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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K





(Mark One)



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2007

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 No. 000-21001





NMT MEDICAL, INC.

(Exact Name of
Registrant as Specified in its Charter)







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

27 Wormwood Street, Boston, Massachusetts 02210

(Address of Principal Executive Offices, Including Zip Code)

Registrants telephone number, including area code: (617) 737-0930





SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:



|                                                                        |  |                                          
|----------------------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                                     |  | Name of each exchange on which registered
|Common Stock, $.001 par value per share Preferred Stock Purchase Rights |  | NASDAQ Global Market                     

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934    Yes   ̈    No  x

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   ̈

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

(Check one):



|                                                                                                                                       |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Large accelerated filer   ̈            Accelerated
filer  x            Non-accelerated filer   ̈            Smaller reporting company   ̈
|(Do not check if a smaller reporting company)                                                                                         

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act)    Yes   ̈    No  x

The aggregate market value of the registrants voting shares of Common Stock held by non-affiliates of the Registrant on June 30, 2007 was $147,726,113 based on the last reported sale price of
registrants Common Stock on the NASDAQ Global Market on that date, which was $11.88 per share.

As of March 5, 2008, there were
12,973,917 shares of the registrants Common Stock, $.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive proxy statement for its 2008 annual meeting of stockholders are incorporated by reference
into Part III of this Form 10-K.









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Table of Contents



|              |  |                                                                                                              |  |     
|------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|              |  |                                                                                                              |  | Page
|PART I        |  |                                                                                                              |  |     
|              |  |                                                                                                             
|Item 1.       |  | Business                                                                                                     |  | 3   
|Item 1A.      |  | Risk Factors                                                                                                 |  | 16  
|Item 1B.      |  | Unresolved Staff Comments                                                                                    |  | 22  
|Item 2.       |  | Properties                                                                                                   |  | 22  
|Item 3.       |  | Legal Proceedings                                                                                            |  | 22  
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23  
|              |  |                                                                                                             
|PART II       |  |                                                                                                              |  |     
|              |  |                                                                                                             
|Item 5.       |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 24  
|Item 6.       |  | Selected Financial Data                                                                                      |  | 25  
|Item 7.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 27  
|Item 7A.      |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 40  
|Item 8.       |  | Financial Statements and Supplementary Data                                                                  |  | 40  
|Item 9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 40  
|Item 9A.      |  | Controls and Procedures                                                                                      |  | 40  
|Item 9B.      |  | Other Information                                                                                            |  | 43  
|              |  |                                                                                                             
|PART III      |  |                                                                                                              |  |     
|              |  |                                                                                                             
|Item 10.      |  | Directors, Executive Officers and Corporate Governance                                                       |  | 43  
|Item 11.      |  | Executive Compensation                                                                                       |  | 43  
|Item 12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 43  
|Item 13.      |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 43  
|Item 14.      |  | Principal Accountant Fees and Services                                                                       |  | 43  
|              |  |                                                                                                             
|PART IV       |  |                                                                                                              |  |     
|              |  |                                                                                                             
|Item 15.      |  | Exhibits and Financial Statement Schedules                                                                   |  | 44  
|              | 
|Signatures    |  | 45                                                                                                          
|              | 
|APPENDIX A    |  |                                                                                                             
|              |  | Reports of Independent Registered Public Accounting Firms                                                    |  | A-2 
|              |  | Consolidated Financial Statements                                                                            |  | A-4 
|              |  | Notes to Consolidated Financial Statements                                                                   |  | A-8 
|              | 
|Exhibit Index |  |                                                                                                             



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PART I

ITEM 1. BUSINESS

OVERVIEW

We are an advanced medical technology company that designs, develops, manufactures and markets proprietary implant technologies that allow interventional cardiologists to treat certain kinds of cardiac structural
heart disease through minimally invasive, catheter-based procedures. We are investigating the potential connection between a common cardiac defect that allows a right to left shunt or flow of blood through a defect like a patent foramen ovale, or a
PFO, and brain attacks such as embolic stroke, transient ischemic attacks, or TIA, and migraine headaches. A common right to left shunt can allow venous blood, unfiltered and unmanaged by the lungs, to directly enter the arterial circulation of the
brain, possibly triggering a cerebral event or brain attack. In utero, the PFO is an opening in the atrial wall that allows the mothers oxygenated blood to support the fetus. At birth, or usually by age one, the PFO completely closes,
preventing venous blood and arterial blood from mixing. We believe that up to 25% of the population has a PFO that does not fully seal and most will never even know that they have this defect. Globally, more than 27,000 PFOs have been closed using
our proprietary, minimally invasive, catheter-based implant technology.

We are a Delaware corporation and were incorporated in 1986. Our
principal executive office is located at 27 Wormwood Street, Boston, Massachusetts 02210-1625, and our telephone number is (617) 737-0930. We maintain a website with the address www.nmtmedical.com. We are not including the information contained
on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the U.S. Securities and Exchange Commission, or the SEC. We also make
available on our website our proxy statements for our annual meeting of stockholders, initial reports of ownership and reports of changes in ownership of our common stock required to be filed pursuant to Section 16(a) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, the charters for our audit committee, joint compensation and options committee, and nominating and corporate governance committee, and our code of business conduct and ethics, and such information is
available in print to any stockholder of NMT Medical who requests it.

PRODUCTS

In February 1996, we acquired the exclusive rights to the CardioSEAL® cardiac septal repair implant from InnerVentions, Inc., a licensee of the Childrens Medical Center Corporation, or CMCC, also known as Childrens Hospital Boston. In connection with this acquisition, we
acquired all of the existing development, manufacturing, testing equipment, patent licenses, know-how and documentation necessary to manufacture cardiac septal repair implant devices. Under the license agreements, as amended, we pay royalties to
CMCC on all commercial sales of our cardiac septal repair products. We sell CardioSEAL® in the United States, Canada and Europe. We sell CardioSEAL®, STARFlex® and BioSTAR® in Europe and Canada. We also re-sell third party products for use with
the CardioSEAL®, STARFlex® and BioSTAR® implant devices, specifically
vascular sizing balloons and sheaths. Since the second half of 2002, following completion of the transitional manufacturing agreement related to the sale of our former vena cava filter product line to C.R. Bard, Inc., or Bard, our cardiac septal
repair implants have accounted for substantially all of our product sales. The aggregate of these product sales accounted for 74.2%, 78.6% and 80.8% of our total revenues for the years ended December 31, 2007, 2006 and 2005, respectively.

Cardiac septal repair implant devices are used for the repair of structural heart disease and intracardiac shunts that result in abnormal
blood flow through the chambers of the heart. Common cardiac septal defects include PFO, ventricular septal defect, or VSD, and atrial septal defects, or ASD. PFO, the most common of these defects, has been implicated as (i) a possible risk
factor of embolic stroke and/or TIA, for which other



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current treatments include lifelong anticoagulation therapy or open heart surgery; (ii) a possible risk factor in sleep apnea, high altitude pulmonary
edema, or HAPE, Alzheimers, among others; and (iii) a possible factor in certain migraine headaches. We believe that our catheter-based cardiac septal repair implant technologies may provide a minimally invasive and less costly treatment
alternative. We estimate that the worldwide market potential for our cardiac septal repair implant technologies is more than approximately 750,000 procedures annually for stroke and TIA and 4.5 million procedures for migraine headaches. In
addition, we believe that congenital heart defects, such as ASD and VSD, account for approximately 30,000 procedures.

In the United States, we received the U.S. Food and Drug Administration, or the FDA, approval to
market our septal repair implant devices under Humanitarian Device Exemption, or HDE, regulations for three indications. Our first HDE approval was granted in September 1999 for nonsurgically closing fenestrated fontans. Following the FDAs
grant of a pre-market approval, or PMA, for a competitive device for this indication, this HDE was withdrawn. Our second HDE approval, also in September 1999, was granted for closing VSD in patients with high surgical risk factors. We received PMA
for this indication in December 2001 and, accordingly, this HDE approval was no longer necessary and was withdrawn. Our third HDE approval, granted in February 2000, provided for the use of CardioSEAL® in treating PFO patients with recurrent cryptogenic stroke due to presumed paradoxical embolism through a PFO who have failed conventional drug therapy such as Coumadin®. In October 2006, we voluntarily withdrew this HDE due to significant changes in the clinical environment and we received approval from the FDA for our STARFlex® implant under an Investigational Device Exemption, or an IDE, called CARS (Closure After Recurrent Stroke). CMCC worked with us to generate the clinical data necessary for our HDE and PMA applications and approvals.

In 1998, we introduced design enhancements to the CardioSEAL® cardiac septal repair device, the STARFlex®, which incorporates a self-centering system. This system allows the implant to self-adjust to variations in the
anatomy of a septal defect without deforming the septum or interfering with heart valve function. This feature accommodates easier implantation and the closure of larger defects than would otherwise be possible. Commercialization began in Europe
following the awarding of the Conformité Europeene, or CE Mark, for STARFlex® in September 1998. During 2000, we introduced the QuickLoad enhancement to the entire CardioSEAL® product family, providing a more ergonomic implant loading system. In 2001, two additional STARFlex® sizes for treatment of larger
defects were awarded the CE Mark. During 2003, we introduced in Europe the Rapid Transport® System, or RTS, which allows the interventional cardiologist to more easily implant the
STARFlex® device. We recently introduced an enhanced version of the RTS in Europe, called RTP (Rapid Transport® Plus).

BioSTAR® is our
proprietary bioabsorbable PFO implant and the first biological closure technology. The collagen matrix biomaterial in BioSTAR® enhances cell growth, promoting more rapid and complete
sealing of the PFO defect. Data has shown that 90% to 95% of the implant is absorbed over time and replaced with healthy native tissue. During 2005, we completed our BEST (BioSTAR®
Evaluation STudy) trial, and we received the CE Mark in June 2007. We also received a Health Products and Food Branch, or HPB, medical device license in Canada for BioSTAR® in June 2007.

Regulatory Factors

In the United States, the FDA classifies septal repair implant devices as Class III medical
devices, which require a PMA prior to being marketed. Under the FDAs HDE regulations, medical devices that provide safe treatment for limited populations of patients can be granted approval by the FDA based upon more limited clinical
experience than is required for a full PMA. Specifically, an HDE application must include safety data, but need not contain the results of clinical investigations demonstrating that the device is effective for its intended use. An approved HDE
authorizes marketing of a humanitarian use device, a device that treats or diagnoses a disease or condition that affects fewer than 4,000 individuals in the United States per year. Our CardioSEAL® product in the United States was granted an HDE in 2000 by the FDA for treating PFO patients with recurrent paradoxical stroke who have failed conventional drug therapy such as Coumadin®. On October 31, 2006 we voluntarily withdrew our HDE. The withdrawal was due to significant changes in the clinical



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environment since the HDE was granted six years prior. In order to accommodate the patients who were eligible for the HDE, and to support our ongoing CLOSURE
I trial, we received an expedited approval for CARS. Patients who meet the requirements under CARS will benefit from an implant upgrade to our STARFlex® technology. We also sell our
CardioSEAL® product in the United States under a PMA for patients with a ventricular septal defect, or VSD, who have high surgical risk factors.

The European Union has promulgated rules governing the marketing and sale of medical products in
the countries of the European Union. These products must receive a CE Mark indicating that the manufacturer has conformed to all of the obligations required by the legislation. The CardioSEAL® and STARFlex® implants have been sold in Europe since they received the CE Mark. We were granted a CE Mark for our new BioSTAR® bioabsorbable, biological closure structural heart repair implant in June 2007. We also received HPB approval in Canada in June 2007.

We also re-sell third party products for use with our CardioSEAL® and STARFlex® implant devices, specifically vascular sizing balloons and sheaths. Sales of our proprietary implant technologies, including these ancillary
third party products, account for substantially all of our current product sales.

CLINICAL TRIALS

Stroke / TIA Opportunity / Other

Stroke is the third
leading cause of death in the United States, and for some young adults, a PFO may be the primary cause or risk factor of embolic stroke. When intracardiac pressures are increased (for example, by strenuous activities, lifting or straining), the PFO
may open and allow blood flow to move, or shunt, from one atrial chamber (the right/venous) to the other (left/arterial). On occasion, emboli present in venous blood, which are normally filtered through the lungs, can now cross through the PFO into
the arterial side, travel to the brain and block essential blood flow. The result may be a stroke, causing potential loss of speech, vision and movement, and even death. Each year, approximately 750,000 Americans suffer a new or recurrent stroke and
500,000 Americans experience a TIA. For these people, who risk embolic stroke each year because of their PFO, traditional therapeutic options have been lifetime medication or heart surgery. We believe that PFO closure using our proprietary implant
technologies is an alternative treatment for a certain subset of patients and is another potentially large market opportunity for us.

CLOSURE I

In April 2002, we filed a PMA application with the FDA for the use of our
STARFlex® implant device for PFO closure in certain high risk patient populations, including the population served by the HDE PFO approval, using a subset of the data we used to obtain our
VSD PMA in December 2001. At a September 2002 meeting of the Circulatory Systems Devices Panel of the FDA, the panel did not recommend approval of this PMA. Working closely with the FDA and experts from the neurology and interventional cardiology
communities, we submitted to the FDA the clinical trial design for our PFO IDE. In June 2003, the FDA approved CLOSURE I, our IDE clinical trial comparing STARFlex® structural heart repair
implant with medical therapy in preventing recurrent stroke and TIA. The trial is a prospective, multi-center, randomized, controlled clinical trial designed to evaluate the safety and efficacy of our STARFlex® septal closure system versus medical therapy in patients who have had a stroke and/or a TIA due to a presumed paradoxical embolism through a PFO. Patients will be evaluated periodically over a two-year period, during
which time, safety and efficacy data, including recurrent event rates (i.e., stroke and/or TIA), will be collected for all patients. Patient enrollment, which currently totals approximately 800 patients, has progressed much slower than anticipated.
On March 2, 2007, we participated in public and private FDA advisory panel meetings to discuss the current status of the ongoing PFO/stroke trials being sponsored by us and other companies. At the close of the meeting, both the FDA and advisory
panel concurred that only randomized, controlled trials would provide the necessary data to be considered for a PMA for devices intended for transcatheter PFO closure in the stroke and TIA indication. During a private session, we provided the FDA
and advisory panel



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with a revised study hypothesis and statistical plan to complete the CLOSURE I study as a randomized controlled trial. On April 23, 2007, we announced
that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Subsequent to this meeting, a review of the revised plan and a look at the
interim data was performed by the Data Safety Monitoring Board. Based on these analyses, the conditional probability of a statistically significant benefit will require an enrollment of 900 patients. Enrollment is expected to be completed during the
second quarter of 2008.

We have committed significant financial and personnel
resources to the execution of our CLOSURE I clinical trial. Including contracts with third party providers, agreements with participating clinical sites, internal clinical department costs and manufacturing costs of the STARFlex® devices to be implanted, total costs are currently estimated to be approximately $22 to $24 million through completion of the trial and submission to the FDA. Of this total, approximately $17.4
million was incurred through 2007. Approximately $3.6 million was incurred during 2007. We currently project 2008 costs to approximate $3.0 million.

In August 2006, we announced that the FDA approved our CARS IDE. This study will supplement our
ongoing CLOSURE I clinical trial to evaluate the connection between PFO and stroke. We will provide eligible patients of both CARS and CLOSURE I with our newer STARFlex® implant technology.
However, while patients in the CLOSURE I trial receive the implant at no cost, those covered under the CARS IDE can be charged for the device. Patients previously covered by our PFO HDE only had access to our original CardioSEAL® device. In addition, the FDA informed us that they had commenced a formal HDE review process for all existing PFO closure devices. Because of the many clinical advances since its approval over
six years ago, the FDA asked us to consider voluntary withdrawal of our HDE, which we did in October 2006. We expressed concern to the FDA that we did not want to put patients who were currently covered under the HDE at risk of losing access to PFO
closure. The FDA endorsed our support for those patients and as a result, quickly approved the CARS IDE. The CARS IDE will provide continued PFO closure access to certain patients who previously were eligible for treatment under the HDE. Approval of
the CARS IDE, combined with our ongoing CLOSURE I trial, allows us to maintain two sources for PFO closure in the United States.

In
addition, we are evaluating recent literature that shows a potential correlation between structural heart disease and other recurring events such as decompression illness, sleep apnea (oxygen desaturation), high altitude pulmonary edema (HAPE) and
Alzheimers. This correlation builds on the concept that a right to left shunt may not be natural or appropriate, and in certain patients it may present an additional risk to the aforementioned recurring events, which risk we believe may be
managed with our technology.

BEST

In June 2005, we received approval in the United Kingdom for our BEST study, a multi-center study
designed to evaluate our new BioSTAR® structural heart repair technology, the first in-human use of a bioabsorbable collagen matrix incorporated on our STARFlex® platform. BioSTAR®, our first biological closure technology, is designed to optimize the biological response by promoting quicker healing and device
endothelialization. Patient enrollment began in July 2005 and completed during the fourth quarter of 2005. The goal of our BEST study was to secure European and Canadian commercial approval for BioSTAR® through the CE Mark and the HPB processes. The CE Mark and HPB approval were received in June 2007. In May of 2006, we reported data from the six-month follow-up period of 57 patients at the late breaking clinical
trials session at the EuroPCR, the largest international cardiology meeting in Europe. At 30 days post implant with BioSTAR®, complete closure rate was achieved in 88.5% of the study
subjects. At six months, the complete closure rate increased to 96.4%. No major safety issues were observed. At the 2006 Transcatheter Cardiovascular Therapeutics 18thAnnual Scientific Symposium, 30 day post implant complete closure rate was updated to 92% of the study patients. The average procedure time to close the septal defect with BioSTAR® was approximately 40 minutes. Total costs of this study, including third party contracts and agreements with clinical sites and other service providers, were approximately $1.4 million.



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Migraine Opportunity

MIST

Several recent research studies have suggested that patients
who have a significant right to left shunt may suffer from severe migraines. Some doctors have observed that after PFO closure to prevent recurrent stroke, patients who had previously suffered from migraines unexpectedly reported that their attacks
either stopped completely or improved in terms of frequency and/or severity. In order to help confirm the clinical relevancy of this apparent connection between migraines and PFOs, in late 2004, we received approval to commence the first
prospective, randomized, double-blinded, controlled clinical study in the United Kingdom using our existing proprietary STARFlex® septal repair technology. The trial was designed to test
the hypothesis that PFO closure will lead to complete migraine resolution. A secondary hypothesis was that PFO closure reduced the intensity and duration of migraine symptoms. The primary endpoint was not achieved. This clinical study, named MIST
(Migraine Intervention with STARFlex® Technology), completed enrollment of 147 patients in July 2005, with follow-up evaluation over the following six-month period. Preliminary results of
MIST, which we released on March 13, 2006, found that over 60% of those screened had a right to left shunt. A shunt is a heart defect, which allows blood to cross from the right to left chambers of the heart, bypassing the lungs. Of those
patients, almost 40% had a moderate or large PFO, six times greater than the general population. MIST results indicated for the first time in a randomized controlled study that closing a PFO provides a significant treatment effect in some patients.
The study showed that approximately 42% of the patients treated with our STARFlex® technology had a reduction in migraine headache days of at least 50% compared to approximately 23% in the
sham arm. The study was designed by a scientific advisory board comprised of some of the top European and North American migraine specialists and interventional cardiologists. The MIST studys patient recruitment process was supported by the
Migraine Action Association, or MAA, a migraine headache advocacy group representing more than 12,000 members in the United Kingdom. Total costs of this trial, including third party contracts and agreements with clinical sites and other service
providers, were approximately $4.9 million. Of this total, approximately $300,000 was incurred during 2007. We believe that the MIST trial demonstrated that eliminating a right to left shunt with STARFlex® helps to remove a risk factor contributing to certain migraine attacks. We also believe that this may represent a potential breakthrough treatment for patients currently not responding to other therapies.

MIST II

In September 2005, we received conditional approval from the FDA for an IDE to initiate enrollment in our pivotal PFO/migraine clinical study, named MIST II. MIST II was initially designed to be a prospective,
randomized, multi-center, controlled study in the United States. In August 2006, utilizing data from our MIST and BEST (BioSTAR® Evaluation STudy) trials, we received conditional approval
from the FDA for modifications we requested to the IDE. These changes included adjustment to the primary endpoint for the study from resolution to reduction of migraine headaches and an upgrade to the implant used in the study from STARFlex® to our new bioabsorbable BioSTAR®. MIST II was a double-blinded trial designed to randomize approximately 600 migraine patients with
a PFO to either structural heart repair with our BioSTAR® technology or a control arm.

In January 2008, we announced that we were closing down this clinical study. We determined that it was in the best interest of our shareholders to better allocate these resources toward our ongoing stroke initiatives. We continue to believe
in the relationship between PFO and migraine, but it became clear that an acceptable enrollment dynamic was not possible and completing this study would require more time and financial resources than we were willing to commit at this time.

MIST III (Long-term follow up of MIST patients)

In October 2005, we received approval from the regulatory authorities in the United Kingdom to
begin enrollment in MIST III. In MIST III, control patients from the original MIST study, i.e., those who did not receive the STARFlex® implant, have the option to receive an implant and
participate in MIST III after they have



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been unblinded as part of the MIST study. These patients follow the protocol as in MIST after which they will be followed for an additional 18 months. In
addition, migraine patients with a PFO who did receive a STARFlex® implant in MIST and opt to participate in MIST III will be followed for an additional 18 months. This study is designed to
test whether or not the benefit demonstrated in MIST continues over time. We currently estimate the cost of MIST III to be approximately $1.0 million. Of this total, approximately $900,000 was incurred through 2007. We currently estimate 2008 costs
to be approximately $100,000. We believe our initial target population for PFO closure with our proprietary technology to be approximately 5% of all migraine sufferers worldwide, or more than 4.5 million people. This is based on statistics from
the World Health Organization and the American Council for Headache Evaluation that the prevalence of migraines in the United States, Europe and Japan is slightly less than 10% of the general population. Also, published medical research indicates
that approximately 20% of migraine sufferers have migraine with aura, often referred to as the classic migraine, and up to 50% of those suffering from migraine with aura are unresponsive to current medications. Within that patient subset, the
prevalence of PFO is estimated to be 50%, or twice what would be expected in a normal population.

We do not charge for the products
implanted in any of the aforementioned clinical trials.

OUR STRATEGY

Our primary strategic objectives for 2008 include:



| |  |  | completing the study enrollment for CLOSURE I;
| | - |  | ----------------------------------------------



| |  |  | expand BioSTAR® sales increase and market leadership in
Europe and Canada; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | enhance technological leadership with our biological closure technologies.
| | - |  | --------------------------------------------------------------------------

With a strong balance sheet, including approximately $31.0 million of cash, cash equivalents, and marketable securities at December 31, 2007, and
anticipated revenue growth from outside the United States, we currently believe that we have the available financial resources to complete these regulatory and clinical activities and to continue our focus on technological improvements to our
products and intellectual property positions.

ROYALTY INCOME

Net royalty income accounted for 25.8%, 21.4% and 19.2% of our total revenues for the years ended December 31, 2007, 2006 and 2005, respectively.

Vena Cava Filters

In November 2001, we sold
our former vena cava filter product line, including the Recovery Filter, or RNF, and Simon Nitinol Filter, or SNF, products, to C.R. Bard, Inc, or Bard, for $27 million in cash and up to
an additional $7 million in cash tied to certain performance and delivery milestones. We continued to manufacture the filter products for Bard through June 2002 and, upon final transfer of manufacturing to Bard, we received a $4 million
milestone payment on September 30, 2002. In January 2003, we received the final $3 million milestone payment as a result of Bards receipt of FDA approval for the commercial sale and use of its RNF product as of December 31, 2002.
Commencing in 2003, we earned royalties from Bard on its sales of the vena cava filter products. Through 2007, the Bard royalty rate applicable to RNF product sales was substantially higher than the royalty rate applicable to SNF products. Beginning
in 2008, the royalty rate we receive from Bard will decrease substantially from its current rate, while the royalty rate we pay to the estate of the original inventor of these products will remain the same. This will result in a net royalty expense
that will be reflected in general and administrative expenses.

Stents

In November 1994, we licensed to Boston Scientific Corporation, or BSC, the exclusive worldwide rights to develop, manufacture, market and distribute products utilizing our stent technology. BSC is not prohibited from
selling competing stents and has established a broad-based stent program. Pursuant to the license agreement, we earn sales royalties and, if applicable, manufacturing cost reduction incentives.



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RESEARCH AND DEVELOPMENT

Our research and development organization included 32 persons as of December 31, 2007, with departmental groups dedicated to product development, regulatory and clinical affairs, and quality assurance. Total
company-sponsored research and development expenses were approximately $15.4 million, $15.5 million and $12.7 million for the years ended December 31, 2007, 2006, and 2005, respectively. Of these totals, approximately $6.0 million,
$8.2 million and $7.5 million for the years ended December 31, 2007, 2006 and 2005, respectively, were clinical trials costs. We currently expect 2008 research and development expenses to increase to approximately $16.0 million compared to
approximately $15.4 million in 2007. This anticipated increase is primarily related to an increase in our new product investments and other development costs.

Product Development

During 2005, we completed enrollment in our BEST
clinical trial and were granted a CE Mark for our biological closure implant BioSTAR® in June 2007. We also received a Health Products and Food Branch, or HPB, medical device license in
Canada for BioSTAR® in June 2007. We are evaluating and developing our regulatory strategy for approval of BioSTAR® in the United
States. We are continuing to develop our next advanced biological closure technology called BioTREK. BioTREK represents our
second biological closure technology and follows our BioSTAR® implant technology. BioTREK incorporates a unique biosynthetic
material that uses the bodys own regenerative capability to restore function naturally. We believe that BioTREK will provide a more natural, biological closure of structures within
the heart, such as the PFO. We continue preclinical evaluation of BioTREK.

Additionally, the research and development group continues to invest in strengthening our intellectual property assets in all aspects of structural heart repair.

Quality Assurance

Our quality assurance group is responsible for product inspection and release, and
for ensuring company-wide compliance with U.S. and international quality system regulations. Quality assurance also manages our field quality and international regulatory approval activities.

MARKETING AND SALES STRATEGY

We market CardioSEAL® through our direct sales force to customers in the United States and Canada and market CardioSEAL®, STARFlex® and BioSTAR® directly in key European markets and through select distributors in
other parts of Europe. As of December 31, 2007, worldwide sales and marketing personnel consisted of 31 persons, of which 13 are in various locations in the United States and 18 support various locations throughout Europe. Our European
employees are based in Germany, France, the United Kingdom, Benelux and Scandinavia. During 2008, we plan to continue to expand our presence to include Spain and other European countries.

Traditionally, the neurologist and the interventional cardiologist have not collaborated on patient diagnosis or treatment. We believe that the PFO/brain
attack connection has changed that relationship. To further facilitate what we believe to be an emerging solution to these brain attacks associated with both stroke and migraine, we have focused added resources on enhancing the referral process and
helping neurologists and interventional cardiologists form the partnerships needed to diagnose and treat PFO. These are often the most challenging aspects of introducing a new technology and promoting a new therapeutic concept. We have sponsored
joint meetings in both Europe and the United States that brought together the interventional cardiology and stroke neurology communities on the subject of prevention and treatment of cardiac sources of migraine headache and stroke.



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We use a variety of marketing and education
programs to create ongoing awareness and demand for our CardioSEAL®, STARFlex® and BioSTAR® products. In addition to active participation in numerous cardiology related symposia and exhibitions in the United States and Europe, we work closely with our leading customers to promote multi-disciplinary dialogue
and education, especially between the interventional cardiology and neurology communities.

CUSTOMERS

Our customers are generally hospitals, clinics and other healthcare centers. It is not necessary
for our U.S. customers to obtain Institutional Review Board, or IRB, approval to purchase CardioSEAL® products for VSD closure, as we have received a PMA for this indication. At
December 31, 2007, we had approximately 400 active customers worldwide to which we sell our CardioSEAL®, STARFlex® and
BioSTAR®products directly.

No
customer accounted for greater than 10% of product sales in any of the three years in the period ended December 31, 2007.

MANUFACTURING

We manufacture the CardioSEAL®, STARFlex® and BioSTAR® cardiac septal repair implants at our headquarters in Boston,
Massachusetts, which includes a Class 10,000 cleanroom. We have received ISO 13485 certification, on adherence to established standards in the areas of quality assurance and manufacturing process control, and we have also received permission to
affix the CE Mark to our products. We believe that our current manufacturing facilities are sufficient to accommodate potential increases in demand for our products.

COMPETITION

Four companies, AGA Medical Corp., or AGA, W. L. Gore & Associates, Inc., or
Gore, Cardia, Inc., or Cardia, and St. Jude Medical, Inc., have developed or acquired technologies that may compete with our proprietary technologies. These companies sell their products in Europe and other international markets, and AGA and Gore
also sell products in the United States. We believe that these competitors are conducting, or are planning to conduct, clinical trials in the United States and Europe. Additionally, more than 40 other companies or individuals have intellectual
property in the field of septal closure, including devices, radiofrequency welding, suturing, abrasion, adhesives and other approaches.

We believe that the STARFlex®,
CardioSEAL® and BioSTAR® implants have a distinct advantage over other PFO closure devices. CardioSEAL® has the longest clinical use history, a highly conformable, atraumatic design, a tissue scaffold proven to promote endothelialization, and a low septal profile and low metal surface area.
Additionally, STARFlex® has a self-adjusting PFO-compatible centering mechanism which provides exceptionally high closure rates. The Rapid Transport® delivery system and the Rapid Transport® Plus provide for simplicity by reducing the number of steps for implantation. We further believe that our new
biological closure device BioSTAR® provides and BioTREK will provide, an even more biological response by promoting quicker
healing and device endothelialization, improving both PFO closure rate and patient safety.

PATENTS AND PROPRIETARY TECHNOLOGY

We seek to protect our technology through the use of patents, trademarks and trade secrets. We are the owner or licensee of 62 issued United States (U.S.)
patents, and corresponding foreign patents, relating to our structural heart repair implant technologies and other related cardiovascular implant technologies. In addition, we have more than 70 pending U.S. patent applications in the field of
structural heart repair, including implants, delivery systems and accessory products, most of which have corresponding foreign counterparts.

The issued U.S. patents expire at various dates ranging from 2008 to 2025. The patents related to our anastomosis devices, which are minimally invasive means of attaching vascular grafts, expire in 2016, the patent



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for our radiopaque markers, which allow catheters to be more visible under x-ray, expires in 2014, the patents for our distal protection system expire from
2019 to 2022, the patent for our nitinol septal repair device expires in 2016, the patent for our superelastic hinge joint, a novel concept with applicability to both implants and delivery systems, expires in 2017, the patent for our new generation
PFO closure device expires in 2025, and the patent for our flexible delivery system expires in 2024.

In addition, we are the exclusive licensee within specific fields of use to several technologies. We are the exclusive licensee under certain patents, expiring from 2012 to 2015, relating to the CardioSEAL®, STARFlex®, and BioSTAR® cardiac septal repair implants, delivery systems
and methods for repairing cardiac and vascular defects. We are the exclusive licensee to a patent used in nitinol septal repair devices which expires in 2011. We are also the exclusive licensee under certain patents, expiring from 2014 to 2019,
related to the intestinal collagen layer utilized in our BioSTAR® device and under certain patents, expiring from 2008 to 2021, related to the novel bioabsorbable polymer utilized in our
BioTREK device.

We also rely on trade secrets and technical know-how in the
development and manufacture of our devices, which we seek to protect, in part, through confidentiality agreements with our employees, consultants and other parties. We have eight trademarks, four of which are registered with the United States Patent
and Trademark Office (see the following table).



|                               |  |                    |  |            |  |             
|------------------------------ |  | ------------------ |  | ---------- |  | ------------
|Trademark                      |  | Jurisdiction       |  | Status     |  | Renewal Date
|At The Heart of Brain Attacks |  | Canada             |  | Pending    |  |            
|At The Heart of Brain Attacks® |  | European Community |  | Registered |  | Sep 2015    
|At The Heart of Brain Attacks |  | United States      |  | Allowed    |  |            
|BioSTAR                       |  | Canada             |  | Allowed    |  |            
|BioSTAR®                       |  | European Community |  | Registered |  | Apr 2014    
|BioSTAR®                       |  | Japan              |  | Registered |  | Oct 2015    
|BioSTAR®                       |  | United States      |  | Registered |  | Jun 2016    
|BioTREK                       |  | Canada             |  | Pending    |  |            
|BioTREK                       |  | European Community |  | Pending    |  |            
|BioTREK®                       |  | Japan              |  | Registered |  | Feb 2016    
|BioTREK                       |  | United States      |  | Pending    |  |            
|CardioSEAL®                    |  | United States      |  | Registered |  | Jan 2008    
|Gator                         |  | Canada             |  | Pending    |  |            
|Gator®                         |  | European Community |  | Registered |  | Apr 2014    
|Gator®                         |  | Japan              |  | Registered |  | Sep 2017    
|Gator                         |  | United States      |  | Allowed    |  |            
|NMT Medical®                   |  | Canada             |  | Registered |  | Jan 2018    
|NMT Medical®                   |  | United States      |  | Registered |  | Apr 2011    
|Rapid Transport®               |  | European Community |  | Registered |  | Aug 2013    
|STARFlex®                      |  | Canada             |  | Registered |  | Sep 2020    
|STARFlex®                      |  | European Community |  | Registered |  | Feb 2011    
|STARFlex®                      |  | Japan              |  | Registered |  | Jun 2014    
|STARFlex®                      |  | United States      |  | Registered |  | Aug 2012    



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LICENSED TECHNOLOGY; ROYALTY OBLIGATIONS

Cardiac Septal Repair Implants

In connection
with our cardiac septal repair implants, we have an exclusive worldwide license from CMCC under United States patents entitled Occluder and Method for Repair of Cardiac and Vascular Defects (U.S. Patent No. 5,425,744),
Occluder for Repair of Cardiac and Vascular Defects (U.S. Patent No. 5,451,235) and Self-Centering Umbrella-Type Septal Closure Device (U.S. Patent No. 5,709,707) and the respective corresponding foreign patents,
patent applications and associated know-how. The license agreement, as amended, provides for royalty payments to CMCC of 10.5% of commercial net sales of our CardioSEAL®, STARFlex® and BioSTAR® septal repair implant devices. Royalties continue until the end of the term of the patents, which range from 2014 to
2016. We also have a royalty-free, worldwide sublicense under the U.S. patent entitled System for the Percutaneous Transluminal Front-End Loading Delivery and Retrieval of a Prosthetic Occluder (U.S. Patent No. 5,649,950) and its
corresponding foreign patents and associated know-how. The sublicense is exclusive in the field of the repair of atrial septal defects and nonexclusive in certain other fields. We have also obtained an exclusive worldwide license from Lloyd A.
Marks, M.D. under the United States patent entitled Aperture Occlusion Device (U.S. Patent No. 5,108,420). The license agreement with Dr. Marks provides for royalty payments, subject to certain annual minimums, based on net
sales of nitinol septal repair implants that are covered by the patent, which expires in 2011. There have been no sales by us of covered nitinol septal repair implants to date.

Vena Cava Filters

Under the terms of the 2001 sale of our former vena cava filter product line to
Bard, we continue to make royalty payments to the estate of the inventor of these products based upon net sales by Bard of its SNF and RNF products. Commencing in 2003, these royalty expenses are reported in our consolidated financial statements as
a reduction of royalty income that we earn from Bard. Beginning in 2008, the royalty rate we receive from Bard will decrease substantially from its current rate, while the royalty rate we pay to the estate of the original inventor of these products
will remain the same. This will result in a net royalty expense that will be reflected in general and administrative expenses.

Stents

We pay a royalty equal to 2.5% of net royalties received from BSC to a former employee of ours and joint inventor of our stent technology. These
payments are reported in our consolidated financial statements as a reduction of royalty income.

GOVERNMENT REGULATION

The manufacture and sale of medical devices intended for commercial distribution are subject to extensive governmental regulations in the United States.
Medical devices are regulated in the United States by the FDA under the Federal Food, Drug, and Cosmetic Act, or the FDC Act, and require pre-market clearance, unless exempt, or PMA prior to commercial distribution. In addition, certain material
changes or modifications to medical devices are also subject to FDA review and clearance or approval. Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture, safety, labeling, storage, record keeping, advertising, and
distribution of medical devices in the United States. Noncompliance with applicable requirements can result in failure of the government to grant pre-market clearance or approval for devices, withdrawal of approvals, total or partial suspension of
production, banning devices or imposing restrictions on sale, distribution or use, fines, injunctions, civil penalties, recall or seizure of products, and criminal prosecution. The FDA also has the authority to request repair, replacement or refund
of the purchase price of any device manufactured or distributed that presents an unreasonable health risk.



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Generally, before a new device can be introduced into the market in the United States, the manufacturer
or distributor must obtain FDA clearance of a pre-market notification, or 510(k), submission, unless exempt, or approval of a PMA. Medical devices are classified into one of three classes on the basis of the level of control deemed by the FDA to be
necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to the least regulatory control (general controls), and generally are exempt from the 510(k) requirement. Devices that cannot be classified as Class I because
the general controls are insufficient to provide reasonable assurance of safety and effectiveness, and for which there is sufficient information to establish special controls (e.g., performance standards or guidelines) are Class II devices. Class II
devices, unless exempt, can be marketed with a cleared 510(k). Specifically, if a medical device manufacturer, (or any other person required to submit a 510(k) under 21 CFR Part 807), can establish that a device is substantially
equivalent to a legally marketed Class I or Class II device, or to a Class III device for which the FDA does not require an approved PMA, the manufacturer may seek clearance from the FDA to market the device by filing a 510(k). The 510(k)
needs to be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. The FDA charges a fee for 510(k) reviews unless an exemption or waiver applies. The 510(k) must be submitted 90 days before
the marketing of the device. The FDA will issue an order determining that the device is substantially equivalent or not substantially equivalent, or may request additional information. There can be no assurance that the FDA review process will not
involve delays or that such clearance will be granted on a timely basis, if at all.

Class III is the most stringent regulatory category
for devices. The FDA places devices in Class III if insufficient information exists to determine that the application of general controls or special controls are sufficient to provide reasonable assurance of safety and effectiveness, and the devices
are life-sustaining or life-supporting, or of substantial importance in preventing the impairment of human health, or present a potential, unreasonable risk of illness or injury. Most Class III devices require clinical testing to ensure safety and
effectiveness, and an approved PMA, prior to marketing and distribution. Class III devices that require an approved PMA to be marketed are devices that were regulated as new drugs prior to May 28, 1976 (transitional devices), devices not found
substantially equivalent to devices marketed prior to May 28, 1976, and Class III pre-amendment devices which were introduced into the U.S. market before May 28, 1976 and which by regulation require a PMA. Pre-amendment devices are
classified automatically by statute into Class III without any FDA rulemaking process, and may be marketed with a 510(k) until the FDA issues a final classification regulation requiring the submission of a PMA. The FDA is directed by statute to
either down-classify pre-amendment Class III devices to Class I or II, or to publish a classification regulation retaining the device in Class III. In reclassifying these devices, the FDA considers data, including adverse safety and effectiveness
information, submitted by manufacturers of pre-amendment Class III devices for which no final regulation has been issued. If the FDA calls for a PMA for a pre-amendment Class III device, a PMA must be submitted for the device even if it has already
received 510(k) clearance. If the FDA down-classifies a pre-amendment Class III device to Class I or Class II, a PMA application is not required. Post-amendment Class III devices that are substantially equivalent to pre-amendment Class III devices,
and for which a regulation calling for an approved PMA has not been published, can be marketed with a 510(k). A PMA application must be supported by extensive data, including preclinical and clinical trial data, to prove the safety and effectiveness
of the device. The FDA charges a fee for PMA reviews unless an exemption or waiver applies. The Medical Device User Fee and Modernization Act of 2002 (MDUFMA) codified the FDAs modular review approach, whereby applicants are allowed to submit
discrete sections of the PMA for review after completion. Under the FDC Act, the FDA must review PMAs within 180 days.

If human clinical
trials of a device are required, and if the device presents a significant risk, the manufacturer of the device is required to file an IDE application with the FDA prior to commencing clinical trials. The IDE application must be supported
by data, typically the results of animal and, possibly, mechanical testing. If the IDE application is approved by the FDA, human clinical trials may begin at a specific number of investigational sites with a maximum number of patients, as approved
by the FDA. Sponsors of clinical trials may charge for an investigational device provided that such costs do not exceed the amount necessary to recover the costs of manufacture, research, development and handling of the investigational device. The
clinical trials



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must be conducted under the auspices of an independent IRB established pursuant to FDA regulations. If one or more IRBs determine that a clinical trial
involves a nonsignificant risk device, the investigation is considered to have an approved IDE if certain conditions are met, including, for example, IRB approval of the investigation and compliance with informed consent requirements.
The sponsor of a study involving a nonsignificant risk device does not need to obtain FDA approval of an IDE application before beginning the study.

After approval or clearance of a device, numerous regulatory requirements apply. These include establishment registration and device listing as well as requirements relating to labeling and corrections and removals
reporting. The FDA also requires that all device manufacturers comply with the Quality System Regulation, or QSR. Under the QSR, manufacturers must comply with various control requirements pertaining to all aspects of the manufacturing process,
including requirements for design and processing controls, packaging, storage, labeling, and recordkeeping, including maintaining complaint files. The FDA enforces these requirements through periodic inspections of the medical device manufacturing
facilities.

Under the Medical Device Reporting regulation, manufacturers or importers must inform the FDA whenever information reasonably
suggests that one of their devices may have caused or contributed to a death or serious injury, or has malfunctioned, and, if the malfunction were to recur, the device would be likely to cause or contribute to a death or serious injury. These
reports are publicly available and, therefore, can become a basis for private tort suits, including class actions.

With the passage of the
Safe Medical Devices Act of 1990, Congress sought to improve the framework to regulate medical devices. Congress recognized that for diseases and conditions affecting small populations, a device manufacturers research and development costs
could exceed its market returns, thereby making development of such devices unattractive. The HDE regulations were created to provide an incentive for development of devices to be used in the treatment of diseases or conditions affecting small
numbers of patients. Under the HDE regulations, medical devices that provide safe treatment and that are intended to treat and diagnose conditions that affect fewer than 4,000 individuals in the United States per year, may be approved on more
limited clinical experience than that required for a PMA. The HDE application is exempt from the effectiveness requirement of a PMA, and the FDA reviews it within 75 days of receipt of the application. One of the criteria that must be satisfied in
order for a device to obtain marketing approval under the HDE regulation is that there is no comparable device, other than another Humanitarian Use Device, or HUD, approved under the HDE regulation, or a device being studied under an approved IDE,
available to treat or diagnose the disease or condition.

From time to time, legislation is drafted and introduced in Congress that could
significantly affect the statutory provisions governing the approval, manufacture, and marketing of medical devices in the U.S. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly
affect business operations and/or products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance, or interpretations will be changed, and what the impact of such changes, if any, may be.

The current regulatory environment in Europe for medical devices differs from that in the United States. Countries in the European Union, or EU, have
promulgated rules, which provide that medical products may not be marketed and sold commercially in the countries in the European Economic Area unless they receive a CE Mark. All of our current products have received approval for CE Marking. Non-EU
members, such as Switzerland, have adopted internal regulations that in most instances mirror the requirements established in the neighboring European Union.

THIRD PARTY REIMBURSEMENT

Health care providers in the United States, such as hospitals and physicians, that purchase
medical devices, such as the products manufactured or licensed by us, generally rely on third party payors, principally Medicare, Medicaid and private health insurance plans, to reimburse all or part of the costs and fees associated with our



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devices. Major third party payors reimburse inpatient medical treatment, including all operating costs and all furnished items or services, including devices
such as ours, at a prospectively fixed rate based on the diagnosis-related group, or DRG, that covers such treatment as established by the Federal Health Care Financing Administration, or HCFA. For interventional procedures, the fixed rate of
reimbursement is based on the procedure or procedures performed and are unrelated to the specific devices used in that procedure. If a procedure is not covered by a DRG, certain third party payors may deny reimbursement. Alternatively, a DRG may be
assigned that does not reflect the costs associated with the use of our devices, resulting in under-reimbursement. If, for any reason, our products were not to be reimbursed by third party payors, our ability to sell the products may be materially
adversely affected.

Mounting concerns about rising health care costs may cause more
restrictive coverage and reimbursement policies to be implemented in the future. Several states and the federal government are investigating a variety of alternatives to reform the health care delivery system and to further reduce and control health
care spending. These reform efforts include proposals to limit spending on health care items and services, limit coverage for new technology and limit, or control directly, the price health care providers and drug and device manufacturers may charge
for their services and products. We believe that U.S. health care providers currently are reimbursed for the cost of purchasing our CardioSEAL® septal repair implants used in PMA
procedures. In the international market, reimbursement by private third party medical insurance providers, including governmental insurers and providers, varies from country to country. In certain countries, our ability to achieve significant market
penetration may depend upon the availability of third party governmental reimbursement. Our independent distributors, and the health care providers to whom such distributors sell, obtain any necessary reimbursement approvals.

The CardioSEAL® septal repair implant
was awarded a Medicare billing pass-through code in September 2000 and has a favorable medical policy position from the national Blue Cross Blue Shield Association. A specific American Medical Association procedure code, or CPT, for catheter closure
of atrial and ventricle level shunts has been issued and became effective March 1, 2003. The assigned CPT codes cover procedures using our CardioSEAL® cardiac septal repair implants
for closure of certain categories of VSD and PFO defects.

Our CLOSURE I trial is being conducted under FDA approved IDEs with Category B
HCFA status, meaning usage under the trial is eligible for Medicare coverage.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

Please see Notes 2(l) and 13 of Notes to Consolidated Financial Statements for certain of our financial information concerning geographic areas.

PRODUCT LIABILITY AND INSURANCE

Our
business involves the risk of product liability claims. We maintain product liability insurance.

EMPLOYEES

As of December 31, 2007, we had 118 full-time employees. We believe that we maintain good relations with our employees.

ENVIRONMENTAL MATTERS

Applicable federal, state and
local environmental laws have not had and are not expected to have a material effect on our business. To date, we have not made any material capital expenditures and do not anticipate making any such expenditures during the next two fiscal years
relating to environmental control facilities.



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ITEM 1A. RISK FACTORS

Statements contained or incorporated by reference in this Annual Report on Form 10-K
that are not based on historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management including, without limitation,
our expectations regarding results of operations, selling and marketing expenses, general and administrative expenses, research and development expenses, the sufficiency of our cash for future operations, and the success of our cardiovascular
business and clinical trials. Forward-looking statements may be identified by the use of forward-looking terminology such as may, could, will, expect, estimate, anticipate,
continue, or similar terms, variations of such terms or the negative of those terms.

We cannot assure investors that
our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to
such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. If any of the following risks
actually occur, our business, financial condition or results of operations would likely suffer.

SUBSTANTIALLY ALL OF OUR REVENUES ARE DERIVED FROM
SALES OF ONE PRODUCT LINE.

We derive a substantial portion of our ongoing
revenues from sales of our CardioSEAL®, STARFlex® and BioSTAR®
products. As demand for, and costs associated with, these products fluctuates, including the potential impact of our revenue and non-revenue producing PFO IDE clinical trials on product sales, our financial results on a quarterly or annual basis may
be significantly impacted. Accordingly, events or circumstances adversely affecting the sales of any of these products would directly and adversely impact our business. These events or circumstances may include reduced demand for our products, lack
of regulatory approvals, product liability claims and/or increased competition.

We
were contacted by the FDA to review our existing HDE, which was approved more than seven years ago. Since the HDE was approved, clinical conditions have significantly changed and the subset of patients who once qualified for consideration for PFO
closure has increased beyond 4,000, the limit normally allowed under the HDE indication. Effective October 31, 2006, as a result and in connection with the CARS study, we voluntarily withdrew the HDE granted by the FDA on February 1, 2000
for our CardioSEAL® Septal Repair System for closure of PFO. At this time, we are unable to predict whether our action and the actions of the FDA will continue to have a negative impact on
our product revenue. However, it is expected that sales growth in the United States will be limited until further regulatory approvals are obtained. The withdrawal did not reflect a device safety issue. CardioSEAL® will continue to be commercially available in the United States under the PMA indication for ventricular septal defect, or VSD.

WE MAY FACE UNCERTAINTIES WITH RESPECT TO THE EXECUTION, COST AND ULTIMATE OUTCOME OF CLOSURE I.

Upon receipt of final FDA
approval, we commenced our CLOSURE I study in June 2003. On April 23, 2007, we announced that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the
U.S. Based on an analysis, the conditional probability of a statistically significant benefit at the end of the data reviewed will require an enrollment of 900 patients, of which approximately 800 patients are already enrolled. The original CLOSURE
I statistical plan required an enrollment of 1,600 patients. We currently anticipate that when completed, study data from CLOSURE I will be used to support a PFO PMA application. We currently estimate the total costs of CLOSURE



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I to be approximately $22 to $24 million through completion of the clinical trial and submission to the FDA. We have limited direct experience conducting a
clinical trial of this magnitude. We cannot be certain that patient enrollment will be completed at all. We cannot be certain that the projected costs of CLOSURE I will not need to be adjusted upwards, primarily related to the extended enrollment
period. Furthermore, we cannot be certain that we will obtain a PMA from the FDA based upon the final results of the trial. If CLOSURE I does not result in a PMA, we may face uncertainties and/or limitations as to the continued growth of revenues of
our CardioSEAL® and STARFlex® products, which may impact our profitability.

WE FACE UNCERTAINTIES WITH RESPECT TO THE AVAILABILITY OF THIRD-PARTY REIMBURSEMENT.

In the United States, Medicare, Medicaid and other government insurance programs, as well as private insurance reimbursement programs, greatly affect revenues for suppliers of health care products and services. Such
third-party payors may affect the pricing or relative attractiveness of our products by regulating the maximum amount, if any, of reimbursement which they provide to the physicians and hospitals using our devices, or any other products that we may
develop. If, for any reason, the third-party payors decided not to provide reimbursement for our products, our ability to sell our products would be materially adversely affected. Moreover, mounting concerns about rising healthcare costs may cause
the government or private insurers to implement more restrictive coverage and reimbursement policies in the future. In the international market, reimbursement by private third-party medical insurance providers and by governmental insurers and
providers varies from country to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party governmental reimbursement.

WE MAY FACE UNCERTAINTIES WITH RESPECT TO COMMERCIALIZATION, PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE OF OUR PRODUCTS.

We cannot be certain that our current products, or products currently under development, will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by surgery, drugs or other medical devices. Currently, the medical community widely accepts many alternative treatments, and these other treatments have a long history of
use. We cannot be certain that our devices and procedures will be able to replace such established treatments or that either physicians or the medical community, in general, will accept and utilize our devices or any other medical products that we
may develop. In addition, our future success depends, in part, on our ability to develop new and improved implant technology products. Even if we determine that a product candidate has medical benefits, the cost of commercializing that product
candidate may be too high to justify development. In addition, competitors may develop products that are more effective, cost less or are ready for commercial introduction before our products. If we are unable to develop additional, commercially
viable products, our future prospects will be limited.

AS A RESULT OF GOVERNMENT REGULATIONS, WE MAY EXPERIENCE LOWER SALES AND EARNINGS.

The manufacture and sale of medical devices intended for commercial distribution are subject to extensive governmental regulations in
the United States and abroad. Medical devices generally require pre-market clearance or pre-market approval prior to commercial distribution. Certain material changes or modifications to medical devices are also subject to regulatory review and
clearance or approval. The regulatory approval process is expensive, uncertain and lengthy. If granted, the approval may include significant limitations on the indicated uses for which a product may be marketed. In addition, any products that we
manufacture or distribute are subject to continuing regulation by the FDA. We cannot be certain that we will be able to obtain necessary regulatory approvals or clearances for our products on a timely basis or at all. The occurrence of any of the
following events could materially affect our business:



| |  |  | delays in receipt of, or failure to receive, regulatory approvals or clearances;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the loss of previous approvals or clearances, including our voluntary withdrawal of our PFO HDE;
| | - |  | ------------------------------------------------------------------------------------------------



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| |  |  | the ability to enroll patients and charge for implants in the CARS IDE;
| | - |  | -----------------------------------------------------------------------



| |  |  | limitations on the intended use of a device imposed as a condition of regulatory approvals or clearances; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our failure to comply with existing or future regulatory requirements.
| | - |  | ----------------------------------------------------------------------

In addition, sales of medical device products outside the United States are subject to foreign regulatory requirements that vary widely from country to
country. Failure to comply with foreign regulatory requirements also could materially affect our business.

REVENUE GENERATED BY CARS IDE MAY BE
LIMITED.

In August 2006, we announced FDA approval for a new PFO/stroke IDE,
called CARS. The CARS IDE will supplement our ongoing CLOSURE I clinical trial to evaluate the connection between PFO and stroke. We will provide eligible patients of both CARS and CLOSURE I with our newer STARFlex® implant technology. Patients previously covered by the HDE only had access to our original CardioSEAL® device. The CARS IDE will provide continued PFO
closure access to certain patients who previously were eligible for treatment under the HDE. However, while patients in the CLOSURE I trial receive the implant at no cost, those covered under the CARS IDE can be charged for the device. We anticipate
a shift of some recurrent stroke patients with PFOs to the CARS IDE from the original HDE because patients will have access to the newer STARFlex® technology. At this time it is difficult
to determine the impact on product revenue in the U.S. as a result of the transition from paid-for HDE devices to the paid-for devices under CARS. We believe the CARS IDE is a significant competitive achievement for us and is necessary to
accommodate the growing demand for more advanced PFO/stroke treatments.

OUR MANUFACTURING OPERATIONS AND RELATED PRODUCT SALES MAY BE ADVERSELY
AFFECTED BY A REDUCTION OR INTERRUPTION IN SUPPLY AND AN INABILITY TO OR DELAYS IN DEVELOPING ALTERNATIVE SOURCES OF SUPPLY.

We procure
certain components from a sole supplier in connection with the manufacture of some of our products. While we work closely with our suppliers to try to ensure continuity of supply while maintaining high quality and reliability, we cannot guarantee
that those efforts will continue to be successful. In addition, due to the stringent regulations and requirements of governmental regulatory bodies, both in the U.S. and abroad, regarding the manufacture of our products, we may not be able to move
quickly enough to establish alternative sources for these components. A reduction or interruption in supply, and an inability to develop alternative sources for such supply, would adversely affect our ability to manufacture our products in a timely
and cost effective manner and, accordingly, could potentially negatively impact our related product sales.

WE MAY FACE CHALLENGES IN EXECUTING OUR
FOCUSED BUSINESS STRATEGY.

As a result of the 2001 sale of our vena cava filter
product line and the 2002 sale of our neurosciences business unit, we have focused our business growth strategy to concentrate on the developing, manufacturing, marketing and selling of our cardiac septal repair implant devices used for structural
heart repair. Our future sales growth and financial results depend almost exclusively upon the growth of sales of this product line. CardioSEAL®, STARFlex® and BioSTAR®product sales may not grow as quickly as we expect for various reasons, including, but not limited
to, delays in receiving further FDA approvals for additional indications and product enhancements, difficulties in recruiting additional experienced sales and marketing personnel and increased competition. This focus has placed significant demands
on our senior management team and other resources. Our future success will depend on our ability to manage and implement our focused business strategy effectively, including:



| |  |  | achieving successful stroke-related clinical trials;
| | - |  | ----------------------------------------------------



| |  |  | developing next generation product lines;
| | - |  | -----------------------------------------



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| |  |  | improving our sales and marketing capabilities;
| | - |  | -----------------------------------------------



| |  |  | improving our ability to successfully manage inventory as we expand production;
| | - |  | -------------------------------------------------------------------------------



| |  |  | continuing to train, motivate and manage our employees; and
| | - |  | -----------------------------------------------------------



| |  |  | developing and improving our operational, financial and other internal systems.
| | - |  | -------------------------------------------------------------------------------

WE MAY NEED TO RAISE DEBT OR EQUITY FUNDS IN THE FUTURE.

In the future, considering our anticipated
significant spending on clinical trials, we may require additional funds for our research and product development programs, regulatory processes, preclinical and clinical testing, sales, marketing and manufacturing infrastructure and programs and
potential licenses and acquisitions. On October 19, 2006, we announced that we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration statement will permit us to offer and sell up to $65 million of equity or debt
securities. Any additional equity financing may be dilutive to our stockholders, and additional debt financing, if available, may involve restrictive covenants. Our capital requirements will depend on numerous factors, including the level of sales
of our products, the progress of our 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 our existing research, licensing and other relationships and the terms of any collaborative, licensing and other similar arrangements
that we may establish. We do not currently have any existing line of credit arrangements, and we may not be able to obtain any such credit facilities on acceptable terms, if at all.

WE MAY FACE UNCERTAINTIES WITH RESPECT TO THE EXECUTION, COST AND ULTIMATE OUTCOME OF MIST.

In November 2004, we received approval to initiate our MIST clinical study in the United Kingdom.
This study was designed to evaluate the effectiveness of structural heart repair (transcatheter closure of a PFO) in the treatment and prevention of migraine headaches. Patient enrollment was completed in early July 2005, with follow-up evaluations
over a six-month period. Preliminary results of MIST, which we released on March 13, 2006, found that over 60% of those screened had a right to left shunt. A shunt is a heart defect, which allows blood to cross from the right to left chambers
of the heart, bypassing the lungs. Of those patients, almost 40% had a moderate or large PFO, six times greater than the general population. MIST results also indicated that approximately 42% of the patients treated with our STARFlex® technology had a reduction in migraine headache days of at least 50%. The total costs of MIST, including third-party contracts, agreements with clinical sites and other service providers, were
approximately $4.9 million. While the results of MIST represented proof of concept and a statistically significant treatment effect, we cannot be certain of the market acceptance of PFO closure as a treatment for certain migraine patients in Europe.
Patients enrolled in MIST have an opportunity to consent to be treated and/or monitored as part of a follow-up study (MIST III). Results of the MIST study were published online on March 3, 2008 in the peer-reviewed journal, Circulation.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS.

Our success will depend, in part, on our ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights
of third parties. We cannot be certain that:



| |  |  | any of our pending patent applications or any future patent applications will result in issued patents;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the scope of our patent protection will exclude competitors or provide competitive advantages to us;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | any of our patents will be held valid if subsequently challenged; or
| | - |  | --------------------------------------------------------------------



| |  |  | others will not claim rights in or ownership of the patents and other proprietary rights held by us.
| | - |  | ----------------------------------------------------------------------------------------------------



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Furthermore, we cannot be certain that others have not or will not develop similar products, duplicate
any of our products or design around any patents issued, or that may be issued, in the future to us or to our licensors. Whether or not patents are issued to us or to our licensors, others may hold or receive patents which contain claims having a
scope that covers products developed by us. We could incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by third parties. In addition, we may be required to obtain licenses
to patents or proprietary rights from third parties. There can be no assurance that such licenses will be available on acceptable terms, if at all.

Our issued U.S. patents, and corresponding foreign patents, expire at various dates ranging from 2008 to 2025. When each of our patents expires, competitors may develop and sell products based on the same or similar technologies as those
covered by the expired patent. We have invested in significant new patent applications, and we cannot be certain that any of these applications will result in an issued patent to enhance our intellectual property rights.

WE RELY ON A SMALL GROUP OF SENIOR EXECUTIVES, AND INTENSE INDUSTRY COMPETITION FOR QUALIFIED EMPLOYEES COULD AFFECT OUR ABILITY TO ATTRACT AND RETAIN NECESSARY,
QUALIFIED PERSONNEL.

We rely on a small group of senior executives and in the medical device field, there is intense competition for
qualified personnel, such that we cannot be assured that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. Both the loss of the services of existing personnel, as well as the
failure to recruit additional qualified scientific, technical and managerial personnel in a timely manner, would be detrimental to our anticipated growth and expansion into areas and activities requiring additional expertise. The failure to attract
and retain such personnel could adversely affect our business.

ROYALTY INCOME WILL DECREASE.

For the year ended December 31, 2007, net royalty income increased approximately 15% compared to the period ended December 31, 2006. Net royalty
revenues for the period ended December 31, 2006, included $500,000 related to the AGA settlement and the issuance of a sublicense to AGA. This increase has been directly attributable to higher sales by Bard of its RNF product, for which Bard
received FDA approval for commercial sales and use as of December 31, 2002. We cannot be certain that the recent trend of Bards RNF sales can be sustained or even maintained at its current level. Furthermore, these sales levels could
fluctuate on a quarter-to-quarter basis. We have incurred virtually no operating expenses, other than royalties paid, related to our net royalty income and, therefore, future increases or decreases, if any, in the level of Bards RNF sales
could have a material effect on net income (loss) in future periods. Beginning in 2008, the royalty rate we receive from Bard will decrease substantially from its current rate, while the royalty rate we pay to the estate of the original inventor of
these products will remain the same. This will result in a net royalty expense that will be reflected in general and administrative expenses.

OUR
LIMITED MANUFACTURING HISTORY AND THE POSSIBILITY OF NON-COMPLIANCE WITH MANUFACTURING REGULATIONS RAISE UNCERTAINTIES WITH RESPECT TO OUR ABILITY TO COMMERCIALIZE FUTURE PRODUCTS.

We have a limited history in manufacturing our products, including our CardioSEAL®, STARFlex® and BioSTAR® structural heart repair implants, and we may face
difficulties as the commercialization of our products and the medical device industry changes. Increases in our manufacturing costs, or significant delays in our manufacturing process, could have a material adverse effect on our business.

The FDA and other regulatory authorities require that our products be manufactured according to rigorous standards including, but not
limited to, Good Manufacturing Practices and International Standards Organization, or ISO, standards. These regulatory requirements may significantly increase our production or purchasing costs



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and may even prevent us from making or obtaining our products in amounts sufficient to meet market demand. If we or a third-party manufacturer change our
approved manufacturing process, the FDA will require a new approval before that process could be used. Failure to develop our manufacturing capabilities may mean that, even if we develop promising new products, we may not be able to produce them
profitably, as a result of delays and additional capital investment costs.

WE MAY BE UNABLE TO SUCCESSFULLY GROW OUR PRODUCT REVENUES OR EXPAND
GEOGRAPHICALLY DUE TO LIMITED MARKETING AND SALES EXPERIENCE.

Our structural
heart repair implant devices are marketed primarily through our direct sales force. Since 2001, we have increased our combined U.S. and European sales and marketing organization headcount from 9 to 31. Because we had marketed our initial products,
such as stents and vena cava filters, through third parties, we have limited experience marketing our products directly. We are uncertain that we can furthur expand geographically in Europe or other potential markets for our products. In order to
market directly the CardioSEAL®, STARFlex® and BioSTAR® septal
implants and any related products, we will have to continue to develop a marketing and sales organization with technical expertise and distribution capabilities.

WE MAY BE UNABLE TO COMPETE SUCCESSFULLY BECAUSE OF INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY.

The
medical device industry is characterized by rapidly evolving technology and intense competition. Existing and future products, therapies, technological approaches and delivery systems will continue to compete directly with our products. Many of our
competitors have substantially greater capital resources, greater research and development, manufacturing and marketing resources and experience and greater name recognition than we do. In addition, new surgical procedures and medications could be
developed that replace or reduce the importance of current or future procedures that utilize our products. As a result, any products that we develop may become obsolete before we recover any expenses incurred in connection with development of these
products.

AN ADVERSE OUTCOME IN ANY LITIGATION WE ARE CURRENTLY INVOLVED IN COULD AFFECT OUR FINANCIAL CONDITION.

We are currently involved in litigation as described in Part I, Item 3 (Legal Proceedings). An adverse outcome involving this matter could result in
substantial monetary damages and/or negatively impact our ability to use intellectual property and, therefore, negatively impact our business.

PRODUCT
LIABILITY CLAIMS, PRODUCT RECALLS AND UNINSURED OR UNDERINSURED LIABILITIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

The
testing, marketing and sale of implantable devices and materials carry an inherent risk that users will assert product liability claims against us or our third-party distributors. In these claims, users might allege that their use of our devices had
adverse effects on their health. A product liability claim or a product recall could have a material adverse effect on our business. Certain of our devices are designed to be used in life-threatening situations where there is a high risk of serious
injury or death. Although we currently maintain limited product liability insurance coverage, we cannot be certain that in the future we will be able to maintain such coverage on acceptable terms, or that current insurance or insurance subsequently
obtained will provide adequate coverage against any or all potential claims. Furthermore, we cannot be certain that we will avoid significant product liability claims and the attendant adverse publicity. Any product liability claim, or other claim,
with respect to uninsured or underinsured liabilities could have a material adverse effect on our business.

OUR EXPANDING EUROPEAN OPERATIONS EXPOSE US
TO RISK INHERENT IN FOREIGN OPERATIONS.

As we increase our presence in Europe
and Canada following the receipt of a CE Mark (Europe) and HPB approval (Canada) for our BioSTAR® technology, the impact of foreign currency fluctuations on our revenue and expenses could
have an adverse impact on our worldwide profitability.



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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal executive offices are located at 27 Wormwood Street, Boston,
Massachusetts 02210-1625. We lease approximately 35,000 square feet of manufacturing, laboratory and administrative space at this facility, under leases that expire in September 2010, with one 5-year renewal option thereafter. The renewal option is
subject to acceptance by the landlord.

ITEM 3. LEGAL PROCEEDINGS

We are a party to the following legal proceeding that could have a material
adverse impact on our results of operations or liquidity if there were an adverse outcome. Although we intend to pursue our rights in this matter vigorously, we cannot predict the ultimate outcome.

In September 2004, we and the Childrens Medical Center Corporation, or CMCC, filed a civil complaint in the U.S. District Court for the District of
Minnesota, or the District Court, for infringement of a patent owned by CMCC and licensed exclusively to us. The complaint alleges that Cardia, Inc., or Cardia, of Burnsville, Minnesota is making, selling and/or offering to sell a medical device in
the United States that infringes CMCCs U.S. patent relating to a device and method for repairing septal defects. We sought an injunction from the District Court to prevent further infringement by Cardia, as well as monetary damages. On
August 30, 2006, the District Court entered an order holding that Cardias device does not infringe the patent-in-suit. The order has no effect on the validity and enforceability of the patent-in-suit and has no impact on our ability to
sell our products. We appealed the ruling to the U.S. Court of Appeals for the Federal Circuit and on June 6, 2007 the Federal Circuit ruled that the District Court incorrectly interpreted one of the patents claims and incorrectly found
no triable issue of fact concerning other claims. The Federal Circuit remanded the case to the District Court for further proceedings consistent with its opinion and instructed that on remand the district court may reconsider the question of summary
judgment for us and CMCC based on the Federal Circuits claim construction. On November 8, 2007, the District Court granted summary judgment in our and CMCCs favor, ruling that Cardias device infringes the patent-in-suit and
striking all of Cardias invalidity defenses. A trial on issues relating to the monetary damages suffered by us and CMCC is now scheduled to commence during the second quarter of 2008.

We resolved the following legal proceeding in 2006.

On March 22, 1999, we filed a patent infringement suit in the United States District Court for the District of Massachusetts, or the Massachusetts Court, against AGA alleging that AGA was infringing U.S. Patent No. 5,108,420, or
the 420 patent, relating to aperture occlusion devices, to which we have an exclusive license. We sought an injunction from the Massachusetts Court to prevent further infringement by AGA, as well as monetary damages. On April 12, 1999,
AGA served its answer and counterclaims denying liability and alleging that we had engaged in false or misleading advertising and in unfair or deceptive business practices. AGAs counterclaims sought an injunction and an unspecified amount of
damages. On May 3, 1999, we answered AGAs counterclaims by denying liability. On April 25, 2001, the Massachusetts Court granted our motion to stay all proceedings in this matter pending reexamination of the 420 patent by the
United States Patent and Trademark Office and, on December 2, 2003, the Massachusetts Court dismissed our claim and AGAs counterclaim without prejudice to our ability to refile suit after the conclusion of the reexamination proceedings.
Although a Patent Office examiner initially rejected the claims of the 420 patent, on August 19, 2004, the Board of Patent Appeals and Interferences reversed the examiners rejection of the claims of the 420 patent and returned
the reexamination for action consistent with its decision. On January 26, 2005, the Patent Office mailed a Notice of Intent to Issue a Reexamination Certificate. This reexamination certificate was issued on June 7, 2005. On
October 13, 2004, AGA initiated a declaratory action in the United States District Court for the District



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of Minnesota seeking a declaration that the 420 patent is invalid, unenforceable, and not infringed. On December 7, 2004, we revived our original
Massachusetts action by filing a complaint alleging that AGA is infringing the 420 patent. On September 1, 2005, AGAs declaratory judgment action in the United States District Court for the District of Minnesota was transferred to
the District of Massachusetts. On October 13, 2005, we answered AGAs complaint in its declaratory judgment action, denying AGAs claims. On November 2, 2005, we filed an amended complaint adding the inventor of the 420
patent as a plaintiff. On November 3, 2005, AGA answered our amended complaint, denying liability and counterclaiming that the 420 patent is invalid, unenforceable, and not infringed. On November 17, 2005, we answered AGAs
counterclaims by denying them.

On March 24, 2006, we entered into a Settlement and Mutual General Release Agreement with AGA. AGA
agreed to make a cash payment of $30.0 million and was granted a nonexclusive sublicense to the patent involved in the litigation. On April 12, 2006, we received the entire cash payment from the settlement totaling $30.0 million which was
shared equally, after deduction of our legal fees and expenses, with the inventor of the patent, Dr. Lloyd Marks. All parties agreed to have the case dismissed with prejudice and also agreed to a general release of any and all claims.

Other than as described above, we have no material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of
security holders during the fourth quarter of the year ended December 31, 2007.



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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the NASDAQ Global Market under the symbol NMTI. There were approximately 100 stockholders of record of our common stock on March 5, 2008, representing approximately 6,000
shareholder accounts. The following table lists the high and low closing sales prices for our common stock for the periods indicated.



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|Period         |  | High |       | Low
|2006           |  |      |       |     |   |      
|First quarter  |  | $    | 25.76 |     | $ | 13.29
|Second quarter |  |      | 15.62 |     |   | 9.22 
|Third quarter  |  |      | 16.35 |     |   | 9.93 
|Fourth quarter |  |      | 16.15 |     |   | 13.53
|               |  |     
|2007           |  |      |       |     |   |      
|First quarter  |  | $    | 14.91 |     | $ | 12.20
|Second quarter |  |      | 16.00 |     |   | 11.02
|Third quarter  |  |      | 12.00 |     |   | 7.37 
|Fourth quarter |  |      | 7.64  |     |   | 4.86 

We did not declare or pay any cash dividends on shares of our common stock during the years ended
December 31, 2007 and 2006 and do not anticipate declaring or paying cash dividends in the foreseeable future. We currently expect that we will retain any earnings for use in our business.

Information relating to the compensation plans under which our equity securities are authorized for issuance is set forth under Equity
Compensation Plan Information in our definitive proxy statement for our 2008 Annual Meeting of Stockholders.



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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data for each of the five
years in the period ended December 31, 2007 were derived from our audited consolidated financial statements. The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by our
audited consolidated financial statements and related notes thereto found at Item 8, Financial Statements and Supplementary Data and Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations which are included elsewhere in this Annual Report on Form 10-K.



|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------------- | - | ------ |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                  |  | 2007                                  |         |   | 2006            |   | 2005   |  |   | 2004   |   |  | 2003 |       
|                                                                  |  | (In thousands, except per share data) |        
|STATEMENT OF OPERATIONS DATA:                                     |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Revenues:                                                         |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Product sales                                                     |  | $                                     | 19,855  |   |                 | $ | 22,135 |  | $ | 19,313 |   |  | $    | 17,279 |   |  | $ | 21,574 |  
|Net royalty income                                                |  |                                       | 6,900   |   |                 |   | 6,016  |  |   | 4,603  |   |  |      | 4,181  |   |  |   | 1,387  |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Total revenues                                                    |  |                                       | 26,755  |   |                 |   | 28,151 |  |   | 23,916 |   |  |      | 21,460 |   |  |   | 22,961 |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Costs and expenses:                                               |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Cost of product sales                                             |  |                                       | 5,409   |   |                 |   | 5,938  |  |   | 5,470  |   |  |      | 4,514  |   |  |   | 5,303  |  
|Research and development                                          |  |                                       | 15,407  |   |                 |   | 15,455 |  |   | 12,746 |   |  |      | 8,045  |   |  |   | 6,340  |  
|General and administrative                                        |  |                                       | 7,988   |   |                 |   | 8,681  |  |   | 7,982  |   |  |      | 6,024  |   |  |   | 6,167  |  
|Selling and marketing                                             |  |                                       | 9,093   |   |                 |   | 8,704  |  |   | 6,340  |   |  |      | 5,542  |   |  |   | 5,614  |  
|Settlement of litigation                                          |  |                                       |        |   |                 |   |       |  |   |       |   |  |      |       |   |  |   | 1,216  |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Total costs and expenses                                          |  |                                       | 37,897  |   |                 |   | 38,778 |  |   | 32,538 |   |  |      | 24,125 |   |  |   | 24,640 |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Net gain from settlement of litigation                            |  |                                       |        |   |                 |   | 15,184 |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income from operations                                     |  |                                       | (11,142 | ) |                 |   | 4,557  |  |   | (8,622 | ) |  |      | (2,665 | ) |  |   | (1,679 | )
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Other income (expense):                                           |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Currency transaction gain (loss)                                  |  |                                       | 88      |   |                 |   | 15     |  |   | (122   | ) |  |      | 92     |   |  |   | 81     |  
|Interest expense                                                  |  |                                       |        |   |                 |   |       |  |   |       |   |  |      | (2     | ) |  |   | (5     | )
|Interest income                                                   |  |                                       | 1,830   |   |                 |   | 1,816  |  |   | 861    |   |  |      | 543    |   |  |   | 558    |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Total other income, net                                           |  |                                       | 1,918   |   |                 |   | 1,831  |  |   | 739    |   |  |      | 633    |   |  |   | 634    |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income before income taxes                                 |  |                                       | (9,224  | ) |                 |   | 6,388  |  |   | (7,883 | ) |  |      | (2,032 | ) |  |   | (1,045 | )
|Income tax (benefit) provision                                    |  |                                       | (122    | ) |                 |   | 502    |  |   |       |   |  |      |       |   |  |   | 105    |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income from continuing operations                          |  |                                       | (9,102  | ) |                 |   | 5,886  |  |   | (7,883 | ) |  |      | (2,032 | ) |  |   | (1,150 | )
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Gain from discontinued operations                                 |  |                                       |        |   |                 |   |       |  |   | 91     |   |  |      | 123    |   |  |   |       |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Net (loss) income                                                 |  | $                                     | (9,102  | ) |                 | $ | 5,886  |  | $ | (7,792 | ) |  | $    | (1,909 | ) |  | $ | (1,150 | )
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Basic net (loss) earnings per common share:                       |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Continuing operations                                             |  | $                                     | (0.70   | ) |                 | $ | 0.46   |  | $ | (0.64  | ) |  | $    | (0.17  | ) |  | $ | (0.10  | )
|Discontinued operations                                           |  |                                       |        |   |                 |   |       |  |   | 0.01   |   |  |      | 0.01   |   |  |   |       |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Net (loss) income                                                 |  | $                                     | (0.70   | ) |                 | $ | 0.46   |  | $ | (0.63  | ) |  | $    | (0.16  | ) |  | $ | (0.10  | )
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted net (loss) earnings per common share:                     |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Continuing operations                                             |  | $                                     | (0.70   | ) |                 | $ | 0.43   |  | $ | (0.64  | ) |  | $    | (0.17  | ) |  | $ | (0.10  | )
|Discontinued operations                                           |  |                                       |        |   |                 |   |       |  |   | 0.01   |   |  |      | 0.01   |   |  |   |       |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Net (loss) income                                                 |  | $                                     | (0.70   | ) |                 | $ | 0.43   |  | $ | (0.63  | ) |  | $    | (0.16  | ) |  | $ | (0.10  | )
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average common shares outstanding:                       |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Basic                                                             |  |                                       | 12,926  |   |                 |   | 12,746 |  |   | 12,332 |   |  |      | 12,031 |   |  |   | 11,808 |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted                                                           |  |                                       | 12,926  |   |                 |   | 13,597 |  |   | 12,332 |   |  |      | 12,031 |   |  |   | 11,808 |  
|                                                                  |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                  |  |                                      
|                                                                  |  |                                       |         |   | At December 31, |  
|                                                                  |  | 2007                                  |         |   | 2006            |   | 2005   |  |   | 2004   |   |  | 2003 |       
|                                                                  |  |                                       |         |   | (In thousands)  |  
|BALANCE SHEET DATA:                                               |  |                                       |         |   |                 |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Cash, cash equivalents, marketable securities and restricted cash |  | $                                     | 30,974  |   |                 | $ | 41,450 |  | $ | 31,506 |   |  | $    | 35,380 |   |  | $ | 36,725 |  
|Working capital                                                   |  |                                       | 30,822  |   |                 |   | 38,860 |  |   | 30,515 |   |  |      | 36,052 |   |  |   | 37,396 |  
|Total assets                                                      |  |                                       | 40,603  |   |                 |   | 51,183 |  |   | 40,490 |   |  |      | 43,364 |   |  |   | 44,122 |  
|Long-term liabilities                                             |  |                                       | 352     |   |                 |   |       |  |   |       |   |  |      |       |   |  |   |       |  
|Stockholders equity                                              |  |                                       | 31,573  |   |                 |   | 39,899 |  |   | 31,320 |   |  |      | 36,872 |   |  |   | 38,236 |  



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The following table presents our unaudited consolidated statements of operations data for each quarter in
the two years ended December 31, 2007. The information for each of these quarters is unaudited, but has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. We
believe that all necessary adjustments, consisting only of normal recurring adjustments, have been made to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and the notes
thereto appearing elsewhere in this document. These operating results are not necessarily indicative of the results of operations that may be expected for any future period.



|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|------------------------------------------------ |  | ------------------------------------------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | ----------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | - |  | - | ------
|                                                 |  | For The Three Months Ended                       
|                                                 |  | DEC. 312007                                       |        |   | SEP. 302007 |   |        | JUN. 302007 |  |   | MAR. 312007 |   |  | DEC. 312006 |        |   | SEP. 302006 |   |        | JUN. 302006 |  |   | MAR. 312006
|                                                 |  | (In thousands, except per share data (unaudited))
|STATEMENT OFOPERATIONS DATA:                     |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Revenues:                                        |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Product sales                                    |  | $                                                 | 5,264  |   |             | $ | 4,553  |             |  | $ | 4,922       |   |  | $           | 5,116  |   |             | $ | 5,838  |             |  | $ | 5,314       |   |  | $ | 5,284  |   |  | $ | 5,700 
|Net royalty income                               |  |                                                   | 1,777  |   |             |   | 1,855  |             |  |   | 1,550       |   |  |             | 1,718  |   |             |   | 1,370  |             |  |   | 1,597       |   |  |   | 1,817  |   |  |   | 1,232 
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Total revenues                                   |  |                                                   | 7,041  |   |             |   | 6,408  |             |  |   | 6,472       |   |  |             | 6,834  |   |             |   | 7,208  |             |  |   | 6,911       |   |  |   | 7,101  |   |  |   | 6,932 
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Costs and Expenses:                              |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Cost of product sales                            |  |                                                   | 1,504  |   |             |   | 1,317  |             |  |   | 1,359       |   |  |             | 1,230  |   |             |   | 1,602  |             |  |   | 1,454       |   |  |   | 1,407  |   |  |   | 1,475 
|Research and development                         |  |                                                   | 4,187  |   |             |   | 4,614  |             |  |   | 4,091       |   |  |             | 2,514  |   |             |   | 4,405  |             |  |   | 3,484       |   |  |   | 3,736  |   |  |   | 3,830 
|General and administrative                       |  |                                                   | 1,987  |   |             |   | 2,102  |             |  |   | 1,886       |   |  |             | 2,013  |   |             |   | 2,569  |             |  |   | 1,873       |   |  |   | 2,014  |   |  |   | 2,224 
|Selling and marketing                            |  |                                                   | 2,578  |   |             |   | 2,163  |             |  |   | 2,305       |   |  |             | 2,047  |   |             |   | 2,418  |             |  |   | 1,920       |   |  |   | 2,293  |   |  |   | 2,074 
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Total costs and expenses                         |  |                                                   | 10,256 |   |             |   | 10,196 |             |  |   | 9,641       |   |  |             | 7,804  |   |             |   | 10,994 |             |  |   | 8,731       |   |  |   | 9,450  |   |  |   | 9,603 
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Net gain from settlement of litigation           |  |                                                   |       |   |             |   |       |             |  |   |            |   |  |             |       |   |             |   |       |             |  |   |            |   |  |   | (25    | ) |  |   | 15,209
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|(Loss) income from operations                    |  |                                                   | (3,215 | ) |             |   | (3,788 | )           |  |   | (3,169      | ) |  |             | (970   | ) |             |   | (3,786 | )           |  |   | (1,820      | ) |  |   | (2,374 | ) |  |   | 12,538
|Total other income, net                          |  |                                                   | 425    |   |             |   | 477    |             |  |   | 458         |   |  |             | 558    |   |             |   | 559    |             |  |   | 491         |   |  |   | 495    |   |  |   | 285   
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|(Loss) income from operationsbefore income taxes |  |                                                   | (2,790 | ) |             |   | (3,311 | )           |  |   | (2,711      | ) |  |             | (412   | ) |             |   | (3,227 | )           |  |   | (1,329      | ) |  |   | (1,879 | ) |  |   | 12,823
|Income tax provision (benefit) (1)               |  |                                                   | 140    |   |             |   | (111   | )           |  |   | (75         | ) |  |             | (76    | ) |             |   | 452    |             |  |   | 50          |   |  |   |       |   |  |   |      
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Net (loss) income                                |  |                                                   | (2,930 | ) |             |   | (3,200 | )           |  |   | (2,636      | ) |  |             | (336   | ) |             |   | (3,679 | )           |  |   | (1,379      | ) |  |   | (1,879 | ) |  |   | 12,823
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Basic earnings per common share:                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Net (loss) income                                |  | $                                                 | (0.23  | ) |             | $ | (0.25  | )           |  | $ | (0.20       | ) |  | $           | (0.03  | ) |             | $ | (0.29  | )           |  | $ | (0.11       | ) |  | $ | (0.15  | ) |  | $ | 1.02  
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Diluted earnings per common share:               |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Net (loss) income                                |  | $                                                 | (0.23  | ) |             | $ | (0.25  | )           |  | $ | (0.20       | ) |  | $           | (0.03  | ) |             | $ | (0.29  | )           |  | $ | (0.11       | ) |  | $ | (0.15  | ) |  | $ | 0.93  
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Weighted average commonshares outstanding:       |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Basic                                            |  |                                                   | 12,926 |   |             |   | 12,943 |             |  |   | 12,916      |   |  |             | 12,873 |   |             |   | 12,858 |             |  |   | 12,777      |   |  |   | 12,718 |   |  |   | 12,626
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       
|Diluted                                          |  |                                                   | 12,926 |   |             |   | 12,943 |             |  |   | 12,916      |   |  |             | 12,873 |   |             |   | 12,858 |             |  |   | 12,777      |   |  |   | 12,718 |   |  |   | 13,747
|                                                 |  |                                                   |        |   |             |   |        |             |  |   |             |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |       



|(1) | The provision for income taxes in the quarter ended December 31, 2007 reflects an increase in liabilities for unrecognized tax benefits during the quarter, primarily due to the
impact of the closure of a foreign tax audit and our evaluation of whether, and the extent to which, additional tax will be due.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Our managements
discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors
that could cause our actual results to differ materially from those indicated. See Item 1A, Risk Factors.

OVERVIEW

We are an advanced medical technology company that designs, develops, manufactures and markets proprietary implant technologies that allow interventional
cardiologists to treat certain kinds of cardiac structural heart disease through minimally invasive, catheter-based procedures. We are investigating the potential connection between a common cardiac defect that allows a right to left shunt or flow
of blood through a defect like a patent foramen ovale, or PFO, and brain attacks such as embolic stroke, transient ischemic attacks, or TIA and migraine headaches. A common right to left shunt can allow venous blood, unfiltered and unmanaged by the
lungs, to directly enter the arterial circulation of the brain, possibly triggering a cerebral event or brain attack. In utero, the PFO is an opening in the arterial wall that allows the mothers oxygenated blood to support the fetus. At birth,
or usually by age one, the PFO completely closes, preventing venous blood and arterial blood from mixing. We believe that up to 25% of the population has a PFO that does not fully seal and most will never even know that they have this defect.

In 2001, we began divesting certain non-strategic assets in order to focus on this
emerging PFO market opportunity utilizing our proprietary implant technologies. These divestitures included the November 2001 sale of our vena cava filter product line to Bard and the July 2002 sale of our neurosciences business unit to Integra. Net
cash proceeds from these sales transactions of approximately $33.8 million, the related net royalty income from Bard that commenced in 2003 and the on-going business operations have provided us with the financial and operational flexibility to
aggressively pursue this emerging market opportunity with our CardioSEAL®, STARFlex® and BioSTAR® implants, clinical research studies and development of next generation catheter-based implant technologies. More than 27,000 PFOs have been closed globally using our CardioSEAL®, STARFlex® and BioSTAR® implant technologies. We are currently conducting PFO-closure related
clinical research trials, focusing on PFO/stroke and PFO/migraine.

2007 Revenues

Our 2007 revenues were predominantly derived from sales of our CardioSEAL®, STARFlex® and BioSTAR® products in the U.S. and Europe and net royalties
earned from Bard. CardioSEAL®, STARFlex® and BioSTAR® product sales
decreased by approximately 10% from 2006 to 2007 primarily in the United States. We believe that sales in the United States continue to be impacted by delays in third party payors in approving reimbursement for the procedure as a result of the
voluntary withdrawal of the Humanitarian Device Exemption, or HDE, for our CardioSEAL® septal repair system. We believe that a combination of increased market awareness of PFO closure and
our proprietary closure technology and targeted marketing efforts has resulted in the addition of new customers, predominantly in Europe. In 2008 we currently expect an approximate 20% increase in worldwide product sales when compared to 2007.
Beginning in 2008, the royalty rate we receive from Bard will decrease substantially from its current rate, while the royalty rate we pay to the estate of the original inventor of these products will remain the same. This will result in a net
royalty expense that will be reflected in general and administrative expenses.

We ended 2007 with approximately $31.0 million in cash,
cash equivalents and marketable securities, providing us with what we believe is the financial strength and flexibility to complete our clinical research initiatives and to continue to invest in additional research and development programs,
regulatory activities and commercial sales efforts, including planned headcount and territory expansion in Europe.



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PFO/Stroke

Stroke is the third leading cause of death in the United States and the leading cause of disability
in adults. Each year, approximately 750,000 Americans suffer a new or recurrent stroke and 500,000 Americans experience a TIA. In 2003, we launched the CLOSURE I clinical trial to compare our STARFlex® cardiac septal repair implant with current medical therapy in stroke prevention. CLOSURE I was initially a 1,600 patient, prospective, randomized, multi-center trial, for which we received complete IDE approval from
the FDA in June 2003. On March 2, 2007, we participated in a public and private FDA advisory panel meeting to discuss the current status of the ongoing PFO/stroke trials being sponsored by us and other companies. At the close of the meeting,
both the FDA and advisory panel concurred that only randomized, controlled trials would provide the necessary data to be considered for premarket approval, or PMA, for devices intended for transcatheter PFO closure in the stroke and TIA indication.
During a private session, we provided the FDA and advisory panel with a revised study hypothesis and statistical plan to complete the CLOSURE I study as a randomized controlled trial. On April 23, 2007, we announced that we received conditional
approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Subsequent to this meeting, a review of the revised plan and a look at the interim data was performed by the Data
Safety Monitoring Board. Based on these analyses, the conditional probability of a statistically significant benefit will require an enrollment of 900 patients. Enrollment is expected to be completed during the second quarter of 2008.

We currently expect that total costs for CLOSURE I will be approximately $22 to $24 million through completion of the trial and submission to the FDA. Of
this total, approximately $17.4 million was incurred through 2007, and we currently project 2008 costs to be approximately $3.0 million.

PFO/Migraine

The prevalence of migraines in the United States is estimated to be slightly less than 10% of the general population or roughly
28 million individuals. We estimate that 20% of all migraine sufferers, or 6 million individuals, have the classic form of migraine, sometimes referred to as migraine with aura. It has also been reported that 50% of these patients do not
satisfactorily respond to current approved forms of medication. Furthermore, data as reported at the Transcatheter Cardiovascular Therapeutic symposium, or TCT, meeting in October 2005 indicated that 60% of the patient subset in our MIST trial had a
right to left shunt. That is twice what would be expected in the general population.

In 2005, we completed enrollment in our MIST study in
the United Kingdom. Total costs for MIST were $4.9 million. Study enrollment was completed in July 2005 and results were presented at the American College of Cardiology meeting on March 13, 2006. Results of the MIST study were published online
on March 3, 2008 in the peer-reviewed journal, Circulation.

In October
2005, we received approval from the regulatory authorities in the United Kingdom to begin enrollment in MIST III. In MIST III, control patients from the original MIST study, those who did not receive the STARFlex® implant, have the option to receive an implant after they have been unblinded as part of the MIST study. These patients will follow the identical protocol as in MIST after which they will be followed for an
additional 18 months. In addition, migraine patients with a PFO who did receive a STARFlex® implant in MIST will be followed for an additional 18 months. We currently estimate the cost of
MIST III to be approximately $1.0 million, of which approximately $900,000 was incurred through 2007.

BioSTAR® and BioTREK

In November 2005, we completed
enrollment in our BEST study, which commenced in July 2005 following regulatory approval in the United Kingdom. This study evaluated our new bioabsorbable, biological closure technology designed to promote a more natural, rapid and complete sealing
of heart defects such as PFO. Approximately 60 patients were enrolled in the BEST study and were followed for six months. Data was



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published in the October 2006 edition of Circulation and was presented at the 2006 Transcatheter Cardiovascular Therapeutics 18thAnnual Scientific Symposium. The study was designed to gain commercial approval for BioSTAR®
through the CE Mark process which was granted in June 2007.

In January 2006, we
announced that we received a Phase I grant from the National Institute of Healths, or NIH, Small Business Technology Transfer Program to initiate a research program to evaluate our advanced septal repair implant called BioTREK, a bioabsorbable, biological closure technology. We believe that the biomaterials in the BioSTAR® and BioTREK implants,
whether used alone or in combination, further complement our current CardioSEAL® and STARFlex® closure technology, providing us
with an exceptionally promising and well-protected technology pipeline.

CRITICAL ACCOUNTING POLICIES

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In preparing our
consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our results of operations and the valuation of certain assets and liabilities on our balance sheet. These estimates, assumptions
and judgments about future events and their effects on our results of operations cannot be made with certainty, and are made based on our experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates
may change as new events occur or as additional information is obtained. While there are a number of accounting policies, methods and estimates affecting our financial statements described in Note 2 of Notes to Consolidated Financial Statements, our
most critical accounting policies, described below, include: (i) revenue recognition; (ii) accounts receivable reserves; (iii) inventories; (iv) expenses associated with clinical trials, and (v) share-based compensation. A
critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make subjective or complex judgments that could have a material effect on our financial condition and results of operations.
Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed
materially from actual results.

Revenue Recognition

We recognize revenue in accordance with Securities and Exchange Commission (SEC), Staff Accounting Bulletin No. 104, or SAB 104, Revenue Recognition in Financial Statements. SAB 104 requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title has transferred to the customer; (3) the fee is fixed and determinable; and
(4) collection is reasonably assured. We use judgment concerning the satisfaction of these criteria, particularly with respect to collectibility. Should changes in conditions cause us to determine that these criteria are not met for certain
future transactions, revenue recognized for any reporting period could be adversely affected.

We require receipt of purchase orders from
our customers for our products. Prior to fulfillment of a customer order, we review that customers account history and outstanding balances to determine if we believe that collectibility of the order value is reasonably assured. We recognize
product revenues upon shipment unless customer purchase orders specifically designate that title to the products transfers upon receipt. Products sold to distributors, which accounted for approximately 1% of our product sales in 2007, are not
subject to a right of return for unsold product.

We recognize royalty income as it is earned in accordance with relevant contract
provisions. Where applicable, we report royalty income in our financial statements net of corresponding royalty obligations to third parties.

Accounts
Receivable Reserves

We provide allowances for doubtful accounts based on estimates of losses related to customer receivable balances.
In establishing these allowances, we make assumptions with respect to the future collectibility of our



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receivable balances. Our assumptions are based on an individual assessment of a customers credit quality, primarily its payment history, as well as
subjective factors and trends, including the aging of receivable balances, the positive or negative effects of the current and projected industry outlook and the economy in general. Once we consider all of these factors, we determine the probability
of customer default, the appropriateness of our current reserve balance and the need to record a charge or credit to operating expense to increase or decrease our reserve level. The amount of the reserve level for our customer accounts receivable
fluctuates depending upon all of these factors. If our assumptions are incorrect, or if the financial condition of certain of our customers were to deteriorate, we may need to make additional allowances. The amount of the allowance at
December 31, 2007 and 2006 was $60,000 and $82,468 respectively.

We also maintain a provision for estimated sales returns and
allowances on product sales. We base these estimates on our assessment of historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to estimate accounts receivable or sales returns do not properly
reflect future returns, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be adversely affected. The amount of the allowance at December 31, 2007 and 2006 was
$101,341 and $200,000 respectively.

Inventories

In accordance with Financial Accounting Standards Board (FASB) Statement No. 151,
Inventory Costs, an amendment of ARB, No. 43, Chapter 4, or SFAS 151, abnormal amounts of idle facility expenses should be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of production be based on the normal capacity of the production facilities. Management judgment will be required in the determination of a range of normal capacity levels, which will directly affect the allocation of fixed
manufacturing overhead costs between inventory costs and period expense. Based upon increased inventory levels in 2004, primarily the result of lower than expected CLOSURE I enrollment and the effects of stricter adherence to HDE guidelines
regarding off-label usage, we scaled back our 2005 implant device production below normalized capacity levels. The resulting excess idle capacity costs charged directly to cost of product sales as period costs during 2005 totaled approximately
$800,000. Inventory levels at the end of 2007 and 2006 increased approximately 9% and 11%, respectively as we prepared sufficient inventory to meet the anticipated demand for our BioSTAR®
product. In 2006 and 2007, production levels approximated normal capacity levels and no idle capacity costs were charged to cost of product sales.

In addition, as a manufacturer of medical devices, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. In such an event,
we would need to take a charge against earnings upon making such a determination. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in
products and prices, reliability and replacement of and the availability of key components from our suppliers.

Our policy is to establish
inventory reserves when we believe that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value
of our inventory based on a combination of factors, including usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. The assumptions we use in determining our
estimates of future product demand may prove to be incorrect; in which case any provision required for excess or obsolete inventory would have to be adjusted. If we determine that our inventory is overvalued, we would be required to recognize such
costs as cost of product sales at the time of that determination and such recognition could have a significant impact on our reported operating results. When recorded, our reserves are intended to reduce the carrying value of our inventory to its
net realizable value.



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Expenses Associated With Clinical Trials

We have invested significant resources in several clinical trials designed to investigate the
potential connection between a PFO and brain attacks such as, strokes, TIAs and migraine headaches. We completed enrollment in July 2005 for MIST in the United Kingdom. In October 2005, we announced approval of MIST III. Our CLOSURE I trial,
commenced in 2003, is an FDA-approved IDE study in the U.S. to evaluate the safety and efficacy of the STARFlex® closure technology to prevent a recurrent embolic stroke and/or TIA in
patients with a PFO. In November 2005, we completed enrollment in the BEST study. Total expenses for all of our clinical trials were approximately $6.0 million, $8.2 million and $7.5 million for the years ended December 31, 2007, 2006 and
2005, respectively.

Our judgment is required in determining methodologies used to
recognize various costs related to our clinical trials. We generally enter into contracts with vendors who render services over an extended period of time. Typically, we enter into three types of vendor contracts (i) time-based,
(ii) patient-based, or (iii) a combination thereof. Under a time-based contract, using critical factors contained within the contract, usually the stated duration of the contract and the timing of services provided, we record the
contractual expense for each service provided under the contract ratably over the period during which we estimate the service will be performed. Under a patient-based contract, we first determine an appropriate per patient cost using critical
factors contained within the contract, which include the estimated number of patients and the total dollar value of the contract. We then record the expense based upon the total number of patients enrolled and/or monitored during the period. On a
quarterly basis, we review both the timetable of services to be rendered and the timing of services actually rendered. Based upon this review, revisions may be made to the forecasted timetable or to the extent of services performed, or both, in
order to reflect our most current estimate of the contract. Adjustments are recorded in the period in which the revisions are estimable. These adjustments could have a material effect on our results of operations. Additional STARFlex® and BioSTAR® products manufactured to accommodate the expected requirements of our clinical trials are included in inventory because
they are saleable units with alternative use outside of the trials. These units will be expensed as a cost of the trials as they are implanted. Substantially all expenses related to our clinical trials are included in research and development in our
consolidated statements of operations.

Share-Based Compensation

We adopted the provisions of FASB No. 123R, Share-Based Payment, or SFAS 123R, beginning January 1, 2006, using a modified prospective transition method. SFAS 123R requires us to measure the
cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements
for periods prior to the date of adoption are not adjusted for the change in accounting. However, compensation expense is recognized for (i) all share-based payments granted after the effective date under SFAS 123R, and (ii) all awards
granted under SFAS 123R to employees prior to the effective date that remain unvested on the effective date. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period. We use the
Black-Scholes option-pricing model to estimate fair value of share-based awards. The fair value of our share-based awards are dependent on the assumptions we use for expected life (in years), the expected stock price volatility, the expected
dividend yield and the risk free interest rate.

Prior to January 1, 2006, we used the intrinsic value method to account for
share-based employee compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and therefore did not recognize compensation expense in association with options granted at or above the
market price of our common stock at the date of grant.



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Comparison of Years ended December 31, 2007, 2006 and 2005

The following two tables present consolidated statements of operations information as a reference for managements discussion which follows. The
first table presents dollar and percentage changes for each listed line item for 2007 compared with 2006 and for 2006 compared with 2005. The second table presents consolidated statements of operations information for each of the three years in the
period ended December 31, 2007 as a percentage of total revenues (except for cost of product sales, which is stated as a percentage of product sales).



|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|---------------------------------------- |  | ---------------------------------- | ------- | - | ------------------- | - | ------ | -------- | - | ------------ | - |  | ------------ | ------- | - | ------------ | - | ------ | ------------ |  | ------ | -- |  | ------ | --
|                                         |  | Years Ended December 31,           |         |   | Increase (Decrease) |   |        | % Change |  
|                                         |  | 2007                               |         |   | 2006                |   | 2005   |          |   | 2006 to 2007 |   |  | 2005 to 2006 |         |   | 2006 to 2007 |   |        | 2005 to 2006 | 
|                                         |  | (In thousands, except percentages) |        
|Revenues:                                |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Product sales                            |  | $                                  | 19,855  |   |                     | $ | 22,135 |          | $ | 19,313       |   |  | $            | (2,280  | ) |              | $ | 2,822  |              |  | (10.3  | )% |  | 14.6   | % 
|Net royalty income                       |  |                                    | 6,900   |   |                     |   | 6,016  |          |   | 4,603        |   |  |              | 884     |   |              | $ | 1,413  |              |  | 14.7   | %  |  | 30.7   | % 
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Total revenues                           |  |                                    | 26,755  |   |                     |   | 28,151 |          |   | 23,916       |   |  |              | (1,396  | ) |              |   | 4,235  |              |  | (5.0   | )% |  | 17.7   | % 
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Costs and expenses:                      |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Cost of product sales                    |  |                                    | 5,409   |   |                     |   | 5,938  |          |   | 5,470        |   |  |              | (529    | ) |              |   | 468    |              |  | (8.9   | )% |  | 8.6    | % 
|Research and development                 |  |                                    | 15,407  |   |                     |   | 15,455 |          |   | 12,746       |   |  |              | (48     | ) |              |   | 2,709  |              |  | (0.3   | )% |  | 21.3   | % 
|General and administrative               |  |                                    | 7,988   |   |                     |   | 8,681  |          |   | 7,982        |   |  |              | (693    | ) |              |   | 699    |              |  | (8.0   | )% |  | 8.8    | % 
|Selling and marketing                    |  |                                    | 9,093   |   |                     |   | 8,704  |          |   | 6,340        |   |  |              | 389     |   |              |   | 2,364  |              |  | 4.5    | %  |  | 37.3   | % 
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Total costs and expenses                 |  |                                    | 37,897  |   |                     |   | 38,778 |          |   | 32,538       |   |  |              | (881    | ) |              |   | 6,240  |              |  | (2.3   | )% |  | 19.2   | % 
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Net gain from settlement of litigation   |  |                                    |        |   |                     |   | 15,184 |          |   |             |   |  |              | (15,184 | ) |              |   | 15,184 |              |  | (100.0 | )% |  |       |   
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|(Loss) income from operations            |  |                                    | (11,142 | ) |                     |   | 4,557  |          |   | (8,622       | ) |  |              | (15,699 | ) |              |   | 13,179 |              |  | (344.5 | )% |  |       |   
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Other income (expense):                  |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Currency transaction gain (loss)         |  |                                    | 88      |   |                     |   | 15     |          |   | (122         | ) |  |              | 73      |   |              |   | 137    |              |  | 486.7  | %  |  |       |   
|Interest income                          |  |                                    | 1,830   |   |                     |   | 1,816  |          |   | 861          |   |  |              | 14      |   |              |   | 955    |              |  | 0.8    | %  |  | 110.9  | % 
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Total other income, net                  |  |                                    | 1,918   |   |                     |   | 1,831  |          |   | 739          |   |  |              | 87      |   |              |   | 1,092  |              |  | 4.8    | %  |  | 147.8  | % 
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|(Loss) income before income taxes        |  |                                    | (9,224  | ) |                     |   | 6,388  |          |   | (7,883       | ) |  |              | (15,612 | ) |              |   | 14,271 |              |  |       |    |  |       |   
|Income tax (benefit) provision           |  |                                    | (122    | ) |                     |   | 502    |          |   |             |   |  |              | (624    | ) |              |   | 502    |              |  |       |    |  |       |   
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|(Loss) income from continuing operations |  |                                    | (9,102  | ) |                     |   | 5,886  |          |   | (7,883       | ) |  |              | (14,988 | ) |              |   | 13,769 |              |  |       |    |  |       |   
|Income from discontinued operations      |  |                                    |        |   |                     |   |       |          |   | 91           |   |  |              |        |   |              |   | (91    | )            |  |       |    |  | (100.0 | )%
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   
|Net (loss) income                        |  | $                                  | (9,102  | ) |                     | $ | 5,886  |          | $ | (7,792       | ) |  | $            | (14,988 | ) |              | $ | 13,678 |              |  |       |    |  |       |   
|                                         |  |                                    |         |   |                     |   |        |          |   |              |   |  |              |         |   |              |   |        |              |  |        |    |  |        |   



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|                                         |  |                          |    |  |       |   |  |       |   
|---------------------------------------- |  | ------------------------ | -- |  | ----- | - |  | ----- | --
|                                         |  | Years Ended December 31, |   
|                                         |  | 2007                     |    |  | 2006  |   |  | 2005  |   
|Revenues:                                |  |                          |    |  |       |   |  |       |   
|Product sales                            |  | 74.2                     | %  |  | 78.6  | % |  | 80.8  | % 
|Net royalty income                       |  | 25.8                     | %  |  | 21.4  | % |  | 19.2  | % 
|                                         |  |                          |    |  |       |   |  |       |   
|Total revenues                           |  | 100.0                    | %  |  | 100.0 | % |  | 100.0 | % 
|                                         |  |                          |    |  |       |   |  |       |   
|Costs and expenses:                      |  |                          |    |  |       |   |  |       |   
|Cost of product sales                    |  | 27.2                     | %  |  | 26.8  | % |  | 28.3  | % 
|Research and development                 |  | 57.6                     | %  |  | 54.9  | % |  | 53.3  | % 
|General and administrative               |  | 29.9                     | %  |  | 30.8  | % |  | 33.4  | % 
|Selling and marketing                    |  | 34.0                     | %  |  | 30.9  | % |  | 26.5  | % 
|Total costs and expenses                 |  | 141.6                    | %  |  | 137.7 | % |  | 136.1 | % 
|                                         |  |                          |    |  |       |   |  |       |   
|Net gain from settlement of litigation   |  |                         |    |  | 53.9  | % |  |      |   
|(Loss) income from operations            |  | (41.6                    | )% |  | 16.2  | % |  | (36.1 | )%
|Other income (expense):                  |  |                          |    |  |       |   |  |       |   
|Currency transaction gain (loss)         |  | 0.3                      | %  |  | 0.1   | % |  | (0.5  | )%
|Interest income                          |  | 6.8                      | %  |  | 6.5   | % |  | 3.6   | % 
|                                         |  |                          |    |  |       |   |  |       |   
|Total other income, net                  |  | 7.2                      | %  |  | 6.5   | % |  | 3.1   | % 
|                                         |  |                          |    |  |       |   |  |       |   
|(Loss) income before income taxes        |  | (34.5                    | )% |  | 22.7  | % |  | (33.0 | )%
|                                         |  |                          |   
|Income tax (benefit) provision           |  | (0.5                     | )% |  | 1.8   | % |  |      |   
|                                         |  |                          |    |  |       |   |  |       |   
|(Loss) income from continuing operations |  | (34.0                    | )% |  | 20.9  | % |  | (33.0 | )%
|Income from discontinued operations      |  |                         |    |  |      |   |  | 0.4   | % 
|                                         |  |                          |    |  |       |   |  |       |   
|Net (loss) income                        |  | (34.0                    | )% |  | 20.9  | % |  | (32.6 | )%
|                                         |  |                          |    |  |       |   |  |       |   

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2007 COMPARED WITH YEAR ENDED DECEMBER 31, 2006

Revenues. Revenues for the years ended
December 31, 2007 and 2006 were as follows:



|                                     |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|------------------------------------ |  | ---------------------------------- | ------ | ------------------ | - | ------------ | -------- | - | ------------ | - |  | ----- | --
|                                     |  | Years Ended December 31,           |        | Increase(Decrease) |   |              | % Change |  
|                                     |  | 2007                               |        | 2006               |   | 2006 to 2007 |          |   | 2006 to 2007 |  
|                                     |  | (In thousands, except percentages) |       
|Product sales:                       |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|CardioSEAL®, STARFlex®
and BioSTAR®: |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|North America                        |  | $                                  | 14,185 |                    | $ | 19,298       |          | $ | (5,113       | ) |  | (26.5 | )%
|Europe                               |  |                                    | 5,670  |                    |   | 2,837        |          |   | 2,833        |   |  | 99.9  | % 
|                                     |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Total product sales                  |  |                                    | 19,855 |                    |   | 22,135       |          |   | (2,280       | ) |  | (10.3 | )%
|                                     |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Net royalty income:                  |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Bard                                 |  |                                    | 6,849  |                    |   | 5,406        |          |   | 1,443        |   |  | 26.7  | % 
|AGA                                  |  |                                    |       |                    |   | 500          |          |   | (500         | ) |  |      |   
|BSC                                  |  |                                    | 51     |                    |   | 110          |          |   | (59          | ) |  | (53.6 | )%
|                                     |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Total net royalty income             |  |                                    | 6,900  |                    |   | 6,016        |          |   | 884          |   |  | 14.7  | % 
|                                     |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Total revenues                       |  | $                                  | 26,755 |                    | $ | 28,151       |          | $ | (1,396       | ) |  | (5.0  | )%
|                                     |  |                                    |        |                    |   |              |          |   |              |   |  |       |   

The decrease in CardioSEAL® and STARFlex® implant sales for 2007 compared to 2006 was primarily the result of decreased product demand in North America,
primarily in the United States. We believe that sales in the



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United States continue to be impacted by delays by third party payors in approving reimbursement for the procedures as a result of the voluntary withdrawal
of the HDE of our CardioSEAL® septal repair system.

The increase in European sales was primarily related to the launch of BioSTAR®, our bioabsorbable structural heart repair implant technology and our Rapid
Transport delivery system following the awarding of the CE Mark for BioSTAR® in June 2007 and HPB approval in Canada in June
2007. The increase was also attributable to increased sales and marketing programs, as well as greater acceptance of our technology by the clinical community throughout Europe. We believe that as a result of the combination of (i) our MIST
study results and headcount investments in the UK and other planned investments in Europe having increased awareness of the positive treatment effect on severe migraine sufferers with a PFO using our technology along with (ii) the impact of the
June 2007 awarding of the CE Mark for BioSTAR®, our European product sales will continue to increase as a percentage of total sales. European sales represented approximately 28.6% and 12.8%
of total product sales in 2007 and 2006, respectively.

We currently believe that our European product sales will approach 40% of total
product sales. We believe that, given the required regulatory processes in the U.S., sales in North America will remain flat. We currently expect that planned European growth and territory expansion during 2008 will result in significant growth in
European product sales. Additionally, relative weakening or strengthening of the U.S. dollar will have a favorable or unfavorable impact, respectively, on European product sales.

The increase in net royalty income for 2007 was directly attributable to Bards sales of its RNF product. The royalty income from Bard was recorded
net of approximately $2.6 million of royalties payable to the estate of the original inventor of SNF and RNF products. As expected, net royalty income from BSC related to the 1994 exclusive license of our stent technology decreased further from 2006
to 2007. BSC is not prohibited from selling competing stents and has established a broad based stent program. We currently anticipate that future royalties earned from BSC will remain flat or decline compared to 2007 levels. Through 2007, the Bard
royalty rate applicable to RNF product sales was substantially higher than the royalty rate applicable to SNF products. Beginning in 2008, the royalty rate we receive from Bard will decrease substantially from its current rate, while the royalty
rate we pay to the estate of the original inventor of these products will remain the same. This will result in a net royalty expense that will be reflected in general and administrative expenses.

Cost of Product Sales. For the year ended December 31, 2007, cost of product sales, as
a percentage of total product sales, was approximately 27.2% compared with 26.8% for the year ended December 31, 2006. This increase was primarily due to the increased sales in Europe, where the selling price of our product is lower than the
selling price of our products in North America and products costs of BioSTAR® are greater than products sold in the United States. Included in cost of product sales were royalty expenses of
approximately $2.1 million and $2.2 million for the years ended December 31, 2007 and 2006, respectively. In 2008, we anticipate a higher proportion of European sales compared to 2007. As a result, we currently expect 2008 cost of product sales
to increase to approximately 28.5% to 29.0%, as a percentage of product sales.

Research and Development. Research and development
costs were relatively flat for the year ended December 31, 2007 compared to the year ended December 31, 2006. Clinical trial costs in 2007 decreased by $2.2 million with the completion of the MIST, MIST III and BEST trials. This decrease
was offset by a one-time payment of $600,000 to a supplier of our collagen matrix material, increased new product development investments of approximately $400,000 and increased salary and related expenses of approximately $250,000. We currently
expect 2008 research and development expenses to increase to approximately $16.0 million compared to approximately $15.4 million in 2007. This anticipated increase is primarily related to an increase in our new product investments and other
development costs.

General and Administrative. General and administrative expenses decreased approximately $700,000 for the year
ended December 31, 2007 compared to the year ended December 31, 2006. Contributing to this decrease in general and administrative expenses were lower bonus expense of approximately $360,000 and lower share-based compensation expense
pursuant to SFAS 123R of approximately $130,000. General and administrative



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expenses for 2006 also included approximately $150,000 for a 401(k) employer match. For 2008, general and administrative expenses are currently expected to
increase to approximately $10.0 million due primarily to the classification of net royalty expense relating to Bard of approximately $1.5 million.

Selling and Marketing. Selling and marketing costs increased approximately $400,000 for the
year ended December 31, 2007 compared to the year ended December 31, 2006. The increase in selling and marketing expense was primarily the result of an increase in expenses related to the launch of BioSTAR® partially offset by savings spread across many expense categories. We currently expect worldwide selling and marketing expense in 2008 to increase approximately $300,000 compared to 2007 as we continue to increase
our marketing to support the anticipated growth in Europe and Canada.

Net Gain from Settlement of Litigation.On March 24,
2006, we entered into a Settlement and Mutual General Release Agreement with AGA. AGA agreed to make a cash payment of $30.0 million and was granted a nonexclusive sublicense to the patent involved in the litigation. The cash payment was shared
equally, after deduction of our legal fees and expenses, with the inventor of the patent, Dr. Lloyd Marks.

Interest Income.
Interest income was relatively flat for the year ended December 31, 2007 compared to the year ended December 31, 2006. We currently expect interest income to approximate $1.0 million in 2008. This decrease compared to 2007 is primarily
related to the use of approximately $13 to $15 million of cash, cash equivalents, and marketable securities to fund 2008 operations.

Income Tax Provision.We have provided for taxes on income from continuing operations based on our anticipated effective income tax rate. For fiscal 2007 we recorded a benefit from income taxes of $121,879 as a result of the tax
benefit for a portion of the taxes paid in 2006 that is refundable by carryback partially offset by the establishment of a liability for uncertain tax positions. The provision for the year ended December 31, 2006 of $502,000 was as a result of
the $15.2 million gain from the settlement of litigation with AGA and less than forecasted clinical trial expenses. We currently expect to incur operating losses in 2008.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005

Revenues. Revenues for the years ended December 31, 2006 and 2005 were as follows:



|                           |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|-------------------------- |  | ---------------------------------- | ------ | ------------------ | - | ------------ | -------- | - | ------------ | - |  | ----- | --
|                           |  | Years Ended December 31,           |        | Increase(Decrease) |   |              | % Change |  
|                           |  | 2006                               |        | 2005               |   | 2005 to 2006 |          |   | 2005 to 2006 |  
|                           |  | (In thousands, except percentages) |       
|Product sales:             |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|CardioSEAL® and STARFlex®: |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|North America              |  | $                                  | 19,298 |                    | $ | 16,095       |          | $ | 3,203        |   |  | 19.9  | % 
|Europe                     |  |                                    | 2,837  |                    |   | 3,218        |          |   | (381         | ) |  | (11.8 | )%
|                           |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Total product sales        |  |                                    | 22,135 |                    |   | 19,313       |          |   | 2,822        |   |  | 14.6  | % 
|                           |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Net royalty income:        |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Bard                       |  |                                    | 5,406  |                    |   | 4,451        |          |   | 955          |   |  | 21.5  | % 
|AGA                        |  |                                    | 500    |                    |   |             |          |   | 500          |   |  |      |   
|BSC                        |  |                                    | 110    |                    |   | 152          |          |   | (42          | ) |  | (27.6 | )%
|                           |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Total net royalty income   |  |                                    | 6,016  |                    |   | 4,603        |          |   | 1,413        |   |  | 30.7  | % 
|                           |  |                                    |        |                    |   |              |          |   |              |   |  |       |   
|Total revenues             |  | $                                  | 28,151 |                    | $ | 23,916       |          | $ | 4,235        |   |  | 17.7  | % 
|                           |  |                                    |        |                    |   |              |          |   |              |   |  |       |   

The increase in CardioSEAL® and STARFlex® implant sales for 2006 compared to 2005 was primarily the result of increased product demand in the United States and
Canada. We believe that a combination of increased market awareness of PFO closure and targeted marketing efforts has resulted in the addition of new customers.

The decrease in European sales was primarily attributable to increased clinical programs throughout Europe. Given the current relatively small market for structural heart repair procedures, competitive trials may have
impacted



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the total volume of procedures for which product was purchased. Incremental strengthening of the U.S. dollar in 2006 also had a slight unfavorable effect on
2006 European product sales. European sales represented approximately 12.8% and 16.7% of total CardioSEAL® and STARFlex® product
sales in 2006 and 2005, respectively.

The increase in net royalty income for 2006 was directly attributable to Bards sales of its
RNF product. The royalty income from Bard was recorded net of approximately $2.0 million of royalties payable to the estate of the original inventor of SNF and RNF products. As expected, net royalty income from BSC related to the 1994 exclusive
license of our stent technology decreased further from 2005 to 2006. BSC is not prohibited from selling competing stents and has established a broad based stent program.

Cost of Product Sales. For the year ended December 31, 2006, cost of product sales, as a percentage of total product sales, was approximately 26.8% compared with 28.3% for the year ended December 31,
2005. This decrease was primarily due to the increase in production levels to our normalized plant capacity levels. In 2005, we incurred unabsorbed manufacturing overhead costs due to production volumes below our normalized levels. As a result, in
accordance with the provisions of SFAS No. 151, Inventory Costs, a portion of our 2005 fixed manufacturing overhead costs were not absorbed as part of inventory unit costs, but instead were charged to cost of product sales in the
period incurred. With 2006 production levels at normalized plant capacity levels, we did not charge any of our 2006 fixed manufacturing overhead as a period expense. Included in cost of product sales were royalty expenses of approximately $2.2
million and $1.9 million for the years ended December 31, 2006 and 2005, respectively.

Research and Development. The increase
in research and development expense from 2005 to 2006 was primarily related to (i) approximately $1.5 million of increased costs related to MIST II in 2006, for which enrollment began in January 2006; (ii) approximately $1.3 million of
increased costs related to CLOSURE I in 2006; (iii) approximately $1.1 million of increased technology license and product development costs in 2006 related to future generation implant technologies; (iv) increased headcount and related
personnel costs of approximately $831,000 in 2006, of which $188,000 resulted from non-cash share-based compensation expense pursuant to the new accounting rules, effective January 1, 2006, prescribed by SFAS No. 123R and
(v) approximately $750,000 in research and development expenses related to MIST III. These increased research and development expenses were partially offset by (i) decreased costs of our MIST study, which decreased by approximately $2.2
million for the year ended December 31, 2006 compared with the same period of 2005; and (ii) decreased costs of our BEST study of approximately $525,000 from 2005 to 2006.

General and Administrative. General and administrative expenses increased approximately $700,000 for the year ended December 31, 2006
compared to the year ended December 31, 2005. Contributing to the increase were increased personnel and recruitment costs of approximately $350,000. In addition, general and administrative expenses for the year ended December 31, 2006
included $519,000 of non-cash share-based compensation expense pursuant to SFAS 123R. For the year ended December 31, 2005, general and administrative expenses included share-based compensation of approximately $257,000 related to our 2001
stock option re-pricing.

Selling and Marketing. Selling and marketing costs increased approximately $2.4 million for the year ended
December 31, 2006 compared to the year ended December 31, 2005. The increase in selling and marketing expense was primarily the result of an increase in sales incentive compensation and personnel and related costs, primarily in Europe, as
well as incremental costs associated with participation in scientific symposia.

Net Gain from Settlement of Litigation.On
March 24, 2006, we entered into a Settlement and Mutual General Release Agreement with AGA. AGA agreed to make a cash payment of $30.0 million and was granted a nonexclusive sublicense to the patent involved in the litigation. The cash payment
was shared equally, after deduction of our legal fees and expenses, with the inventor of the patent, Dr. Lloyd Marks.

Interest
Income. The increase in interest income of approximately $955,000 for the year ended December 31, 2006 compared to the year ended December 31, 2005 was attributable to higher cash balances during 2006 as a result of our receiving
approximately $15 million from the settlement of the AGA litigation in



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April 2006 as well as higher weighted average interest rates earned due to (i) the increased percentage of marketable securities versus cash and cash
equivalents in 2006 compared to 2005; and (ii) the general trend of increasing short-term interest rates.

Income Tax
Provision. We recorded a tax provision for the year ended December 31, 2006 of $502,000 compared to no tax provision for the year ended December 31, 2005. The provision for the year ended December 31, 2006 was as a result of the
$15.2 million gain from the settlement of litigation with AGA and less than forecasted clinical trial expenses.

LIQUIDITY AND CAPITAL RESOURCES



|                                                                  |  |                                  |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                  |  | For the Years Ended December 31, |        
|                                                                  |  | 2007                             |         |   | 2006 |   |         | 2005 | 
|                                                                  |  | (In thousands)                   |        
|Cash, cash equivalents, marketable securities and restricted cash |  | $                                | 30,974  |   |      | $ | 41,450  |      |  | $ | 31,506 |  
|Net cash (used in) provided by operating activities               |  |                                  | (11,148 | ) |      |   | 8,174   |      |  |   | (5,108 | )
|Net cash provided by (used in) investing activities               |  |                                  | 9,242   |   |      |   | (12,046 | )    |  |   | 4,277  |  
|Net cash provided by financing activities                         |  |                                  | 604     |   |      |   | 1,768   |      |  |   | 1,883  |  

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities for the year ended December 31, 2007 totaled approximately $11.1 million and consisted of a net loss of
approximately $9.1 million. Net loss in 2007 included non-cash charges of approximately $585,000. Working capital requirements also decreased by approximately $2.6 million.

The non-cash charges of approximately $585,000 during the year ended December 31, 2007 consisted of share-based compensation expense
and depreciation of property and equipment, offset partially by accretion of bond discount on marketable debt securities.

The primary
elements of the $2.6 million net decrease in working capital requirements during the year ended December 31, 2007 consisted of a $1.7 million decrease in liabilities related to our clinical trials and a $565,000 decrease in payroll related
liabilities, primarily for bonuses and the contribution to our 401(k) plan.

Net cash provided by operating activities for 2006 totaled
approximately $8.2 million and was comprised of (a) net income of approximately $5.9 million (b) net changes in components of working capital of approximately $1.6 million and (c) various non-cash charges to operations of
approximately $690,000.

Net Cash Provided By (Used in) Investing Activities

Net cash provided by investing activities of approximately $9.2 million during the year ended December 31, 2007 consisted primarily of approximately
$38.1 million of proceeds from maturities of marketable securities, offset by approximately $28.4 million of purchases of marketable securities. Purchases of property and equipment for use in our manufacturing, research and development, and general
and administrative activities totaled approximately $367,000 during the year ended December 31, 2007 compared to approximately $566,000 in 2006. This compared to approximately $12.0 million used in operations in 2006, which consisted
primarily of approximately $49.3 million of purchases of marketable securities offset by approximately $37.9 million of proceeds from maturities of marketable securities.

Net Cash Provided By Financing Activities

Net cash provided by financing activities was
approximately $604,000 for the year ended December 31, 2007 and $1.8 million for the year ended December 31, 2006. For both periods, net cash from financing activities includes proceeds from the exercise of common stock options and the
issuance of shares of common stock pursuant to our employee stock purchase plan. For the year ended December 31, 2006, financing activities also reflected excess tax benefits from share-based compensation of $583,000.



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Primarily as a result of the anticipated ongoing costs of CLOSURE I and other research and product
development programs, we currently expect to incur annual operating losses at least through 2009. The total cost of our CLOSURE I clinical trial is currently estimated to be approximately $22.0 to $24.0 million through completion of the trial and
submission to the FDA. Of this amount, approximately $17.4 million was incurred through 2007 and we currently expect to incur approximately $3.0 million in 2008.

Capital expenditures are projected to total approximately $1.0 million during 2008, primarily for manufacturing and research and development equipment.

We currently believe that aggregate cash, cash equivalents, and marketable securities balances of approximately $31.0 million at December 31, 2007
will be sufficient to meet our working capital, financing and capital expenditure requirements through at least 2009.

We may require
additional funds for our research and product development programs, regulatory processes, preclinical and clinical testing, sales and marketing infrastructure and programs and potential licenses and acquisitions. On October 19, 2006, we filed a
shelf registration statement on Form S-3 with the SEC and that will permit us to offer and sell up to $65 million of equity or debt securities. Any additional equity financing will be dilutive to stockholders, and additional debt financing, if
available, may involve restrictive covenants. Our capital requirements will depend on numerous factors, including the level of sales of our products, the progress of our 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 our
existing research, licensing and other relationships and the terms of any collaborative, licensing and other similar arrangements that we may establish. We do not currently have any line of credit arrangements.

CONTRACTUAL OBLIGATIONS

Clinical Trials

During 2007, we incurred costs for five significant clinical trials at various stages of completion. In connection with these trials, we have entered into
various contractual obligations with third party service providers and the participating clinical sites. Under certain agreements, we have the right to terminate, in which case the remaining obligations would be limited to costs incurred as of that
date. Including the internal costs of our clinical department and the manufacturing costs of products used, the following table provides, by trial, our current estimate of total costs to be incurred, actual cumulative costs through fiscal 2007, our
current estimates of 2008 costs and the remaining costs estimated to be incurred subsequent to 2008. The estimated total costs, as well as the timing and amounts of estimated future costs, are dependent upon a variety of factors, including the
timing of patient enrollment and patient monitoring and, in the case of new clinical trials, the finalization of various third party contracts. Of the total costs incurred through 2007, approximately $2.4 million was included in accrued expenses at
December 31, 2007.



|          |  |                        |  |                                              |             |                          |   |                                 |  |                                      |     |                                              |   |           |  |                 
|--------- |  | ---------------------- |  | -------------------------------------------- | ----------- | ------------------------ | - | ------------------------------- |  | ------------------------------------ | --- | -------------------------------------------- | - | --------- |  | ----------------
|          |  | Inception ofEnrollment |  | CurrentProjectedTotal Costsof Clinical Trial |             | CostsIncurredThrough2007 |   | ProjectedCost To BeIncurred2008 |  | ProjectedCost To BeIncurredAfter2008 |     | Projected TrialCompletion /Regulatory Filing
|          |  |                        |  | (In millions of dollars)                     |             |                         
|CLOSURE I |  | 2003                   |  |                                              | 22.0  24.0 |                          |   | 17.4                            |  |                                      | 3.0 |                                              |   | 1.7  3.7 |  | To be determined
|BEST      |  | 2005                   |  |                                              | 1.4         |                          |   | 1.4                             |  |                                      |    |                                              |   |          |  | Completed       
|MIST      |  | 2005                   |  |                                              | 4.9         |                          |   | 4.9                             |  |                                      |    |                                              |   |          |  | Completed       
|MIST II   |  | 2007                   |  |                                              |            |                          |   | 3.9                             |  |                                      |    |                                              |   |          |  | Not applicable  
|MIST III  |  | 2006                   |  |                                              | 1.0         |                          |   | 0.9                             |  |                                      | 0.1 |                                              |   |          |  | 2008            
|          |  |                        |  |                                              |             |                          |   |                                 |  |                                      |     |                                              |   |           |  |                 
|Totals    |  |                        |  | $                                            | 29.3  31.3 |                          | $ | 28.5                            |  | $                                    | 3.1 |                                              | $ | 1.7  3.7 |  |                 
|          |  |                        |  |                                              |             |                          |   |                                 |  |                                      |     |                                              |   |           |  |                 



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Royalty and License Agreements

We are party to various royalty agreements under which we are obligated to pay royalties:
(i) to CMCC on commercial sales of our CardioSEAL®, STARFlex® and BioSTAR® product sales; (ii) to the estate of the original inventor of certain vena cava filter products on sales of those products by Bard; (iii) to Dr. Lloyd Marks; and (iv) to Organogenesis, Inc. on
sales of BioSTAR®. Royalty expenses in 2007 totaled approximately $5.1 million.

Operating
Leases

Substantially all of our operating leases relate to our Boston, Massachusetts manufacturing, research and development and
administrative offices. The facility leases, which expire in September 2010, include one five-year renewal option, subject to acceptance by the landlord upon exercise by us.

The following table summarizes our estimated minimum future operating lease contractual commitments at December 31, 2007:



|                 |  |                        |           |                   |   |          |  |          |           |              |   |  |  
|---------------- |  | ---------------------- | --------- | ----------------- | - | -------- |  | -------- | --------- | ------------ | - |  | -
|                 |  | Payments Due By Period
|                 |  | Total                  |           | Less ThanOne Year |   | 1-3Years |  | 3-5Years |           | After 5Years
|Operating leases |  | $                      | 2,389,861 |                   | $ | 862,877  |  | $        | 1,526,984 |              |  |  | 
|                 |  |                        |           |                   |   |          |  |          |           |              |   |  |  

OFF-BALANCE SHEET FINANCING

During the year ended December 31, 2007, we have not engaged in any off-balance sheet activities, including the use of structured finance or specific purpose entities.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position 157-2, which defers the effective date of SFAS 157 for
certain nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. We are in the process of evaluating the impact, if any, that SFAS 157 will have on our operating results and financial position.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB No. 115, or SFAS 159. The Statement permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not
made an election under SFAS 159 for any of our presently held financial instruments or certain other items.

In June 2007, the FASB
ratified Emerging Issues Task Force 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities, or EITF 07-3. EITF 07-3 requires nonrefundable advance payments
for research and development goods or services to be deferred and capitalized. Expense is recognized as the services are performed or goods are delivered. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. We are
evaluating the impact of adopting EITF 07-3 and believe there will be no material effect on our financial position, liquidity or results of operations.



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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 revised 2007,
Business Combinations, or SFAS 141R, and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51, or
SFAS 160. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for the Company beginning in the first quarter of fiscal 2009. Early adoption is not permitted. We are evaluating the
impact, if any, SFAS 141R and SFAS 160 will have on our operating results and financial position.

ITEM  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2007
and 2006, we did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under FASB Statement No. 107, Disclosures About Fair Value of
Financial Instruments. Our investments are primarily short-term money market accounts that are carried on our books at cost, which approximates fair market value, and U.S. Government agency and corporate debt instruments that are carried on
our books at amortized cost, increased or decreased by unrealized gains or losses, net of tax, respectively, which amounts are recorded as a component of stockholders equity in our consolidated financial statements. Accordingly, we have no
quantitative information concerning the market risk of participating in such investments.

We are subject to market risk in the form of
interest rate risk and foreign currency risk. Interest rate risk is immaterial to us. We denominate certain product sales and operating expenses in non-U.S. currencies (See Note 2(l) of Notes to Consolidated Financial Statements). Accordingly,
we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time and could have a material adverse impact on our financial condition.

We translate the accounts of our foreign subsidiaries in accordance with SFAS No. 52, Foreign Currency Translation. The functional
currency of our foreign subsidiaries is the U.S. dollar and, accordingly, translation gains and losses are reflected in the consolidated statements of operations. Revenue and expense accounts are translated using the weighted average exchange rate
in effect during the period.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

All financial statements required to be filed under
this Item 8, other than selected quarterly financial data, are filed as Appendix A hereto, are listed under Item 15(a) and are incorporated herein by this reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2007. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed



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by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as
of December 31, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Managements Annual Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a
process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors: and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
and procedures may deteriorate.

We have assessed the effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, we used the criteria set forth by the Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).

Based on our assessment, we believe that, as of December 31, 2007, our internal control over financial reporting was effective at a reasonable
assurance level based on these criteria.

Deloitte & Touche LLP, the independent registered public accounting firm that audited
our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. That report appears on page 42 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of NMT Medical, Inc.

Boston, Massachusetts

We
have audited the internal control over financial reporting of NMT Medical, Inc. and subsidiaries (the Company) as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal
control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2007 of the Company and our report dated March 11, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the adoption of
Financial Accounting Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes an Interpretation of Financial Accounting Standards Board Statement No. 109.

/s/    DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 11, 2008



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ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to our
directors and executive officers required under this item is incorporated by reference to the information set forth under the section entitled Election of Directors in our proxy statement for our 2008 Annual Meeting of
Stockholders to be held on June 18, 2008. Information relating to certain filings of Forms 3, 4 and 5 is contained in our 2008 proxy statement under the section entitled Section 16(a) Beneficial Ownership Reporting
Compliance and is incorporated herein by reference.

The information required under this item relating to an Audit Committee
financial expert and identification of the Audit Committee of our Board of Directors is contained in our 2008 proxy statement under the caption Corporate Governanceand is incorporated herein by reference.

We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics is posted on our website. We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics on our
website which is located at www.nmtmedical.com.

ITEM 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated by reference to
the sections entitled Executive Compensation, Director Compensationand Compensation Committee Interlocks and Insider Participation in our 2008 proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information required under this item is incorporated by reference to the section entitled Stock Ownership of Certain Beneficial Owners and Managementand Equity Compensation Plan
Informationin our 2008 proxy statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information required under this item is incorporated by reference to the section entitled Certain Transactionsin our 2008 proxy statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required under this item is incorporated
by reference to the section entitled Independent Registered Public Accounting Firmin our 2008 proxy statement.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Consolidated Financial Statements. The following
documents are filed as Appendix A hereto and are included as part of this Annual Report on Form 10-K:

Financial Statements of NMT Medical,
Inc. and Subsidiaries:

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets at December 31, 2007 and 2006

Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005

Notes to Consolidated Financial Statements

(b) Exhibits. The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such exhibits, and are incorporated herein by this reference. We have identified in the Exhibit Index each
management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(b) of Form 10-K.

(c) Financial Statement Schedules. We are not filing any financial statement schedules as part of this Annual Report on Form 10-K because such schedules are either not applicable or the required information is included in the financial
statements or notes thereto.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



NMT MEDICAL, INC.By:

/s/    JOHN E. AHERNJohn E. Ahern President and Chief Executive Officer


Dated: March 12, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.



|                                                   |  |                                                                                                   |  |               
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|SIGNATURE                                          |  | TITLE                                                                                             |  | DATE          
|                                                   |  |                                                                                                  
|/s/    JOHN E.
AHERN John E. Ahern                 |  | President, Chief Executive Officer and Director (Principal Executive Officer)                     |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    RICHARD E.
DAVIS Richard E. Davis           |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    JAMES J. MAHONEY,
JR. James J. Mahoney, Jr. |  | Chairman of the Board                                                                             |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    CHERYL L.
CLARKSON Cheryl L. Clarkson       |  | Director                                                                                          |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    DANIEL F.
HANLEY Daniel F. Hanley, M.D.     |  | Director                                                                                          |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    JAMES E.
LOCK James E. Lock, M.D.           |  | Director                                                                                          |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    FRANCIS J.
MARTIN Francis J. Martin         |  | Director                                                                                          |  | March 12, 2008
|                                                   |  |                                                                                                  
|/s/    DAVID L.
WEST David L. West, Ph.D., M.P.H.  |  | Director                                                                                          |  | March 12, 2008



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Appendix A

NMT MEDICAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |    
|---------------------------------------------------------------------------------------------------- |  | ---
|Reports of Independent Registered Public Accounting Firms                                            |  | A-2
|                                                                                                     | 
|Consolidated Balance Sheets at December 31, 2007 and 2006                                            |  | A-4
|                                                                                                     | 
|Consolidated Statements of Operations for the Years ended December 31, 2007, 2006 and 2005           |  | A-5
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity for the Years ended December 31, 2007, 2006 and 2005 |  | A-6
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years ended December 31, 2007, 2006 and 2005           |  | A-7
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | A-8



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##### Table of Contents

R
EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of NMT Medical, Inc.

Boston, Massachusetts

We have audited the accompanying consolidated balance sheet of NMT Medical, Inc. and subsidiaries (the Company) as of December 31, 2007,
and the related consolidated statements of operations, stockholders equity, and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on the financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of NMT Medical, Inc. and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an Interpretation of Financial Accounting Standards Board Statement No. 109.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 11, 2008 expressed an unqualified opinion on the Companys internal control over financial reporting.

/s/    DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 11, 2008



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of NMT Medical, Inc.:

We have audited the accompanying consolidated balance sheet of NMT Medical, Inc. (a Delaware corporation) as of December 31, 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for
each of the two years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NMT Medical, Inc. as of December 31, 2006, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.

As discussed in Note 10 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payments using the modified-prospective transition method.

/s/    ERNST & YOUNG LLP

Boston, Massachusetts

March 9, 2007



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##### Table of Contents

N
MT Medical, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                               |  |                     |             |   |                     |   |             |  
|------------------------------------------------------------------------------ |  | ------------------- | ----------- | - | ------------------- | - | ----------- | -
|                                                                               |  | At December 31,2007 |             |   | At December 31,2006 |  
|Assets                                                                         |  |                     |             |   |                     |   |             |  
|Current assets:                                                                |  |                     |             |   |                     |   |             |  
|Cash and cash equivalents                                                      |  | $                   | 6,984,383   |   |                     | $ | 8,285,561   |  
|Marketable securities                                                          |  |                     | 23,989,995  |   |                     |   | 33,163,998  |  
|Accounts receivable, net of allowances of $161,341 in 2007 and $282,468in 2006 |  |                     | 3,046,308   |   |                     |   | 2,729,188   |  
|Inventories                                                                    |  |                     | 2,071,534   |   |                     |   | 1,909,236   |  
|Prepaid expenses and other current assets                                      |  |                     | 3,407,084   |   |                     |   | 4,055,627   |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Total current assets                                                           |  |                     | 39,499,304  |   |                     |   | 50,143,610  |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Property and equipment, at cost:                                               |  |                     |             |   |                     |   |             |  
|Laboratory and computer equipment                                              |  |                     | 3,393,215   |   |                     |   | 3,830,430   |  
|Leasehold improvements                                                         |  |                     | 1,302,649   |   |                     |   | 1,307,563   |  
|Office furniture and equipment                                                 |  |                     | 583,038     |   |                     |   | 1,028,397   |  
|                                                                               |  |                     |             |   |                     |   |             |  
|                                                                               |  |                     | 5,278,902   |   |                     |   | 6,166,390   |  
|Less accumulated depreciation and amortization                                 |  |                     | 4,175,357   |   |                     |   | 5,127,063   |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Total property and equipment, net                                              |  |                     | 1,103,545   |   |                     |   | 1,039,327   |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Total Assets                                                                   |  | $                   | 40,602,849  |   |                     | $ | 51,182,937  |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Liabilities and Stockholders Equity                                           |  |                     |             |   |                     |   |             |  
|Current liabilities:                                                           |  |                     |             |   |                     |   |             |  
|Accounts payable                                                               |  | $                   | 2,456,316   |   |                     | $ | 2,284,347   |  
|Accrued expenses                                                               |  |                     | 6,221,427   |   |                     |   | 8,999,151   |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Total current liabilities                                                      |  |                     | 8,677,743   |   |                     |   | 11,283,498  |  
|                                                                               |  |                     |             |   |                     |   |             |  
|                                                                               |  |                    
|Long-term liabilities                                                          |  | $                   | 352,185     |   |                     | $ |            |  
|                                                                               |  |                    
|Commitments and contingencies (Notes 7 and 15)                                 |  |                     |             |   |                     |   |             |  
|                                                                               |  |                    
|Stockholders equity:                                                          |  |                     |             |   |                     |   |             |  
|Preferred stock, $.001 par value                                               |  |                     |             |   |                     |   |             |  
|Authorized3,000,000 shares                                                    |  |                     |             |   |                     |   |             |  
|Issued and outstandingnone                                                    |  |                     |            |   |                     |   |            |  
|Common stock, $.001 par value                                                  |  |                     |             |   |                     |   |             |  
|Authorized30,000,000 shares                                                   |  |                     |             |   |                     |   |             |  
|Issued13,012,142 shares in 2007 and 12,901,310shares in 2006                  |  |                     | 13,012      |   |                     |   | 12,901      |  
|Additional paid-in capital                                                     |  |                     | 51,645,489  |   |                     |   | 50,870,411  |  
|Treasury stock40,000 shares at cost                                           |  |                     | (119,600    | ) |                     |   | (119,600    | )
|Accumulated deficit                                                            |  |                     | (19,969,853 | ) |                     |   | (10,867,401 | )
|Accumulated other comprehensive income                                         |  |                     | 3,873       |   |                     |   | 3,128       |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Total stockholders equity                                                     |  |                     | 31,572,921  |   |                     |   | 39,899,439  |  
|                                                                               |  |                     |             |   |                     |   |             |  
|Total Liabilities and Stockholders Equity                                     |  | $                   | 40,602,849  |   |                     | $ | 51,182,937  |  
|                                                                               |  |                     |             |   |                     |   |             |  

See accompanying notes.



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|--------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ---------- |  | - | ---------- | -
|                                              |  | For the Year Ended December 31, |            
|                                              |  | 2007                            |             |   | 2006 |   | 2005       | 
|Revenues:                                     |  |                                 |             |   |      |   |            |  |   |            |  
|Product sales                                 |  | $                               | 19,854,658  |   |      | $ | 22,135,286 |  | $ | 19,313,103 |  
|Net royalty income                            |  |                                 | 6,900,467   |   |      |   | 6,016,044  |  |   | 4,603,058  |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Total revenues                                |  |                                 | 26,755,125  |   |      |   | 28,151,330 |  |   | 23,916,161 |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Costs and expenses:                           |  |                                 |             |   |      |   |            |  |   |            |  
|Cost of product sales                         |  |                                 | 5,409,180   |   |      |   | 5,938,575  |  |   | 5,469,722  |  
|Research and development                      |  |                                 | 15,407,153  |   |      |   | 15,454,948 |  |   | 12,745,721 |  
|General and administrative                    |  |                                 | 7,987,917   |   |      |   | 8,680,671  |  |   | 7,982,670  |  
|Selling and marketing                         |  |                                 | 9,093,349   |   |      |   | 8,703,728  |  |   | 6,340,085  |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Total costs and expenses                      |  |                                 | 37,897,599  |   |      |   | 38,777,922 |  |   | 32,538,198 |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Net gain from settlement of litigation        |  |                                 |            |   |      |   | 15,183,894 |  |   |           |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|(Loss) income from operations                 |  |                                 | (11,142,474 | ) |      |   | 4,557,302  |  |   | (8,622,037 | )
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Other income (expense):                       |  |                                 |             |   |      |   |            |  |   |            |  
|Currency transaction gain (loss)              |  |                                 | 87,952      |   |      |   | 14,468     |  |   | (122,387   | )
|Interest income                               |  |                                 | 1,830,191   |   |      |   | 1,816,239  |  |   | 861,481    |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Total other income, net                       |  |                                 | 1,918,143   |   |      |   | 1,830,707  |  |   | 739,094    |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|(Loss) income before income taxes             |  |                                 | (9,224,331  | ) |      |   | 6,388,009  |  |   | (7,882,943 | )
|Income tax (benefit) provision                |  |                                 | (121,879    | ) |      |   | 502,000    |  |   |           |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|(Loss) income from continuing operations      |  |                                 | (9,102,452  | ) |      |   | 5,886,009  |  |   | (7,882,943 | )
|Income from discontinued operations           |  |                                 |            |   |      |   |           |  |   | 90,687     |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Net (loss) income                             |  | $                               | (9,102,452  | ) |      | $ | 5,886,009  |  | $ | (7,792,256 | )
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Basic net (loss) earnings per common share:   |  |                                 |             |   |      |   |            |  |   |            |  
|Continuing operations                         |  | $                               | (0.70       | ) |      | $ | 0.46       |  | $ | (0.64      | )
|Discontinued operations                       |  |                                 |            |   |      |   |           |  |   | 0.01       |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Net (loss) income                             |  | $                               | (0.70       | ) |      | $ | 0.46       |  | $ | (0.63      | )
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Diluted net (loss) earnings per common share: |  |                                 |             |   |      |   |            |  |   |            |  
|Continuing operations                         |  | $                               | (0.70       | ) |      | $ | 0.43       |  | $ | (0.64      | )
|Discontinued operations                       |  |                                 |            |   |      |   |           |  |   | 0.01       |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Net (loss) income                             |  | $                               | (0.70       | ) |      | $ | 0.43       |  | $ | (0.63      | )
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Weighted average common shares outstanding:   |  |                                 |             |   |      |   |            |  |   |            |  
|Basic                                         |  |                                 | 12,926,020  |   |      |   | 12,745,601 |  |   | 12,332,001 |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  
|Diluted                                       |  |                                 | 12,926,020  |   |      |   | 13,597,080 |  |   | 12,332,001 |  
|                                              |  |                                 |             |   |      |   |            |  |   |            |  

See accompanying notes.



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Stockholders Equity



|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | --------------- |  | --------------- | ------ | ------------------------- | -------------- | ---------- | --------------- |  | ------- | ---- |  | - | ------------------ | - |  | ------------------------------------------- | ----------- | - | ------------------------ | - | -------- | -------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | Common Stock    |  |                 |        |                           | Treasury Stock |            |                 |  |         |      |  |   |                    |   |  |                                             |             |  
|                                                            |  | Number ofShares |  | $0.001 PerValue |        | AdditionalPaid-in Capital |                |            | Number ofShares |  |         | Cost |  |   | AccumulatedDeficit |   |  | Accumulated OtherComprehensiveIncome (Loss) |             |   | TotalStockholdersEquity |   |          | ComprehensiveIncome (Loss) | 
|Balance, January 1, 2005                                    |  | 12,176,183      |  |                 | 12,176 |                           |                | 46,093,075 |                 |  | (40,000 | )    |  |   | (119,600           | ) |  |                                             | (8,961,154  | ) |                          |   | (152,596 | )                          |  |   | 36,871,901 |   |  | $ |           |  
|Common stock issued under the employee stock purchase plan  |  | 49,332          |  |                 | 49     |                           |                | 222,037    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 222,086    |   |  |   |           |  
|Exercise of common stock options and warrants               |  | 410,317         |  |                 | 411    |                           |                | 1,660,478  |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 1,660,889  |   |  |   |           |  
|Share-based compensation                                    |  |                |  |                 |       |                           |                | 257,188    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 257,188    |   |  |   |           |  
|Unrealized gain on marketable securities                    |  |                |  |                 |       |                           |                |           |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   | 99,762   |                            |  |   | 99,762     |   |  |   | 99,762     |  
|Net loss                                                    |  |                |  |                 |       |                           |                |           |                 |  |        |      |  |   |                   |   |  |                                             | (7,792,256  | ) |                          |   |         |                            |  |   | (7,792,256 | ) |  |   | (7,792,256 | )
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|Net comprehensive loss                                      |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  | $ | (7,692,494 | )
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|Balance, December 31, 2005                                  |  | 12,635,832      |  | $               | 12,636 |                           | $              | 48,232,778 |                 |  | (40,000 | )    |  | $ | (119,600           | ) |  | $                                           | (16,753,410 | ) |                          | $ | (52,834  | )                          |  | $ | 31,319,570 |   |  |   |            |  
|Common stock issued under the employee stock purchase plan  |  | 29,806          |  |                 | 29     |                           |                | 332,595    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 332,624    |   |  |   |           |  
|Exercise of common stock options                            |  | 235,672         |  |                 | 236    |                           |                | 851,809    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 852,045    |   |  |   |           |  
|Share-based compensation                                    |  |                |  |                 |       |                           |                | 870,229    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 870,229    |   |  |   |           |  
|Unrealized gain on marketable securities                    |  |                |  |                 |       |                           |                |           |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   | 55,962   |                            |  |   | 55,962     |   |  |   | 55,962     |  
|Tax benefit on stock option exercises                       |  |                |  |                 |       |                           |                | 583,000    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 583,000    |   |  |   |           |  
|Net income                                                  |  |                |  |                 |       |                           |                |           |                 |  |        |      |  |   |                   |   |  |                                             | 5,886,009   |   |                          |   |         |                            |  |   | 5,886,009  |   |  |   | 5,886,009  |  
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|Net comprehensive income                                    |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  | $ | 5,941,971  |  
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|Balance, December 31, 2006                                  |  | 12,901,310      |  | $               | 12,901 |                           | $              | 50,870,411 |                 |  | (40,000 | )    |  | $ | (119,600           | ) |  | $                                           | (10,867,401 | ) |                          | $ | 3,128    |                            |  | $ | 39,899,439 |   |  |   |            |  
|Common stock issued under the employee stock purchase plan  |  | 35,808          |  |                 | 36     |                           |                | 307,314    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 307,350    |   |  |   |           |  
|Exercise of common stock options                            |  | 75,024          |  |                 | 75     |                           |                | 296,958    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 297,033    |   |  |   |           |  
|Share-based compensation                                    |  |                |  |                 |       |                           |                | 716,846    |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | 716,846    |   |  |   |           |  
|Unrealized gain on marketable securities                    |  |                |  |                 |       |                           |                |           |                 |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   | 745      |                            |  |   | 745        |   |  |   | 745        |  
|Change in estimated tax benefit from stock option exercises |  |                |  |                 |       |                           |                | (546,040   | )               |  |        |      |  |   |                   |   |  |                                             |            |   |                          |   |         |                            |  |   | (546,040   | ) |  |   |           |  
|Net loss                                                    |  |                |  |                 |       |                           |                |           |                 |  |        |      |  |   |                   |   |  |                                             | (9,102,452  | ) |                          |   |         |                            |  |   | (9,102,452 | ) |  |   | (9,102,452 | )
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|Net comprehensive income                                    |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  | $ | (9,101,707 | )
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  
|Balance, December 31, 2007                                  |  | 13,012,142      |  | $               | 13,012 |                           | $              | 51,645,489 |                 |  | (40,000 | )    |  | $ | (119,600           | ) |  | $                                           | (19,969,853 | ) |                          | $ | 3,873    |                            |  | $ | 31,572,921 |   |  |   |            |  
|                                                            |  |                 |  |                 |        |                           |                |            |                 |  |         |      |  |   |                    |   |  |                                             |             |   |                          |   |          |                            |  |   |            |   |  |   |            |  

See accompanying notes.



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                  |  | For the Years Ended December 31, |            
|                                                                                                  |  | 2007                             |             |   | 2006 |   |             | 2005 | 
|Cash flows from operating activities:                                                             |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net (loss) income                                                                                 |  | $                                | (9,102,452  | ) |      | $ | 5,886,009   |      |  | $ | (7,792,256  | )
|Adjustments to reconcile net (loss) income to net cash(used in) provided by operating activities- |  |                                  |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                                     |  |                                  | 302,571     |   |      |   | 331,006     |      |  |   | 314,867     |  
|(Accretion) amortization of bond (discount) premium                                               |  |                                  | (434,244    | ) |      |   | (511,142    | )    |  |   | 447,861     |  
|Share-based compensation expense                                                                  |  |                                  | 716,846     |   |      |   | 870,229     |      |  |   | 257,188     |  
|Change in estimated tax benefit from stock option exercises                                       |  |                                  | (546,040    | ) |      |   |            |      |  |   |            |  
|Change in assets and liabilities-                                                                 |  |                                  |             |   |      |   |             |      |  |   |             |  
|Accounts receivable                                                                               |  |                                  | (317,120    | ) |      |   | 117,496     |      |  |   | (1,070,079  | )
|Inventories                                                                                       |  |                                  | (162,298    | ) |      |   | (182,936    | )    |  |   | 796,762     |  
|Prepaid expenses and other current assets                                                         |  |                                  | 648,543     |   |      |   | (450,087    | )    |  |   | (800,986    | )
|Accounts payable                                                                                  |  |                                  | 171,969     |   |      |   | (370,052    | )    |  |   | 972,127     |  
|Accrued expenses and long-term liabilities                                                        |  |                                  | (2,425,539  | ) |      |   | 2,483,342   |      |  |   | 2,181,223   |  
|Discontinued operations liabilities                                                               |  |                                  |            |   |      |   |            |      |  |   | (414,954    | )
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net cash (used in) provided by operating activities                                               |  |                                  | (11,147,764 | ) |      |   | 8,173,865   |      |  |   | (5,108,247  | )
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|                                                                                                  |  |                                  |            
|Cash flows from investing activities:                                                             |  |                                  |             |   |      |   |             |      |  |   |             |  
|Purchases of property and equipment                                                               |  |                                  | (366,789    | ) |      |   | (565,564    | )    |  |   | (329,275    | )
|Purchases of marketable securities                                                                |  |                                  | (28,441,008 | ) |      |   | (49,330,548 | )    |  |   | (16,685,722 | )
|Maturities of marketable securities                                                               |  |                                  | 38,050,000  |   |      |   | 37,850,000  |      |  |   | 20,170,000  |  
|Restricted cash                                                                                   |  |                                  |            |   |      |   |            |      |  |   | 1,122,200   |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) investing activities                                               |  |                                  | 9,242,203   |   |      |   | (12,046,112 | )    |  |   | 4,277,203   |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|                                                                                                  |  |                                  |            
|Cash flows from financing activities:                                                             |  |                                  |             |   |      |   |             |      |  |   |             |  
|Proceeds from exercise of common stock options                                                    |  |                                  | 297,033     |   |      |   | 852,045     |      |  |   | 1,660,889   |  
|Proceeds from issuance of common stock under the employee stock purchase plan                     |  |                                  | 307,350     |   |      |   | 332,624     |      |  |   | 222,086     |  
|Excess tax benefits from share-based compensation                                                 |  |                                  |            |   |      |   | 583,000     |      |  |   |            |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                         |  |                                  | 604,383     |   |      |   | 1,767,669   |      |  |   | 1,882,975   |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|Net (decrease) increase in cash and cash equivalents                                              |  |                                  | (1,301,178  | ) |      |   | (2,104,578  | )    |  |   | 1,051,931   |  
|Cash and cash equivalents, beginning of period                                                    |  |                                  | 8,285,561   |   |      |   | 10,390,139  |      |  |   | 9,338,208   |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, end of period                                                          |  | $                                | 6,984,383   |   |      | $ | 8,285,561   |      |  | $ | 10,390,139  |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  
|Supplemental cash flow information:                                                               |  |                                  |             |   |      |   |             |      |  |   |             |  
|Cash paid for income taxes                                                                        |  | $                                | 17,747      |   |      | $ | 50,000      |      |  | $ |            |  
|                                                                                                  |  |                                  |             |   |      |   |             |      |  |   |             |  

See accompanying notes.



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N
MT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(1) OPERATIONS

We are an advanced medical technology
company that designs, develops, manufactures and markets proprietary implant technologies that allow interventional cardiologists to treat certain kinds of cardiac structural heart disease through minimally invasive, catheter-based procedures. We
are investigating the potential connection between a common cardiac defect that allows a right to left shunt or flow of blood through a defect like a patent foramen ovale, or PFO, and brain attacks such as stroke, transient ischemic attacks, or TIA
and migraine headaches. A PFO can allow venous blood, unfiltered and unmanaged by the lungs, to directly enter the arterial circulation of the brain, possibly triggering a cerebral event or brain attack. More than 27,000 PFOs have been closed
globally with our minimally invasive, catheter-based implant technology.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

(b) Management Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts
of revenues and expenses during the reporting periods and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

(c) Cash, Cash Equivalents, and Marketable Securities

We consider all investments with maturities of 90 days or fewer from the date of purchase to be cash equivalents and all investments with original maturity dates greater than 90 days to be marketable securities.

Cash and cash equivalents, which are carried at cost and approximate market, consist of cash, money market accounts and commercial paper
investments.

In accordance with Financial Accounting Standards Board (FASB) Statement 115, Accounting for Certain Investments
in Debt and Equity Securities, or SFAS 115, we have classified our marketable securities as available-for-sale. Available-for-sale securities represent those securities that do not meet the definition of held-to-maturity and are not actively
traded. In accordance with SFAS 115, these securities are reported at fair market value, with unrealized gains and losses, net of tax, included as a separate component of stockholders equity. We record the amortization of premium and accretion
of discounts on marketable debt securities in the consolidated statement of operations.

The estimated fair value of marketable securities
is determined based on quoted market prices or rates for the same or similar instruments. The estimated fair value and amortized cost of our marketable securities are as follows:



|                             |  |                 |            |               |   |            |  |               |            |  |   |           
|---------------------------- |  | --------------- | ---------- | ------------- | - | ---------- |  | ------------- | ---------- |  | - | ----------
|                             |  | At December 31,
|                             |  | 2007            |            | 2006         
|                             |  | Fair Value      |            | AmortizedCost |   | Fair Value |  | AmortizedCost
|Corporate bonds              |  | $               | 14,039,535 |               | $ | 14,037,432 |  | $             | 19,807,998 |  | $ | 19,805,628
|Government agency securities |  |                 |           |               |   |           |  |               | 4,760,775  |  |   | 4,759,736 
|Commercial Paper             |  |                 | 8,949,220  |               |   | 8,948,122  |  |               | 5,394,654  |  |   | 5,394,889 
|Certificates of Deposit      |  |                 | 1,001,240  |               |   | 1,000,568  |  |               | 3,200,571  |  |   | 3,200,617 
|                             |  |                 |            |               |   |            |  |               |            |  |   |           
|                             |  | $               | 23,989,995 |               | $ | 23,986,122 |  | $             | 33,163,998 |  | $ | 33,160,870
|                             |  |                 |            |               |   |            |  |               |            |  |   |           



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Maturities of marketable securities classified as available-for-sale by contractual maturity are
shown below:



|                    |  |              |            |      |   |           
|------------------- |  | ------------ | ---------- | ---- | - | ----------
|                    |  | December 31,
|                    |  | 2007         |            | 2006
|Due within one year |  | $            | 21,993,005 |      | $ | 31,980,570
|Due in 1-2 years    |  |              | 1,996,990  |      |   | 1,183,428 
|                    |  |              |            |      |   |           
|                    |  | $            | 23,989,995 |      | $ | 33,163,998
|                    |  |              |            |      |   |           

At December 31, 2007 there were $10,207 of gross unrealized gains and $6,334 of gross
unrealized losses on marketable securities. The aggregate fair value of marketable securities with unrealized gains at December 31, 2007 was approximately $17.6 million. We have no other-than-temporary impairments at this time. These corporate
bonds are all highly rated investments. At December 31, 2006 there were $11,054 of gross unrealized losses and $7,926 of gross unrealized gains on marketable securities. There were no realized gains or losses on marketable securities in each of
the three years in the period ended December 31, 2007.

Accrued interest of $238,000 and $396,000 were included in prepaid expenses
and other current assets in the accompanying consolidated balance sheets at December 31, 2007 and 2006, respectively.

(d) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:



|                |  |                 |           |      |   |          
|--------------- |  | --------------- | --------- | ---- | - | ---------
|                |  | At December 31,
|                |  | 2007            |           | 2006
|Raw materials   |  | $               | 750,389   |      | $ | 773,704  
|Work-in-process |  |                 | 109,058   |      |   | 229,808  
|Finished goods  |  |                 | 1,212,087 |      |   | 905,724  
|                |  |                 |           |      |   |          
|                |  | $               | 2,071,534 |      | $ | 1,909,236
|                |  |                 |           |      |   |          

Finished goods are comprised of materials, labor and manufacturing overhead.

The Company records abnormal amounts of idle facility expenses as current-period charges in accordance with FASB Statement No. 151, Inventory
Costs, or SFAS 151. The Company allocates fixed production overheads to the costs of production based on the normal capacity of the production facilities. Management judgment is required in the determination of a range of normal capacity
levels, which directly affects the allocation of fixed manufacturing overhead costs between inventory costs and period expense. Idle capacity costs charged directly to cost of product sales during 2005 totaled approximately $800,000. In 2006 and
2007, production levels approximated normal capacity levels and no idle capacity costs were charged to cost of product sales.

The Company
establishes inventory reserves when management believes that inventory on-hand may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for its products and market conditions. When recorded, excess or obsolete
inventory reserves are recorded as adjustments to the carrying value of inventory. As such, inventory is recorded at its net realizable value.



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NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



(e) Financial Instruments

Our financial instruments consist of cash and cash equivalents, marketable securities and accounts receivable. The estimated fair value of these financial
instruments approximates their carrying value at December 31, 2007 and 2006, respectively. The estimated fair values have been determined through information obtained from market sources and management estimates. We do not have any derivatives
as defined by FASB Statement No. 133, Accounting for Derivative and Hedging Instruments.

(f)
Concentration of Credit Risk and Significant Customers

Financial instruments that subject us to potential credit risk consist primarily of
trade accounts receivable with customers in the health care industry. We perform ongoing credit evaluations of our customers financial condition, but do not require collateral. We continuously monitor collections from customers and maintain a
provision for estimated credit losses based upon historical experience and any specific customer collection issues that we have identified. Historically, we have not experienced significant losses related to our accounts receivable. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We have not engaged in off-balance sheet activities, including the use of structured finance or
special purpose entities.

No customer accounted for greater than 10% of product sales in any of the three years ended December 31,
2007.

At December 31, 2007, 44.1% of gross accounts receivable represented accounts denominated in foreign currencies that were
translated at year-end exchange rates. For the years ended December 31, 2007, 2006 and 2005, product sales to customers outside North America accounted for 28.6%, 12.8% and 16.7% of total product sales, respectively.

(g) Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment. We periodically review long-lived assets for impairments whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate. Based on managements assessment, no impairment of long-lived assets existed as of December 31, 2007 or 2006.

(h) Depreciation and Amortization

We provide for depreciation and amortization of our property and equipment by charges to operations using the straight-line method, which allocates the cost of property, plant and equipment over the following estimated useful lives:



|                                  |  |                                                
|--------------------------------- |  | -----------------------------------------------
|Asset Classification              |  | Estimated Useful Life                          
|Leasehold improvements            |  | Shorter of Economic UsefulLife or Life of Lease
|Laboratory and computer equipment |  | 3-7 Years                                      
|Office Furniture and equipment    |  | 5-10 Years                                     

Depreciation and amortization expense was $303,000, $331,000 and $315,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. Maintenance and repairs are charged to expense when incurred. Additions and improvements are capitalized.



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NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



(i) Revenue Recognition

In accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin, or SAB, No. 104, we record product sales upon transfer of
title to the customer, provided that there is persuasive evidence of an arrangement, there are no significant post-delivery obligations and the sales price is fixed or determinable and collection of the sales price is reasonably assured. Products
sold to our distributors are not subject to a right of return for unsold product. Royalty income is recognized as earned, net of related royalty obligations to third parties.

We also maintain a provision for estimated sales returns and allowances on product sales. The reserve is based on managements assessment of
historical sales returns and other known factors.

(j) Net Income (Loss) per Common Share

Basic and diluted net income (loss) per share is presented in conformity with FASB Statement No. 128, Earnings per Share, or SFAS 128,
for all periods presented. In accordance with SFAS 128, basic net income (loss) per share was determined by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income per share was determined
by dividing net income by the weighted average common shares outstanding, including potential common shares from the exercise of stock options and warrants using the treasury stock method, if dilutive. We incurred net losses for the years ended
December 31, 2007 and 2005, accordingly, none of our outstanding options and warrants was dilutive. For the year ended December 31, 2006 in which we incurred net income, 851,000 shares were included in the diluted earnings per share
calculation. Options to purchase a total of 1,068,124, 241,750 and 1,739,509 common shares have been excluded from the computation of diluted weighted average shares outstanding for the years ended December 31, 2007, 2006 and 2005,
respectively, as they were anti-dilutive.

(k) Share-Based Compensation

Prior to January 1, 2006, we accounted for share-based employee compensation, including stock options, using the method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, or APB Opinion No. 25. Under APB Opinion No. 25, for stock options granted at market price, no compensation cost was
recognized, and a disclosure was made regarding the pro forma effect on net earnings assuming compensation cost had been recognized in accordance with FASB Statement No. 123, Accounting for Stock-Based Compensation,or
SFAS 123. On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004) Share Based Payment, or SFAS 123R, which requires companies to measure and recognize compensation expense for all
share-based payments at fair value. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally requires that such transactions be accounted for using prescribed
fair-value-based methods. SFAS 123R permits public companies to adopt its requirements using one of two methods: (a) a modified prospective method in which compensation costs are recognized beginning with the effective date
based on the requirements of SFAS 123R for all share-based payments granted or modified after the effective date, and based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R
that remain unvested on the effective date, or (b) a modified retrospective method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts
previously recognized under SFAS 123 for purposes of pro forma disclosures either for all periods presented, or prior interim periods of the year of adoption. Effective January 1, 2006, we adopted SFAS 123R using the modified
prospective method.



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



(l) Foreign Currency

The functional currency of our foreign subsidiaries is the U.S. dollar and, accordingly, translation gains and losses are reflected in the consolidated
statements of operations. Revenue and expense accounts are translated using the weighted average exchange rate in effect during the period. Foreign currency transaction gains or losses are reflected in the consolidated statements of operations. We
had foreign currency transaction gains (losses) of approximately $88,000, $14,000 and $(122,000) for the years ended December 31, 2007, 2006 and 2005, 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.

(m) Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income (loss) consists entirely of
unrealized gains and losses on marketable securities.

(n) Income Taxes

A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities, as
measured by the tax rates expected to be in effect when these differences reverse. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation
of FASB Statement No. 109, or FIN 48.

(o) Guarantees and Indemnifications

We recognize liabilities for guarantees in accordance with FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others, or FIN 45. FIN 45 requires that, upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that
guarantee.

(p) Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. The
Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued Staff Position 157-2, which defers the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. We
are in the process of evaluating the impact, if any, that SFAS 157 will have on our operating results and financial position.

In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB No. 115, or SFAS 159. The Statement permits companies to choose to measure many
financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We have not made an election under SFAS 159 for any of our presently held financial instruments or certain other items.



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In June 2007, the FASB ratified Emerging Issues Task Force 07-3, Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and Development Activities, or EITF 07-3. EITF 07-3 requires nonrefundable advance payments for research and development goods or services to be deferred and
capitalized. Expense is recognized as the services are performed or goods are delivered. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. We are evaluating the impact of adopting EITF 07-3 and believe there will be no
material effect on our financial position, liquidity or results of operations.

In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), Business Combinations, or SFAS 141R, and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of
Accounting Research Bulletin No. 51, or SFAS 160. SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for the Company beginning in the first quarter of fiscal 2009.
Early adoption is not permitted. We are evaluating the impact, if any, SFAS 141R and SFAS 160 will have on our operating results and financial position.

(q) 401(k) Plan

We offer a
savings plan to eligible employees that is intended to qualify under Section 401(k) of the Internal Revenue Code. Participating employees may defer up to 15% of their pre-tax compensation, as defined, subject to certain limitations. There was
no employer match for the year ended December 31, 2007. The Board of Directors approved a 401(k) employer match for the years ended December 31, 2006 and 2005 in the amount of $149,000 and $120,000, respectively.

(r) Segment Reporting

We
operate our business as one segment.

(s) Expenses Associated with Clinical Trials

We have invested significant resources in several clinical trials designed to investigate the
potential connection between a PFO and brain attacks such as migraine headaches, strokes and TIAs. We completed enrollment in July 2005 for our first PFO/migraine study (MIST) in the United Kingdom. In October 2005, we announced approval of MIST
III, a study designed to expand data and follow-up on MIST migraine patients. Our CLOSURE I trial, commenced in 2003, is an FDA-approved investigational device exemption, or IDE, study in the U.S. to evaluate the safety and efficacy of our
STARFlex® closure technology to prevent a recurrent embolic stroke and/or TIA in patients with a PFO. In November 2005, we completed enrollment in our BEST study (BioSTAR® Evaluation STudy). The BioSTAR® implant represents a new generation biological closure technology that we believe promotes a more
natural, rapid and complete sealing of heart defects such as a PFO.

Total expenses for our clinical trials were approximately $6.0
million, $8.2 million and $7.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. This included direct advertising costs of approximately $200,000, $52,000 and $2,000 for the years ended December 31, 2007, 2006 and
2005, respectively.

Our judgment is required in determining methodologies used to recognize various costs related to our clinical trials.
We generally enter into contracts with vendors who render services over an extended period of time. Typically, we enter into three types of vendor contracts (i) time-based, (ii) patient-based, or (iii) a combination thereof. Under a
time-based contract, using critical factors contained within the contract, usually the



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



stated duration of the contract and the timing of services provided, we record the contractual expense for each service provided under the contract ratably
over the period during which we estimate the service will be performed. Under a patient-based contract, we first determine an appropriate per patient cost using critical factors contained within the contract, which include the estimated number of
patients and the total dollar value of the contract. We then record the expense based upon the total number of patients enrolled and/or monitored during the period. On a quarterly basis, we review both the timetable of services to be rendered and
the timing of services actually rendered. Based upon this review, revisions may be made to the forecasted timetable or to the extent of services performed, or both, in order to reflect our most current estimate of the contract. Adjustments are
recorded in the period in which the revisions are estimable. These adjustments could have a material effect on our results of operations. Additional STARFlex® and BioSTAR® products manufactured to accommodate the expected requirements of our clinical trials are included in inventory because they are saleable units with alternative use outside of the trials. These
units will be expensed as a cost of the trials as they are implanted. Substantially all expenses related to our clinical trials are included in research and development in our consolidated statements of operations.

(3) DISCONTINUED OPERATIONS

On July 6, 2005, we
settled a French tax claim related to our former neurosciences business unit, which was sold in 2002 to Integra LifeSciences Holding Corporation, or Integra. Pursuant to an indemnification agreement, we paid $324,267 to Integra, which amount was net
of a previous deposit payment of approximately $60,000. In connection with this settlement, we recorded income from discontinued operations of $90,687 for the year ended December 31, 2005.

(4) INCOME TAXES

The (benefit) provision for income
taxes in the accompanying consolidated statements of operations for the years ended December 31, 2007, 2006 and 2005 consisted of the following:



|                 |  |                                  |          |   |      |   |          |      |  |   |         |  
|---------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                 |  | For the Years Ended December 31, |         
|                 |  | 2007                             |          |   | 2006 |   |          | 2005 | 
|Foreigncurrent  |  | $                                | 7,950    |   |      | $ |         |      |  | $ |        |  
|Federalcurrent  |  |                                  | (382,612 | ) |      |   | 746,000  |      |  |   | (92,000 | )
|Statecurrent    |  |                                  | 8,783    |   |      |   |         |      |  |   |        |  
|                 |  |                                  |          |   |      |   |          |      |  |   |         |  
|                 |  |                                  | (365,879 | ) |      |   | 746,000  |      |  |   | (92,000 | )
|                 |  |                                  |          |   |      |   |          |      |  |   |         |  
|Foreigndeferred |  |                                  |         |   |      |   |         |      |  |   |        |  
|Federaldeferred |  |                                  | 244,000  |   |      |   | (244,000 | )    |  |   | 92,000  |  
|Statedeferred   |  |                                  |         |   |      |   |         |      |  |   |        |  
|                 |  |                                  |          |   |      |   |          |      |  |   |         |  
|                 |  |                                  | 244,000  |   |      |   | (244,000 | )    |  |   | 92,000  |  
|                 |  |                                  |          |   |      |   |          |      |  |   |         |  
|                 |  | $                                | (121,879 | ) |      | $ | 502,000  |      |  | $ |        |  
|                 |  |                                  |          |   |      |   |          |      |  |   |         |  

We have U.S. net tax operating loss carryforwards of approximately $4.5 million and tax credit
carryforwards of approximately $3.4 million that are available to reduce federal and state tax liabilities in future periods, if any. These carryforwards expire on various dates through 2027. We also have U.S. net tax operating losses of
approximately $4.4 million that relate to excess stock option benefits. If and when these net operating losses are realized, the benefit will credit additional paid-in capital.



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Notes to Consolidated Financial Statements(Continued)



The tax effects of temporary differences that give rise to significant portions of the current
deferred tax asset at December 31, 2007 and 2006 are as follows:



|                                                                |  |      |            |   |      |   |            |  
|--------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                |  | 2007 |            |   | 2006 |  
|Net operating losses                                            |  | $    | 1,743,830  |   |      | $ |           |  
|Tax credit carryforwards                                        |  |      | 3,377,066  |   |      |   | 1,632,000  |  
|Timing differences, including reserves, accruals and write-offs |  |      | 922,473    |   |      |   | 1,128,000  |  
|                                                                |  |      |            |   |      |   |            |  
|                                                                |  |      | 6,043,369  |   |      |   | 2,760,000  |  
|LessValuation allowance                                        |  |      | (6,043,369 | ) |      |   | (2,516,000 | )
|                                                                |  |      |            |   |      |   |            |  
|Net deferred tax asset                                          |  | $    |           |   |      | $ | 244,000    |  
|                                                                |  |      |            |   |      |   |            |  

We have provided a valuation allowance for our gross deferred tax asset due to the uncertainty
regarding the ability to realize the assets.

A reconciliation of the federal statutory tax rate to our effective tax rate is as follows:



|                                                                                            |  |                                  |    |  |       |   |  |       |   
|------------------------------------------------------------------------------------------- |  | -------------------------------- | -- |  | ----- | - |  | ----- | --
|                                                                                            |  | For the Years Ended December 31, |   
|                                                                                            |  | 2007                             |    |  | 2006  |   |  | 2005  |   
|Statutory federal income tax rate (benefit)                                                 |  | (34.0                            | )% |  | 34.0  | % |  | (34.0 | )%
|State income taxes, net of federal income tax benefit                                       |  |                                 |    |  |      |   |  |      |   
|Change in valuation allowance/utilization of netoperating loss and tax credit carryforwards |  | 31.2                             |    |  | (31.4 | ) |  | 35.5  |   
|Tax reserve                                                                                 |  | 1.3                              |    |  |      |   |  |      |   
|Other                                                                                       |  | 0.2                              |    |  | 5.3   |   |  | (1.5  | ) 
|                                                                                            |  |                                  |    |  |       |   |  |       |   
|                                                                                            |  | (1.3                             | )% |  | 7.9   | % |  |      | % 
|                                                                                            |  |                                  |    |  |       |   |  |       |   

On January 1, 2007 we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, or FIN 48. The adoption of FIN 48 did not result in any adjustment to the financial statements at January 1, 2007.

The following table summarizes the activity related to our unrecognized tax benefits:



|                                                                   |  |   |        
|------------------------------------------------------------------ |  | - | -------
|Balance at January 1, 2007                                         |  | $ |       
|Increases related to tax positions taken during a prior period     |  |   | 105,883
|Increases related to tax positions taken during the current period |  |   | 52,046 
|                                                                   |  |   |        
|Balance at December 31, 2007                                       |  | $ | 157,929
|                                                                   |  |   |        

Our unrecognized tax benefits at December 31, 2007 relate to various tax jurisdictions. The
increase in liabilities for unrecognized tax benefits of $157,929 during 2007 is primarily due to the impact of the closure of a foreign tax audit and the Companys evaluation of whether, and the extent to which, additional taxes will be due.
If these unrecognized benefits of $157,929 at December 31, 2007 were recognized, they would decrease our annual effective tax rate. We also recorded a liability for potential interest in the amount of $15,219. The unrecognized tax benefit and
the accrual for potential interest are included in long-term liabilities. It is our policy to record and classify interest and penalties as income tax expense. We do not expect our unrecognized tax benefits to change significantly over the next
twelve months.



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Notes to Consolidated Financial Statements(Continued)



We file U. S., state and foreign income tax returns in jurisdictions with varying statutes of
limitations. The 2005 through 2007 tax years remain subject to examination by federal authorities and the 2004 through 2007 tax years remain subject to examination by their respective tax authorities.

(5) NET ROYALTY INCOME

In connection with the
November 2001 sale of our vena cava filter product line to C.R. Bard, Inc., or Bard, we entered into a royalty agreement pursuant to which Bard commenced payment of royalties in 2003. As part of that agreement, we continue to pay related royalty
obligations to the estate of the original inventor of these products. On November 22, 1994, we granted to an unrelated third party an exclusive, worldwide license, including the right to sublicense to others, to develop, produce and market our
stent technology. Royalty income has been reported in the accompanying consolidated statements of operations net of related royalty obligations to third parties. Net royalty income totaled approximately $6.9 million, $6.0 million and $4.6 million
during the years ended December 31, 2007, 2006 and 2005, respectively. Beginning in 2008, the royalty rate we receive from Bard will decrease substantially from its current rate, while the royalty rate we pay to the estate of the original
inventor of these products will remain the same. This will result in a net royalty expense that will be reflected in general and administrative expenses.

(6) SETTLEMENT OF LITIGATION

On March 22, 1999, we filed a patent infringement suit in the United States District
Court for the District of Massachusetts, or the Massachusetts Court, against AGA alleging that AGA was infringing U.S. Patent No. 5,108,420, or the 420 patent, relating to aperture occlusion devices, to which we have an exclusive license.
We sought an injunction from the Massachusetts Court to prevent further infringement by AGA, as well as monetary damages. On April 12, 1999, AGA served its answer and counterclaims denying liability and alleging that we had engaged in false or
misleading advertising and in unfair or deceptive business practices. AGAs counterclaims sought an injunction and an unspecified amount of damages. On May 3, 1999, we answered AGAs counterclaims by denying liability. On
April 25, 2001, the Massachusetts Court granted our motion to stay all proceedings in this matter pending reexamination of the 420 patent by the United States Patent and Trademark Office and, on December 2, 2003, the Massachusetts
Court dismissed our claim and AGAs counterclaim without prejudice to our ability to refile suit after the conclusion of the reexamination proceedings. Although a Patent Office examiner initially rejected the claims of the 420 patent, on
August 19, 2004, the Board of Patent Appeals and Interferences reversed the examiners rejection of the claims of the 420 patent and returned the reexamination for action consistent with its decision. On January 26, 2005, the
Patent Office mailed a Notice of Intent to Issue a Reexamination Certificate. This reexamination certificate was issued on June 7, 2005. On October 13, 2004, AGA initiated a declaratory action in the United States District Court for the
District of Minnesota seeking a declaration that the 420 patent is invalid, unenforceable, and not infringed. On December 7, 2004, we revived our original Massachusetts action by filing a complaint alleging that AGA is infringing the
420 patent. On September 1, 2005, AGAs declaratory judgment action in the United States District Court for the District of Minnesota was transferred to the District of Massachusetts. On October 13, 2005, we answered AGAs
complaint in its declaratory judgment action, denying AGAs claims. On November 2, 2005, we filed an amended complaint adding the inventor of the 420 patent as a plaintiff. On November 3, 2005, AGA answered our amended
complaint, denying liability and counterclaiming that the 420 patent is invalid, unenforceable, and not infringed. On November 17, 2005, we answered AGAs counterclaims by denying them.

On March 24, 2006, we entered into a Settlement and Mutual General Release Agreement with AGA. AGA agreed to make a cash payment of $30.0 million
and was granted a nonexclusive sublicense to the patent involved in the litigation. On April 12, 2006, we received the entire cash payment from the settlement totaling



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Notes to Consolidated Financial Statements(Continued)



$30.0 million which was shared equally, after deduction of our legal fees and expenses, with the inventor of the patent, Dr. Lloyd Marks. All parties
agreed to have the case dismissed with prejudice and also agreed to a general release of any and all claims.

(7) COMMITMENTS

(a) Operating Leases

We
have operating leases for (i) office and laboratory space aggregating approximately 35,000 square feet; and (ii) office equipment and motor vehicle leases expiring through 2009. The office leases require payment of a pro rata share of
common area maintenance expenses and real estate taxes in excess of base year amounts. In November 2005, we entered into an amendment to our office lease agreement, which extended the term by four years through September 2010, and included certain
incentives, including one month of free rent during 2006 and reimbursement for tenant improvements up to a maximum of $248,000. The effects of the variable rent disbursements have been expensed on a straight line basis over the life of the lease.
The office lease amendment also provides for one five year renewal option subject to approval by the landlord.

Future minimum rental
payments due under operating lease agreements at December 31, 2007 are approximately as follows:



|                          |  |   |          
|------------------------- |  | - | ---------
|Years Ending December 31, |  |  
|2008                      |  | $ | 862,877  
|2009                      |  |   | 904,381  
|2010                      |  |   | 622,603  
|2011                      |  |   |         
|2012                      |  |   |         
|                          |  |   |          
|                          |  | $ | 2,389,861
|                          |  |   |          

Rent expense for the years ended December 31, 2007, 2006 and 2005 totaled $968,000, $983,000
and $981,000, respectively.

(b) Royalties and Licensed Technology

We have entered into various agreements that require payment of royalties based on specified percentages of future sales, as defined. In addition, we have
agreed to pay royalties to a former employee and a stockholder/founder based on sales or licenses of products where they were the sole or joint inventor.

Royalty expense under royalty agreements was $5,107,000, $4,417,000 and $3,610,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Approximately $2,300,000, $2,028,000 and $1,565,000 of these
royalties were included as a reduction of related royalty income earned from third parties for the years ended December 31, 2007, 2006 and 2005, respectively. The remaining amount of royalty expense is reflected within cost of product sales and
research and development expenses.

(c) Employment Agreements

We have employment agreements with our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, through June 2009 and December 2008,
respectively. In the event of termination without cause, as defined therein, these employment agreements provide up to one years continued salary as then in effect, in addition to



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Notes to Consolidated Financial Statements(Continued)



any earned incentive compensation, and, in the case of the CEO, continued health insurance coverage for eighteen months. Upon consummation of a change in
control of the Company, as defined, these executives would be entitled to a cash payment equal to a percentage of the total deal consideration paid by an acquirer. This percentage would range from 1.0% to 4.2% for our CEO and from 0.25% to 1.0% for
our CFO.

(d) Clinical Trials

We have commitments to third parties in excess of amounts accrued. While these commitments are not significant, we expect to spend significant amounts in our clinical trials.

CLOSURE I

We have committed significant financial and personnel resources to the execution of our pivotal CLOSURE I clinical trial. Including contracts with third party providers, agreements with participating clinical sites,
internal clinical department costs and manufacturing costs of the STARFlex® devices to be implanted, total costs are currently estimated to be approximately $22 to $24 million through
completion of the trial and submission to the FDA. Of this total, approximately $17.4 million was incurred through 2007, and approximately $3.6 million was incurred during 2007. We currently project 2008 costs to approximate $3.0 million. Currently
there are approximately 800 patients enrolled. On March 2, 2007, we participated in a public and private FDA advisory panel meeting to discuss the current status of the ongoing PFO/stroke trials being sponsored by us and other companies. At the
close of the meeting, both the FDA and advisory panel concurred that only randomized, controlled trials would provide the necessary data to be considered for premarket approval, or PMA, for devices intended for transcatheter PFO closure in the
stroke and TIA indication. During a private session, we provided the FDA and advisory panel with a revised study hypothesis and statistical plan to complete the CLOSURE I study as a randomized controlled trial. On April 23, 2007, we announced
that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Subsequent to this meeting, a review of the revised plan and a look at the interim data
was performed by the Data Safety Monitoring Board. Based on these analyses, the conditional probability of a statistically significant benefit will require an enrollment of 900 patients. Enrollment is expected to be completed during the second
quarter of 2008. The original CLOSURE I statistical plan required an enrollment of 1,600 patients.

BEST

In June 2005, we received approval in the United Kingdom for our BioSTAR® Evaluation STudy, or BEST, a multi-center study designed to evaluate our new BioSTAR® PFO closure technology, the first in-human use
of a bioabsorbable collagen matrix incorporated on our STARFlex® platform. BioSTAR®, our first biological closure technology, is
designed to optimize the biological response by promoting quicker healing and device endothelialization. Patient enrollment was initiated in July 2005 and completed during the fourth quarter of 2005. The goal of our BEST study was to secure European
commercial approval for our novel BioSTAR® technology through the Conformité Europeene, or CE Mark, process. The approval was received in June 2007. We also received the HPB approval
for Canada in June 2007. Total costs of this study, including third party contracts and agreements with clinical sites and other service providers, were $1.4 million.

MIST

In November 2004, we received approval
in the United Kingdom for the MIST study, the first prospective, randomized, double-blinded study to evaluate the effectiveness of transcatheter closure of a PFO, using our proprietary STARFlex® septal repair technology, in the treatment and prevention of migraine headaches. MIST is a multi-center study involving approximately 16 centers, with an enrollment of 147 migraine patients with aura,



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Notes to Consolidated Financial Statements(Continued)



who have a PFO and who were randomized to either PFO closure with the STARFlex® implant or a
control arm. The study was designed by a scientific advisory board comprised of some of the top European and North American migraine specialists and interventional cardiologists. The MIST studys patient recruitment process was supported by the
Migraine Action Association (MAA), a migraine headache advocacy group representing more than 12,000 members in the United Kingdom. Total costs of this trial, including third party contracts and agreements with clinical sites and other service
providers, were approximately $4.9 million. Of this total, approximately $300,000 was incurred during 2007.

MIST II

In September 2005, we received conditional approval from the FDA for an IDE to initiate enrollment
in our pivotal PFO/migraine clinical study, named MIST II. MIST II was initially designed to be a prospective, randomized, multi-center, controlled study. In August 2006, utilizing data from our MIST and BEST (BioSTAR® Evaluation STudy) trials, we received conditional approval from the FDA for modifications we requested to the IDE. These changes included adjustment to the primary endpoint for the study from resolution to reduction
of migraine headaches and an upgrade to the implant used in the study from STARFlex® to our new bioabsorbable BioSTAR®. MIST II
was a double-blinded trial designed to randomize approximately 600 migraine patients with a PFO to either structural heart repair with our BioSTAR® technology or a control arm.

In January 2008, we announced that we were closing down this clinical study in order to focus our resources on the PFO/stroke opportunity. When we
announced the decision, we ceased patient enrollment in MIST II, which was being conducted at 20 centers in the U.S. Due to strict enrollment requirements, MIST II had little likelihood of being completed in a reasonable timeframe. More than 1,400
patients had been screened for enrollment in the trial, but only two patients met the requirements to be randomized. Closing down this trial is expected to reduce costs by approximately $14 million over the next two to three years. Through the end
of 2007, $3.9 million was incurred, of which $1.9 million was incurred during 2007.

MIST III

In October 2005, we received approval from the regulatory authorities in the United Kingdom to
begin enrollment in MIST III. In MIST III, control patients from the original MIST study, those who did not receive the STARFlex® implant, have the option to receive an implant after they
have been unblinded as part of the MIST study. These patients will follow the identical protocol as in MIST after which they will be followed for an additional 18 months. In addition, migraine patients with a PFO who did receive a STARFlex® implant in MIST will be followed for an additional 18 months. We currently estimate the cost of MIST III to be approximately $1.0 million. Of this total, approximately $900,000 was incurred
through 2007. We currently estimate 2008 costs to be approximately $100,000.

(e) Guarantees and Indemnifications

In the ordinary course of our business, we agree to indemnification provisions in certain of our agreements with our customers, clinical
sites, licensors and real estate lessors. With respect to our customer agreements and licenses, we generally indemnify the customer or licensor against losses, expenses and other damages that result from, among other things, product liability claims
or infringement of a third partys intellectual property. With respect to our real estate leases, we indemnify our lessor for losses, expenses and other damages that result from, among other things, personal injury and property damage that
occur at our facilities and for any breach by us of the terms of the lease. Based on our policies, practices and claims and payment history, we believe that the estimated fair value of these indemnification obligations is minimal.



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Notes to Consolidated Financial Statements(Continued)



(8) STOCKHOLDERS EQUITY

(a) Preferred Stock

Our
second amended and restated certificate of incorporation provides for, and the Board of Directors and stockholders authorized, 3,000,000 shares of $0.001 par value preferred stock. We have designated 50,000 shares as Series A Junior Participating
Preferred Stock (Series A) in connection with the rights agreement discussed below. No shares of Series A have been issued. However, upon issuance, the Series A will be entitled to vote, receive dividends, and have liquidation rights.
The remaining authorized preferred stock is undesignated and our Board of Directors has the authority to issue such shares in one or more series and to fix the relative rights and preferences without vote or action by the stockholders.

(b) Rights Agreement

In June 1999, our Board of Directors adopted a stockholder rights plan, or Rights Plan. The Rights
Plan is intended to protect our stockholders from unfair or coercive takeover practices. In accordance with the Rights Plan, our Board of Directors declared a dividend distribution of one purchase right, or a Right, for each share of common stock
outstanding to our stockholders of record on June 10, 1999. Each share of common stock newly issued after that date also carries with it one Right. Subject to the conditions contained in the Rights Plan, each Right entitles the registered
holder to purchase from us one one-thousandth (1/1000th) of a share of Series A at an initial purchase price of $20, as adjusted from time to
time for certain events. The Rights become exercisable (a Triggering Event) ten (10) business days after the earlier of our announcement that a person or group has acquired beneficial ownership of 15% or more (each, a
Triggering Holder) of our common stock or an announcement of a tender or exchange offer which would result in a person or group acquiring 15% or more of our common stock; in either case, our Board of Directors can extend this ten-day
period. At such time, if we have not redeemed or exchanged the Rights, each holder of a Right (other than the Triggering Holder) will have the right to receive, upon payment of the then current purchase price of the Right, and in lieu of one
one-thousandth (1/1000th) of a Series A share, the number of shares of our common stock that equals the result obtained by dividing the then
current purchase price of the Right by 50% of the then current market price per share of our common stock. In the event that the number of shares of our common stock then currently authorized, but not outstanding or reserved for issuance for
purposes other than the exercise of the Rights, are not sufficient to permit the exercise in full of the Rights, we will either (i) reduce the purchase price of the Right accordingly; or (ii) make other substitute provisions of equivalent
value as specified in the Rights Plan. If, at any time following the Triggering Event, we are acquired in a merger or other business combination transaction in which we are not the surviving corporation or more than 50% of our assets or earning
power is sold to a person or group, each holder of a Right shall thereafter have the right to receive, upon purchase of each Right, that number of shares of common stock of the acquiring company equal to the result obtained by dividing the then
current exercise price of the Right by 50% of the then current market price per share of the acquirers common stock.

The Rights
expire on June 9, 2009. We may redeem the Rights for $.001 per Right at any time prior to the Rights becoming exercisable, or June 9, 2009. There are no Rights outstanding as of December 31, 2007.

(9) STOCK OPTIONS

Our 1996 Stock Option Plan, 1998
Stock Incentive Plan, 2001 Stock Incentive Plan and 2007 Stock Incentive Plan, or collectively, the Plans, generally provide for the grant of incentive stock options, nonstatutory stock options and restricted stock awards, as appropriate, to our
eligible employees, officers, directors, consultants and advisors. The Joint Compensation and Options Committee of our Board of Directors administers the Plans, subject to the terms and conditions of the respective Plans. Options granted generally
vest in equal



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Notes to Consolidated Financial Statements(Continued)



annual installments over a four-year period from the date of grant. At December 31, 2007 there were 1,731,807 options outstanding and 550,770 options
available for grant under the 1998, 2001 and 2007 Plans. There can be no additional grants under the 1996 Plan as this plan has expired.

Our 1996 Stock Option Plan for Non-Employee Directors, or Directors Plan, provides for the automatic grant of non-statutory stock options to purchase shares of common stock to our directors who are not our employees and who do not otherwise
receive compensation from us. Under the terms of the Directors Plan, as amended, each new non-employee director not otherwise compensated by us receives an initial grant of options to purchase 20,000 shares of common stock at an exercise price equal
to the fair market value per share at the date of grant, subject to vesting in equal monthly installments over a three-year period. Subsequently, coincident with such directors re-election to the Board at our annual meeting of stockholders,
there is an additional grant of options to purchase 5,000 shares of common stock that fully vests six months after the date of grant. In addition, following each annual meeting of stockholders, each eligible director who served as a member of a
committee of the Board of Directors during the preceding fiscal year is granted an additional option to purchase (i) 2,000 shares of common stock if such director served as a chairperson of such committee or (ii) 1,000 shares of common
stock if such director did not serve as chairperson of such committee. At December 31, 2007 there were 199,300 options outstanding under the Directors Plan. There can be no additional grants under this plan, as this plan has expired.

On March 1, 2001, our Board of Directors authorized an offer for employees to exchange certain Plan options outstanding. Under this
exchange offer, certain employees elected to have a total of 322,521 existing options cancelled in exchange for 131,558 new options. The new options were granted at $2.19 per share, which was the fair market value of the common stock as of the date
of grant. These options were subject to variable accounting as defined in FIN 44, Accounting for Certain Transactions Involving Stock Compensation. In addition, we granted 83,450 additional options to employees who participated in the
option exchange program, which were subject to variable accounting under FIN 44. We followed the provisions of FIN 44 and revalued to market the re-priced options, through the date of exercise, cancellation or expiration, at each reporting date,
over the four-year vesting period which ended in April 2005. Compensation expense, included in general and administrative expense, related to the re-priced options was $257,000 for the year ended December 31, 2005. As these options were fully
vested on the date of adoption of SFAS123R, no further compensation has been recorded in 2006 or 2007 for these awards.

All unexercised
options expire ten years from date of grant.

(10) SHARE-BASED COMPENSATION

Effective January 1, 2006, we adopted SFAS 123R using the modified prospective application method. Prior to the adoption of SFAS 123R, we followed
the intrinsic value method in accordance with APB No. 25 to account for employee stock options. Historically, all stock options have been granted with an exercise price equal to the fair market value of the common stock on the date of grant.
Accordingly, no compensation expense was recognized from option grants to employees and directors prior to the adoption of SFAS No. 123R.

Under the modified prospective approach, SFAS 123R applies to new awards issued on or after January 1, 2006 as well as awards that were outstanding as of December 31, 2005, including those that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, we utilize the straight-line attribution method for recognizing share-based compensation expense under SFAS 123R. We recorded $717,000 and $870,000 of compensation expense in the
years ended December 31, 2007 and 2006, respectively, for share-based payment awards made to our employees and directors consisting of stock options issued based on the



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Notes to Consolidated Financial Statements(Continued)



estimated fair values. Of these amounts, for the year ended December 31, 2007, $387,000 was recorded as part of general and administrative expenses,
$166,000 was included in research and development expenses, $128,000 was included in selling and marketing and $36,000 was included in cost of product sales. For the year ended December 31, 2006, $519,000 was recorded as part of general and
administrative expenses, $188,000 was included in research and development expenses, $134,000 was included in selling and marketing and $29,000 was included in cost of product sales.

At December 31, 2007, there was $1.7 million of unrecognized compensation cost related to share-based payments that is expected to be recognized
over a weighted-average period of fewer than four years.

SFAS 123R requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under APB No. 25. This requirement reduces reported operating cash flows and increases reported financing cash flows in periods after
adoption. We have recorded net losses in 2007 and 2005, and in 2006, if not for the net gain from settlement of litigation we would have also recorded a net loss. We have not recorded any benefits from tax deductions for years ended
December 31, 2007 and 2006. In November 2005, the Company granted to employees 175,800 fully vested options with an exercise price of $16.34, the fair market value on the date of grant. Of the $2,731,788 pro forma share-based compensation
expense for 2005 disclosed below, approximately $1,385,000 relates to these options. Had the Company granted these options with longer time-based vesting, the Company would have incurred significant share-based compensation expense in future years
in accordance with SFAS 123R.

Had compensation expense for employee stock options been determined based on fair value at the grant date
consistent with SFAS 123R, with stock options expensed using the straight-line attribution method, our net loss and loss per share for the year ended December 31, 2005 would have been increased to the pro forma amounts indicated below:



|                                                                                                              |  |      |             |  
|------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | -
|                                                                                                              |  | 2005 |            
|Net loss as reported (Under APB No. 25)                                                                       |  | $    | (7,792,256  | )
|Add: Share-based employee compensation included in netloss as reported                                        |  |      | 257,188     |  
|Less: Total stock-based employee compensation expensedetermined under fair value based methods for all awards |  |      | (2,731,788  | )
|                                                                                                              |  |      |             |  
|Pro forma net loss                                                                                            |  | $    | (10,266,856 | )
|                                                                                                              |  |      |             |  
|Basic and Diluted net loss per common share:                                                                  |  |      |             |  
|As reported                                                                                                   |  | $    | (0.63       | )
|                                                                                                              |  |      |             |  
|Pro forma                                                                                                     |  | $    | (0.83       | )
|                                                                                                              |  |      |             |  

We use the Black-Scholes option-pricing model to estimate fair value of share-based awards with
the following weighted average assumptions:



|                                |  |               |  |               |  |              
|------------------------------- |  | ------------- |  | ------------- |  | -------------
|                                |  | 2007          |  | 2006          |  | 2005         
|Expected life (years)           |  | 4             |  | 4             |  | 7            
|Expected stock price volatility |  | 55%  58%     |  | 58%  63%     |  | 68%  69%    
|Expected dividend yield         |  | 0             |  | 0             |  | 0            
|Risk-free interest rate         |  | 3.28%  4.07% |  | 4.27%  5.23% |  | 3.86%  4.48%

The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with
the expected life of the stock options. Expected volatility and expected life are based on our historical experience. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no



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Notes to Consolidated Financial Statements(Continued)



current plans to do so in the future. As required by SFAS 123R, we adjust the estimated forfeiture rate based upon actual experience. The expected life for
options granted in 2007 and 2006 was based upon the exercise and forfeiture rate for the preceding four years, which resulted in an expected life equal to the vesting period of four years. For options granted in 2005, we used the midpoint of the
vesting period to the grant expiration, which ranged from four years to ten years, to obtain the expected life of seven years.

The
following table summarizes a reconciliation of all stock option activity for the year ended December 31, 2007:



|                                              |  |                 |  |                              |       |                                         |      |                          |   |      
|--------------------------------------------- |  | --------------- |  | ---------------------------- | ----- | --------------------------------------- | ---- | ------------------------ | - | -----
|                                              |  | Number ofShares |  | Weightedaverageexerciseprice |       | Weightedaverageremainingcontractualterm |      | Aggregateintrinsic value
|                                              |  |                 |  |                              |       | (in years)                              |      | (in thousands)          
|Options outstanding at January 1, 2007        |  | 1,519,883       |  | $                            | 6.94  |                                         |      |                          |   |      
|Granted                                       |  | 318,350         |  |                              | 9.33  |                                         |      |                          |   |      
|Exercised                                     |  | 75,024          |  |                              | 4.00  |                                         |      |                          | $ | 688  
|Cancelled                                     |  | 31,402          |  |                              | 12.42 |                                         |      |                          |   |      
|                                              |  |                 |  |                              |       |                                         |      |                          |   |      
|Options outstanding at December 31, 2007      |  | 1,731,807       |  |                              | 7.41  |                                         | 6.32 |                          | $ | 1,399
|                                              |  |                 |  |                              |       |                                         |      |                          |   |      
|Options expected to vest at December 31, 2007 |  | 325,351         |  |                              | 9.18  |                                         | 8.96 |                          | $ | 67   
|Options exercisable at December 31, 2007      |  | 1,325,118       |  |                              | 6.87  |                                         | 5.51 |                          | $ | 1,315

The aggregate intrinsic value represents the pretax value (the periods closing market price,
less the exercise price, times the number of in-the-money options) that would have been received by all option holders had they exercised their options at the end of the period.

The weighted average grant-date fair value of options granted during the years ended December 31, 2007, 2006 and 2005 was $9.25, $14.89 and $12.51,
respectively, The aggregate intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $688,000, $2.7 million and $3.1 million, respectively.

Net cash proceeds from the exercise of stock options were $297,033 and $852,045 for the years ended December 31, 2007 and 2006, respectively. We
have not recorded any tax benefit from stock option exercises for the years ended December 31, 2007 and 2006.

The following table
summarizes information about stock options at December 31, 2007:



|               |  |                     |  |                              |  |                              |       |        |           |                              |   |      
|-------------- |  | ------------------- |  | ---------------------------- |  | ---------------------------- | ----- | ------ | --------- | ---------------------------- | - | -----
|               |  | Outstanding Options |  | Exercisable Options         
|               |  | Shares              |  | WeightedAverageRemainingLife |  | WeightedAverageExercisePrice |       | Shares |           | WeightedAverageExercisePrice
|               |  |                     |  | (in years)                   |  |                              |       |        |           |                             
|$1.50  2.25   |  | 81,927              |  | 2.99                         |  | $                            | 1.92  |        | 81,927    |                              | $ | 1.92 
|$2.26  3.50   |  | 305,787             |  | 5.38                         |  |                              | 3.17  |        | 275,383   |                              |   | 3.14 
|$3.51  5.18   |  | 275,969             |  | 5.28                         |  |                              | 4.36  |        | 263,281   |                              |   | 4.37 
|$5.19  7.80   |  | 475,699             |  | 5.23                         |  |                              | 6.67  |        | 398,632   |                              |   | 6.63 
|$7.81  12.19  |  | 345,000             |  | 9.11                         |  |                              | 9.49  |        | 123,822   |                              |   | 10.41
|$12.20  15.92 |  | 36,900              |  | 9.00                         |  |                              | 14.81 |        | 6,379     |                              |   | 10.91
|$15.93  17.60 |  | 202,875             |  | 7.77                         |  |                              | 16.54 |        | 173,570   |                              |   | 16.45
|$17.61  23.10 |  | 7,650               |  | 8.09                         |  |                              | 20.05 |        | 2,124     |                              |   | 20.17
|               |  |                     |  |                              |  |                              |       |        |           |                              |   |      
|$1.50  23.10  |  | 1,731,807           |  | 6.32                         |  | $                            | 7.41  |        | 1,325,118 |                              | $ | 5.51 
|               |  |                     |  |                              |  |                              |       |        |           |                              |   |      



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Employee Stock Purchase Plan

We offer an employee stock purchase plan, or ESPP, for all eligible employees. Under the ESPP, which qualifies as an employee stock purchase
plan under Section 423 of the Internal Revenue Code, shares of our common stock can be purchased at 85% of the lower of the fair market value of the stock on the first or last day of each six-month offering period. Employee purchases in
any year are limited to the lesser of $25,000 worth of stock, determined by the fair market value of the common stock at the time the offering begins, or 12% of annual base pay.

A total of 425,000 common shares have been reserved for issuance under the ESPP, as amended. At our 2006 annual meeting, our stockholders approved an
amendment to our ESPP, as amended, to increase the number of shares of our common stock authorized for issuance from 275,000 to 425,000 shares. Employees purchased 35,808, 29,806 and 49,332 shares of common stock under the ESPP during the years
ended December 31, 2007, 2006 and 2005, respectively. The average purchase prices for total ESPP shares acquired were $8.58, $11.16 and $4.50 for the years ended December 31, 2007, 2006 and 2005, respectively. At December 31, 2007,
there were 105,439 shares available for issuance under the ESPP, as amended.

(11) RELATED PARTY TRANSACTIONS

Pursuant to the terms of an exclusive license agreement with Childrens Medical Center
Corporation, or CMCC, we pay royalties on sales of our CardioSEAL®, STARFlex® and BioSTAR® products to CMCC. James E. Lock, M.D., a member of our Board of Directors and affiliated with CMCC, receives from CMCC a portion of these royalties.

(12) PREPAID EXPENSES AND OTHER CURRENT ASSETS AND ACCRUED EXPENSES

Prepaid expenses and other
current assets consisted of the following:



|                   |  |                 |           |      |   |          
|------------------ |  | --------------- | --------- | ---- | - | ---------
|                   |  | At December 31,
|                   |  | 2007            |           | 2006
|Royalty receivable |  | $               | 2,447,337 |      | $ | 1,880,819
|Other              |  |                 | 959,747   |      |   | 2,174,808
|                   |  |                 |           |      |   |          
|                   |  | $               | 3,407,084 |      | $ | 4,055,627
|                   |  |                 |           |      |   |          

Accrued expenses consisted of the following:



|                            |  |                 |           |      |   |          
|--------------------------- |  | --------------- | --------- | ---- | - | ---------
|                            |  | At December 31,
|                            |  | 2007            |           | 2006
|Clinical trials             |  | $               | 2,438,606 |      | $ | 4,135,710
|Payroll and payroll related |  |                 | 706,427   |      |   | 1,264,429
|Royalties                   |  |                 | 1,368,037 |      |   | 1,247,775
|Professional Fees           |  |                 | 361,296   |      |   | 648,431  
|Other accrued expenses      |  |                 | 1,347,061 |      |   | 1,702,806
|                            |  |                 |           |      |   |          
|                            |  | $               | 6,221,427 |      | $ | 8,999,151
|                            |  |                 |           |      |   |          



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



(13) FINANCIAL INFORMATION BY GEOGRAPHIC AREA

Revenues by destination country for the years ended December 31, 2007, 2006 and 2005 were as follows:



|               |  |      |            |      |   |            |  |   |           
|-------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|               |  | 2007 |            | 2006 |   | 2005      
|United States  |  | $    | 21,084,910 |      | $ | 25,314,000 |  | $ | 20,583,000
|Germany        |  |      | 1,365,913  |      |   | 312,000    |  |   | 905,000   
|United Kingdom |  |      | 2,038,352  |      |   | 1,258,000  |  |   | 822,000   
|Other          |  |      | 2,265,950  |      |   | 1,267,330  |  |   | 1,606,161 
|               |  |      |            |      |   |            |  |   |           
|               |  | $    | 26,755,125 |      | $ | 28,151,330 |  | $ | 23,916,161
|               |  |      |            |      |   |            |  |   |           

Net book value of long-lived assets by geographic area at December 31, 2007, 2006 and 2005
were as follows:



|              |  |      |           |      |   |           |  |   |        
|------------- |  | ---- | --------- | ---- | - | --------- |  | - | -------
|              |  | 2007 |           | 2006 |   | 2005     
|United States |  | $    | 1,099,527 |      | $ | 1,032,330 |  | $ | 793,556
|Other         |  |      | 4,018     |      |   | 6,997     |  |   | 11,213 
|              |  |      |           |      |   |           |  |   |        
|              |  | $    | 1,103,545 |      | $ | 1,039,327 |  | $ | 804,769
|              |  |      |           |      |   |           |  |   |        

(14) VALUATION OF QUALIFYING ACCOUNTS

The following table sets forth the activity in our allowance for doubtful accounts and sales returns:



|                                                    |  |                                  |          |   |      |   |         |      |  |   |         |  
|--------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                    |  | For the Years Ended December 31, |         
|                                                    |  | 2007                             |          |   | 2006 |   |         | 2005 | 
|Balance at beginning of period                      |  | $                                | 282,468  |   |      | $ | 369,984 |      |  | $ | 378,150 |  
|Provision for bad debt and sales returnsadjustments |  |                                  |         |   |      |   |        |      |  |   |        |  
|Write-offs and returns                              |  |                                  | (121,127 | ) |      |   | (87,516 | )    |  |   | (8,166  | )
|                                                    |  |                                  |          |   |      |   |         |      |  |   |         |  
|Balance at end of period                            |  | $                                | 161,341  |   |      | $ | 282,468 |      |  | $ | 369,984 |  
|                                                    |  |                                  |          |   |      |   |         |      |  |   |         |  

(15) LEGAL PROCEEDINGS

We are a party to the following legal proceeding that could have a material adverse impact on our results of operations or liquidity if there were an adverse outcome. Although we intend to pursue our rights in this
matter vigorously, we cannot predict the ultimate outcome.

In September 2004, we and the Childrens Medical Center Corporation, or
CMCC, filed a civil complaint in the U.S. District Court for the District of Minnesota, or the District Court, for infringement of a patent owned by CMCC and licensed exclusively to us. The complaint alleges that Cardia, Inc., or Cardia, of
Burnsville, Minnesota is making, selling and/or offering to sell a medical device in the United States that infringes CMCCs U.S. patent relating to a device and method for repairing septal defects. We sought an injunction from the District
Court to prevent further infringement by Cardia, as well as monetary damages. On August 30, 2006, the District Court entered an order holding that Cardias device does not infringe the patent-in-suit. The order has no effect on the
validity and enforceability of the patent-in-suit and has no impact on our ability to sell our products. We appealed the ruling to the U.S. Court of Appeals for the Federal Circuit and on June 6, 2007 the Federal Circuit ruled that the District
Court incorrectly interpreted one of the patents claims and incorrectly found no triable issue of fact concerning other claims. The Federal Circuit remanded the case to the District Court for further



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##### Table of Contents

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



proceedings consistent with its opinion and instructed that on remand the district court may reconsider the question of summary judgment for us and CMCC
based on the Federal Circuits claim construction. On November 8, 2007, the District Court granted summary judgement in our and CMCCs favor, ruling that Cardias device infringes the patent-in-suit and striking all of
Cardias invalidity defenses. A trial on issues relating to the monetary damages suffered by us and CMCC is now scheduled to commence during the second quarter of 2008.

Other than as described above, we have no material pending legal proceedings.

(16) SUMMARY OF QUARTERLY DATA (UNAUDITED)

A summary of quarterly data follows (in thousands, except
per share amounts);



|                                       |  |                         |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|-------------------------------------- |  | ----------------------- | ------ | - | --- | - | ------ | --- |  | - | ------ | - |  | - | ------ | -
|                                       |  | For the Year ended 2007 |       
|                                       |  | 1st                     |        |   | 2nd |   |        | 3rd |  |   | 4th    |  
|Total revenues                         |  | $                       | 6,834  |   |     | $ | 6,472  |     |  | $ | 6,408  |   |  | $ | 7,041  |  
|Total costs and expenses               |  |                         | 7,804  |   |     |   | 9,641  |     |  |   | 10,196 |   |  |   | 10,256 |  
|Loss from operations                   |  |                         | (970   | ) |     |   | (3,169 | )   |  |   | (3,788 | ) |  |   | (3,215 | )
|Net loss                               |  |                         | (336   | ) |     |   | (2,636 | )   |  |   | (3,200 | ) |  |   | (2,930 | )
|Net loss per share:                    |  |                         |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Basic and diluted                      |  | $                       | (0.03  | ) |     | $ | (0.20  | )   |  | $ | (0.25  | ) |  | $ | (0.23  | )
|                                       |  | For the Year ended 2006 |       
|                                       |  | 1st                     |        |   | 2nd |   |        | 3rd |  |   | 4th    |  
|Total revenues                         |  | $                       | 6,932  |   |     | $ | 7,101  |     |  | $ | 6,911  |   |  | $ | 7,208  |  
|Total costs and expenses               |  |                         | 9,603  |   |     |   | 9,450  |     |  |   | 8,731  |   |  |   | 10,994 |  
|Net gain from settlement of litigation |  |                         | 15,209 |   |     |   | (25    | )   |  |   |       |   |  |   |       |  
|Income (loss) from operations          |  |                         | 12,823 |   |     |   | (1,879 | )   |  |   | (1,329 | ) |  |   | (3,227 | )
|Net income (loss)                      |  |                         | 12,823 |   |     |   | (1,879 | )   |  |   | (1,379 | ) |  |   | (3,679 | )
|Net income (loss) per share:           |  |                         |        |   |     |   |        |     |  |   |        |   |  |   |        |  
|Basic                                  |  | $                       | 1.02   |   |     | $ | (0.15  | )   |  | $ | (0.11  | ) |  | $ | (0.29  | )
|Diluted                                |  | $                       | 0.93   |   |     | $ | (0.02  | )   |  | $ | (0.01  | ) |  | $ | 0.29   |  



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##### Table of Contents

EXHIBIT INDEX



|                                                                    |  |                                                                                                                                                        |  |                              |  |                     |  |       |  | 
|------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- |  | ------------------- |  | ----- |  | 
|Exhibit No.                                                         |  | Description                                                                                                                                            |  | Incorporated by Reference to |  | Filed withthis 10-K
|                                                                    |  | Form andSEC File No.                                                                                                                                   |  | SECFiling Date               |  | Exhibit No.         | 
|Acquisition Agreements                                              |  |                                                                                                                                                        |  |                              |  |                     |  |      
|                                                                    |  |                                                                                                                                                        |  |                              | 
|2.1                                                                |  | Asset Purchase Agreement, dated as of October 19, 2001, among the Registrant and C.R. Bard, Inc.                                                       |  | 8-K (000-21001)              |  | 11-16-2001          |  | 2.1   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|2.2                                                                 |  | Stock Purchase Agreement, dated as of July 31, 2002, between the Registrant and Integra LifeSciences Corporation                                       |  | 8-K (000-21001)              |  | 8-14-2002           |  | 2.1   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|2.3                                                                 |  | Agreement and Plan of Merger by and among the Registrant, NMT Heart, Inc., InnerVentions, Inc. and Fletcher Spaght, Inc., dated as of January 25, 1996 |  | S-1 (333-06463)              |  | 6-20-1996           |  | 10.3  |  | 
|                                                                    |  |                                                                                                                                                        |  |                             
|Certificate of Incorporation and By-Laws                            |  |                                                                                                                                                        |  |                              |  |                     |  |      
|                                                                    |  |                                                                                                                                                        |  |                              | 
|3.1                                                                 |  | Second Amended and Restated Certificate of Incorporation of the Registrant                                                                             |  | 10-Q (000-21001)             |  | 8-5-1998            |  | 3.1   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|3.2                                                                 |  | Certificate of Amendment of Second Amended and Restated Certificate of Incorporation of the Registrant                                                 |  | 10-Q (000-21001)             |  | 8-16-1999           |  | 3.1   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|3.3                                                                 |  | Certificate of Designation, Series A Junior Participating Preferred Stock of the Registrant                                                            |  | 10-Q (000-21001)             |  | 8-16-1999           |  | 3.2   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|3.4                                                                 |  | Amended and Restated By-Laws of the Registrant                                                                                                         |  | S-1 (333-06463)              |  | 6-20-1996           |  | 3.2   |  | 
|                                                                    |  |                                                                                                                                                        |  |                             
|Instruments Defining the Rights of Security Holders                 |  |                                                                                                                                                        |  |                              |  |                     |  |      
|                                                                    |  |                                                                                                                                                        |  |                              | 
|4.1                                                                 |  | Form of Common Stock Certificate of the Registrant                                                                                                     |  | S-1/A (333-06463)            |  | 7-12-1996           |  | 4.1   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|4.2                                                                 |  | Rights Agreement, dated as of June 7, 1999, between the Registrant and American Stock Transfer & Trust Company, as Rights Agent                        |  | 8-K (000-21001)              |  | 6-8-1999            |  | 4.1   |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|4.3                                                                 |  | Amendment to Rights Agreement dated as of December 14, 2006 between the Registrant and American Stock Transfer & Trust Company, as Rights Agent        |  | 8-A12G/A (000-21001)         |  | 12-15-2006          |  | 1     |  | 
|                                                                    |  |                                                                                                                                                       
|Material ContractsEquity Compensation Plans and Related Agreements |  |                                                                                                                                                        |  |                             
|                                                                    |  |                                                                                                                                                        |  |                              | 
|10.1#                                                               |  | 1994 Stock Option Plan of the Registrant                                                                                                               |  | S-1 (333-06463)              |  | 6-20-1996           |  | 10.28 |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|10.2#                                                               |  | 1996 Stock Option Plan of the Registrant, as amended                                                                                                   |  | 10-Q (000-21001)             |  | 8-5-1998            |  | 10.1  |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|10.3#                                                               |  | 1996 Stock Option Plan for Non-Employee Directors, as amended, of the Registrant                                                                       |  | 10-Q (000-21001)             |  | 8-11-2003           |  | 10.3  |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|10.4#                                                               |  | 1998 Stock Incentive Plan of the Registrant                                                                                                            |  | 10-Q (000-21001)             |  | 8-5-1998            |  | 10.2  |  | 
|                                                                    |  |                                                                                                                                                        |  |                              | 
|10.5#                                                               |  | 2001 Stock Incentive Plan, as amended, of the Registrant                                                                                               |  | 10-Q(000-21001)              |  | 8-10-2004           |  | 10.1  |  | 



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##### Table of Contents

|                                                  |  |                                                                                                                                                             |  |                              |  |                     |  |        |  | 
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | ------------------- |  | ------ |  | 
|Exhibit No.                                       |  | Description                                                                                                                                                 |  | Incorporated by Reference to |  | Filed withthis 10-K
|                                                  |  | Form andSEC File No.                                                                                                                                        |  | SECFiling Date               |  | Exhibit No.         | 
|10.6#                                             |  | 2001 Employee Stock Purchase Plan, as amended, of the Registrant                                                                                            |  | 10-Q (000-21001)             |  | 8-11-2003           |  | 10.2   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.7#                                             |  | Amendment, dated as of December 31, 2002, to Incentive Stock Option Agreement between the Registrant and John E. Ahern, dated as of September 21, 2000      |  | 10-K (000-21001)             |  | 3-20-2003           |  | 10.37  |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.8#                                             |  | Incentive Stock Option Agreement Granted Under 2001 Stock Incentive Plan between the Registrant and John E. Ahern, dated as of December 31, 2002            |  | 10-K (000-21001)             |  | 3-20-2003           |  | 10.34  |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.9#                                             |  | Incentive Stock Option Agreement Granted Under 2001 Stock Incentive Plan between the Registrant and Richard E. Davis, dated as of September 21, 2004        |  | 8-K (000-21001)              |  | 9-27-2004           |  | 99.1   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.10#                                            |  | Form of Incentive Stock Option Agreement Granted Under 2001 Stock Incentive Plan, as amended                                                                |  | 10-Q (000-21001)             |  | 11-10-2004          |  | 10.1   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.11#                                            |  | Form of Incentive Stock Option Agreement Granted Under 1998 Stock Incentive Plan                                                                            |  | 10-Q (000-21001)             |  | 11-10-2004          |  | 10.2   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.12#                                            |  | Form of Incentive Stock Option Letter Agreement Granted Under 1996 Stock Option Plan                                                                        |  | 10-Q (000-21001)             |  | 11-10-2004          |  | 10.3   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.13#                                            |  | Form of Nonstatutory Stock Option Letter Agreement Granted Under 1996 Stock Option Plan for Non-Employee Directors, as amended                              |  | 10-Q (000-21001)             |  | 11-10-2004          |  | 10.4   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.14#                                            |  | 2007 Stock Incentive Plan                                                                                                                                   |  | 8-K (000-21001)              |  | 6-26-2007           |  | 10.1   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.15#                                            |  | Form of Incentive Stock Option Agreement Granted Under 2007 Stock Incentive Plan                                                                            |  | 8-K (000-21001)              |  | 6-26-2007           |  | 10.2   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.16#                                            |  | Form of Nonstatutory Stock Option Letter Agreement Granted Under 2007 Stock Option Plan                                                                     |  | 8-K (000-21001)              |  | 6-26-2007           |  | 10.3   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.17#                                            |  | Restricted Stock Agreement Granted Under 2007 Stock Incentive Plan                                                                                          |  | 10-Q (000-21001)             |  | 6-26-2007           |  | 10.4   |  | 
|                                                  |  |                                                                                                                                                             |  |                             
|Material ContractsRegistration Rights Agreements |  |                                                                                                                                                             |  |                              |  |                     |  |       
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.18                                             |  | Registration Rights Agreement between the Registrant and Fletcher Spaght, Inc., dated as of February 14, 1996                                               |  | S-1 (333-06463)              |  | 6-20-1996           |  | 10.6   |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.19                                             |  | Amendment No. 1, dated as of July 1, 1998, to Registration Rights Agreement between the Registrant and Fletcher Spaght, Inc., dated as of February 14, 1996 |  | 10-K (000-21001)             |  | 4-15-1999           |  | 10.6.1 |  | 
|                                                  |  |                                                                                                                                                             |  |                              | 
|10.20                                             |  | Form of Registration Rights Agreement between the Registrant and certain of its existing stockholders, dated as of February 14, 1996                        |  | S-1 (333-06463)              |  | 6-20-1996           |  | 10.26  |  | 



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##### Table of Contents

|                                                             |  |                                                                                                                                                                    |  |                              |  |                     |  |       |  |  
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- |  | ------------------- |  | ----- |  | -
|Exhibit No.                                                  |  | Description                                                                                                                                                        |  | Incorporated by Reference to |  | Filed withthis 10-K
|                                                             |  | Form andSEC File No.                                                                                                                                               |  | SECFiling Date               |  | Exhibit No.         | 
|10.21                                                        |  | Registration Rights Agreement, dated as of March 30, 1999, among the Registrant and the individuals listed on Schedule A thereto                                   |  | 10-Q (000-21001)             |  | 5-17-1999           |  | 10.3  |  |  
|                                                             |  |                                                                                                                                                                    |  |                             
|Material ContractsLeases                                    |  |                                                                                                                                                                    |  |                              |  |                     |  |      
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.22                                                        |  | Lease by and between the Registrant and the Trustees of Wormwood Realty, dated as of May 8, 1996                                                                   |  | S-1 (333-06463)              |  | 6-20-1996           |  | 10.27 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.23                                                        |  | Amendment of Leases by and between the Registrant and Fort Point Place VEFV, LLC, as successor to Trustees of Wormwood Realty Trust, dated as of November 9, 2005 |  | 8-K (000-21001)              |  | 11-14-2005          |  | 10.1  |  |  
|                                                            
|Material ContractsLicense and Technology Related Agreements
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.24                                                       |  | License and Development Agreement by and between the Registrant and Boston Scientific Corporation, dated as of November 22, 1994                                   |  | S-1/A (333-06463)            |  | 9-5-1996            |  | 10.9  |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.25                                                       |  | Technology Purchase Agreement by and between the Registrant and Morris Simon, M.D., dated as of April 14, 1987                                                     |  | S-1/A (333-06463)            |  | 9-5-1996            |  | 10.11 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.26                                                        |  | Asset and Technology Donation and Transfer Agreement by and between C.R. Bard, Inc. and Childrens Medical Center Corporation dated as of May 12, 1995             |  | S-1/A (333-06463)            |  | 7-12-1996           |  | 10.12 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.27                                                        |  | Stock Transfer Agreement between Childrens Medical Center Corporation and InnerVentions, Inc., dated as of June 19, 1995                                          |  | S-1/A (333-06463)            |  | 7-12-1996           |  | 10.13 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.28                                                       |  | License Agreement by and between Childrens Medical Center Corporation and InnerVentions, Inc., dated as of June 19, 1995                                          |  | S-1/A (333-06463)            |  | 8-13-1996           |  | 10.14 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.29                                                        |  | Sublicense Agreement by and between Childrens Medical Center Corporation and InnerVentions, Inc., dated as of June 19, 1995                                       |  | S-1/A (333-06463)            |  | 7-12-1996           |  | 10.15 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.30                                                        |  | Assignment Agreement by and between the Registrant and The Beth Israel Hospital Association, dated as of June 30, 1994                                             |  | S-1/A (333-06463)            |  | 7-12-1996           |  | 10.16 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.31                                                       |  | Agreement by and between the Registrant and Lloyd A. Marks, dated as of April 15, 1996                                                                             |  | S-1/A (333-06463)            |  | 8-13-1996           |  | 10.17 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.32                                                        |  | License Agreement, dated as of October 2000, by and between the Registrant and Childrens Medical Center Corporation                                               |  | 10-K (000-21001)             |  | 4-2-2001            |  | 10.66 |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.33                                                       |  | Royalty Agreement, dated as of October 19, 2001, by and among the Registrant and C.R. Bard, Inc.                                                                   |  | 8-K (000-21001)              |  | 11-16-2001          |  | 10.1  |  |  
|                                                             |  |                                                                                                                                                                    |  |                              | 
|10.34                                                       |  | Supply Agreement by and between the Registrant and Organogenesis Inc., dated as of March 30, 2005                                                                  |  |                              |  |                     |  |       |  | *



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##### Table of Contents

|                                                                       |  |                                                                                                                                                                             |  |                              |  |                     |  |      |  |  
|---------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | ------------------- |  | ---- |  | -
|Exhibit No.                                                            |  | Description                                                                                                                                                                 |  | Incorporated by Reference to |  | Filed withthis 10-K
|                                                                       |  | Form andSEC File No.                                                                                                                                                        |  | SECFiling Date               |  | Exhibit No.         | 
|                                                                      
|Material ContractsEmployment Agreements and Compensation Arrangements
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|10.35#                                                                |  | Third Amended and Restated Employment Agreement by and between the Registrant and John E. Ahern, dated as of October 18, 2007                                               |  | 10-Q (000-21001)             |  | 11-8-2007           |  | 10.1 |  |  
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|10.36#                                                                |  | Amended and Restated Employment Agreement by and between the Registrant and Richard E. Davis, dated as of May 20, 2004                                                      |  | 10-Q (000-21001)             |  | 8-10-2004           |  | 10.2 |  |  
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|10.37#                                                                |  | Amendment No. 1, dated as of August 14, 2006, to the Amended and Restated Employment Agreement by and between the Registrant and Richard E. Davis, dated as of May 20, 2004 |  | 10-Q (000-21001)             |  | 11-9-2006           |  | 10.1 |  |  
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|10.38#                                                                 |  | Revised Summary of Compensation Arrangement Applicable to the Registrants Non-Employee Directors                                                                           |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|10.39#                                                                 |  | Revised Summary of Compensation Arrangement Applicable to the Registrants Named Executive Officers                                                                         |  |                              |  |                     |  |      |  | *
|                                                                      
|Additional Exhibits                                                   
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|14.1                                                                   |  | Code of Business Conduct and Ethics of the Registrant                                                                                                                       |  | 10-K (000-21001)             |  | 3-24-2004           |  | 14.1 |  |  
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|21.1                                                                   |  | Subsidiaries of the Registrant                                                                                                                                              |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|23.1                                                                   |  | Consent of Deloitte & Touche LLP                                                                                                                                            |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|23.2                                                                   |  | Consent of Ernst & Young LLP                                                                                                                                                |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|31.1                                                                   |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|31.2                                                                   |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|32.1                                                                   |  | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                            |  |                              |  |                     |  |      |  | *
|                                                                       |  |                                                                                                                                                                             |  |                              | 
|32.2                                                                   |  | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                            |  |                              |  |                     |  |      |  | *



|# | Management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to Item 15(a) of Form 10-K.
|- | -----------------------------------------------------------------------------------------------------------------------------------------

| | Confidential treatment requested as to certain portions, which portions have been separately filed with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------