<PAGE>
 


                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                   FORM 10-Q
(Mark One)

[x]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the quarterly period ended September 30, 1998

          or

[_]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934


     For the transition period from ______ to ______

     Commission file number:  0-21001
 


                      Nitinol Medical Technologies, Inc.
                      ----------------------------------
            (Exact Name of Registrant as Specified in Its Charter)

           Delaware                                        95-4090463
           --------                                        ----------
(State or Other Jurisdiction of                         (I.R.S. Employer
 Incorporation or Organization)                        Identification No.)

27 Wormwood Street, Boston, Massachusetts                      02210
-----------------------------------------------------------------------
(Address of Principal Executive Offices)                     (Zip Code)

                                 617-737-0930
                                 ------------
             (Registrant's Telephone Number, Including Area Code)

                                      N/A
                                      ---
             (Former Name, Former Address and Former Fiscal Year,
                         if Changed Since Last Report)


     Indicate by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   x    No ___
                                                ---         

     As of November 11, 1998, there were 10,629,190 shares of Common Stock,
$.001 par value per share, outstanding.



<PAGE>
 
                      NITINOL MEDICAL TECHNOLOGIES, INC.

                                     INDEX
                                     -----



Part I.  Financial Information                                       Page Number
         ---------------------                                       -----------

 Item 1.   Financial Statements.
           Consolidated Balance Sheets at September 30, 1998 
           and December 31, 1997                                          3

           Consolidated Statements of Operations for the
           Three Months Ended September 30, 1998 and 1997
           and for the Nine Months Ended September 30, 1998 
           and 1997                                                       4  

           Consolidated Statements of Cash Flows for the
           Nine Months Ended September 30, 1998 and 1997                  5

           Notes to Consolidated Financial Statements                     6

 Item 2.   Management's Discussion and Analysis of
           Financial Condition and Results of Operations.                15

 Item 3.   Quantitative and Qualitative Disclosures about
           Market Risk.                                                  25  

Part II. Other Information
         -----------------

 Item 2.   Changes in Securities and Use of Proceeds.                    26

 Item 5.   Other Information.                                            26

 Item 6.   Exhibits and Reports on Form 8-K.                             27

Signatures                                                               28 

<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS



Part I   Financial Information
------------------------------ 
Item 1.  Financial Statements.
         ---------------------
                                  (UNAUDITED)
<TABLE>   
<CAPTION>  
                                                                                    AT                 AT
                                                                               SEPTEMBER 30,       DECEMBER 31,
                                                                                   1998               1997
                                                                               -------------       ------------
<S>                                                                            <C>                 <C> 
      ASSETS
Current assets:                                                                     
  Cash and cash equivalents                                                     $  4,123,366        $ 5,561,445
  Marketable securities                                                            5,846,313         20,822,405
  Accounts receivable, net of allowances for doubtful                       
      accounts  of $811,000 and $125,000 as of                              
      September 30, 1998 and December 31, 1997,                             
      respectively                                                                11,514,427           2,317,408
  Inventories                                                                      8,554,062           1,071,265
  Prepaid expenses and other current assets                                        3,498,201           1,110,271
                                                                                ------------        ------------ 
                 Total current assets                                             33,536,369          30,882,794
                                                                                ------------        ------------ 
Property and equipment, at cost:                                                              
  Land and Buildings                                                              13,056,000                   -
  Laboratory and computer equipment                                                3,614,672           1,091,380
  Office furniture and equipment                                                   1,297,809             143,640
  Leasehold improvements                                                           1,122,235           1,135,583
  Equipment under capital lease                                                    1,006,693             948,155
                                                                                ------------        ------------ 
                                                                                  20,097,409           3,318,758
  Less--Accumulated depreciation and amortization                                  1,911,290             845,512
                                                                                ------------        ------------ 
                                                                                  18,186,119           2,473,246
                                                                                ------------        ------------ 
Investments in long-term marketable securities                                     1,516,269           1,478,058
Investment in affiliate                                                              999,849                   -
Goodwill and other intangible assets                                               8,080,686                   -
Other assets                                                                       2,960,191             171,415
                                                                                ------------        ------------ 
                                                                                $ 65,279,483        $ 35,005,513
                                                                                ============        ============
      LIABILITIES AND STOCKHOLDERS' EQUITY                                             
Current Liabilities:                                                                              
  Accounts payable                                                              $  4,359,927        $    166,248
  Accrued expenses                                                                 4,924,134             986,128
  Current portion of capital lease obligation                                        178,500             168,736
  Current portion of senior debt                                                     184,000                   -
  Current portion of deferred tax liability                                          106,226                   -
  Deferred revenue                                                                         -             300,000
                                                                                ------------        ------------ 
                 Total current liabilities                                         9,752,787           1,621,112
                                                                                ------------        ------------ 
Capital lease obligation, net of current portion                                     525,778             612,458
Senior debt, net of current portion                                                  313,000
Subordinated debt, net of original issue discount                                 16,886,666                   -
Deferrred tax liability                                                            4,142,831                   -
                                                                                ------------        ------------ 
                 Total long-term liabilities                                      21,868,275             612,458
                                                                                ------------        ------------ 
Stockholders' equity                                                                              
     Common stock, $.001 par value-                                                         
                 Authorized-30,000,000 shares                                              
                 Issued and outstanding-10,622,245 and 9,823,186 shares                 
                 at September 30, 1998 and December 31,1997, respectively             10,623               9,824
     Addditional paid-in capital                                                  40,800,368          36,610,997
     Cumulative translation adjustment                                               669,000                   -
     Accumulated deficit                                                          (7,821,570)         (3,848,878)
                                                                                ------------        ------------ 
                 Total stockholders' equity                                       33,658,421          32,771,943
                                                                                ------------        ------------ 
                                                                                $ 65,279,483        $ 35,005,513
                                                                                ============        ============

The accompanying Notes are an integral part of these Consolidated Financial Statements.

</TABLE> 

                                       3
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE> 
<CAPTION>
                                                     FOR THE THREE MONTHS ENDED                   FOR THE NINE MONTHS ENDED
                                                           SEPTEMBER 30,                                SEPTEMBER 30,
                                                      1998                1997                       1998              1997
                                                  --------------------------------             --------------------------------  
<S>                                               <C>                  <C>                     <C>                 <C> 
Revenues:                                                                               
     Product sales                                $ 11,920,173         $ 2,265,077             $   17,445,695      $  6,154,792
     License fees                                      296,558             250,000                  1,522,357           750,000
     Product development                                     -               8,216                      1,453            58,610
                                                  --------------------------------             --------------------------------  
                                                    12,216,731           2,523,293                 18,969,505         6,963,402
                                                  --------------------------------             --------------------------------  
Expenses:
     Cost of product sales                           5,024,891             917,213                  7,139,029         2,802,896
     Research and development                        1,120,353             793,909                  2,792,718         2,268,618
     General and administrative                      2,234,606             636,604                  3,547,956         1,968,402
     Selling and marketing                           2,748,310             294,128                  3,473,668           678,475
     In-process research and development             4,710,000                   -                  4,710,000         2,449,072
     Merger and integration                            687,242                   -                    687,242           193,635
                                                  --------------------------------             --------------------------------  
                                                    16,525,402           2,641,854                 22,350,613        10,361,098
                                                  --------------------------------             --------------------------------  
                 Loss from operations               (4,308,671)           (118,561)                (3,381,108)       (3,397,696)
                                                  --------------------------------             --------------------------------  
                                                                                        
Equity in loss of affiliate                           (154,614)                  -                   (247,951)                -
                                                                                        
Currency Transaction Loss                              (18,939)                  -                    (88,403)                -
                                                                                        
Interest expense                                      (658,973)            (10,979)                  (689,528)          (30,726)
Interest income                                        155,109             394,624                    946,485         1,201,103
                                                  --------------------------------             --------------------------------  
                                                      (503,864)            383,645                    256,957         1,170,377
                                                  --------------------------------             --------------------------------  
                                                                                        
                 Income (loss) before provision 
                   for income taxes                 (4,986,088)            265,084                 (3,460,505)       (2,227,319)
                                                                                        
Provision (benefit) for income taxes                   (38,313)             90,500                    512,187           113,500
                                                  --------------------------------             --------------------------------  
                                                                                        
     Net income (loss)                            $ (4,947,775)        $   174,584             $   (3,972,692)     $ (2,340,819)
                                                  ================================             ================================ 
                                                                                        
Basic net income (loss) per common share          $      (0.47)        $      0.02             $        (0.40)     $      (0.25)
                                                  ================================             ================================ 
Weighted average common shares outstanding          10,464,675           9,614,778                 10,041,041         9,535,505
                                                  ================================             ================================ 
Diluted net income (loss) per common share        $      (0.47)             $ 0.02             $        (0.40)     $      (0.25)
                                                  ================================             ================================ 
Diluted weighted average common and common
  equivalent shares outstanding                     10,464,675          11,151,490                 10,041,041         9,535,505
                                                  ================================             ================================ 

</TABLE> 


The accompanying Notes are an integral part of these Consolidated Financial
Statements.

                                       4
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                                     FOR THE NINE MONTHS ENDED
                                                                                           SEPTEMBER 30,        
                                                                                       1998             1997       
                                                                                  ------------------------------
<S>                                                                               <C>              <C>  
Cash flows from operating activities:                                                                           
     Net loss                                                                     $ (3,972,692)    $ (2,340,819)
     Adjustments to reconcile net loss to net cash                                                              
     used in operating activities-                                                                              
                In-process research & development                                    4,710,000                - 
                Depreciation and amortization                                          959,657          329,211 
                Equity in loss of affiliate                                            247,951                - 
                Acceleration of stock options                                           11,679          111,576 
                Changes in assets and liabilities-                                                              
                                Accounts receivable                                 (8,663,892)        (909,205)
                                Inventories                                            416,260         (331,130)
                                Prepaid expenses and other current assets           (1,193,929)        (338,949)
                                Accounts payable                                     6,078,947         (268,844)
                                Accrued expenses                                       274,004           99,985 
                                Deferred revenue                                      (300,000)               - 
                                                                                                                
                                                                                  ---------------------------- 
                                    Net cash used in operating activities           (1,432,015)      (3,648,175)
                                                                                  ---------------------------- 
Cash flows from investing activities:                                                                          
     Maturities of marketable securities                                            14,920,848        4,954,164 
     Purchases of property and equipment                                              (551,004)        (213,827)
     Increase in other assets                                                         (971,871)         (63,003)
     Increase in investment in affiliate                                            (1,247,800)               - 
     Acquisition of Elekta Neurosurgical Instruments, net of cash acquired         (33,193,714)               - 

                                                                                  -----------------------------
                                    Net cash provided by 
                                      (used in) investing activities               (21,043,541)       4,677,334  
                                                                                  ----------------------------- 
Cash flows from financing activities:                                             
     Payments of capital lease obligations                                            (135,454)         (86,003)
     Proceeds from issuance of common stock                                          4,134,341          660,317
     Issuance of common stock pursuant to employee stock purchase plan                  44,151                -
     Payments senior debt                                                              (17,592)               -
     Increase in subordinated debt, net                                             16,744,999                -

                                                                                  -----------------------------
                                    Net cash provided by financing activities       20,770,445          574,314
                                                                                  -----------------------------
                                                                                  
Effect of exchange rate changes on cash                                                267,032                -
                                                                                  
Net increase (decrease) in cash and cash equivalents                                (1,438,079)       1,603,473
Cash and cash equivalents, beginning of period                                       5,561,445        4,082,486
                                                                                  -----------------------------
Cash and cash equivalents, end of period                                          $  4,123,366     $  5,685,959
                                                                                  =============================
                                                                                  
Supplemental disclosure of cash flow information:                             
     Cash paid during the period for-                                         
                Interest                                                          $    689,528     $     30,726
                                                                                  =============================
                Taxes                                                             $    528,324     $     28,500
                                                                                  =============================
                                                                              
Supplemental disclosure of non-cash investing and financing transactions:     
     Equipment under capital lease obligation                                     $     58,538     $    303,481
                                                                                  =============================
     Write-off of abandonement of leasehold improvements                          $          -     $    111,472
                                                                                  =============================
     Acquisition of Elekta Neurosurgical Instruments:                         
                Fair value of assets acquired                                     $ 32,691,000     $         -
                Goodwill and intangible assets                                      10,081,714               -
                In-process research and development                                  4,710,000               -
                Liabilities assumed                                                (12,096,000)              -
                Cash acquired                                                       (2,193,000)              -
                                                                                  ----------------------------
                                                                                  $ 33,193,714     $         -
                                                                                  ============================
</TABLE> 
The accompanying Notes are an integral part of these Consolidated Financial
Statements.

                                       5
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Operations

     Nitinol Medical Technologies, Inc. (the Company) designs, develops and
     markets innovative medical devices that utilize advanced technologies and
     are delivered by minimally invasive procedures. The Company's products are
     designed to offer alternative approaches to existing complex treatments,
     thereby reducing patient trauma, shortening procedure, hospitalization and
     recovery times and lowering overall treatment costs. The Company's patented
     medical devices include self-expanding stents, vena cava filters and septal
     repair devices. Currently, the Company's stents have been commercially
     launched in Europe and in the United States for certain indications, its
     vena cava filters are marketed in the United States and abroad and the
     CardioSEAL Septal Occluder is in the clinical trials stage in the United
     States and is sold commercially in Europe and other international markets.
     As a result of the Company's acquisition on July 8, 1998 of the
     neurosurgical instruments business (ENI) of Elekta AB (PUBL), a Swedish
     corporation, which the Company operates through its NMT Neurosciences
     division (See Note 3), the Company provides a wide range of products
     including cerebral spinal fluid shunts, the Selector Ultrasonic Aspirator,
     Ruggles Surgical Instruments, the Spetzler Titanium Aneurysm Clip and
     endoscopes and instrumentation for minimally invasive surgery. The Company
     is subject to a number of risks similar to those of other companies in this
     stage of development, including uncertainties regarding the development of
     commercially viable products, competition from alternative procedures and
     larger companies, dependence on key personnel and government regulation,
     both foreign and domestic.

2.   Interim Financial Statements

     The accompanying Consolidated Financial Statements as of September 30, 1998
     and for the three and nine month periods ended September 30, 1997 and 1998
     are unaudited. In management's opinion, these unaudited Consolidated
     Financial Statements have been prepared on the same basis as the audited
     Consolidated Financial Statements included in the Company's Annual Report
     on Form 10-K for the period ending December 31, 1997, as filed with the
     Securities and Exchange Commission on March 17, 1998, and include all
     adjustments, consisting of only normal recurring adjustments, necessary for
     a fair presentation of the results for such interim periods. The results of
     operations for the three and nine months ended September 30, 1998 are not
     necessarily indicative of the results expected for the fiscal year ending
     December 31, 1998.

                                       6
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


3.   Acquisition of Elekta Neurosurgical Instruments

     On July 8, 1998 the Company acquired Elekta Neurosurgical Instruments
     (ENI), the neurosurgical instruments business of Elekta AB (PUBL), a
     Swedish corporation, for approximately $35.4 million, which includes
     acquisition costs of approximately $2.4 million. The acquisition has been
     accounted for as a purchase in accordance with the requirements of
     Accounting Principles Board Opinion No. 16, Business Combinations, and
     accordingly ENI's results of operations are included in those of the
     Company beginning on the date of the acquisition in the accompanying
     financial statements. The transaction was financed with $15.4 million of
     the Company's cash and $20 million of subordinated debt borrowed from an
     affiliate of a significant stockholder of the Company. The subordinated
     debt, which is secured by substantially all of the assets of the Company,
     is due September 30, 2003 with quarterly interest payable at 10.101% per
     annum and contains certain restrictive covenants as defined by the
     agreement. A total of 675,000 shares of the Company's $.001 par value
     common stock was issued to the significant stockholder and its affiliate in
     connection with this transaction. The shares are accompanied by certain
     demand and "piggy-back" registration rights and are restricted for resale
     for up to one year. The Company paid the stockholder a debt placement fee
     of $600,000 in connection with this transaction. A significant portion of
     the purchase price was identified as intangible assets in an independent
     appraisal, using proven valuation procedures and techniques. These
     intangible assets included $4.7 million for acquired in-process research
     and development for projects that did not have future alternative uses.
     This allocation represents the estimated fair market value based on risk-
     adjusted cash flows related to the in-process research and development
     projects. At the date of acquisition the development of these projects had
     not yet reached technological feasibility and the in-process research and
     development had no alternative future uses. Accordingly, these costs were
     written off in the quarter ended September 30, 1998. The remaining premium
     of approximately $16.1 million was allocated to the following identifiable
     assets and goodwill and will be amortized over periods of 7 to 40 years:

                                                         Amortization
                                          Amount            Period
                                        ------------     ------------
           Land and Buildings           $10,150,000        40 Years
           Leashold Improvements          1,170,000        40 Years
           Goodwill                       8,904,000      7-20 Years
           Deferred tax liability        (4,096,000)       40 Years
                                        -----------
                                        $16,128,000
                                        ===========


                                       7
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


3.   Acquisition of Elekta Neurosurgical Instruments--(continued)

     The total consideration allocated to the fair market value of assets and
     liabilities acquired on the purchase date is as follows, net of cash
     acquired of approximately $2.2 million:

<TABLE>
<S>                                                       <C>
       Accounts receivable                                $ 5,815,000
       Inventories                                          7,160,000
       Prepaid expenses and other current assets            2,047,000
       Property and equipment                              15,476,000
       Goodwill                                             8,911,714
       Other assets                                         1,170,000
       In-process research and development                  4,710,000
       Accounts payable                                    (7,058,000)
       Accrued expenses                                      (155,000)
       Senior debt                                           (523,000)
       Deferred tax liability                              (4,360,000)
                                                          ------------
                                                          $33,193,714
                                                          ============
</TABLE>
                                                                                
     Additionally, as a result of this acquisition, the Company reorganized its
     operations and recorded $687,000 in merger and integration expenses for the
     three and nine month periods ended September 30, 1998, respectively.

     Unaudited pro forma condensed statements for the nine month periods ended
     September 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                      SEPTEMBER 30,         SEPTEMBER 30,
                                          1998                  1997
                                      -------------         -------------
<S>                                  <C>                   <C>
       Revenues                        $35,789,000          $29,115,000 
                                       ============         ============ 
       Net Loss                        $(6,843,000)         $(9,331,000)
                                       ============         ============ 
       Diluted weighted average                                           
         shares outstanding             10,716,041           10,210,505 
                                       ============         ============ 
       Diluted loss per share          $      (.64)         $      (.91)
                                       ============         ============  
</TABLE>
                                                                                
4.   Reclassifications
 
     Certain prior period amounts have been reclassified to conform to the
     current period's presentation.

                                       8
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


5.   Cash and Cash Equivalents and Investments in Marketable Securities
 
     In accordance with Statement of Financial Accounting Standards (SFAS) No.
     115, Accounting for Certain Investments in Debt and Equity Securities, the
     Company has classified its marketable securities and long-term investments
     as held-to-maturity. 

     Held-to-maturity securities represent those securities which the Company
     has the intent and ability to hold to maturity and are reported at
     amortized cost. The Company considers all investments with maturities of 90
     days or less from the date of purchase to be cash equivalents. Investments
     with maturities greater than one year from the balance sheet date are
     considered to be long-term investments.

     Cash and cash equivalents, which are carried at cost and approximate market
     value, consist of the following:

<TABLE>
<CAPTION>
 
                                       SEPTEMBER 30,      DECEMBER 31,
                                            1998              1997
                                       -------------      ------------
<S>                                    <C>                <C>
          Cash                            $4,111,464       $1,626,074
          Cash equivalents--                              
             Money market                     11,902          971,176
             Commercial paper                     --        2,964,195
                                          ----------       ----------
                                          $4,123,366       $5,561,445
                                          ==========       ==========
</TABLE>
                                                                                
     Marketable securities, with a weighted average maturity of approximately
     seven months and three months at September 30, 1998 and December 31, 1997,
     respectively, are carried at cost and approximate market value and consist
     of the following:

<TABLE>
<CAPTION>
                                       SEPTEMBER 30,      DECEMBER 31,
                                            1998              1997
                                       -------------      ------------
<S>                                    <C>                <C>
          Held-to-maturity--             
             Eurodollar bonds             $4,828,305       $10,619,598
             Medium-term notes               511,724           665,998
             Corporate debt securities       506,284         2,388,681
             Commercial paper                     --         5,985,895
             Zero coupon bonds                    --         1,162,233
                                          ----------       -----------
                                          $5,846,313       $20,822,405
                                          ==========       ===========
</TABLE>
                                                                                

                                       9
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


5.   Cash and Cash Equivalents and Investments in Marketable Securities--
     (continued)

     Long-term investments, with a weighted average maturity of approximately 17
     months and 15 1/2 months at September 30, 1998 and December 31, 1997,
     respectively, are carried at cost and approximate market value and consist
     of the following:

<TABLE>
<CAPTION>
                                          SEPTEMBER 30,    DECEMBER 31,
                                              1998            1997     
                                          -------------    ------------
<S>                                       <C>              <C>         
        Held-to-maturity--              
           Medium-term notes               $1,011,208       $  502,468
           Eurodollar bonds                   505,061               --
           Corporate debt securities               --          975,590
                                           ----------       ----------
                                           $1,516,269       $1,478,058
                                           ==========       ==========
</TABLE>

     In addition, the following amounts of interest receivable generated from
     the Company's cash and cash equivalents, marketable securities, and long-
     term investments are included in prepaid expenses and other current assets
     and in other assets in the accompanying balance sheets:

<TABLE>
<CAPTION>
                                          SEPTEMBER 30,    DECEMBER 31,
                                              1998            1997     
                                          -------------    ------------
<S>                                       <C>              <C>         
         Short-term interest receivable     $143,142         $476,559
         Long-term interest receivable        19,624            5,676
                                            --------         --------
                                            $162,766         $482,235
                                            ========         ======== 
</TABLE>
                                                                           

6.   Inventories
 
     Inventories are stated at the lower of cost (first-in, first-out) or market
     and consist of the following:
 
<TABLE> 
<CAPTION> 
                                          SEPTEMBER 30,    DECEMBER 31,
                                              1998            1997     
                                          -------------    ------------
<S>                                       <C>              <C>         
         Components                        $3,716,526       $  625,381   
         Finished Goods                     4,837,536          445,884   
                                           ----------       ----------   
                                           $8,554,062       $1,071,265   
                                           ==========       ==========    
</TABLE>
     Finished goods consist of materials, labor and manufacturing overhead.

                                       10
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)
                                        

7.   Depreciation and Amortization

     The Company provides for depreciation and amortization by charges to
     operations using the straight-line method, which allocates the cost of
     property and equipment over the following estimated useful lives:


          Asset Classification              Estimated Useful Life  
          --------------------              ---------------------  
                                                                   
          Buildings                         40 Years               
          Laboratory and computer                                  
            equipment                       3-7  Years             
          Office furniture and equipment    5-10 Years             
          Leasehold improvements            Life of Lease          
          Equipment under capital leases    Life of Lease           


8.   Net Income (Loss) per Common and Common Equivalent Share

     In 1997, the Company adopted SFAS No. 128, Earnings per Share, effective
     December 15, 1997. SFAS No. 128 establishes standards for computing and
     presenting earnings (loss) per share and applies to entities with publicly
     held common stock or potential common stock. Calculations of basic and
     diluted net income (loss) per share are as follows:

<TABLE>
<CAPTION> 
                                                     THREE MONTHS ENDED            NINE MONTHS ENDED
                                                         SEPTEMBER 30,               SEPTEMBER 30,
                                                      1998          1997           1998          1997
                                                      ----          ----           ----          ----
<S>                                                <C>          <C>            <C>           <C>
             Net income (loss) available to      
                 common stockholders              $(4,947,775)  $   174,584   $(3,972,692)   $(2,340,819)
                                                  ===========   ===========   ===========    ===========  
             Weighted average common shares
                 outstanding                       10,464,675     9,614,778    10,041,041      9,535,505
             Potential common stock pursuant to  
                 stock options                             --     1,536,712            --             --
                                                  -----------   -----------   -----------    -----------
             Diluted weighted average common and
                 common equivalent shares
                 outstanding                       10,464,675    11,151,490    10,041,041      9,535,505
                                                  ===========   ===========   ===========    ===========
             Basic income (loss) per share        $      (.47)  $       .02   $      (.41)   $      (.25)
                                                  ===========   ===========   ===========    ===========
             Diluted income (loss) per share      $      (.47)  $       .02   $      (.41)   $      (.25)
                                                  ===========   ===========   ===========    ===========
</TABLE>
                                                                                

                                       11
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


9.   Investment in Affiliate

     In connection with the Company's acquisition of a 23% ownership interest in
     Image Technologies Corporation (ITC), the Company extended to ITC a credit
     line of up to $2.0 million of senior debt that bears interest at 10% per
     annum. During the second quarter of 1998, ITC began to make borrowings
     against this line in order to fund its operations and as of September 30,
     1998 owes the Company $1,247,800 plus accrued interest. The Company has not
     recorded interest income on the note receivable from ITC because interest
     is not due until May 29, 1999 and payment will be waived if the Company
     exercises its option to convert its senior debt into additional equity. The
     note is convertible at the rate of one percent of ownership per $100,000
     borrowed. This option expires May 29, 1999. The Company believes that if it
     does not exercise this option the amount due from ITC will be collectible
     from ITC's future cash flows or from independent financing. In the quarter
     ended September 30, 1998, the Company recorded $155,000 as its equity in
     the loss of ITC. The carrying value of the note receivable from ITC has
     been reduced by the amount of the loss recorded by the Company.


10.  Lease Finance Facility Agreement

     The Company has outstanding borrowings of $351,000 under an expired lease
     finance facility agreement with a bank under which the Company leases
     equipment at an interest rate that is 200 basis points above the bank's
     cost of funds. Upon expiration of this agreement in June 1997, the Company
     entered into a $1.0 million lease finance facility agreement with the same
     bank under similar terms. Borrowings of $376,000 and $250,000 have been
     made under this agreement by the Company and its affiliate, ITC,
     respectively, of which $298,000 and $191,000 was outstanding as of
     September 30, 1998, respectively. On April 1, 1998, the Company entered
     into a new agreement with this bank that provides the Company and ITC with
     similar terms and the option to borrow up to $750,000 through March 31,
     2003. Borrowings of $59,000 and $20,000 have been made under this new
     agreement by the Company and ITC, respectively, of which $56,000 and
     $18,000 was outstanding as of September 30, 1998, respectively. Leases
     under these agreements are payable in equal monthly installments over a
     period of 36-60 months and expire through August 2003. The Company
     guarantees the outstanding leases of ITC under these agreements.

                                       12
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

11.  Accrued Expenses

     Accrued expenses consist of the following at:

<TABLE>
<CAPTION>
                                         SEPTEMBER 30,     DECEMBER 31,
                                             1998             1997     
                                         -------------    -------------
<S>                                     <C>               <C>         
       Payroll and payroll related        $1,704,267         $252,425  
       Merger and integration expenses       420,609               --  
       Income taxes payable                  787,000           (8,000) 
       Royalties                             140,777          116,012  
       Leasehold improvements                     --           48,553  
       Other accrued expenses              1,871,481          577,138  
                                          ----------         --------  
                                          $4,924,134         $986,128  
                                          ==========         ========   
</TABLE>
                                                                                
12.  SFAS No. 52, Foreign Currency Translation

     The accounts of ENI are translated in accordance with SFAS No. 52, Foreign
     Currency Translation. Accordingly, assets and liabilities of ENI's foreign
     subsidiaries are translated from their local currency, which is the
     functional currency, into U.S. dollars, the reporting currency, using the
     exchange rate at the balance sheet date. Income and expense accounts are
     translated using an average rate of exchange during the period. Cumulative
     foreign currency translation gains or losses are reflected as a component
     of consolidated stockholders' equity and amounted to a gain of $669,000 for
     the three and nine months ended September 30, 1998. There were no foreign
     currency translation gains or losses for the three and nine month periods
     ended September 30, 1997.

     Additionally, the Company had foreign currency exchange transaction losses
     of approximately $19,000 and $88,000 for the three and nine month periods
     ended September 30, 1998, respectively. Foreign currency transaction gains
     and losses result from differences in exchange rates between the functional
     currency and the currency in which a transaction is denominated and are
     included in the consolidated statement of operations in the period in which
     the exchange rate changes. There were no foreign currency exchange
     transaction gains or losses for the three and nine month periods ended
     September 30, 1997.

13.  New Accounting Standards

     The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
     January 1, 1998. SFAS No. 130 establishes standards for reporting and
     displaying comprehensive income and its components in the financial
     statements. The adoption of this standard did not have a material effect on
     the Company's financial statements, as the only elements of comprehensive
     income related to the Company are foreign currency translation adjustments
     which are presented separately on the balance sheet as required. If
     presented on the statement of operations for the three month and nine month
     periods ended September 30, 1998, comprehensive income would be $669,000
     more than reported income. There were no differences in net income (loss)
     and comprehensive net income (loss) for the three and nine month periods
     ended September 30, 1997.



                                       13
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


13.  New Accounting Standards--(continued)

     In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
     an Enterprise and Related Information. SFAS No. 131 requires certain
     financial and supplementary information to be disclosed on an annual and
     interim basis for each reportable segment of an enterprise. SFAS No. 131 is
     effective for fiscal years beginning after December 15, 1997. The Company
     will adopt SFAS No. 131 for the year ended December 31, 1998. Unless
     impracticable, companies would be required to disclose similar prior period
     information upon adoption.


                                       14
<PAGE>
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results
        -----------------------------------------------------------------------
        of Operations.
        --------------

This Quarterly Report on Form 10-Q, other than the historical financial
information, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.  All such forward-looking
statements involve known and unknown risks, uncertainties or other factors which
may cause actual results, performance or achievement by the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements.  Factors that might
cause such a difference include uncertainties of product development and market
acceptance, government regulation and uncertainty of product approvals,
uncertainties associated with intellectual property rights and litigation, the
impact of healthcare reform programs and competitive products and pricing, risks
associated with technology and product development and commercialization,
potential product liability, management of growth, dependence on significant
corporate relationships and other risks detailed under the heading "Management's
Discussion and Analysis of Financial Conditions and Results of Operations
Certain Factors That May Affect Future Results" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 17, 1998.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997

Revenues. Revenues for the three months ended September 30, 1998 increased to
$12.2 million from $2.5 million for the three months ended September 30, 1997.
Product sales increased to $11.9 million for the three months ended September
30, 1998 from $2.3 million for the three months ended September 30, 1997. The
increase is primarily attributable to the Company's acquisition of Elekta
Neurosurgical Instruments (ENI), the neurosurgical intstruments business of
Elekta AB (PUBL), a Swedish corporation, on July 8, 1998 and accordingly ENI's
results of operations, including product revenues of $9.0 million for the period
since acquisition on July 8, 1998, are included in those of the Company from
that date. Additionally, the Company had increased unit sales of vena cava
filters and CardioSEAL Septal Occluders in the quarter ended September 30, 1998
as compared to the quarter ended September 30, 1997. License fees for the three
months ended September 30, 1998 and September 30, 1997 remained relatively
consistent at $297,000 and $250,000, respectively.



                                       15
<PAGE>
 
Cost of Product Sales. Cost of product sales increased to $5.0 million for the
three months ended September 30, 1998 from $917,000 for the three months ended
September 30, 1997 primarily due to the Company's acquisition of ENI on July 8,
1998 and accordingly ENI's cost of product sales of $3.9 million are included
with those of the Company since the acquisition date. The Company also had
increases in unit sales of the vena cava filter and the CardioSEAL Septal
Occluder. Cost of product sales, as a percent of product sales, increased to 42%
for the three months ended September 30, 1998 from 40% for the three months
ended September 30, 1997 due to the inclusion of cost of sales of ENI's products
which have a higher cost of product sales as a percent of sales than do the vena
cava filter and the CardioSEAL Septal Occluder.

Research and Development. Research and development expenses increased to $1.1
million for the three months ended September 30, 1998 from $794,000 for the
three months ended September 30, 1997. The increase is partly attributable to
the Company's acquisition of ENI on July 8, 1998 and accordingly, ENI's research
and development expenses are included with those of the Company since the
acquisition date. Additionally, the increase in research and development
expenses also reflects increased regulatory and clinical trial expenses relating
to clinical trials of the CardioSEAL Septal Occluder that commenced in September
1996, as well as for clinical trials related to the closure of patent foramen
ovales (PFO), and increased activity in the Company's development programs for
vena cava filters and other products under development. Increased expenses
resulted primarily from increases in personnel and related costs and engineering
expenses.

General and Administrative. General and administrative expenses for the three
months ended September 30, 1998 increased to $2.2 million from $637,000 for the
three months ended September 30, 1997. The increase is primarily attributable to
the inclusion of ENI's general and administrative expenses of $1.5 million since
the date of acquisition on July 8, 1998 and increases in personnel and related
costs, legal and professional fees and consulting expenses due to the Company's
expanded scope of operations.

Selling and Marketing.  Selling and marketing expenses increased to $2.7 million
for the three months ended September 30, 1998 from $294,000 for the three months
ended September 30, 1997. The increase is primarily attributable to the
inclusion of ENI's selling and marketing expenses of $2.1 million since the date
of acquisition on July 8, 1998 and to increases in marketing activities related
to both the CardioSEAL Septal Occluder in connection with clinical trials and
from the commencement of commercial sales of the CardioSEAL Septal Occluder in
June 1997 in European and other international markets.

                                       16
<PAGE>
 
In-Process Research and Development. For the three months ended September 30,
1998, the Company recorded $4.7 million of in-process research and development
expenses related to the Company's acquisition of ENI on July 8, 1998. See Note 3
of the accompanying Notes to Consolidated Financial Statements as of September
30, 1998. On the date of acquisition, ENI's in-process research and development
value was comprised of five primary research and development programs that were
expected to reach completion between late 1998 and 2000. At the acquisition 
date, continuing research and development commitments to complete the projects
were expected to be approximately $2.0 million through 2000 ($680,000, $888,000,
and $383,000 in 1998, 1999, and 2000, respectively). These estimates are subject
to change, given the uncertainties of the development process, and no assurance
can be given that deviations from these estimates will not occur.

Merger and Integration Expense. As a result of the acquisition of ENI on July 8,
1998, the Company reorganized certain of its operations.  In connection with
this reorganization, the Company recorded merger and integration expenses of
$687,000 in the quarter ended September 30,1998.

Equity in Loss of Affiliate.  During the three months ended September 30, 1998,
the Company recorded $155,000 as its equity in the loss of Image Technologies
Corporation (ITC).  The carrying value of the note receivable from ITC has been
reduced by the amount of the loss recorded by the Company.  See Note 9 of Notes
to Consolidated Financial Statements in the accompanying financial statements as
of September 30, 1998.

Interest Expense. Interest expense was $659,000 for the three months ended 
September 30, 1998 as compared to $11,000 for the three months ended September 
30, 1997. The increase was primarily the result of the Company's issuance of $20
million of subordinated debt to finance its acquisition of ENI. The subordinated
debt bears interest at a rate of 10.101% per annum. As a result, the Company is 
amortizing prepaid interest and original issue discount related to this 
acquisition which amounted to $466,000 and $179,000, respectively, in the 
statements of operations for the three and nine month periods ended September 
30, 1998.

Interest Income. Interest income was $155,000 for the three months ended 
September 30, 1998 as compared to $395,000 for the three months ended September 
30, 1997 (a 61% decrease). The decrease was due to the Company's lower cash 
balances as a result of its financing the acquisition of ENI with cash of $15.4 
million on July 8, 1998.

Provision (Benefit) for Income Taxes.  The Company had a benefit for income
taxes of $38,000 for the three months ended September 30, 1998, based on an
estimated effective tax rate of 40% and the nondeductibility of the $4.7 million
acquired in-process research and development write-off and other 
acquisition-related items. For the three months ended September 30, 1997, the
Company had a provision for income taxes of $90,500 based on an income before
provision for income taxes of $265,000 for the period and an effective tax rate
of 34%, which reflects the impact of lower state taxation on the Company's
investment income.

                                       17
<PAGE>
 
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED 
SEPTEMBER 30, 1997

Revenues. Revenues for the nine months ended September 30, 1998 increased to
$19.0 million from $7.0 million for the nine months ended September 30, 1997.
Product seles increased to $17.4 million for the nine months ended September 30,
1998 from $6.2 million for the nine months ended September 30, 1997. The
increase is primarily attributable to the Company's acquisition of ENI on July
8, 1998 and accordingly ENI's results of operations, including product revenues
of $9.0 million, are included in those of the Company since that date.
Additionally, the Company had increased unit sales of vena cava filters and
CardioSEAL Septal Occluders during the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 due to the commencement of
commercial sales of the CardioSEAL Septal Occluder in June 1997 in certain
European and other international markets and general increased demand for the
vena cava filter. License fees for the nine months ended September 30, 1998
increased to $1.5 million from $750,000 during the nine months ended September
30, 1997. Specifically, the Company recorded $1,125,000 in minimum quarterly
license fees, $300,000 in milestone payments and $79,000 in cost reduction
incentives from Boston Scientific. Revenues for the nine months ended September
30, 1997 included three quarterly minimum royalty payments of $250,000 each.

Cost of  Product Sales.  Cost of product sales increased to $7.1 million for the
nine months ended September 30, 1998 from $2.8 million for the nine months ended
September 30, 1997, primarily due to the Company's acquisition of ENI on July 8,
1998 and accordingly $3.9 million of ENI's cost of product sales are included
with those of the Company since the acquisition date. Cost of product sales also
increased due to increases in unit sales of the vena cava filter and the
CardioSEAL Septal Occluder attributable to increased demand for the vena cava
filter and commencement of commercial sales of the CardioSEAL Septal Occluder in
June 1997 in certain European and other international markets. Cost of product
sales, as a percent of product sales, decreased to 41% for the nine months ended
September 30, 1998 from 45% for the nine months ended September 30, 1997. This
decrease is due primarily to the Company's reorganization of its vena cava
filter operations during the second quarter of 1997, which has resulted in lower
per unit manufacturing costs for the vena cava filter, as well as to increased
sales of the CardioSEAL Septal Occluder which has a lower cost of product sales
as a percent of sales than does the vena cava filter, partially offset by the
inclusion of ENI's products which have a higher cost of product sales as a
percent of sales than do the vena cava filter and CardioSEAL Septal Occluder.

                                       18
<PAGE>
 
Research and Development.  Research and development expenses increased to $2.8
million for the nine months ended September 30, 1998 from $2.3 million for the
nine months ended September 30, 1997 (a 22% increase).  The increase is
primarily attributable to the Company's acquisition of ENI on July 8, 1998 and
accordingly ENI's research and development expenses are included with those of
the Company since the acquisition date.  Additionally, the increase reflects
increased regulatory and clinical trial expenses relating to clinical trials of
the CardioSEAL Septal Occluder that commenced in September 1996, as well as for
clinical trials related to the closure of patent foramen ovales (PFO) and
increased activity in the Company's development programs for vena cava filters
and other products under development.  Increased expenses resulted primarily
from increases in personnel and related costs and engineering expenses.

General and Administrative.  General and administrative expenses increased to
$3.5 million for the nine months ended September 30, 1998 from $2.0 million for
the nine months ended September 30, 1997. The increase is primarily attributable
to the inclusion of ENI's general and administrative expenses of $1.5 million
since the date of acquisition on July 8, 1998.

Selling and Marketing.  Selling and marketing expenses increased to $3.5 million
for the nine months ended September 30, 1998 from $678,000 for the nine months
ended September 30, 1997. The increase is primarily attributable to the
inclusion of ENI's selling and marketing expenses of $2.1 million since the date
of acquisition on July 8, 1998 and from increases in marketing activities
related to both the CardioSEAL Septal Occluder in connection with clinical
trials and from the commencement of commercial sales of the CardioSEAL Septal
Occluder in June 1997 in European and other international markets.

In-Process Research and Development.  For the nine months ended September 30,
1998, the Company recorded $4.7 million of in-process research and development
expenses related to the Company's acquisition of ENI on July 8, 1998.  See Note
3 of the accompanying Notes to Consolidated Financial Statements as of September
30, 1998. On the date of acquisition, ENI's in-process research and development
value was comprised of five primary research and development programs that were
expected to reach completion between late 1998 and 2000. At the acquisition date
continuing research and development commitments to complete the projects were
expected to be approximately $2.0 million through 2000 ($680,000, $888,000, and
$383,000 in 1998, 1999, and 2000, respectively). These estimates are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. For the nine
months ended September 30, 1997, the Company recorded $2.4 million of in-process

                                       19
<PAGE>
 
research and development expenses related to the Company's investment in ITC on
May 29, 1997.  See Note 3 of Notes to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on March 17, 1998.

Merger and Integration Expense.  As a result of the acquisition of ENI on July
8, 1998, the Company reorganized certain of its operations.  In connection with
this reorganization, the Company recorded merger and integration expenses of
$687,000 during the nine months ended September 30, 1998.

Restructuring Charge.  During the six months ended June 30, 1997, the Company
reorganized its vena cava filter operations and brought the assembly of its
straight-line vena cava filters in-house.  In connection with this
reorganization, the Company recorded a restructuring charge of $194,000 in the
nine months ended September 30, 1997.  See Note 4 of the Notes to Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 as filed with the Securities and Exchange Commission on
March 17, 1998.

Equity in Loss of Affiliate.  During the nine months ended September 30, 1998,
the Company recorded $248,000 as its equity in the loss of ITC.  The carrying
value of the note receivable from ITC has been reduced by the amount of the loss
recorded by the Company.  See Note 9 of Notes to Consolidated Financial
Statements in the accompanying financial statements as of September 30, 1998.

Interest Expense. Interest expense was $690,000 for the nine months ended 
September 30, 1998 as compared to $31,000 for the nine months ended September 
30, 1997. The increase was primarily the result of the Company's acquisition of
ENI on July 8, 1998, pursuant to which the Company incurred $20 million of debt
on which it owes interest at 10.101% per annum. As a result, the Company is
amortizing prepaid interest and original issue discount related to this
acquisition which amounted to $466,000 and $179,000, respectively, in the
statements of operations for the three and nine month periods ended September
30, 1998.

Interest Income. Interest income was $947,000 for the three months ended 
September 30, 1998 as compared to $1.2 million for the three months ended 
September 30, 1997 (a 27% decrease). The decrease was due to the Company's lower
cash balances as a result of its financing the acquisition of ENI with cash of 
$15.4 million on July 8, 1998.

Provision (Benefit) for Income Taxes. The Company had a provision for income
taxes of $257,000 for the nine months ended September 30, 1998 based on an
operating income before the write-off of in-process research and development
expenses and other items related to the acquisition of ENI on July 8, 1998 and
an estimated effective tax rate of 40%. For the nine months ended September 30,
1997 the Company had a provision for income taxes of $113,500, which reflects
the non-deductibility of the in-process research and development expenses and a
portion of the $194,000 restructuring charge recorded in the period then ended.
See Notes 3(b) and 4 of the Notes to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on March 17, 1998.

                                       20
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

In the nine months ended September 30, 1998, the Company's operations used cash
of approximately $1.4 million which was primarily the result of the Company's
acquisition of ENI on July 8, 1998 for approximately $35.4 million, including
approximately $2.4 million of acquisition costs. The acquisition has been
accounted for as a purchase in accordance with the requirements of Accounting
Principles Board Opinion No. 16, Business Combinations, and accordingly ENI's
results of operations are included in those of the Company beginning on the date
of the acquisition. The transaction was financed with $15.4 million of the
Company's cash and $20 million of subordinated debt borrowed from an affiliate
of a significant stockholder of the Company. The subordinated debt, which is
secured by all of the assets of the Company, is due September 30, 2003 with
quarterly interest payable at 10.101% per annum and contains restrictive
covenants. The Company anticipates repaying the subordinated debt from its cash
flows, including the operations of ENI, or from debt or equity financing. A
total of 675,000 shares of the Company's $.001 par value common stock was issued
to the significant stockholder and its affiliate in connection with this
transaction. The shares are accompanied by certain demand and "piggy-back"
registration rights and are restricted for resale for up to one year. The
Company paid the stockholder a debt placement fee of $600,000 in connection with
this transaction. A significant portion of the purchase price was identified as
intangible assets in an independent appraisal, using proven valuation procedures
and techniques. These intangible assets included $4.7 million for acquired in-
process research and development for projects that did not have future
alternative uses. This allocation represents the estimated fair market value
based on risk-adjusted cash flows related to the in-process research and
development projects. At the date of acquisition the development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative future uses. Accordingly, these
costs were written off in the quarter ended September 30, 1998. The remaining
premium of approximately $10.7 million was allocated to identifiable assets and
goodwill and will be amortized over periods of 7 to 40 years. Additionally, as a
result of this acquisition, the Company reorganized its operations and recorded
$687,000 in merger and integration expenses for the three and nine month periods
ended September 30, 1998, respectively. During the nine months ended September
30, 1997, the Company's operations utilized cash of approximately $3.6 million,
of which $2.4 million was used to acquire the 23% interest in ITC. An additional
$1.2 million was used for working capital primarily related to sales of the
CardioSEAL Septal Occluder in connection with clinical trials and commercial
sales in certain European and other international markets and for increased vena
cava filter sales.

                                       21
<PAGE>
 
Purchases and capitalized leases of property and equipment for use in its
research and development and general and administrative activities amounted to
$551,000 for the nine months ended September 30, 1998.  In June 1997, the
Company entered into an agreement with a bank for a $1.0 million equipment lease
line of credit agreement without covenants.  Borrowings of $376,000 and $250,000
have been made under this agreement by the Company and ITC, respectively, of
which $298,000 and $191,000 was outstanding as of September 30, 1998.  On April
1, 1998, the Company entered into a new agreement with the bank that provides
the Company and ITC with similar terms and the option to borrow up to $750,000
through March 31, 2003.  Borrowings of $59,000 and $20,000 have been made under
this agreement by the Company and ITC, respectively, of which $56,000 and
$18,000 was outstanding as of September 30, 1998, respectively.  The Company
also has outstanding borrowings of $351,000 under an expired lease finance
facility agreement with the same bank.

In connection with the Company's acquisition of a 23% ownership interest in ITC,
the Company extended to ITC a credit line of up to $2.0 million of senior debt
that bears interest at 10% per annum.  During the second quarter of 1998, ITC
began to make borrowings against this line in order to fund its operations and
as of September 30, 1998 owes the Company $1,247,800.  The Company has not
recorded interest income on the note receivable from ITC because interest is not
due until May 29, 1999 and payment will be waived if the Company exercises its
option to convert its senior debt into additional equity.  The note is
convertible at the rate of one percent of ownership per $100,000 borrowed.  This
option expires May 29, 1999.  The Company believes that if it does not exercise
this option the amount due from ITC will be collectible from ITC's future cash
flows or from independent financing.  In the three and nine months ended
September 30, 1998, the Company recorded $155,000 and $248,000, respectively as
its equity in the loss of ITC.  The carrying value of the note receivable from
ITC has been reduced by the amount of the loss recorded by the Company.

The Company is party to various other substantial contractual arrangements
including salaries and fees for current employees and consultants which are
likely to increase as additional agreements are entered into and additional
personnel are retained.  The Company also has committed to purchase certain
minimum quantities of the vena cava filter from a supplier through June 2001.
See Note 9 to the Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on March 17, 1998.  All of
these arrangements require cash payments by the Company over varying periods of
time.  Certain of these arrangements are cancelable on short notice and certain
require termination or severance payments as part of any early termination.

The Company believes that its existing resources and cash flow from current
operations will be sufficient to fund its current level of operations and
planned 

                                       22
<PAGE>
 
new product development, including increased working capital requirements and
capital expenditures, for the foreseeable future. The Company expects to expend
substantial resources to complete development of its products, to seek
regulatory clearances or approvals, to build its marketing, sales and
manufacturing organizations and to conduct further research and development.

The Company may require additional funds for its research and product
development programs, preclinical and clinical testing, operating expenses,
regulatory processes, manufacturing and marketing programs and potential
licenses and acquisitions.  Any additional equity financing may be dilutive to
stockholders, and additional debt financing, if available, may involve
restrictive covenants.  The Company's capital requirements will depend on
numerous factors, including the sales of its products, the progress of its
research and development programs, the progress of clinical testing, the time
and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any collaborative, licensing and other similar
arrangements that the Company may establish.


Year 2000 Readiness

Prior to the Company's acquisition of ENI on July 8, 1998, the Company had
reviewed its internal computer systems and their capabilities of recognizing the
year 2000 and years thereafter. At that time, the Company was Year 2000
compliant.

In addition, prior to the acquisition of ENI by the Company, management of ENI
had determined that its financial and operational systems needed modification or
replacement not only to be year 2000 compliant, but also to (a) improve
functionality, (b) assure continued Euro currency compliance, (c) provide more
meaningful information and (d) integrate the various companies within ENI onto a
world-class Enterprise Reporting System (ERP). ENI management had developed a
comprehensive plan for implementing the new system, including selecting the
system and related providers of implementation assistance, but the decision to
proceed was postponed until the closing of the acquisition.

After the closing of the acquisition, the Company authorized the plan described
above in August 1998, and committed to the implementation of a new ERP system
for its NMT Neurosciences Division. See Notes 1 and 3 of Notes to Consolidated
Financial Statements as of September 30, 1998.  The new systems are expected to
be operational by the end of the third quarter of 1999 at a total project cost
of $2.0 million, of which approximately $1.3 million will be for computer
hardware and other capital expenditures.  The Company anticipates financing the
above capital component and expects to fund the remainder from operating cash
flows.

                                       23
<PAGE>
 
While the Company currently does not have a contingency plan in the event a
particular system is not Year 2000 compliant, such a plan will be developed if
it becomes clear that the Company is not going to achieve its scheduled
compliance objectives.  Since the Company is completely replacing the systems at
its Neurosciences Division with a commercially available and tested ERP product,
it is believed that the project will proceed more efficiently than it would have
had the Company chosen to modify its existing systems.

Since the Company interfaces with its major customers and suppliers via
telephone and fax, the Company does not anticipate to incur significant losses
in the event that either the Company or its customers and suppliers is not Year
2000 compliant.

The costs of the project and the date on which the Company believes it will
complete the implementation of its ERP system are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of resources and other factors.  However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.

Euro Currency

On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the Euro.  The participating countries have agreed to
adopt the Euro as their common legal currency on that date.

The Company, including its Neurosciences Division, conducts a substantial
portion of its business within the member countries of the European Union, and
accordingly its existing systems are generally capable of accommodating multiple
currencies, including the Euro. The new ERP system described above will also
assure continued Euro currency compliance.

The Company has formed a task force and has begun to assess the potential impact
to the Company that may result from the Euro conversion.  In addition to tax and
accounting considerations, the Company is assessing the potential impact from
the Euro conversion in a number of areas, including the following: (1) the
competitive impact of cross-border price transparency, which may make it more
difficult for businesses to charge different prices for the same products on a
country-by-country basis; (2) the impact on currency exchange costs and currency
exchange rate risk; and (3) the impact on existing contracts.

                                       24
<PAGE>
 
At this early stage of its assessment, the Company cannot yet predict the
anticipated impact of the Euro conversion on the Company.



Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
         -----------------------------------------------------------

         Not Applicable.

                                       25
<PAGE>
 
Part II -- Other Information
----------------------------

Item 2.   Changes in Securities and Use of Proceeds.
          ------------------------------------------

     (c)  Recent Sales of Unregistered Securities. The Company issued the 
          ---------------------------------------
following unregistered securities during the quarterly period ended September 
30, 1998:

        (i)  stock options under the 1998 Stock Incentive Plan to purchase an
             aggregate of 108,250 shares of common stock at a weighted average
             exercise price of $5.26 per share;

        (ii) in connection with the financing of the Company's acquisition of
             the neurosurgical instruments business of Electa AB (PUBL), a
             Swedish corporation ("Elekta"), an aggregate of 675,000 shares of
             common stock to J.H. Whitney & Co., a significant stockholder of
             the Company, and one of its affiliates.

     The securities were offered and issued in reliance upon the exemption from 
registration set forth in Section 4(2) of the Securities Act of 1933, as 
amended.

     (d)  Uses of Proceeds from Registered Securities. During the quarterly 
          -------------------------------------------
period ended September 30, 1998, the Company used $15.4 million of the offering
proceeds from the sale of securities by the Company pursuant to its Registration
Statement on Form S-1 (Registration No. 333-06463), which was declared effective
on September 27, 1996, to acquire the neurosurgical instruments business of
Elekta. In connection with the financing of the acquisition, the Company used
$600,000 of this amount to pay J.H. Whitney & Co., a 10% stockholder of the
Company, a debt placement fee. The balance of the offering proceeds are invested
in short-term investment grade interest bearing instruments.

Item 5.   Other Information.
          -----------------

     As set forth in the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
inclusion in the Company's proxy materials for its 1999 Annual Meeting of
Stockholders must be received by the Secretary of the Company at the principal
offices of the Company no later than December 24, 1998.

     In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and
14a-8 under the Exchange Act, written notice of shareholder proposals submitted
outside the process of Rule 14a-8 for consideration at the 1999 Annual Meeting
of Stockholders must be received by the Company on or before March 9, 1999, in
order to be considered timely for purposes of Rule 14a-4. The persons designated
in the Company's proxy statement will be granted discretionary authority with
respect to any shareholder proposals of which the Company does not receive
timely notice.

                                      26
<PAGE>
 

Item 6.   Exhibits and Reports on Form 8-K.
          ---------------------------------

     (a)  Exhibits.
          -------- 
 
          27.1  Financial Data Schedule
 
     (b)  Reports on Form 8-K.  On July 23, 1998, the Company filed a Current
Report on Form 8-K dated July 8, 1998, reporting the completion of its
acquisition of the neurosurgical instruments business of Elekta. The Current
Report was amended by Amendment No. 1, filed on September 21, 1998. The
following financial statements were filed with Amendment No. 1:

          (i) Financial Statements of Business Acquired -- Elekta Neurosurgical
               Instruments, including:

               (a)  Report of Independent Public Accountants;

               (b)  Combined Balance Sheets as of April 30, 1998 and 1997;

               (c)  Combined Statements of Operations and Parent Company Equity
                    for the Years Ended April 30, 1998, 1997 and 1996;

               (d)  Combined Statements of Cash Flows for the Years Ended 
                    April 30, 1998, 1997 and 1996;

               (e)  Notes to Combined Financial Statements; and

          (ii) Pro Forma Financial Information -- Nitinol Medical Technologies,
               Inc. and subsidiaries, including:

               (a)  Overview;
 
               (b)  Unaudited Pro Forma Condensed Combined Statement of
                    Operations for the Year Ended December 31, 1997;

               (c)  Notes to Unaudited Pro Forma Condensed Combined Statement of
                    Operations for the Year Ended December 31, 1997;

               (d)  Unaudited Pro Forma Condensed Combined Statement of
                    Operations for the Six Months ended June 30, 1998;

               (e)  Notes to Unaudited Pro Forma Condensed Combined Statement of
                    Operations for the Six Months ended June 30, 1998;

               (f)  Unaudited Pro Forma Condensed Combined Balance Sheet as of 
                    June 30, 1998;

               (g)  Notes to Unaudited Pro Forma Condensed Combined Balance
                    Sheet as of June 30, 1998.

On September 29, 1998, the Company filed a Current Report on Form 8-K dated
September 23, 1998, announcing the issuance of a press release on September 23,
1998 regarding the naming of William J. Knight as Vice President of Finance and
Administration and Chief Financial Officer of the Company. No financial
statements were filed with this Current Report.

                                      27
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                NITINOL MEDICAL TECHNOLOGIES, INC.




Date: November 13, 1998         By: /s/ Thomas M. Tully
                                   -------------------------------------
                                   Thomas M. Tully
                                   President and Chief Executive Officer




Date: November 13, 1998         By: /s/ William J. Knight
                                   -----------------------------------
                                   William J. Knight
                                   Vice President of Finance and Administration 
                                     and Chief Financial Officer

                                      28

<PAGE>
 
                                 EXHIBIT INDEX


Exhibits
--------
 
  27.1   Financial Data Schedule