                                   |       | 2005     |       |                | 256,964    |                  |       |                   | 70,200     |                      |       |       | 513,800    |   |   |   | 132,405 |   |   |   | 6,300 |   |   |
| *President,  Cardio Peripheral Division*             |       | 2004     |       |                | 214,968    |                  |       |                   | 58,964     |                      |       |       | —     |   |   |   | 15,416 |   |   |   | — |   |   |
| L. Cecily Hines.                                     |       | 2005     |       |                | 227,136    |                  |       |                   | 74,955     |                      |       |       | 293,600    |   |   |   | 66,311 |   |   |   | 6,300 |   |   |
| *Vice President, Secretary and  Chief Legal Officer* |       | 2004     |       |                | 216,320    |                  |       |                   | 37,856     |                      |       |       | —     |   |   |   | 5,833 |   |   |   | — |   |   |

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(1)    The valueof executive perquisites provided to our named executive officers did notexceed the lesser of $50,000 or 10% of the compensation reported in the tablefor each of the named executive officers.

(2)           Annual bonus for fiscal year reflected was earnedduring such fiscal year but paid during the subsequent fiscal year.

(3)           The following named executive officers held thefollowing number of shares of restricted stock as of December 31, 2005,which shares represented the following values, based on the closing sales priceof our common stock as of that date: Mr. Corbett (100,000 shares;$1,474,000); Ms. Enxing Seng (35,000 shares; $515,900) and Ms. Hines(20,000 shares; $294,800). These shares vest in equal installments on an annualbasis over a four-year period from the date of grant. These individuals havethe right to receive any cash dividends declared on these shares and to votethese shares until their right to these shares is forfeited. Any stockdividends or other distributions of property declared on these shares willremain subject to forfeiture until the shares with respect to which thedividends or other property are attributable are forfeited or becomenonforfeitable.

(4)           “All Other Compensation” includes, except in the caseof Mr. Girin, for all years presented, contributions that we made underthe ev3 401(k) Retirement Plan. Under our 401(k) plan, participantsmay voluntarily request that we reduce his or her pre-tax compensation by up to75% (subject to certain special limitations) and contribute such amountsto the 401(k) plan’s trust. We contribute matching contributions in anamount equal to 50% of a participant’s pre-tax 401(k) contributions (otherthan catch-up contributions) for the pay period or, if less, 3% of theparticipant’s eligible earnings for that pay period. The 401(k) planalso has a “true-up” provision, meaning that at the end of the plan yearan eligible participant may receive an additional matching contribution byapplying the plan’s matching contribution formula to the participant’s aggregate401(k) contributions and eligible earnings for the entire plan year. For2005, the matching contributions made on behalf of Messrs. Corbett,Girin and Wilder and Ms. Enxing Seng and Ms. Hines,respectively, were $0, $0, $0, $6,300 and $6,300. Under 

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the 401(k) plan,we may, in our sole discretion, also make profit sharing contributions onbehalf of eligible participants for any plan year. For 2005, we did notmake any discretionary profit sharing contributions under the 401(k) plan.“All Other Compensation” for Mr. Girin reflects a car allowance.

(5)           Reflected in U.S. dollars but paid in Euros. Conversioninto U.S. dollars based on conversion rate as of December 30, 2005 in thecase of salary and all other compensation and the conversion rate as of thetime of payment in the case of the annual bonus. Conversion rate as of December 30,2005 was one Euro to $1.18730 and conversion rate as of time of payment ofannual bonus to Mr. Girin was one Euro to $1.20934.

(6)           Includes $794.38 as compensation for forfeitedvacation.

(7)           Represents options granted by MTI to purchaseshares of MTI’s common stock, which options were subsequently converted intooptions to purchase shares of our common stock in connection with ouracquisition of the shares of common stock of MTI not previously owned by us in January 2006.Shares indicated represent number of options on an as-converted basis.

**Option Grants in Last Fiscal Year**

The following table sets forth information concerningoption grants granted to each of our named executive officers during the yearended December 31, 2005. No stock appreciation rights were granted tothese individuals during the year ended December 31, 2005. Withrespect to Mr. Wilder, the number of options granted in the followingtable represents the number of options to purchase shares of our common stock grantedas reflected on an as-converted basis to reflect the conversion of his optionsto purchase shares of MTI’s common stock into options to purchase shares of ourcommon stock as a result of our acquisition of the shares of common stock ofMTI not previously owned by us in January 2006. In addition, with respectto Mr. Wilder, the percent of total options granted to employees in thelast fiscal year in the following table represents the percent of total optionsgranted to MTI employees in 2005. With respect to Mr. Corbett, the numberof options granted in the following table excludes options to purchase sharesof MTI’s common stock granted to Mr. Corbett in connection with hisservices as a director of MTI. See “—Director Compensation.”

|                      | ** ** | **Individual Grants**(1) | ** ** | ** **             | ** ** |
|----------------------|------------|-------------------------------|------------|------------------------|------------|
| ** **           | ** ** | **Number of**            | ** ** | **Percent of**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Securities**                | ** ** | **Total Options** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Underlying**                | ** ** | **Granted to**    | ** ** | **Exercise** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Options**                   | ** ** | **Employees in**  | ** ** | **Price** | ** ** | **Expiration** | ** ** | **Grant Date** | ** ** |
| Name                 | ** ** | ** **                    | ** ** | **Granted (#)**   | ** ** | **Fiscal Year** | ** ** | **($/Share)** | ** ** | **Date** | ** ** | **Present Value ($)**(2) | ** ** |
| James M. Corbett     |       |                          | 52,083     |                   |       |   | 2.3% |   |   |   | $ | 8.82 |   |   | 01/07/2015 |   |   | $ | 291,317 |   |   |
|                      |       |                          | 300,000    |                   |       |   | 13.0% |   |   |   | 14.00 |   |   | 07/01/2015 |   |   | 1,809,527 |   |   |
| Pascal E.R. Girin    |       |                          | 6,666      |                   |       |   | 0.3% |   |   |   | 8.82 |   |   | 01/07/2015 |   |   | 37,285 |   |   |
|                 |       |                          | 88,000     |                   |       |   | 3.8% |   |   |   | 14.00 |   |   | 07/01/2015 |   |   | 530,795 |   |   |
| Thomas C. Wilder III |       |                          | 18,495     |                   |       |   | 1.0% |   |   |   | 8.07 |   |   | 01/10/2015 |   |   | 72,307 |   |   |
|                      |       |                          | 100,576    |                   |       |   | 5.6% |   |   |   | 8.07 |   |   | 01/10/2015 |   |   | 393,193 |   |   |
| Stacy Enxing Seng    |       |                          | 8,333      |                   |       |   | 0.4% |   |   |   | 8.82 |   |   | 01/07/2015 |   |   | 46,609 |   |   |
|                 |       |                          | 25,000     |                   |       |   | 1.1% |   |   |   | 8.82 |   |   | 02/01/2015 |   |   | 140,382 |   |   |
|                 |       |                          | 99,072     |                   |       |   | 4.3% |   |   |   | 14.00 |   |   | 07/01/2015 |   |   | 597,578 |   |   |
| L. Cecily Hines      |       |                          | 8,333      |                   |       |   | 0.4% |   |   |   | 8.82 |   |   | 01/07/2015 |   |   | 46,609 |   |   |
|                      |       |                          | 5,000      |                   |       |   | 0.2% |   |   |   | 12.60 |   |   | 04/25/2015 |   |   | 33,549 |   |   |
|                      |       |                          | 52,978     |                   |       |   | 2.3% |   |   |   | 14.00 |   |   | 07/01/2015 |   |   | 319,550 |   |   |
|                      |            |                               |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Options granted prior to our initial public offeringwere granted under the ev3 LLC 2003 Stock Option Plan and options granted afterour initial public offering were granted under the ev3 Inc. Amended andRestated 2005 Incentive Stock Plan. Options generally have a ten-year term andvest over a four-year period, with 25% of the underlying shares vesting within oneyear of the date of grant and 1¤36 of the remaining 75% of the underlyingshares vesting each month after the one-year anniversary date.

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(2)          The grant date present value shown is anestimate only, arrived at using the Black-Scholes option pricing model, withthe following weighted average assumptions as of the following grant dates: (i) January 7,2005: risk-free interest rate of 3.71%, expected life of option of 5 years,expected dividend yield of zero and expected stock volatility of zero; (ii) January 10,2005: risk-free interest rate of 4%, expected life of option of 4 years,expected dividend yield of zero and expected stock volatility of 58.44%; (iii) February 1,2005: risk-free interest rate of 3.77%, expected life of option of 5 years,expected dividend yield of zero and expected stock volatility of zero; (iv) April 25,2005: risk-free interest rate of 3.8%, expected life of option of 4 years,expected dividend yield of zero and expected stock volatility of 50% and (v) July 1,2005: risk-free interest rate of 3.84%, expected life of option of 4 years,expected dividend yield of zero and expected stock volatility of 50%.

**AggregatedOption Exercises In Last Fiscal Year and Fiscal Year-End Option Values**

There were no option exercises by any of the namedexecutive officers during the year ended December 31, 2005. The followingtable sets forth the number and value of options held by each of our namedexecutive officers at December 31, 2005. With respect to Mr. Wilder,the number of securities reflected in the table below represents the number ofshares of our common stock underlying unexercised options at year-end on anas-converted basis to reflect the conversion of his options to purchase sharesof MTI’s common stock into options to purchase shares of our common stock as aresult of our acquisition of the shares of common stock of MTI notpreviously owned by us in January 2006 andthe value of the unexercised in-the-money options at year-end reflected in thetable below has been calculated based upon the closing price of our commonstock on the NASDAQ National Market on December 30, 2005, which was $14.74per share.

| ** **            | ** ** | **Number of Securities**Underlying Unexercised  Options at December 31, 2005(1) | ** ** | **Value of Unexercised**In-the-Money Optionsat December 31, 2005(2) | ** ** |
|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | ** **                                                                                                         | ** ** | ** Exercisable **                                                                       | ** ** | ** Unexercisable ** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| James M. Corbett      |       |                                                                                                               | 68,388     |                                                                                              |       |   | 389,696 |   |   | $ | 427,191 |   |   | $ | 753,000 |   |   |
| Pascal E.R. Girin     |       |                                                                                                               | 19,620     |                                                                                              |       |   | 110,646 |   |   | 116,150 |   |   | 199,184 |   |   |
| Thomas C. Wilder  III |       |                                                                                                               | 152,411    |                                                                                              |       |   | 128,597 |   |   | 1,313,528 |   |   | 879,768 |   |   |
| Stacy Enxing Seng     |       |                                                                                                               | 62,301     |                                                                                              |       |   | 149,351 |   |   | 414,092 |   |   | 370,965 |   |   |
| L. Cecily Hines       |       |                                                                                                               | 40,137     |                                                                                              |       |   | 70,186 |   |   | 227,645 |   |   | 141,075 |   |   |
|                       |            |                                                                                                                    |            |                                                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Our option and incentivestock plans generally provide that the exercise price of options must be paidentirely in cash or another method of payment or combination of methods ofpayment as approved by the compensation committee. It is the current policy ofthe compensation committee to permit broker-assisted cashless exercises and thesurrender of previously acquired shares that have been held by the optionee atleast six months.

(2)          Valuebased on the difference between the fair market value of one share of ourcommon stock at December 30, 2005 ($14.74), and the exercise price of theoptions ranging from $3.54 to $14.00 per share. Options are in-the-money if themarket price of the shares exceeds the option exercise price.

**Employment Agreements**

We have entered into employeeconfidentiality/restrictive covenant agreements with James M. Corbett, ourPresident and Chief Executive Officer, and Patrick D. Spangler, our ChiefFinancial Officer and Treasurer. The agreements impose certain restrictions onthe current and post-employment activities of Messrs. Corbett and Spangler.The agreements contain, among other things, a confidentiality provision thatrestricts disclosure by Messrs. Corbett and Spangler of our confidentialand proprietary information, both during their employment with us as well as tothe fullest extent permitted by law after their employment is voluntarily orinvoluntarily terminated. A non-competition provision and a non-solicitation 

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provision restrict theactivities of Messrs. Corbett and Spangler after termination of employmentwith us and each continues for a one-year period after termination of employment.The employment of Messrs. Corbett and Spangler is at-will and may beterminated by us, Mr. Corbett or Mr. Spangler at any time with orwithout cause.

On September 3, 2002,MTI entered into an employment agreement with Thomas C. Wilder III, who wasnamed as MTI’s President on September 3, 2002 and who became its ChiefExecutive Officer on October 31, 2002. Pursuant to the terms of theagreement, Mr. Wilder is eligible to receive a bonus of up to 40% of hisbase salary based upon performance relative to goals set for MTI and for Mr. Wilder.Pursuant to the terms of the agreement, Mr. Wilder will be entitled to sixmonths’ salary as severance if his employment is terminated by MTI other thanfor cause or pursuant to a layoff.

**Consulting Agreement**

Wehave entered into a consulting agreement with Dale A. Spencer, one of ourdirectors, under which we have engaged Mr. Spencer as a consultant. Theagreement is subject to automatic annual extensions unless terminated by eitherparty with 30 days’ notice. Pursuant to the agreement, we have agreed to pay Mr. Spencera fee of $23,750 per month, which fee is reduced by any cash fees paid to Mr. Spencerby any of our affiliates, including MTI. In addition, we are required to pay Mr. Spenceran additional $2,000 per month to defray the costs of his insurance anddisability coverage benefits. In 2005, we paid Mr. Spencer $309,000 in theaggregate. The agreement contains non-competition and non-solicitationcovenants which restrict Mr. Spencer’s activities during the term of theagreement, as well as confidentiality provisions.

**Change in Control Agreements**

We are a party to a change incontrol agreement with each of Dale A. Spencer and James M. Corbett. Mr. Spencer’schange in control agreement provides that in the event of a change in control,as defined in such agreement, of our company, all of Mr. Spencer’s thenunvested, non-statutory stock options or other stock awards granted to himunder certain stock incentive plans will be accelerated and thereby becomefully vested and immediately exercisable.

Mr. Corbett’s change incontrol agreement entitles him, upon the occurrence of a change in control, tobase pay owed to him through such date and a pro rata portion of his bonus planpayment based on the number of months in the year worked prior to the change incontrol. In addition, whether or not Mr. Corbett is offered futureemployment with the successor or the surviving subsidiary, Mr. Corbettwould receive a lump sum payment equal to 18 months of his then-current basepay, and the full amount of his bonus plan payment for the next 18 months.However, if Mr. Corbett is employed by the successor or the survivingsubsidiary, this cash payment would be deferred until the earlier of the end ofthe six-month period or such earlier date elected by the successor or thesurviving subsidiary. Further, however, no such payment would be due if Mr. Corbett’semployment is terminated for cause or by Mr. Corbett without good reason.Upon the occurrence of a change in control, Mr. Corbett’s stock options orstock awards pursuant to our stock incentive plans would be accelerated and allsuch options would become fully vested and immediately exercisable. Mr. Corbettwould also be entitled to certain group health plan benefits, to the extent paymentsreceived by Mr. Corbett constitute parachute payments which result in anexcise tax under Section 4999 of the Internal Revenue Code, gross-uppayments to cover such excise tax as well as applicable taxes on such gross-uppayments, outplacement services (as of the date the cash payment is due) for acost of up to $40,000 and certain indemnification rights.

We have also entered into changein control agreements with the following executive officers: Stacy Enxing Seng,Pascal E.R. Girin, L. Cecily Hines, Gregory Morrison, Jeffrey J. Peters,Patrick D. Spangler and Thomas C. Wilder III. Under these agreements, eachindividual has similar salary and bonus payout, cash payment, group healthplan, gross-up payments, outplacement services and indemnification rights as 

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describedabove with respect to Mr. Corbett’s change in control agreement, exceptthat the cash payment is based on 12 months and the outplacement services covercosts up to $20,000 (as of the date the cash payment is due). In addition, inthe event any such individual is employed with the successor or survivingsubsidiary, he or she is entitled to a lump sum cash payment equal to12 months of then-current base pay and the full annualized amount dueunder the then-current bonus plan payment commitment only in the event thatsuch employment is terminated by the successor or surviving subsidiary for anyreason other than death or for cause or if the individual terminates his or heremployment for good reason within 12 months following the change in control.If, on the other hand, an offer of employment is made and declined, no furtherbenefits are payable. The stock option acceleration provision under theseagreements provides that acceleration is not available if the acquiring entityor successor assumes or replaces unvested stock options or awards granted tosuch individual unless the individual is not offered employment with thesuccessor or surviving subsidiary or employment is terminated undercircumstances entitling the individual to the cash payment described above.

Prior to our acquisitionof the shares of common stock of MTI not previously owned by us in January 2006, MTI had previously entered into change incontrol letter agreements with certain members of its management, includingThomas C. Wilder III, regarding certain payments and benefits to which each ofthese individuals would become entitled upon a qualifying termination of his orher employment within 12 months of a change in control. The completion of ouracquisition of the shares of common stock of MTI not previously owned by us in January 2006constituted a change in control under the letter agreements. Pursuant to theterms of the letter agreements, in the event one of these individuals is eitherterminated by MTI for reasons other than cause (as described below) or resignsfor good reason (as described below) within 12 months after a change incontrol, the individual is entitled to receive a lump sum payment equal to thesum of (i) 12 months of their then current annual base salary (or, ifgreater, their base salary in effect immediately prior to the change incontrol), (ii) a pro rated portion of their target bonus plan payment forthe then current year (determined assuming all performance goals are achieved)and (iii) the full amount of their bonus plan payment for the next 12months (determined assuming all performance goals are achieved). Such paymentwill be the joint responsibility of MTI, or its successor, and us. In additionto the cash payment described above, the vesting of all of the unvested optionsthen held by the individual will automatically accelerate and becomeimmediately exercisable in full. Upon any qualifying termination of employment,the individual (and his or her family members and eligible dependents) will alsobe entitled to continue to participate in a group health plan (under the sameterms and at the same cost as provided in the 90-day period immediatelypreceding the change in control) for up to 18 months after the change incontrol or his or her qualifying termination, as the case may be, and will beentitled to receive up to $20,000 in outplacement services. Additionally, MTIand we will be responsible for indemnifying and advancing expenses to theindividuals to the full extent permitted by law for damages, costs and expenses(including, without limitation, judgments, fines, penalties, settlements andreasonable fees and expenses for counsel) incurred as a result of his or herservice to, or status as an officer and employee with, MTI or any other corporation,employee benefit plan or other entity with whom the individual served at therequest MTI prior to the change in control, provided that such damages, costsand expenses did not arise as a result of the individual’s gross negligence orwillful misconduct.

For purposes of the MTI change in control letteragreements, the term “cause” means (i) the individual’s gross misconduct; (ii) theindividual’s willful and continued failure to perform substantially theindividual’s duties with MTI (other than a failure resulting from theindividual’s incapacity due to bodily injury or physical or mental illness)after a demand for substantial performance is delivered to the individual bythe chair of MTI’s board of directors which specifically identifies the mannerin which the individual has not substantially performed his or her duties andprovides for a reasonable period of time within which the individual may takecorrective measures or (iii) the individual’s conviction (including a pleaof nolo contendere) of willfully engaging in illegal conduct constituting afelony or gross misdemeanor 

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under federal or state lawwhich is materially and demonstrably injurious to MTI, or which impairs theindividual’s ability to perform substantially the individual’s duties for MTI.

For purposes of the MTIchange in control letter agreements, the term “good reason” means (i) asubstantial change in the individual’s status, position(s), duties orresponsibilities as an executive of MTI (as in effect immediately prior to thechange in control) which, in the individual’s reasonable judgment, is adversewith respect to any of the foregoing; provided, however, that good reason doesnot include a change in the individual’s status, position(s), duties orresponsibilities caused by (A) an inadvertent action that is remedied byMTI promptly after receipt of notice of the individual’s objection to suchchange, and it also being agreed that small and insubstantial changes will notbe considered good reason unless the changes in totality would be substantial;or (B) the individual’s continuing in the same position of the entity orportion of an entity operating the business of MTI, which is the neuroradiologybusiness and the individual reports directly to the president of such division;(ii) a reduction by MTI in the individual’s annual base salary, a materialchange in the annual bonus expectations, or an adverse change in the form ortiming of the payments thereof, as in effect immediately prior to the change incontrol or as thereafter increased; (iii) the failure by MTI to cover theindividual under benefit plans that, in the aggregate, provide substantiallysimilar benefits to the individual and/or the individual’s family anddependents at a substantially similar total cost to the individual (e.g.,premiums, deductibles, co-pays, out of pocket maximums, required contributionsand the like) relative to the benefits and total costs under the benefit plansin which the individual (and/or the individual’s family or dependents) wereparticipating at any time during the 90-day period immediately precedingthe change in control; (iv) MTI requiring the individual to be based morethan 50 miles from where the individual’s office is located immediately priorto the change in control, except for required travel on MTI’s business or (v) anypurported termination by MTI of the individual’s employment that is notproperly effected pursuant to the terms of the letter agreements.

**Indemnification Agreements**

Wehave entered into agreements with our directors, executive officers and certainother employees regarding indemnification. Under these agreements, we arerequired to indemnify them against expenses, judgments, penalties, fines,settlements and other amounts actually and reasonably incurred, including expensesof a derivative action, in connection with an actual or threatened proceedingif any of them may be made a party because he or she is or was one of ourdirectors, officers or employees. We will be obligated to pay these amountsonly if the officer, director or employee acted in good faith and in a mannerthat he or she reasonably believed to be in or not opposed to our bestinterests. With respect to any criminal proceeding, we will be obligated to paythese amounts only if the officer, director or employee had no reasonable causeto believe his or her conduct was unlawful. The indemnification agreements alsoset forth procedures that will apply in the event of a claim forindemnification.

**Director Compensation**

We pay our directors who are not our employees orassociated with Warburg Pincus or The Vertical Group (thus excluding Ms. Weathermanand Messrs. Corbett, Emmitt and Spencer) an annual fee of $24,000. Inaddition, we pay each of these directors $10,000 per year for each committee ofour board of directors for which they act as chairperson.

We also may from time to time issue shares ofrestricted stock to these directors or grant these directors options topurchase shares of our common stock, in each case in amounts and upon terms tobe determined by our board of directors or a committee of our board ofdirectors. Each outside director receives an initial grant of an option topurchase 10,833 shares of our common stock and an annual grant of an option topurchase 1,666 shares of our common stock in each year of service thereafter. Inaddition, each outside director who serves as the chairperson of a committee ofour board of directors receives an additional initial grant of an option topurchase 5,833 shares of our common stock and an annual grant of 

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an option to purchase 833shares of our common stock in each year of service thereafter. The exerciseprice of each option is the fair market value of our common stock on the dateof grant. All options vest 25% immediately and the remaining 75% over the followingthree years, with 25% vesting on each anniversary of the date of the initialgrant.

In 2005, upon their initial appointments to our boardof directors and to the board of managers of ev3 LLC, Mr. Cochranewas granted options to purchase an aggregate of 100,000 membership units of ev3 LLC,including an option to purchase 35,000 membership units of ev3 LLC for hisservice as chairman of our audit committee, which options converted intooptions to purchase an aggregate of 16,666 shares of our common stock at anexercise price equal to $8.82 per share in connection with our June 2005reorganization and one for six reverse stock split, and Mr. Kohrs wasgranted an option to purchase 65,000 membership units of ev3 LLC, which optionconverted into an option to purchase 10,833 shares of our common stock at anexercise price equal to $8.82 per share in connection with our June 2005reorganization and one for six reverse stock split. In addition, in July 2005,each of Messrs. Cochrane and Kohrs was granted an option to purchase15,000 shares of our common stock at an exercise price equal to $13.41 pershare and each of Messrs. Spencer and Timbie was granted an option topurchase 65,000 and 75,000 shares of our common stock, respectively, at anexercise price equal to $13.41 per share, which represented the fair marketvalue of our common stock on the date of grant. These options also vest 25%immediately and the remaining 75% over the following three years, with 25%vesting on each anniversary of the date of the initial grant.

Other than outside directors, we do not compensate ourdirectors for serving on our board of directors or any of our board committees.We do, however, reimburse each member of our board of directors forout-of-pocket expenses incurred in connection with attending our board andcommittee meetings.

During 2005, Mr. Timbie was paid $256,091 inconnection with his services as our Interim Chief Financial Officer through April 10,2005 and our Vice President through June 22, 2005. In addition to the optiongranted to Mr. Timbie in July 2005 as described above, Mr. Timbiewas also granted during 2005 options to purchase an aggregate of 49,998 sharesof our common stock at an exercise price of $8.82 per share and options topurchase 5,000 shares of our common stock at an exercise price of $12.60 pershare in consideration for his services as our Interim Chief Financial Officerin 2005.

In addition, we paid Mr. Spencer $309,000 in 2005pursuant to the consulting agreement described above under “—ConsultingAgreement.”

Ms. Weatherman and Messrs. Corbett,Emmitt and Spencer also served as members of the board of directors of MTIduring 2005. Ms. Weatherman and Messrs. Corbett, Emmitt and Spencerdid not receive cash compensation for their service on MTI’s board ofdirectors, but were reimbursed for certain expenses incurred in connection withmeetings of the board of directors and its committees that they attended. Atthe discretion of MTI’s board of directors, each non-employee director of MTIwas granted options to purchase MTI common stock under MTI’s 1996 StockIncentive Plan. In 2005, Mr. Corbett, Mr. Emmitt, Mr. Spencerand Ms. Weatherman were each granted an option to purchase 4,000 shares ofMTI common stock pursuant to their re-election to MTI’s board of directors in May 2005,which options were assumed by us and converted into options to purchase 1,905shares of our common stock at an exercise price equal to $8.40 per share as aresult of our acquisition of the shares of common stock of MTI not previouslyowned by us in January 2006. As of December 31, 2005, Mr. Corbett,Mr. Emmitt, Mr. Spencer and Ms. Weatherman held options topurchase 84,000, 28,000, 28,000 and 28,000 shares of MTI common stock,respectively. In connection with the merger of Micro Investment, LLC with andinto MTI, these options were assumed by us and converted into options topurchase 41,912, 15,240, 15,240 and 15,240 shares of our common stock,respectively. These options vested 25% immediately and the remaining 75% willvest over the following three years, with 25% vesting on each anniversary ofthe date of the initial grant. In the event 

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that thenon-employee’s service on our board of directors terminates for any reason, allunvested options will immediately terminate and all vested options must beexercised within twelve months of the termination.

**Compensation Committee Interlocks and InsiderParticipation**

Noneof our executive officers serve as a member of the board of directors orcompensation committee of any entity that has one or more executive officerswho serve on our board of directors or compensation committee. None of themembers of our compensation committee have been an officer or employee of us orone of our subsidiaries.

**Compensation Committee Report on Executive Compensation**

***Responsibilities of theCompensation Committee***

The compensation committee ofthe board of directors is comprised of Richard B. Emmitt, Douglas W. Kohrs andElizabeth H. Weatherman and until July 2005, Dale A. Spencer. Mr. Kohrsserves as chairman of the committee. As a “controlled company” under thelisting requirements of the NASDAQ National Market, we are permitted, and haveelected, to opt out of the NASDAQ listing requirements that would otherwiserequire our compensation committee to be comprised entirely of independentdirectors.

The primary purpose of thecompensation committee is to assist our board of directors in discharging itsresponsibilities relating to the compensation of our executive officers. Theresponsibilities of the compensation committee include reviewing andrecommending policy relating to compensation and benefits of our officers andemployees, including reviewing and approving corporate goals and objectivesrelevant to compensation of our chief executive officer and other seniorofficers, evaluating the performance of these officers in light of those goalsand objectives and setting compensation of these officers based on suchevaluations. The compensation committee determines the annual salaries,incentive compensation, long-term compensation and any other compensationapplicable to our chief executive officer and other executive officers. Thecompensation committee operates under a formal written charter that has beenapproved by our board of directors and reflects these various responsibilities.

The compensation committeegenerally meets on several occasions during the year and also considers andtakes action by written consent. The compensation committee reports oncommittee actions and recommendations at board of director meetings. Thecompensation committee has the authority to engage the services of outsideexperts and advisors as it deems necessary or appropriate to carry out itsduties and responsibilities.

***Compensation Philosophy***

The decisions of the compensation committee and our compensation programsare based on the following principles:

·       As aperformance-driven growth company, we favor having a significant component ofvariable compensation tied to results and achievement over solely fixedcompensation.

·       As a growthcompany, we need to attract, retain and motivate executives and key employeeswith the capability to enable us to achieve significantly greater scale. Wetherefore benchmark our compensation against companies with whom we compete formarket share and executive talent.

·       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 as aggressiveperformance targets are met or surpassed.

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·       We targetbase compensation at the 50-75th percentile with the opportunity toearn total compensation above the market median when business performanceexceeds the company’s aggressive plan targets.

·       Individualdifferentiation in compensation occurs among executives based on scope andnature of responsibility, education and experience, job performance andpotential.

Indischarging its responsibilities, the compensation committee considers factorssuch as company performance, both in isolation and in comparison to othercompanies; the individual performance of our executive officers; historicalcompensation levels; the overall competitive environment for executive talentand the level of compensation necessary to attract and retain the talentnecessary to achieve our objectives. In order to foster cooperation andcommunication among executives and among their respective teams, thecompensation committee places primary emphasis on company performance (rather thanindividual performance) as measured against goals approved by the compensationcommittee. In analyzing these factors, the compensation committee from time totime reviews competitive compensation data gathered in comparative surveys orcollected by independent consultants.

***Executive Compensation ProgramElements***

Our executive compensationprogram is primarily comprised of base salary, annual cash incentivecompensation, and long-term equity-based incentive compensation.

*Base Salary.*   The compensation committee’sdeterminations regarding the base salary of our executive officers, includingthe compensation of our chief executive officer, are based on a number offactors, including: the level of skill and responsibility required to fulfilleach executive’s responsibilities; each executive’s experience andqualifications; each executive’s performance and the impact of such performanceon our results and competitive compensation data. Base salaries are reviewedannually, and the compensation committee seeks to set executive officer basesalaries at approximately the 50-75th percentileof base salaries at the companies with which we compete for executives. The2005 base salaries for our named executive officers represented an increase ofthree to six percent over such individuals’ base salaries for 2004. Thecompensation committee recently established 2006 base salaries for ourexecutive officers, which represent an increase of zero to five percent oversuch individuals’ base salaries for 2005.

*AnnualIncentive Compensation.*   We provide annual cash incentive compensation for our executiveofficers and certain other employees under an executive performance incentiveplan. This plan is designed to provide a direct financial incentive to ourexecutive officers and other employees for achievement of specific performancegoals of our company and individual goals of the employees. At the beginning ofeach fiscal year, the compensation committee determines:

·       Theemployees that are eligible to participate in the plan for the year;

·       Thequarterly and/or annual performance goal or goals for the year and the approvedincentive pool funding level based on the levels of achievement of suchperformance goal or goals;

·       For eacheligible employee, the target bonus level as a percentage of base compensation;and

·       For eacheligible employee, the employee’s individual performance.

For 2005, the compensationcommittee established net revenue as the exclusive annual corporate performancegoal for determining annual incentive compensation for executive officers andadjusted final payouts for each individual based on his or her own individualperformance. Executive officers were eligible to receive a bonus paymentranging from 40% to 50% of their base salary. Based on the company’sperformance as measured against these goals, the company’s executive officersreceived annual bonuses for 2005 ranging from 27.3% to 50.4% of their basesalaries.

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For 2006, the compensationcommittee established quarterly performance goals and payouts for executivesand certain other members of senior management. Each executive officer’sincentive payment under the plan for a particular quarter will vary dependingupon the approved incentive pool funding level for that particular quarter, theexecutive officer’s base salary, the executive officer’s incentive targetexpressed as a percentage of base salary and the executive officer’s overallindividual performance during that particular quarter. The incentive poolfunding is primarily based on achievement of four company performance measures:worldwide revenue, worldwide operating expense, worldwide gross margin andearnings before interest, taxes, depreciation, amortization and stock-basedcompensation expense. The compensation committee also will take intoconsideration the relative performance by each division of ev3 with regard todivisional revenue, operating expenses, and gross margin in determining theincentive pool funding. Based on performance as measured against these factors,executives are eligible to receive a bonus payment for 2006 ranging from 40% to50% of base salary. The compensation committee has the authority to recognizeindividual performance and to provide appropriate differential incentivecompensation.

*Long-Term Incentive Compensation.*   We make long-term incentive compensationavailable to our executive officers, as well as to many other of our employees,in the form of stock options and/or restricted stock awards. Through the grantof these equity incentives, we seek to align the long-term interests of ourexecutives and other employees with the long-term interests of our stockholdersby creating a strong and direct linkage between compensation and long-termstockholder return. We further seek to enable executives and other key employeesto achieve meaningful ownership in our company, thereby improving our abilityto retain executives and other key employees.

Executive officers and otheremployees are eligible for option grants upon joining our company andthereafter on an annual basis. All stock option grants have an exercise priceequal to 100% of the fair market value of our common stock on the date ofgrant. Stock option grants typically become exercisable over a period of fouryears from the date of grant, 25% of the underlying shares in one year of thedate of grant and 1¤36 of the remainingunderlying shares each month thereafter. Stock options typically remainexercisable for a period of 10 years from the date of grant, so long as theindividual continues to be employed by us. In the past, stock option grantshave been the primary form of equity-based incentives granted to our executivesand other key employees. At the end of 2005, we granted restricted stock awardsto certain executives for retention and recognition purposes and to furtheralign the interests of these executives with those of our stockholders. Restrictedstock awards represent full share grants that become fully vested and owned bythe employee free of restrictions over time; in this case it was in equalannual installments over a four year period.

We review the total size of ourannual equity-based incentive awards against benchmark data. Individual awardsare based on levels of responsibility and potential impact on our results,individual performance and benchmark data. A subcommittee of the compensationcommittee comprised solely of our “non-employee directors” within the meaningof Section 16 under the Securities Exchange Act of 1934, as amended,grants all stock options and other equity compensation awards, such asrestricted stock grants, under our Amended and Restated 2005 Incentive StockPlan. These directors include Messrs. Kohrs and Emmitt. Furtherinformation regarding equity-based incentive awards granted to our chiefexecutive officer and other named executive officers is included in the tablesunder the heading “—Executive Compensation” above.

*OtherCompensation Arrangements.*   All of our employees,including our executive officers, are employed at will and do not haveemployment agreements, other than Mr. Wilder whose employment agreement isdescribed elsewhere in this proxy statement. We have, however, entered intowritten change in control agreements with all of our executive officers andcertain other personnel, which provide for certain cash and other benefits uponthe termination of the executive officer’s employment with us under certaincircumstances, as described in more detail elsewhere in this report. Wemaintain the 

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ev3 401(k) RetirementPlan under which participants, including our executive officers, mayvoluntarily request that we reduce his or her pre-tax compensation by up to 75%(subject to certain special limitations) and contribute such amounts toa the 401(k) plan’s trust. We 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 payperiod. The 401(k) plan also has a “true-up” provision, meaning thatat the end of the plan year an eligible participant may receive an additionalmatching contribution by applying the plan’s matching contribution formulato the participant’s aggregate 401(k) contributions and eligibleearnings for the entire plan year. Under the 401(k) plan we may, in oursole discretion, also make profit sharing contributions on behalf of eligibleparticipants for any plan year. For 2005, we did not make a discretionaryprofit sharing contribution under the 401(k) plan. Our health care andother insurance programs are the same for all eligible employees, including ourexecutive officers. We do not provide our executive officers with any othermaterial compensation arrangements or personal benefits other than thosedescribed in this report.

***Chief Executive OfficerCompensation and Performance***

The compensation for James M.Corbett, our President and Chief Executive Officer, consists of an annual basesalary, annual cash incentive compensation and long-term equity-based incentivecompensation. The compensation committee determines the level for each of thesecompensation elements using methods consistent with those used for the company’sother senior executives, including the assessment of Mr. Corbett’sperformance and review of competitive benchmark data. The compensationcommittee evaluates Mr. Corbett’s performance by soliciting input from allmembers of the board of directors as well as from other members of the seniormanagement team.

For2005, the compensation committee approved an increase in Mr. Corbett’sbase salary to $357,000, maintained his target bonus level at 50% of basesalary and granted to Mr. Corbett stock options to purchase an aggregateof 352,083 shares of our common stock and a restricted stock award for 100,000shares. The compensation committee believes that these compensation elementsare commensurate with Mr. Corbett’s performance for the most recent fiscalyear and well-aligned with competitive benchmarks.

***Section 162(m)***

Section 162(m) ofthe Internal Revenue Code requires that we meet specific criteria, includingstockholder approval of certain stock and incentive plans, in order to deduct,for federal income tax purposes, compensation over $1 million per individualpaid to our chief executive officer and each of our four other most highlycompensated executives. As a new public company during the reporting period, wewere subject to certain exemptions from Section 162(m) undertransition rules of the Code. Therefore, the compensation committeebelieves that all compensation attributable to the period qualified fordeductibility by ev3. However, due to ambiguities and uncertainties in theapplication of Section 162(m), there can be no assurances.

*Compensation Committee*

Douglas W. Kohrs, Chair

Richard B. Emmitt

Elizabeth H. Weatherman

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**Stock Performance Graph**

The following graph compares theannual cumulative total stockholder return on our common stock from June 16,2005, the date of our initial public offering, until December 31, 2005,with the annual cumulative total return over the same period of the NASDAQStock Market (U.S.) Index and the NASDAQ Medical Equipment Index.

Thecomparison assumes the investment of $100 in each of our common stock, theNASDAQ Stock Market (U.S.) Index and the NASDAQ Medical Equipment Index on June 16,2005, and the reinvestment of all dividends.

**COMPARISON OF 6 MONTH CUMULATIVE TOTAL RETURN*AMONG EV3 INC., THE NASDAQ STOCK MARKET (U.S.) INDEXAND THE NASDAQ MEDICAL EQUIPMENT INDEX**

****

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

| ** **                  | ** ** | **Cumulative Total Return** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **  6/16/05  **   | ** ** | **  12/31/05  ** | ** ** |
| ev3 INC.                    |       |                                  | 100.00     |   |   |   | 105.29 |   |   |
| NASDAQ STOCK  MARKET (U.S.) |       |                                  | 100.00     |   |   |   | 107.60 |   |   |
| NASDAQ MEDICAL EQUIPMENT    |       |                                  | 100.00     |   |   |   | 110.45 |   |   |

 

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

**Security Ownership of Certain Beneficial Owners andManagement**

The following table sets forth information known to us regarding thebeneficial ownership of our common stock as of February 15, 2006 for:

·       eachperson known by us to beneficially own more than 5% of the outstanding sharesof our common stock;

·       eachof our directors;

·       eachof our named executive officers; and

·       allof our executive officers 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                                 |       |       | 66.6 | % |   |   |
| Vertical Fund I,  L.P.(4)                                            |       | 2,241,611                                  |       |       | 4.0 | % |   |   |
| Vertical Fund II,  L.P.(4)                                           |       | 560,113                                    |       |       | 1.0 | % |   |   |
| **Directors and named executive  officers:**                         |       |                                       |       |       |   |   |   |   |
| James M. Corbett(5)                                                  |       | 263,721                                    |       |       | * |   |   |   |
| Haywood D.  Cochrane(6)                                              |       | 12,082                                     |       |       | * |   |   |   |
| Richard B. Emmitt(7)                                                 |       | 2,814,105                                  |       |       | 5.0 | % |   |   |
| Douglas W. Kohrs(8)                                                  |       | 29,166                                     |       |       | * |   |   |   |
| Dale A. Spencer(9)                                                   |       | 220,308                                    |       |       | * |   |   |   |
| Thomas E. Timbie(10)                                                 |       | 74,790                                     |       |       | * |   |   |   |
| Elizabeth H.  Weatherman(11)                                         |       | 37,413,941                                 |       |       | 66.6 | % |   |   |
| Pascal E.R. Girin(12)                                                |       | 24,566                                     |       |       | * |   |   |   |
| Thomas C. Wilder  III(13)                                            |       | 178,986                                    |       |       | * |   |   |   |
| Stacy Enxing Seng(14)                                                |       | 124,706                                    |       |       | * |   |   |   |
| L. Cecily Hines(15)                                                  |       | 71,500                                     |       |       | * |   |   |   |
| All executive officers  and directors as a group (14 persons)(16)    |       | 41,358,450                                 |       |       | 72.6 | % |   |   |
|                                                                      |            |                                            |            |            |  |  |  |  |  |  |  |  |  |  |  |

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*                    Representsbeneficial ownership of less than one percent of our common stock.

(1)          Unless otherwiseindicated, the address for each of the stockholders in the table above is c/oev3 Inc., 9600 54th Avenue North, Plymouth, Minnesota 55442.

(2)          The number of sharesbeneficially owned by a person includes shares subject to options held by thatperson that are currently exercisable within 60 days of February 15, 2006.Percentages are calculated pursuant to Rule 13d-3 under the ExchangeAct. Percentage calculations assume, for each person and group, that all sharesthat may be acquired by such person or group pursuant to options currentlyexercisable or that become exercisable within 60 days following February 15,2006 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.

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(3)          Includes 35,344,471shares owned directly and 2,057,089 shares beneficially owned by two affiliatedpartnerships. Warburg Pincus Partners LLC, or WPP LLC, a New York limitedliability company and a subsidiary of Warburg Pincus & Co., or WP, aNew York general partnership, is the sole general partner of Warburg, PincusEquity Partners, L.P., or WPEP, a Delaware limited partnership. WPEP is managedby Warburg Pincus LLC, or WP LLC, a New York limited liability company. WPEP,WPP LLC, WP and WP LLC are each referred to as a “Warburg Pincus Entity” andare collectively referred to as the “Warburg Pincus Entities”. Each of theWarburg Pincus Entities shares with the other Warburg Pincus Entities thevoting and investment control of all of the shares of common stock such WarburgPincus Entity may be deemed to beneficially own. Charles R. Kaye and Joseph P.Landy are each managing general partners of WP and co-presidents and managingmembers of WP LLC. Each of these individuals disclaims beneficial ownership ofthe shares of common stock of ev3 that the Warburg Pincus Entities may bedeemed to beneficially own. The address of the Warburg Pincus Entities is 466Lexington Avenue, New York, New York 10017.

(4)          The Vertical Group,L.P., or The Vertical Group, a Delaware limited partnership, is the solegeneral partner of each of Vertical Fund I, L.P., a Delaware limitedpartnership, or VFI, and Vertical Fund II, L.P., a Delaware limitedpartnership, 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. The address ofthe Vertical Group Entities is 25 DeForest Avenue, Summit, New Jersey 07901.

(5)          Includes 133,928 sharessubject to options exercisable as of February 15, 2006 or within 60 daysthereafter and 100,000 shares pursuant to a stock grant which vests over timeand are subject to forfeiture until vested.

(6)          Consists of 12,082shares subject to options exercisable as of February 15, 2006 or within 60days thereafter.

(7)          Mr. Emmitt, one ofev3’s directors, is a general partner and a managing director of The VerticalGroup. All shares indicated as owned by Mr. Emmitt are included because ofhis affiliation with the Vertical Group Entities. Mr. Emmitt may be deemedto share with the Vertical Group Entities and the other general partners of TheVertical Group the voting and investment control of all of the shares of ev3common stock 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 12,381 shares subject to options exercisableas of February 15, 2006 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 of 9,166 sharessubject to options exercisable as of February 15, 2006 or within 60 daysthereafter.

(9)          Includes 7,172 sharesheld by a revocable trust and 89,770 shares subject to options exercisable asof February 15, 2006 or within 60 days thereafter.

(10)   Consists of 74,790 sharessubject to options exercisable as of February 15, 2006 or within 60 daysthereafter.

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(11)   Ms. Weatherman, one of ev3’sdirectors, is a managing director and member of WP LLC and a general partner ofWP. All shares indicated as owned by Ms. Weatherman are included becauseof her affiliation with the Warburg Pincus Entities. Ms. Weatherman doesnot own any shares individually and disclaims beneficial ownership of allshares owned by the Warburg Pincus Entities. The number of shares indicated tobe owned by Ms. Weatherman includes 12,381 shares subject to optionsexercisable as of February 15, 2006 or within 60 days thereafter. Ms. Weatherman’saddress is c/o Warburg Pincus LLC, 466 Lexington Avenue, New York, New York10017. See footnote 3 above.

(12)   Consists of 24,566 sharessubject to options exercisable as of February 15, 2006 or within 60 daysthereafter. Does not include 5,000 shares pursuant to a stock grant that willbe issued over time upon vesting.

(13)   Includes 172,454 shares subjectto options exercisable as of February 15, 2006 or within 60 daysthereafter.

(14)   Includes 77,436 shares subjectto options exercisable as of February 15, 2006 or within 60 daysthereafter and 35,000 shares pursuant to a stock grant which vests over timeand are subject to forfeiture until vested.

(15)   Includes 48,644 shares subjectto options exercisable as of February 15, 2006 or within 60 days thereafterand 20,000 shares pursuant to a stock grant which vests over time and aresubject to forfeiture until vested.

(16)   Theamount beneficially owned by all current directors and executive officers as agroup includes 768,177 shares issuable upon exercise of options exercisable asof February 15, 2006 or within 60 days thereafter held by theseindividuals and 185,000 shares pursuant to stock grants which vest over timeand are subject to forfeiture until vested.

**Securities Authorized for Issuance Under EquityCompensation Plans**

The following table summarizesoutstanding options under our equity compensation plans as of December 31,2005. Our only equity compensation plans as of December 31, 2005 were theev3 Inc. Amended and Restated 2005 Incentive Stock Plan and the ev3 LLC 2003Stock Option Plan. No future options will be granted under the ev3 LLC 2003Stock Option Plan.

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Except otherwise stated below, options granted in thefuture under the ev3 Inc. Amended and Restated 2005 Incentive Stock Plan are withinthe discretion of the compensation committee of our board of directors andtherefore cannot be ascertained at this time. The non-employee directorsubcommittee of the compensation committee has granted options to purchase anaggregate of 736,000 shares of our common stock, subject to approval by ourstockholders of an amendment to our Amended and Restated 2005 Incentive StockPlan to increase the number of shares reserved for issuance under the plan. Inaddition to an amendment to increase the number of authorized shares under ourAmended and Restated 2005 Incentive Stock Plan, we expect to submit to ourstockholders at our next annual meeting of stockholders a proposal to approvean employee stock purchase plan pursuant to which we could issue up to 750,000shares of our common stock to employees.

| ** **                                                 | ** ** | **(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     |       |       | 3,823,309  |                                                                                                                                                 |       |                                                                                                        | $          | 11.41 |   |   |   | 85,354 |   |   |
| Equity compensation plans not approved by security holders |       |       | —     |                                                                                                                                                 |       |                                                                                                        | —     |   |   |   | — |   |   |
| **Total**                                                  |       |       | 3,823,309  |                                                                                                                                                 |       |                                                                                                        | $          | 11.41 |   |   |   | 85,354 |   |   |
|                                                            |            |            |            |                                                                                                                                                      |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

 

On January 6, 2006,we acquired the outstanding shares of our then majority owned subsidiary, MicroTherapeutics, Inc., that we did not already own through a merger of MicroInvestment, LLC, our wholly owned subsidiary, with and into MTI, with MTIcontinuing as the surviving corporation and our wholly owned subsidiary. Inconnection with the merger, we assumed outstanding options to purchase sharesof MTI common stock, which options were converted in the merger into options topurchase an aggregate of 2,448,218 shares of our common stock at a weightedaverage exercise price of $9.97 per share. Except for these adjustments to thetype of security issuable upon exercise of the options and the exercise priceas a result of the merger, the terms and conditions (including vesting) of theoptions remain the same, as set forth in the applicable plan under which theoptions were granted, the Micro Therapeutics, Inc.’s 1993 Incentive StockOption, Nonqualified Stock Option and Restricted Stock Purchase Plan or MicroTherapeutics, Inc.’s 1996 Stock Incentive Plan, as amended, or theapplicable option agreement.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

**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 

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on Form S-4(File No. 333-129956) initially filed with the Securities andExchange Commission on November 23, 2005 and declared effective on December 7,2005. Subsequent to the completion of the merger, MTI filed a Form 15 withthe SEC to terminate registration of MTI’s common stock under the SecuritiesExchange Act of 1934, as amended, and MTI’s common stock was delisted fromtrading on the NASDAQ National Market as of the close of the market on January 6,2006.

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 any otheragreements in effect on the date of the merger agreement, will survive themerger. For a period of six years following the completion of the merger, wewill cause the certificates of incorporation and bylaws of MTI and any of itssubsidiaries 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 directors’ and officers’ liability insurance, and if thatinsurance cannot be obtained at all or if the annual premiums of that insurancecoverage exceed this amount, MTI will be obligated to obtain the maximum amountof such insurance available for a cost not exceeding that amount.

**Financing for New MTI Facility**

During the second quarter of 2005, we and MTI enteredinto negotiations regarding a possible loan by us to MTI in connection with MTI’santicipated move into its new facility in Irvine, California. In addition, ev3Endovascular, Inc., a wholly owned subsidiary of ours, entered into a $1.0million letter of credit with the landlord of MTI’s facility as thebeneficiary, in order to finance the relocation of MTI’s Irvine operations,including its manufacturing facility.

On October 13, 2005, we and MTI finalized theterms of a note with respect to an unsecured loan and MTI executed it. Underthe note, MTI may make draw downs from time to time in an aggregate amount notto exceed $2.3 million. Each draw down under the note will bear interest at afloating prime rate plus 2.3% and will be due and payable in 36 consecutivemonthly installments of principal, each in an amount equal to the amount ofsuch draw down divided by 36, plus accrued interest, each due and payable onthe first business day of each calendar month commencing on the later of November 1,2005 or the first day of the month following the draw down made under the note,and continuing on the first business day of each succeeding month thereafterfor 36 consecutive months, when the unpaid amount of the draw down and allaccrued and unpaid interest will be due and payable in full. MTI will have theright to prepay the outstanding principal balance and accrued and unpaidinterest thereon prior to maturity, without premium or penalty.

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The note evidencing the loan contains customary eventsof default, including payment defaults with cure periods, bankruptcy andinvoluntary proceedings, monetary judgment defaults in excess of specifiedamounts, cross-defaults to other agreements and certain changes of control. Forcertain events of default related to insolvency and receivership, the entireoutstanding unpaid principal balance of the note and all accrued and unpaidinterest thereon will automatically become immediately due and payable. In theevent of other defaults by MTI, we may declare the entire outstanding unpaidprincipal balance of the note and all accrued and unpaid interest thereon to beimmediately due and payable. Upon an event of default, we may also exercise allrights and remedies under any other instrument, document, or agreement betweenMTI and us, enforce all rights and remedies under any applicable law, andoffset any and all balances, credits, deposits, accounts, or monies of MTI thenor thereafter with us, or any obligations of us to MTI arising under anyagreement or arrangement between us and MTI, against any amounts due to us fromMTI arising under the note.

In addition, ev3 Endovascular has provided MTI with a$1.0 million standby irrevocable letter of credit in favor of the landlord ofMTI’s new facility to provide MTI with additional financing to support plannedimprovements at the new facility. The letter of credit expires on September 15,2006, but will be automatically extended for successive one-year periodsthereafter, unless LaSalle Bank N.A. notifies the parties that it does notintend to renew the letter of credit for an additional year at least 30 daysprior to the expiration date, as such expiration date may be extended.

As of December 31,2005, MTI had not drawn on the note or letter of credit, respectively.

**CorporateReorganization Prior to Initial Public Offering**

In connection with our initial public offering in June 2005,we completed a series of transactions in order to reorganize our business intoa corporate structure, consolidate the interests in MTI directly held by ourinvestors into our company, and reduce our outstanding debt by converting aportion of such debt into equity. These transactions, which we refer to as thereorganization transactions in this report, are described below.

*Contributionof MTI Stock.**  *Pursuantto a contribution and exchange agreement dated as of April 4, 2005,Warburg Pincus and The Vertical Group each contributed shares of MTI’s commonstock to ev3 LLC on May 26, 2005 in exchange for 10,804,500 and 3,004,332common membership units of ev3 LLC. We refer to the contributions of the sharesof MTI’s common stock by Warburg Pincus and The Vertical Group as the MTI sharecontribution. The MTI share contribution was intended to result in the issuanceof a number of common membership units approximately equal in value to theshares of MTI’s common stock contributed. At the effective time of our mergerwith ev3 LLC as described below, these common membership units were convertedinto the right to receive one share of our common stock.

The contribution and exchange agreement and thetransactions contemplated thereby were approved by an independent specialcommittee of MTI’s board of directors. The independent committee alsodetermined that we would not be deemed to be an “interested stockholder” pursuantto Section 203 of the Delaware General Corporation Law or an “acquiringperson” under MTI’s rights agreement.

*Mergerwith ev3 LLC.**  *OnJune 21, 2005, ev3 LLC merged with and into us and we became the holdingcompany of ev3 LLC’s then current subsidiaries. Pursuant to the mergeragreement, each membership unit representing a preferred or common equityinterest in ev3 LLC was converted into the right to receive one share of ourcommon stock and each option to purchase common membership units of ev3 LLC wasconverted into an option to purchase an equivalent number of shares of ourcommon stock. Pursuant to the merger agreement, the operating agreement of ev3LLC terminated upon the consummation of the merger except for the provisionsregarding indemnification of officers and members of ev3 LLC’s board ofmanagers.

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*Contribution of DemandNotes.**  *OnJune 21, 2005, Warburg Pincus and The Vertical Group contributed to us$316.0 million aggregate principal amount of demand notes issued by ev3Endovascular, Inc. plus $8.2 million of accrued and unpaid interestthereon in exchange for 21,964,815 and 1,194,489 shares of our common stock,respectively. The number of shares of common stock issued to Warburg Pincus andThe Vertical Group in exchange for the demand notes and accrued and unpaidinterest was determined by dividing the aggregate principal amount of demandnotes contributed by each such noteholder plus accrued and unpaid interestthereon through July 3, 2005 by $14.00, which represented the per shareinitial public offering price. This calculation was intended to result in theissuance of a number of shares of our common stock approximately equal in valueto the aggregate principal amount of demand notes and interest contributed.

**Holders Agreement**

We are a party to aholders agreement along with our principal stockholders, the Warburg Entitiesand the Vertical Fund, and certain of our directors and executive officers,including Dale A. Spencer, James M. Corbett, Stacy Enxing Seng and L. CecilyHines. Pursuant to the terms of this agreement, we are required to nominate anduse our best efforts to have elected to our board of directors:

·       twopersons designated by the Warburg Entities and the Vertical Funds if theWarburg Entities, the Vertical Funds and their affiliates collectivelybeneficially own 20% or more of our common stock; or

·       oneperson designated by the Warburg Entities and the Vertical Funds if the WarburgEntities, the Vertical Funds and their affiliates collectively beneficially ownat 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 theholders agreement also agreed to be subject to lock-up agreements in certaincircumstances, including in connection with our initial public offering and upto two registration statements filed after our initial public offering.

**Demand Notes**

In order to fund ouroperations prior to our initial public offering, ev3 Endovascular entered intovarious subscription agreements with Warburg Pincus and The Vertical Grouppursuant to which ev3 Endovascular sold to them demand notes. Interest on thedemand notes was payable upon repayment of the principal. The demand notes hadindefinite maturities and holders of the demand notes were entitled torepayment of the outstanding principal and accrued interest at any time uponwritten demand. As discussed in more detail above, in June 2005, WarburgPincus and The Vertical Group contributed to us $316.0 million aggregateprincipal amount of the demand notes plus $8.2 million of accrued andunpaid interest thereon in exchange for 21,964,815 and 1,194,489 shares of ourcommon stock, respectively. Immediately prior to the contribution of thesedemand notes to us in exchange for shares of our common stock, as described in “—CorporateReorganization” above, the Warburg Entities and the Vertical Funds held$299.7 million and $16.3 million aggregate principal amount of thesedemand notes, respectively, which bore interest at an interest rate of 8% perannum. We used $36.5 million of the net proceeds of our initial publicoffering to repay a portion of the accrued and unpaid interest on the demandnotes.

**Registration Rights Agreement**

On June 21,2005, we entered into a registration rights agreement with certain of ourstockholders, directors, officers and employees, including, among others,Warburg Pincus, The Vertical Group, Dale A. Spencer, James M. Corbett, StacyEnxing Seng and L. Cecily Hines, who we refer to as the holders, with 

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respectto shares of our common stock held by them. Pursuant to the registration rightsagreement, we agreed 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. Theserights were waived in connection with our initial public offering through December 13,2005, subject to extension in certain circumstances. We agreed to bear theexpenses, including the fees and disbursements of one legal counsel for theholders, in connection with the registration of the registrable securities,except for any underwriting commissions relating to the sale of the registrablesecurities.

**Loansfrom Majority Stockholder 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 and, in some cases, are securedby a pledge of shares of our common stock that are owned by the borrower. Proceedsfrom the sale by the borrowers of the shares of our common stock securing theloans will first go to the repayment of interest on the loans and then to theoutstanding principal of such loans. The purpose of these loans was to fund thepurchase of equity interests in ev3 LLC or its predecessors and were notarranged by such entities.

*James M. Corbett,*our President and Chief Executive Officer andone of our directors, is a party to two loan agreements with Warburg Pincus,both of which accrue interest at the rate of 3.46% per annum and mature on September 30,2006. As of February 15, 2006, the aggregate outstanding principal amountof, and accrued interest on, these loans was approximately $1,134,223.

*Dale A. Spencer*,one of our directors, is a party to nine loanagreements with Warburg Pincus, which accrue interest at rates per annumranging from 3.46% to 6.10% and have maturities ranging from May 31, 2006to February 20, 2008. Mr. Spencer sold 4,200 shares of our commonstock in our initial public offering upon exercise by the underwriters of theirover-allotment option and used the proceeds from the sale of those shares torepay a portion of his loans from Warburg Pincus. As of February 15, 2006,the aggregate outstanding principal amount of, and accrued interest on, theseloans was approximately $3,662,533.

*Stacy Enxing Seng*, ourPresident, Cardio Peripheral Division, is a party to four loan agreements withWarburg Pincus, which accrue interest at rates per annum ranging from 4.63% to4.77% and have maturities ranging from May 31, 2005 to March 5, 2006.As of February 15, 2006, the aggregate outstanding principal amount of,and accrued interest on, these loans was approximately $307,437.

**Participationin Initial Public Offering**

Warburg Pincus and TheVertical Group purchased 3,196,750 and 168,250 shares of our common stock,respectively, in our initial public offering, at a per share purchase price of$14.00 per share, or an aggregate purchase price of $44,754,500 and $2,355,500,respectively. Dale A. Spencer, one of our directors, sold 4,200 shares of ourcommon stock in our initial public offering upon exercise by the 

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underwritersof the over-allotment option at a per share purchase price of $13.02 per share,or an aggregate purchase price of $54,684.

**MTICorporate Opportunity Agreement**

We have entered into a corporate opportunity agreementwith Warburg Pincus and The Vertical Group under which we have the first rightto negotiate a financing of MTI to further fund MTI’s operations. Pursuant tothe agreement, Warburg Pincus and The Vertical Group are obligated to give usnotice in the event that MTI seeks financing from them and we will have thefirst right to negotiate to provide such financing. If we choose not to providesuch financing or if MTI advises us that, based on a determination of amajority of its independent directors, it will not consider a financing fromus, Warburg Pincus and The Vertical Group will have the right to provide suchfinancing to MTI. Notwithstanding the foregoing, Warburg Pincus and TheVertical Group are permitted to provide short-term financing to MTI in order tomeet its obligations under its existing financing commitment to MTI.

In addition, pursuant to the corporate opportunityagreement, if Warburg Pincus or The Vertical Group negotiates the terms of aproposed investment in MTI, we have a first right to pursue such investment onthe same terms. If we choose not to purse such investment or if we fail to signa definitive agreement with MTI within specified time periods, Warburg Pincusand The Vertical Group will have the right to pursue such investment on thesame terms. Thereafter, if there is a material change in the proposed terms ofthe investment by Warburg Pincus or The Vertical Group, we will have the firstopportunity to pursue an investment based upon the revised proposed terms.

Except with respect to the first right to negotiate orpursue a financing of MTI, pursuant to the corporate opportunity agreement wehave acknowledged that Warburg Pincus and The Vertical Group may engage orinvest in, independently or with others, any business activity or any type oftransaction with MTI, and, pursuant to Section 122(17) of the DelawareGeneral Corporation Law, we have renounced any interest or expectation therein.

The corporate opportunityagreement will terminate on the date on which Warburg Pincus and The VerticalGroup collectively beneficially own less than 10% of our common stock. Anydeterminations made under the corporate opportunity agreement, including anydecisions regarding any proposed financing or investment, will be approved by amajority of our disinterested directors.

**MTI Funding Support Letter**

MTI received a supportletter from Warburg Pincus pursuant to which Warburg Pincus agreed to provideadditional funding up to $5.0 million to MTI if needed to fund MTI’soperations. The Warburg Pincus commitment is effective through July 4,2006 and will be reduced to the extent of proceeds, if any, that becomeavailable from a third party lender or any amounts raised in a third partyfinancing.

**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;

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·       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, has been chairman of MTI’s board ofdirectors since January 2002 and was MTI’s acting President and ChiefExecutive 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. Currently,James M. Corbett, Patrick D. Spangler and Thomas C. Wilder III are directors ofMTI.

**Services Agreements with MTI**

In April 2002, ev3 International, Inc., ourwholly owned subsidiary, entered into a lease and support services agreementwith MTI, under which MTI provided ev3 International with office space andcertain facility related and administrative services in exchange for a fee. Thefee was recalculated annually, based on the square footage used by ev3International and MTI’s budgeted facility costs. MTI also charged ev3International for the cost of one administrative employee. ev3 Internationalpaid MTI $84,444 under this agreement in 2005. This agreement was terminatedeffective January 6, 2006.

In September 2002, MTI entered into a masterservices agreement, effective as of October 1, 2002, with ev3 Endovascularunder which it installed MTI’s primary information systems and renderedinformation technology support services. MTI paid ev3 Endovascular $403,716 in2005 under this agreement. This agreement was terminated effective January 6,2006.

In June 2003, MTI and ev3 Endovascular enteredinto a distribution support services agreement under which ev3 Endovascularperformed inventory management and administrative services with respect tocertain inventory of MTI’s products. Under the terms of the agreement, ev3Endovascular charged MTI a fee based on a fixed percentage of grossend-physician sales realized by MTI from sales of such products in the UnitedStates. MTI paid ev3 Endovascular $717,128 in 2005 under this agreement. Thisagreement was terminated effective January 6, 2006.

Effective August 4,2003, and subsequently amended on April 6, 2005, MTI and ev3 Internationalentered into an amended and restated sales representative agreement, whichreplaced a prior agreement. Under this agreement, ev3 International promoted,marketed and obtained orders for certain MTI’s products in certain locationsand managed their distribution in others. Under the terms of the agreement, asconsideration for ev3 International’s services, MTI paid a fee based on a fixedpercentage of the revenues MTI realizes from sales of products in territoriesin which ev3 International maintains sales representatives, and a fee based ona fixed percentage of revenues received from sales to third party distributorswith respect to whom ev3 International performs distributor managementservices. MTI paid ev3 International $8.7 million in 2005 under this agreement.This agreement was terminated effective January 6, 2006.

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**Distribution Agreements with MTI**

In April 2003, MTI and ev3 Endovascular enteredinto a distribution agreement, which replaced a prior agreement. Under theterms of the agreement, ev3 Endovascular purchased products, includingperipheral vascular devices and related radiological devices, from MTI at afixed percentage of the actual sales prices, subject to a set minimum, realizedby ev3 Endovascular from end-user physician customers. MTI’s collection ofpayment from ev3 Endovascular for such purchases was fixed by the terms of theagreement, and was not contingent upon ev3 Endovascular’s collections from itsphysician customers. Based upon the difference between the actual sales pricespaid by end-user physician customers and the amounts paid by ev3 Endovascularto MTI for these products, ev3 Endovascular earned $1.1 million in 2005 underthis agreement. This agreement was terminated effective January 6, 2006.

In June 2003, MTI entered into a distributionagreement with ev3 Canada, Inc., a wholly owned subsidiary of ours. Underthe terms of the agreement, ev3 Canada purchased peripheral vascular and neurovascularproducts from MTI at a fixed percentage of the actual sales prices, subject toa set minimum, realized by ev3 Canada from end-user physician customers. Basedupon the difference between the actual sales prices paid by end-user physiciancustomers and the amounts paid by ev3 Canada to MTI for these products, ev3Canada earned $486,034 in 2005 under this agreement. This agreement wasterminated effective January 6, 2006.

In June 2003, MTIentered into a distribution agreement with ev3 K.K. (Japan), a wholly ownedsubsidiary of ours. The agreement has an initial term of three years and willrenew automatically, unless otherwise terminated, for a subsequent one-yearperiod. The agreement may be terminated by MTI if the subsidiary fails to meetcertain minimum sales requirements. Under the terms of the agreement, ev3 K.K.(Japan) purchases peripheral vascular and neurovascular products from MTI at afixed percentage of the actual sales prices, subject to a set minimum, realizedby ev3 K.K. (Japan) from end-user physician customers. Based upon thedifference between the actual sales prices paid by end-user physician customersand the amounts paid by ev3 K.K. (Japan) for these products, ev3 K.K. (Japan)earned $716,903 in 2005 under this agreement.

**Directorand Executive Officer Compensation**

Please see “Item 12. ExecutiveCompensation” for information regarding the compensation of our directors andexecutive officers and for information regarding employment, consulting, changein control, indemnification and other agreements we have entered into with ourdirectors and executive officers.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

**Audit, Audit-Related, Tax and Other Fees**

The following table presents the aggregate fees billedto us for professional services rendered by PricewaterhouseCoopers LLP for thefiscal years ended December 31, 2005 and December 31, 2004.

| ** **             | ** ** | **Aggregate Amount Billed by  PricewaterhouseCoopers LLP** | ** ** |
|------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **2005**                                                                       | ** ** | **2004** | ** ** |
| Audit Fees(1)          |       | $                                                                              | 1,477,229  |   | $ | 2,159,958 |   |
| Audit-Related  Fees(2) |       | 34,952                                                                         |       | 3,120 |   |
| Tax Fees(3)            |       | 279,838                                                                        |       | 166,025 |   |
| All Other Fees(4)      |       | 6,500                                                                          |       | 5,000 |   |
|                        |            |                                                                                |            |  |  |  |  |

----

(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 our Form S-1registration statement in connection with our initial public offering and our Form S-4registration statement in connection with 

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our acquisition of theminority interest of Micro Therapeutics, Inc. and other services normallyprovided in connection with our statutory and regulatory filings orengagements.

(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 the board of directors has considered whetherthe provision of these services is compatible with maintainingPricewaterhouseCoopers LLP’s independence and has determined that it is.

(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 the 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 the 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 byPricewaterhouseCoopers LLP to us, are pre-approved by our audit committee. Allservices rendered by PricewaterhouseCoopers LLP to us during 2005 since ourinitial public offering were permissible under applicable laws and regulations,and all such services provided by PricewaterhouseCoopers LLP to us during suchtime, other than de minimis non-audit services allowed under applicable law,were approved in advance by our audit committee in accordance with the rules adoptedby the Securities and Exchange Commission in order to implement requirements ofthe 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 QualifyingAccounts. All other schedules are omitted because the required information isinapplicable or the information is presented in the consolidated financialstatements or related notes.

The exhibits to this report are listed on the Exhibit Indexon pages 120—127. A copy of any of the exhibits listed or referred toabove will be furnished at a reasonable cost, upon receipt from any such personof a written request for any such exhibit. Such request should be sent to ev3Inc., 9600 54th Avenue North, Suite 100, Plymouth,Minnesota 55442, Attn: Stockholder Information.

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 (incorporatedby reference to Exhibit 10.53 to ev3’s Registration Statement on Form S-1filed with the Securities and Exchange Commission on April 5, 2005 (File No. 333-123851)).

D.             Employment OfferLetter, dated as of August 16, 2002, between Micro Therapeutics, Inc.and Thomas C. Wilder III (incorporated by reference to Exhibit 10.36 toMicro Therapeutics, Inc.’s Quarterly Report on Form 10-QSB asfiled with the Securities and Exchange Commission on November 14, 2002(File No. 000-06523)).

E.              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 10.10to ev3’s Registration Statement on Form S-1 filed with theSecurities and Exchange Commission on April 5, 2005 (File No. 333-123851)).

F.               Change in ControlAgreement, dated as of September 1, 2003, among ev3 Endovascular, Inc.(formerly known as ev3 Inc.), ev3 LLC and James M. Corbett (incorporated byreference to Exhibit 10.11 to ev3’s Registration Statement on Form S-1filed with the Securities and Exchange Commission on April 5, 2005 (File No. 333-123851)).

G.            Change in ControlAgreement, dated as of October 8, 2004, among Micro Therapeutics, Inc.,ev3 LLC and Thomas C. Wilder III (incorporated by reference to Exhibit 10.46to Micro Therapeutics, Inc.’s Current Report on Form 8-K filedwith the Securities and Exchange Commission on October 13, 2004 (File No. 000-06523)).

H.            Change in ControlAgreement, dated as of September 1, 2003, among ev3 Endovascular, Inc.(formerly known as ev3 Inc.), ev3 LLC and Dale A. Spencer (incorporated byreference to 

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Exhibit 10.13 to ev3’sRegistration Statement on Form S-1 filed with the Securities andExchange Commission on April 5, 2005 (File No. 333-123851)).

I.                  Form ofChange in Control Agreement among ev3 Endovascular, Inc. (formerly knownas ev3 Inc.), ev3 LLC and various officers (incorporated by reference to Exhibit 10.14ev3’s Registration Statement on Form S-1 filed with the Securitiesand Exchange Commission on April 5, 2005 (File No. 333-123851)).

J.                 Form ofLetter Agreement, by and among Micro Therapeutics, Inc., ev3 Inc. andcertain executive officers of Micro Therapeutics, Inc. (incorporated byreference to Exhibit 10.52 to Micro Therapeutics, Inc.’s CurrentReport on Form 8-K as filed with the Securities and ExchangeCommission on August 31, 2005 (File No. 000-06523)).

K.             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)).

L.               ev3 Amended andRestated 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.4to ev3’s Quarterly Report on Form 10-Q for the quarter ended July 3,2005 (File No. 000-51348)).

M.           Form ofNon-Statutory Stock Option Grant Certificate under ev3 Inc. Amended andRestated 2005 Incentive Stock Plan (incorporated by reference to Exhibit 10.3to ev3’s Quarterly Report on Form 10-Q for the quarter ended October 2,2005 (File No. 000-51348)).

N.             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 December 30, 2005(File No. 000-51348)).

O.            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)).

P.               ev3 LLC 2003Incentive Plan, as amended (incorporated by reference to Exhibit 10.16 toev3’s Registration Statement on Form S-1 filed with the Securitiesand Exchange Commission on April 5, 2005 (File No. 333-123851)).

Q.            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-KSBfiled with the Securities and Exchange Commission on April 4, 2003 (FileNo.000-06523)).

R.             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)).

S.                ev3 Inc. EmployeeStock Purchase Plan (filed herewith).

T.              ev3 Inc. ExecutivePerformance Incentive Plan (filed herewith).

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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 6, 2006 | **ev3 INC.** |
|---------------------------|--------------|
|                      | By           |   /s/ JAMES M. CORBETT |
|                      |         |   James M. Corbett |
|                      |         |   President and Chief Executive Officer    (principal executive officer) |
|                      | By           |   /s/ PATRICK D. SPANGLER |
|                      |         |   Patrick D. Spangler |
|                      |         |   Chief Financial Officer and Treasurer    (principal 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 and |       | March 6,  2006 |
| James M. Corbett            |                   | Director                               |       |                |
| /s/ HAYWOOD D. COCHRANE     |                   | Director                               |       | March 6, 2006  |
| Haywood D. Cochrane         |                   |                                   |       |                |
| /s/ RICHARD B. EMMITT       |                   | Director                               |       | March 6, 2006  |
| Richard B. Emmitt           |                   |                                   |       |                |
| /s/ DOUGLAS W. KOHRS        |                   | Director                               |       | March 6, 2006  |
| Douglas W. Kohrs            |                   |                                   |       |                |
| /s/ DALE A. SPENCER         |                   | Director                               |       | March 6, 2006  |
| Dale A. Spencer             |                   |                                   |       |                |
| /s/ THOMAS E. TIMBIE        |                   | Director                               |       | March 6, 2006  |
| Thomas E. Timbie            |                   |                                   |       |                |
| /s/ ELIZABETH H. WEATHERMAN |                   | Director                               |       | March 6, 2006  |
| Elizabeth H. Weatherman     |                   |                                   |       |                |

 

 

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**ev3 INC.**

**EXHIBITINDEX TO ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2005**

| 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-1 filed  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)       |

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| 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) |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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  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 quarter ended July 3, 2005 (File  No. 000-51348)                                                          |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |   | Lease Agreement, dated April 24, 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 |   | Lease Agreement dated August 22, 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 quarter ended October 2, 2005  (File No. 000-51348)                                                      |
| 10.3 |   | 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)  |
| 10.4 |   | Industrial Real  Estate Lease dated June 10, 1998 between Micro Therapeutics, Inc. and New  Goodyear, LTD                                                                                                                                                                                                                                                                                   |   | Incorporated by  reference to Exhibit 10.2 to ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File No.  333-123851)                  |
| 10.5 |   | First Amendment  to Lease, dated as of May 28, 2003, by and between Micro Therapeutics, Inc.  and EJM Development Co.                                                                                                                                                                                                                                                                       |   | Incorporated by  reference to Exhibit 10.4.1 to Micro Therapeutics’ Quarterly Report on Form  10-QSB as filed with the Securities and Exchange Commission on August 13,  2003 (File No. 000-06523) |
| 10.6 |   | 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)                  |
| 10.7 |   | 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)                   |

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| 10.8  |   | 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)                                |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Employment Offer Letter, dated as of August 16,  2002, between Micro Therapeutics, Inc. and Thomas C. Wilder III                                               |   | Incorporated by reference to Exhibit 10.36 to  Micro Therapeutics, Inc.’s Quarterly Report on Form 10-QSB filed  with the Securities and Exchange Commission on November 14, 2002 (File No. 000-06523) |
| 10.10 |   | 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)                                |
| 10.11 |   | Change in Control Agreement, dated as of September  1, 2003, among ev3 Endovascular, Inc. (formerly known as ev3 Inc.), ev3 LLC  and James M. Corbett     |   | Incorporated by reference to Exhibit 10.11 to  ev3’s Registration Statement on Form S-1 filed with the Securities and  Exchange Commission on April 5, 2005 (File No. 333-123851)                                |
| 10.12 |   | Change in Control  Agreement, dated as of October 8, 2004, among Micro Therapeutics, Inc.,  ev3 LLC and Thomas C. Wilder III                              |   | Incorporated by  reference to Exhibit 10.46 to Micro Therapeutics, Inc.’s Current Report  on Form 8-K filed with the Securities and Exchange Commission on  October 13, 2004 (File No. 000-06523)                |
| 10.13 |   | Change in Control  Agreement, dated as of September 1, 2003, among ev3 Endovascular, Inc.  (formerly known as ev3 Inc.), ev3 LLC and Dale A. Spencer |   | Incorporated by  reference to Exhibit 10.13 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 |   | Form of Change in  Control Agreement among ev3 Endovascular, Inc. (formerly known as ev3 Inc.),  ev3 LLC and certain officers of ev3 Inc.                      |   | Incorporated by  reference to Exhibit 10.14 ev3’s Registration Statement on Form S-1  filed with the Securities and Exchange Commission on April 5, 2005 (File No.  333-123851)                                  |
| 10.15 |   | Form of Letter  Agreement, by and among Micro Therapeutics, Inc., ev3 Inc. and certain  executive officers of Micro Therapeutics, Inc.                         |   | Incorporated by  reference to Exhibit 10.52 to Micro Therapeutics, Inc.’s Current Report  on Form 8-K as filed with the Securities and Exchange Commission on  August 31, 2005 (File No. 000-06523)              |

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| 10.16 |   | 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)      |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17 |   | ev3 Inc. Amended  and Restated 2005 Incentive Stock Plan                                                                    |   | Incorporated by  reference to Exhibit 10.4 to ev3’s Quarterly Report on Form 10-Q for the  quarter ended July 3, 2005 (File No. 000-51348)                                                                |
| 10.18 |   | Form of Non-Statutory Stock Option Grant Notice  under ev3 Inc. 2005 Incentive Stock Plan                                   |   | Incorporated by reference to Exhibit 10.3 to  ev3’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2005  (File No. 000-51348)                                                             |
| 10.19 |   | 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 December 30, 2005 (File No. 000-51348)                                    |
| 10.20 |   | 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)                                |
| 10.21 |   | ev3 LLC 2003 Incentive Plan, as amended                                                                                     |   | Incorporated by reference to Exhibit 10.16 to  ev3’s Registration Statement on Form S-1 filed with the Securities and  Exchange Commission on April 5, 2005 (File No. 333-123851)                         |
| 10.22 |   | 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 filed with the  Securities and Exchange Commission on April 4, 2003 (File No. 000-06523)     |
| 10.23 |   | 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) |
| 10.24 |   | ev3 Inc. Employee Stock Purchase Plan                                                                                       |   | Filed herewith                                                                                                                                                                                                      |
| 10.25 |   | ev3 Inc. Executive Performance Incentive Plan                                                                               |   | Filed herewith                                                                                                                                                                                                      |

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| 10.26 |   | Corporate Opportunity Agreement, dated as of April  4, 2005, by and among the institutional stockholders listed on Schedule I  thereto and ev3 Inc.                                                                                                                                                                                                  |   | Incorporated by reference to Exhibit 10.32 to  ev3’s Registration Statement on Form S-1 filed with the Securities and  Exchange Commission on April 5, 2005 (File No. 333-123851)                              |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.27 |   | 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)                              |
| 10.28 |   | 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) |
| 10.29 |   | 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) |
| 10.30 |   | Royalty Agreement, dated November 18, 1993, between  Microvena Corporation and Frank Kotula                                                                                                                                                                                                                                                               |   | Incorporated by reference to Exhibit 10.36 to  ev3’s Registration Statement on Form S-1 filed with the Securities and  Exchange Commission on April 5, 2005 (File No. 333-123851)                              |
| 10.31 |   | Royalty Agreement, dated October 21, 1993, between  Microvena Corporation and Kurt Amplatz                                                                                                                                                                                                                                                                |   | Incorporated by reference to Exhibit 10.37 to  ev3’s Registration Statement on Form S-1 filed with the Securities and  Exchange Commission on April 5, 2005 (File No. 333-123851)                              |
| 10.32 |   | License  Agreement, dated as of April 1, 1995, by and between Terumo Corporation,  Flexmedics Corporation and Microvena Corporation                                                                                                                                                                                                                       |   | Incorporated by  reference to Exhibit 10.38 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 |   | License and  Development Agreement, dated as of December 6, 1996, between Intravascular  Medical, Inc. and Baxter Healthcare Corporation                                                                                                                                                                                                             |   | Incorporated by  reference to Exhibit 10.39 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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| 10.34 |   | License Agreement, effective November 20, 1998, by  and among Medtronic InStent, Inc. and Medtronic, Inc.                                                                             |   | Incorporated by reference to Exhibit 10.40 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 |   | 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) |
| 10.36 |   | 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) |
| 10.37 |   | 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) |
| 10.38 |   | 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) |
| 10.39 |   | 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) |
| 10.40 |   | 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) |
| 10.41 |   | License Agreement, dated as of September 29, 2004,  between Edwards Lifesciences AG and ev3 Endovascular, Inc. (formerly known as  ev3 Inc.)                                          |   | Incorporated by reference to Exhibit 10.47 to  ev3’s Registration Statement on Form S-1 filed with the Securities and  Exchange Commission on April 5, 2005 (File No. 333-123851) |
| 10.42 |   | Sublicense Agreement, dated August 28, 2000, by and  between Angiomed, GmbH & Co. Medizintechnik KG and EndiCOR Medical, Inc.                                                     |   | Incorporated by reference to Exhibit 10.48 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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| 10.43 |   | 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)                 |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44 |   | 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),                |
| 10.45 |   | 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)                 |
| 10.46 |   | Loan and Security Agreement, dated May 6, 2005, by  and between Micro Therapeutics, Inc. and Silicon Valley Bank                                    |   | Incorporated by reference to Exhibit 10.56 to  Micro Therapeutics, Inc.’s Current Report on Form 8-K filed with the  Securities and Exchange Commission on May 10, 2005 (File No. 000-06523) |
| 21.1  |   | Subsidiaries of ev3 Inc.                                                                                                                            |   | Filed herewith                                                                                                                                                                                              |
| 23.1  |   | 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.

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