<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the Year Ended December 31, 1996

COMMISSION FILE NO. 0-21001

                      NITINOL MEDICAL TECHNOLOGIES, INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)

       Delaware                                    95-4090463
-------------------------------        ----------------------------------------
(State or other jurisdiction of         (I.R.S. Employer Identification Number)
incorporation or organization)

27 Wormwood Road, Boston, Massachusetts                          02210
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
                                     None

Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.001 par value
                               (Title of Class)

     Indicate by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 of 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]

     The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant on March 7, 1997, was $65,479,560, based on the last reported
sale price of the registrant's Common Stock on the Nasdaq National Market on
that date.  Registrant had 9,435,922 shares of Common Stock outstanding as of
March 7, 1997.

Documents Incorporated By Reference
-----------------------------------

                                                                    
                                           Part of Form 10-K     
                Document                   into which incorporated  
                --------                   -----------------------  
Portions of the Registrant's Proxy         Items 10, 11, 12 and 13 of
Statement with respect to the Annual       Part III
Meeting of Stockholders to be held on
June 19, 1997
<PAGE>


                                    PART I

ITEM I.  BUSINESS
                                   BUSINESS

OVERVIEW

Nitinol Medical Technologies, Inc. (together with its subsidiaries, "the
Company" or "NMT"), designs, develops, and markets innovative medical devices
that utilize advanced materials and are delivered by minimally invasive
procedures.  These products offer alternative approaches to complex medical
treatments, thereby reducing patient trauma, shortening procedure,
hospitalization and recovery times, and lowering overall treatment costs.  The
Company's patented medical devices include self-expanding stents, vena cava
filters (the Simon Nitinol Filter or "SNF") and septal repair devices (the
CardioSEAL Septal Occluder).  The Company's strategy is to develop and
commercialize a broad range of advanced medical devices for minimally invasive
applications to address unmet medical needs.  At this time, the Company's stents
have been commercially launched in Europe for certain indications, its vena cava
filters are marketed in the United States and abroad, and the CardioSEAL device
is in U.S. and European clinical trials.

The Company has established agreements with Boston Scientific and Bard,
worldwide leaders in sales of minimally invasive medical devices, for the
distribution, sale and marketing of its stents and its Simon Nitinol Filter,
respectively.  The Company intends to continue to market products with extensive
distribution requirements through collaborations with established market
leaders.  For products with smaller and more easily accessible user groups (such
as the CardioSEAL Septal Occluder) NMT intends to develop direct marketing and
distribution capabilities.

BACKGROUND

The Company was founded in July 1986 to develop and commercialize medical
devices using nitinol.  In April 1990, the Company obtained clearance from the
Food and Drug Administration (the "FDA") to market its initial product, the
Simon Nitinol Filter, in the United States.  The Company entered into an
exclusive distribution agreement with Bard Radiology for distribution of the SNF
in the United States and certain other countries in May 1992.  The Company's
primary stent patent was issued in November 1994 and, during the same month, the
Company entered into an exclusive license agreement with Boston Scientific to
further develop, manufacture, market and distribute NMT's stents worldwide.  In
November 1995, the Company expanded its relationship with Bard by granting Bard
International the right to distribute the SNF in most markets outside the United
States.  In February 1996, the Company acquired the rights to its CardioSEAL
Septal Occluder to expand its product base and complement its core technologies.

                                      -2-
<PAGE>
 
CORE TECHNOLOGIES

NMT has developed an expertise in precisely engineering nitinol and other
advanced materials, such as MP35N, for a variety of innovative medical device
applications.  The Company has developed capabilities in advanced device
fabrication, materials characterization, manufacturing and process control and
sophisticated in vitro testing resulting in highly efficient and reliable
manufacturing processes.

Nitinol, a nickel-titanium alloy, has unique superelastic and thermal shape-
memory characteristics.  The superelastic characteristics enable a nitinol-based
device to undergo severe deformation without permanent damage to either its
shape or strength.  The thermal shape-memory characteristics of nitinol enable a
device which has been radically deformed to return to its intended shape in
response to a small change in temperature. The mechanical properties that can be
engineered into nitinol-based devices permit innovative product designs that
presently would be difficult or impossible to replicate with other materials.
The Company utilizes the thermal shape-memory characteristic of nitinol for
medical device applications.  The Company has demonstrated its ability to
utilize this characteristic to provide for ease of access and delivery of
sophisticated medical devices that transform into their intended shape once
placed into the body. Nitinol is biocompatible and non-ferromagnetic, thereby
allowing the use of magnetic resonance imaging on patients with nitinol-based
device implants.

MP35N is an advanced metal alloy which is biocompatible and resistant to
corrosion and fatigue.  The Company has combined the use of MP35N with knitted
polyester in developing the CardioSEAL Septal Occluder.  Knitted polyester, a
biocompatible fabric that encourages tissue in-growth, has been extensively used
in the vasculature for many years.

PRODUCTS

Stents

Stents are small tubes that hold open arteries, veins and other passageways in
the body, such as the bile duct, that have closed or become obstructed as a
result of disease, trauma, or aging.  Stents are placed in the body using
catheter-based delivery systems in minimally invasive procedures.  Once
deployed, they exert radial force against the walls of passageways to enable
such passageways to remain open and functional.  A number of different stent
designs, materials and delivery systems, with varying characteristics are
currently available.  The three most prevalent stent designs are slotted tubes
(a metal tube from which most of the material is removed, resulting in a
lattice-like structure), coiled stents (continuous coiled wire) and wire mesh
stents (knitted metal wire).  Most stents are currently manufactured using
stainless steel or similar alloys and are deployed through the expansion of a
balloon on a catheter-based delivery system.  After deployment, a second balloon
may be used to further expand the stent.  Certain stents, including the
Company's, are self-expanding, thereby eliminating the need for a balloon 

                                      -3-
<PAGE>
 
on the delivery catheter. The factors influencing the performance of a stent
include ease of deployment, radial strength, flexibility, stability and the
ability to achieve precise placement.

Stents have emerged as one of the fastest growing segments of the medical device
market and are used increasingly as adjuncts or alternatives to a variety of
medical procedures because it is believed that they are beneficial to overall
patient outcome and may, over time, reduce total treatment costs.

NMT's Hex-cell Stents.  The Company has developed and patented a nitinol stent
which relies on a novel hexagonal cell (hex-cell) design.  NMT's stents can be
customized into a variety of sizes, shapes, flexibilities, and radial force
characteristics for use in treating specific indications.  The Company utilizes
the thermal shape-memory characteristic of nitinol to provide for ease of access
and delivery of its stents which transform into their intended shape once placed
into the body.

Market Opportunity.  From its infancy in 1990, the stent market has grown to
estimated worldwide sales of $1 billion in 1996 with continued growth expected.
To date, most stents have been used for the treatment of atherosclerotic plaque
in the coronary arteries. The Company believes that the increase in stent usage
for other procedures and indications has been limited, in part, by the
characteristics of stents currently available. NMT believes that its stents may
offer certain advantages over currently available stents and, in connection with
its collaboration with Boston Scientific, is actively pursuing the development
of its stents in each of the market segments described below.

Peripheral Vascular.  Existing stents for vascular disease include both balloon-
-------------------                                                             
expandable and self-expanding stents.  While stent use is well established in
the larger vessels such as the iliac arteries, currently available stents have
limitations in their use in the smaller, more exposed vessels of the leg due to
difficulty of placement, insufficient radial strength and flexibility and a
higher risk of clot formation.

The Company believes that its stents may offer advantages over currently
available stents in flexibility, radial strength and placement.  NMT's stents
have precisely engineered radial strength, cannot be permanently deformed after
deployment, and can be delivered using a small diameter catheter.

Peripheral Vascular Stent Grafts.  For many patients who currently undergo
--------------------------------                                          
surgical bypass grafting for the treatment of atherosclerosis in the vessels of
the legs, the length of the blockage makes balloon dilation and traditional
stenting difficult or impractical.

The Company believes that its stents may provide for a new minimally invasive
alternative to bypass surgery using long covered stents or multiple stents
joined with graft material (stent grafts) and inserted in the vessel
percutaneously.  NMT's stents can be mated easily to graft material, cannot be
deformed by trauma to the stented vessel, can be engineered with precise radial
force to prevent movement and assure hemostasis 

                                      -4-
<PAGE>
 
(absence of blood leakage around the stent) after deployment. The self-expanding
deployment of NMT's stents may also simplify the delivery mechanics for the
physician.

Carotid Arteries.  While some stenting of the carotid arteries (located near the
----------------                                                                
surface of the neck) is being done experimentally, the Company believes that the
characteristics of current stents limit their utility in the carotid arteries.
Balloon expandable stents require occluding blood flow to the brain during
deployment.  In addition, balloon expandable stents can be permanently deformed
by compression or trauma to the stented vessel.

The Company believes its stents will not require occluding blood flow to the
brain during deployment and, unlike currently available balloon expandable
stents, cannot be permanently deformed after deployment, thereby preventing
accidental closure of the vessel.  In addition, the Company believes that its
stents can be engineered to exert precise radial force to prevent movement, are
designed to conform well to the vessel shape, have minimal length change during
deployment for highly accurate placement, and can be delivered by a small
diameter catheter.

Abdominal Aortic Aneurysm.  The Company believes that the use of a covered stent
-------------------------                                                       
or stented graft could provide a minimally invasive alternative to surgery in
the treatment of abdominal aortic aneurysm ("AAA").

The Company believes that its stents may be particularly well suited for AAA
treatment. Specifically, NMT's stents can be mated easily to grafting material
and have sustained radial force to prevent migration and assure hemostasis.  In
addition, NMT's stents have a large expansion (up to 15:1) ratio for deployment
of a large diameter stent on a small diameter catheter and are self-expanding
thereby avoiding occlusion of the aorta during deployment and simplifying the
procedure.

Biliary.  Existing stents for tumor ingrowth of the bile duct primarily include
-------                                                                        
plastic and self-expanding wire mesh stents.  Plastic stents can become blocked
rather quickly because of their narrow diameter, and the wire mesh stents, due
to their mesh design, may not resist further tumor growth.

The Company believes that its stents may have advantages for this indication.
NMT's stents have a large expansion ratio for delivery of a large diameter stent
on a small diameter catheter and exert sustained radial force which may resist
recoil from continued tumor growth.

Coronary Arteries.  Existing stents for coronary disease include balloon-
-----------------                                                       
expandable or self-expanding wire mesh stents.

The Company believes that its stents may have advantages over other stents for
use in coronary arteries.  NMT's stents are self-expanding to avoid balloon
occlusion of the vessel during placement, may not require post-deployment
ballooning, and exhibit minimal length change during deployment for highly
accurate placement.

                                      -5-
<PAGE>
 
Relationship with Boston Scientific.  In November 1994, NMT licensed to Boston
Scientific, a worldwide leader in sales of minimally invasive medical devices,
exclusive worldwide rights to develop, manufacture, market and distribute the
Company's stent technology. Boston Scientific is the leader in the peripheral
angioplasty market, a leader in the vascular graft market and a leader in the
coronary angioplasty market.  Under the terms of this agreement, Boston
Scientific funds, and has control over, product development, manufacturing
scale-up, clinical trials, marketing and distribution worldwide and has the sole
right to use the patents and technical information owned by NMT related to
stents. NMT receives a sales royalty, milestone payments, minimum license fees,
manufacturing cost reduction incentives and reimbursement of development costs.
Boston Scientific has assumed responsibility for conducting the necessary
preclinical and clinical studies, obtaining the regulatory approvals it deems
necessary, and manufacturing and marketing NMT's stents worldwide.

Boston Scientific is not prohibited from selling competing stents and has
established a broad-based stent program. In addition to its collaboration with
the Company, Boston Scientific has obtained exclusive worldwide rights to
Medinol, Ltd.'s balloon expandable stent technology and has developed its own
Strecker knitted stent technology and Sabre(TM) self-expanding stent
technology. Boston Scientific launched Medinol's NIR(TM) coronary stent in
Europe in March 1996. In May 1996, Boston Scientific acquired Mintec, Inc., a
privately held company, which develops stent graft technology and has announced
its intention to launch a device for the repair of AAAs in the near future.

The Company believes that its relationship with Boston Scientific, a market
leader which has made a significant commitment to developing stent technology,
will facilitate the development and commercialization of the Company's stents.
The Company and Boston Scientific are currently pursuing projects to develop the
Company's stents for a variety of applications.  The markets ultimately targeted
for commercial sales will be determined by Boston Scientific pursuant to the
license agreement.

Current Status.  European clinical trials for the NMT stent in peripheral
vessels have been completed by Boston Scientific.  Boston Scientific has advised
the Company that it began marketing a line of the Company's peripheral vascular
stents in Europe in January 1997 under the name Symphony and intends to seek FDA
approval of an Investigational Device Exemption ("IDE") for peripheral vascular
applications in the near future.  Boston Scientific has also initiated European
trials of the NMT stent for peripheral vascular stent grafts.  Such trials are
intended to demonstrate that a stent graft may provide for a new minimally
invasive alternative to bypass surgery using multiple NMT stents joined with
graft material and inserted in the vessel percutaneously.

Boston Scientific is completing a scale-up of its peripheral vascular stent
manufacturing capabilities in the United States to enable it to manufacture
NMT's stents in quantities to support initial commercialization in certain
markets.  The Company and Boston Scientific 

                                      -6-
<PAGE>
 
continue to work collaboratively towards the development of NMT's stents for
additional indications and to achieve manufacturing efficiencies.

Competition.  Competition in the stent market is intense and is expected to
increase. Most of the stents sold today are balloon expandable and have been
designed primarily for coronary applications.  However, the companies listed
below, as well as other companies, may be developing additional stents.  Some of
the stents being developed may be more similar to the Company's stents than
those in the market today, although the Company does not know of any competitor
that is developing a stent substantially similar to its product.

Johnson & Johnson Interventional Systems Co., Cook Inc., Guidant
Corporation/ACS, Boston Scientific/Medinol, and Arterial Vascular Engineering,
Inc., among others, currently sell stainless steel, balloon expandable stents in
the United States or internationally.

The following table lists the Company's major competitors who are currently
selling or, to the Company's knowledge, developing self-expanding stents in the
United States or internationally.

<TABLE>
<CAPTION>
          COMPANY                          MATERIAL            DESIGN       
          -------                          --------            ------      
          <S>                              <C>                 <C>         
          Pfizer, Inc./Schneider           Stainless steel     Wire mesh   
          Medtronic, Inc./Instent          Nitinol             Coil        
          Boston Scientific (Strecker)     Tantalum            Wire mesh   
          Boston Scientific (Sabre(TM))    Nitinol             Slotted tube
          Bard/Angiomed                    Nitinol             Slotted tube
          </TABLE>                                                          

Vena Cava Filters

Vena cava filters are used for the prevention of pulmonary embolism (a blood
clot lodged in the vessels supplying blood to the lungs).  These emboli (clots),
which often develop initially in the veins of the legs, can break loose and
travel up the vena cava, through the heart and into the blood vessels of the
lungs, causing acute respiratory and circulation problems.  Vena cava filters
are intended to trap these clots before they can reach the lungs.  Patients at
high risk for pulmonary embolism include post-operative orthopedic and
neurosurgery patients, cancer patients undergoing surgery and chemotherapy and
severe trauma victims.  There are 600,000 incidents of pulmonary embolism
diagnosed in the United States each year with 125,000 to 150,000 deaths per
year.  While usually treated initially with anticoagulant drugs, vena cava
filters may be used in cases where drug therapy has failed or is
contraindicated.  Factors influencing the performance of vena cava filters
include coverage of the vena cava and the pattern of the filtering method.
Additionally, the variety of entry site options and the size of the delivery
system affects ease of deployment.

                                      -7-
<PAGE>
 
Simon Nitinol Filter.  The Company has developed a nitinol vena cava filter
which possesses highly efficient clot filtering characteristics.  The Company
has engineered both the superelastic and thermal shape-memory characteristics of
nitinol to provide for ease of delivery of a vena cava filter which can be
easily implanted in the patient by a minimally invasive procedure using the
Company's patented catheter-based delivery systems.  The Company's vena cava
filter transforms into its intended shape once deployed into the body.  The SNF
can be implanted from the veins in the leg or neck, and is the only currently
available vena cava filter which can also be implanted from the veins in the
arm.

Market Opportunity.  The worldwide sales for vena cava filters were estimated to
be $60 million in 1996.  Worldwide sales for vena cava filters has grown at an
average annual rate of 14% for the past four years.  The United States
represents 75% of current worldwide sales.  NMT's vena cava filters currently
ranks second in worldwide sales. The European market is currently small but is
expected to grow as clinical data on the cost effectiveness of vena cava filter
use continues to be developed.

Current Status.  The Company received FDA 510(k) clearance to market the SNF,
and commenced sales, in April 1990.  All 510(k) notifications with respect to
subsequent modifications to the SNF have also been accepted by the FDA.  In
November 1995, the Company introduced a simplified, straight line catheter-based
delivery system for its SNF.  In November 1996, the Company received 510K
clearance for the implementation of the SNF through the subclavian vein in the
shoulder.

New Product Development.  The Company is currently developing a retrievable vena
cava filter as discussed below.

Retrievable Vena Cava Filter.  Currently available vena cava filters are
----------------------------                                            
permanent implants which can only be removed surgically.  Therefore, patients
who are at risk for pulmonary embolism for a defined period of time (post-
operative recovery, recovery from trauma, etc.) and receive a vena cava filter
have the implant in place for life.  There is often a psychological resistance
to implantation of a permanent device.  As a result, a vena cava filter is often
not used until a patient at risk has experienced his or her first pulmonary
embolism.  However, recent controlled studies conducted by others of the
prophylactic use of currently available permanent vena cava filters in severe
trauma patients have demonstrated a significant reduction in morbidity and
mortality in this category of high-risk patients for pulmonary embolism.  The
Company believes that the availability of a retrievable vena cava filter may
result in greater prophylactic use, and may be used in lieu of a permanently
implanted device in certain circumstances.

The Company is conducting early design and feasibility work on a retrievable
vena cava filter which can be placed into the body and later removed.  Vena cava
filters which remained implanted for six weeks were successfully removed from
sheep in studies conducted by the Company in April 1996.  Following additional
laboratory and animal testing, the Company anticipates commencing European
clinical trials during 1998.  The 

                                      -8-
<PAGE>
 
Company also anticipates filing an IDE for a retrievable vena cava filter during
1997 to enable the Company to conduct human clinical trials in the United
States.

Relationship with Bard.  The Company entered into an exclusive distribution
agreement in May 1992 with Bard Radiology for distribution of the SNF in the
United States and certain other countries.  Sales and market penetration for the
SNF have increased significantly as a result of this agreement.  Beginning
November 30, 1995, Bard International was granted the exclusive right to
distribute the SNF in most markets outside the United States.  NMT believes that
international sales and market share growth will increase substantially as a
result.

Each of the distribution agreements is for a five year term. Bard Radiology may
renew, at its option, its agreement thereafter for periods of five years. The
Company's agreement with Bard International renews automatically for successive
one year periods unless terminated by either party. Both distributors are
obligated to make annual minimum purchases and have agreed not to sell competing
vena cava filters during the term of the respective distribution agreements.
Bard Radiology has also agreed not to compete for an additional two years after
its distribution agreement with the Company has terminated. In addition, the
Company has granted Bard Radiology a right of first offer for any of NMT's new
devices (including the retrievable vena cava filter) which may be marketed to
interventional radiologists and for which NMT desires to enter into an exclusive
distributorship within the United States.

Manufacturing. The Company has contracted with Lake Region Manufacturing for the
production of the filter component of the SNF. The Company's agreement with Lake
Region grants Lake Region the right to manufacture a certain percentage of the
Company's worldwide requirements of the current filter until June 30, 2001. The
Company is obligated to order a minimum quantity of the current filters and pay
Lake Region a fixed price per unit. Lake Region has agreed not to manufacture
filters for a third party for a period of two years after the termination of the
agreement. The Company currently purchases the delivery systems for the SNF
under purchase orders from third-party suppliers and is in process of bringing
the final assembly of the vena cava filter system into its own facility.

Competition.  Boston Scientific, among others, currently competes with the
Company in sales of vena cava filters.  Boston Scientific introduced the
Greenfield Filter to the market in the mid-1970's and is still the predominant
leader with more than half of current unit sales of vena cava filters in the
United States.  Since the introduction of the Simon Nitinol Filter in 1990, NMT
has achieved the second highest level of sales in the United States due
primarily to its distribution agreement with Bard Radiology and the introduction
of a new simplified delivery system.  Other competitors in this market include
Cook, Inc. and B. Braun.

                                      -9-
<PAGE>
 
Septal Repair Devices

In February 1996, to expand its product base and complement its core
technologies, the Company acquired the exclusive rights to its CardioSEAL Septal
Occluder, which is designed for the repair of intracardiac shunts commonly known
as "holes in the heart." Intracardiac shunts are common medical problems,
occurring primarily in children, that result in abnormal blood flow through the
chambers of the heart.  The most common defects occur in either the atrial
("ASD") or ventricular ("VSD") septum which divide the left and right pumping
chambers of the heart.  Patients with these defects may suffer from poorly
oxygenated blood and require increased cardiac effort to adequately supply blood
to the body.  This may lead to congestive heart failure and pulmonary
hypertension, resulting in severe incapacity or even death.  The current
treatment is open heart surgery.  Open-heart surgery involves opening a
patient's chest, cutting through the sternum, connecting the patient to a
heart/lung machine and opening the heart to surgically repair the hole.  Such a
procedure is costly and generally requires up to a week of hospitalization and
an extensive recovery period.  The CardioSEAL Septal Occluder is designed to be
a minimally invasive, less costly alternative to open heart surgery.

Another common septal defect is the Patent Foramen Ovale ("PFO"), a transient
hole which may open under straining efforts (coughing, defecating, etc.).  PFO
has been implicated as a possible cause of embolic strokes, in which small blood
clots escape through the PFO and travel to the brain.  Current treatment for
patients who have experienced embolic strokes is lifelong anticoagulation
therapy, which may result in significant side effects and/or patient
noncompliance with the treatment regimen. Recently, some institutions have begun
advocating open heart surgery to close PFO's to prevent additional strokes.  The
Company believes that its septal repair device using a minimally-invasive
delivery system may address the needs of the PFO market.

CardioSEAL Septal Occluder.  The CardioSEAL Septal Occluder is a catheter-
delivered cardiac implant designed to close septal defects.  The device consists
of eight wire spring arms covered with two pieces of knitted polyester fabric
which form two opposed disk-like occluders each having an umbrella shape.  The
framework is made of MP35N, a material chosen because of its superior
characteristics as an implant material (biocompatibility and corrosion and
fatigue resistance).  Knitted polyester was chosen because of its extensive use
in the cardiovascular system and its ability to promote normal tissue in-growth.
At the center of the occluders is an inter-connection point which allows the
product to be placed within the septal defect so that one umbrella is opened on
each side of the defect.  The product is designed to be manufactured in five
diameter sizes ranging from 17mm to 40mm.

The CardioSEAL Septal Occluder is delivered to the site of the defect through a
puncture of the femoral vein in the leg. The device is loaded into a delivery
catheter and moved toward the defect site. At the defect site, the CardioSEAL
Septal Occluder is deployed through the defect and the first umbrella is opened.
The delivery system is then

                                      -10-
<PAGE>

retracted through the hole so that the first umbrella comes into contact with
the septal wall. The delivery system is then retracted further allowing the
second umbrella to open and seal the defect from both sides. Once the position
of the CardioSEAL Septal Occluder is confirmed, the physician detaches the
delivery system and removes it from the patient. To date, the CardioSEAL implant
procedures have taken approximately one hour to complete, with patients
returning home to normal activity just one to two days later.

An earlier version of the septal repair device, named the Clamshell, was
developed by Bard in collaboration with Children's Hospital of Boston.  Between
1989 and 1991 Bard sponsored clinical trials of the Clamshell in over 700
patients with a variety of cardiac conditions.  In 1991, Bard discovered
fractures of the stainless steel framework in certain of the devices implanted
during such clinical trials and, following such discovery, suspended its
clinical trials.  However, Bard subsequently submitted, and the FDA approved, a
revised IDE to permit the continued use of the Clamshell for patients with
limited therapeutic alternatives and at high risk for surgical repair of their
condition. The Company is not aware of any significant adverse clinical
consequences resulting from the observed fractures.  Extensive engineering
redesign and testing, including the use of MP35N for the framework, resulted in
significant improvements in both the fatigue and corrosion resistance of the
device.  In 1995, Bard donated the technology and associated assets to
Children's Hospital of Boston which subsequently licensed the technology to
InnerVentions.  The Company acquired the rights to develop and commercialize the
current septal repair device in February 1996.   In connection with the
acquisition, the Company acquired all of the existing development, manufacturing
and testing equipment, patent licenses, know-how and documentation necessary to
manufacture septal repair devices which had been originally developed by Bard.

Market Opportunity.  The Company believes the CardioSEAL Septal Occluder may be
suitable for approximately 55,000 patient implants annually for congenital heart
defects and approximately 145,000 adult patients annually with PFOs.  Such
estimates are based on industry reports of the total numbers of patients
diagnosed with such conditions and the Company's own analysis of the portions of
such populations for whom its device may be suitable.

Current Status.  Children's Hospital of Boston is currently conducting clinical
trials of the redesigned Clamshell device manufactured by Bard prior to the
acquisition by the Company under an IDE granted by the FDA in the second quarter
of 1996 to allow for use of the devices in patients with a variety of cardiac
conditions and at high risk for surgery.  The devices being tested by Children's
Hospital of Boston were not included in the assets acquired by the Company.
Beginning in December 1996, NMT has begun to supply Children's Hospital of
Boston with CardioSEAL Septal Occluders.  The CardioSEAL Septal Occluder is
manufactured by the Company based on the same design specifications as the
redesigned Clamshell devices being tested by Children's Hospital of Boston.

                                      -11-
<PAGE>
 
In the United States, the FDA classifies the septal repair device as a Class III
medical device, which requires receipt of pre-market approval prior to
marketing. In August 1996, NMT received approval of its IDE from the FDA to
conduct a multi-center pivotal clinical trial of the CardioSEAL in the United
States for ASDs, and implants of the device have been underway since October
1996. Participants include Children's Hospital in Boston, Yale New Haven
Children's Hospital, Miami Children's Hospital, Texas Children's Hospital in
Houston, Cleveland Clinic, Children's Hospital of Philadelphia and the Medical
Center at the University of California San Francisco. Additionally, five
European centers and one Canadian center are currently implanting the CardioSEAL
under a clinical investigational protocol. The Company is planning a European
launch of the CardioSEAL later in 1997 pending successful conclusion of these
trials. The Company will pursue clinical studies for the PFO indication
following the successful completion of its ASD trials.

New Product Development.  The Company is currently evaluating design
enhancements to the CardioSEAL Septal Occluder as well as alternative designs
for the device.  The Company is considering the use of nitinol for the device to
further reduce the size of the delivery system, further simplify the deployment
procedure and potentially broaden the range of therapeutic indications.

Marketing and Sales Strategy.  The Company intends to develop its own sales
force to market the CardioSEAL Septal Occluder and, in connection therewith, has
employed a Vice President of Marketing and Sales, Septal Repair Division, and a
European Director of Sales and Marketing.  There are approximately 150 to 200
pediatric interventional cardiologists in the United States who could
potentially implant the device.  These specialists practice at an estimated 75
to 100 institutions that provide advanced cardiac care to children.  It is
estimated that a similar number of centers would be targeted internationally.
Therefore, the Company believes that the size and scope of the target audience
is manageable with a small, specialized sales and marketing team.  The Company's
marketing strategy will require a specific physician training program prior to
selling products into any center.

Manufacturing.  The Company currently leases an approximately 27,000 square foot
manufacturing, laboratory and administrative facility in Boston, where it
manufactures its CardioSEAL Septal Occluder.  The facility includes a Class
10,000 clean room.  The Company has implemented policies and procedures intended
to allow the Company to receive ISO 9000 certification.  ISO 9000 certification
is based on adherence to established standards in the areas of quality assurance
and manufacturing process control.  This certification is a significant European
Union sales requirement that will permit the Company or its collaborators to
affix the prescribed "CE" mark to its products.  The European Union has
promulgated rules which provide that, beginning in mid-1998, medical products
may not be marketed and sold commercially in the countries of the European
Economic Area unless they receive a CE mark.

                                      -12-
<PAGE>
 
Competition.  The Company believes that only three companies, Microvena
Corporation, Dr. Osypka GmbH, and Pediatric Cardiology Custom Medical Devices
are actively developing competitive devices and that none of these companies
currently has a product on the market.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company seeks to protect its technology through the use of patents and trade
secrets.  The Company is the owner or licensee of nine issued United States
patents, and corresponding foreign patents, relating to its stents, the SNF, the
septal repair device and nitinol radiopaque markers.  In addition, the Company
has pending applications for additional patents in the United States and abroad.
The Company's owned United States and foreign patents and patent applications
cover its stents, methods of manufacturing its stents, methods and devices for
inserting its stents, its SNF and devices for inserting its SNF.  The expiration
dates of the Company's patents relating to its stents range from 2012 to 2013.
The patent for its vena cava filters expires in 2001 and the patent for its
radiopaque markers expires in 2014.  In addition, the Company is the exclusive
licensee under certain patents relating to the CardioSEAL Septal Occluder and
methods for repairing cardiac and vascular defects.  The Company also holds
licenses to certain technology used in the SNF and in nitinol septal repair
devices.

The Company also relies on trade secrets and technical know-how in the
development and manufacture of its devices, which it seeks to protect, in part,
through confidentiality agreements with its employees, consultants and other
parties.  The Company has seven trademarks, two of which are registered in the
United States Patent and Trademark Office.

LICENSED TECHNOLOGY; ROYALTY OBLIGATIONS

In connection with its septal repair device, the Company has obtained an
exclusive worldwide license from Children's Medical Center Corporation under
United States patents entitled "Occluder and Method for Repair of Cardiac and
Vascular Defects" and "Occluder for Repair of Cardiac and Vascular Defects" and
the respective corresponding foreign patents, patent applications and associated
know-how.  The license agreement provides for royalty payments of five percent
based on net sales of the Company's CardioSEAL Septal Occluder until the end of
the term of the patents or termination of the agreement.  The patents expire in
September 2012 and June 2012, respectively. Pursuant to the license agreement,
the Company is required to achieve certain milestones in exploiting the patent
rights.  The Company has achieved all required milestones to date.  If the
Company fails to achieve the milestones, Children's Medical Center Corporation
may terminate the license agreement.  The Company also has a royalty-free,
worldwide sublicense under the United States patent entitled "System for the
Percutaneous Transluminal Front-End Loading Delivery and Retrieval of a
Prosthetic Occluder" 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 

                                      -13-
<PAGE>
 
in certain other fields. The Company has also obtained an exclusive worldwide
license from Lloyd A. Marks, M.D. under the United States patent entitled
"Aperture Occlusion Device." The license agreement with Dr. Marks provides for
royalty payments based on net sales of nitinol septal repair devices which are
covered by the patent until the end of term of the patent in 2011. Certain
minimum royalty payments must be paid regardless of net sales.

In connection with the Simon Nitinol Filter, the Company entered into a
Technology Purchase Agreement dated April 14, 1987 with Morris Simon, M.D., the
Company's Scientific Director and co-founder.  Pursuant to the agreement, Dr.
Simon assigned all the technology relating to the SNF to the Company in exchange
for certain royalty payments based on net sales of technology invented by Dr.
Simon relating to the SNF, to continue perpetually unless the agreement is
sooner terminated.  Dr. Simon agreed not to compete with the Company in the vena
cava filter market during the term of the agreement.  In connection with the
agreement, Beth Israel Hospital Association granted the Company an exclusive
worldwide license under U.S. patent entitled "Blood Clot Filter."  In
consideration for the license, Dr. Simon assigned a percentage of his royalty
payments from the Company to Beth Israel Hospital Association.

Pursuant to their respective employment agreements, the Company has agreed to
pay royalties of one to five percent to Messrs. Kleshinski and Harry based on
sales or licenses of products where either Mr. Kleshinski or Dr. Harry, as the
case may be, was the sole or joint inventor.

AGREEMENTS WITH BOSTON SCIENTIFIC AND BARD

Boston Scientific

In November 1994, NMT entered into an agreement with Boston Scientific,
pertaining to its stent technology.  Under the terms of the agreement, NMT
granted to Boston Scientific exclusive worldwide rights to develop, manufacture,
market and distribute products incorporating NMT's stent technology.  Boston
Scientific has the right to market and advertise products based on the Company's
stent technology exclusively under its own name and the Company has no right to
any trademarks or tradenames developed by Boston Scientific.  Boston Scientific
has exclusive control over, and is responsible for, funding product development,
manufacturing scale-up, clinical trials, marketing and distribution worldwide.
Boston Scientific is not prohibited from developing or selling competing stents.

Boston Scientific is obligated to pay NMT a percentage of revenue from the sale
of products using NMT's stent technology.  If the fees payable are less than
certain minimum levels, Boston Scientific must pay the difference or NMT can
elect to make the license non-exclusive.  Boston Scientific is also obligated to
make payments upon the occurrence of certain developmental events and the
achievement of certain manufacturing cost reductions, and reimburse certain
development costs.

                                      -14-
<PAGE>
 
The term of the agreement is for the longer of 20 years from market launch or
the date on which the last NMT patent relating to stents expires.  Boston
Scientific also has the perpetual non-exclusive and royalty-free right to
manufacture, use and sell all products as to which it has previously paid
licensing fees and on products for which all applicable patents have expired or
have been held invalid.  Such additional rights granted to Boston Scientific
survive termination of the agreement.

Bard

The Company has entered into strategic distribution agreements with Bard
Radiology (as amended, the "Bard Radiology Agreement") and Bard International
(the "Bard International Agreement") to distribute the SNF in the United States
and certain other countries.

The Bard Radiology Agreement, signed in May 1992 and amended in February 1993
and October 1995, grants Bard Radiology the exclusive right to distribute the
Simon Nitinol Filter, and any changes, improvements or modifications thereto, in
the United States and certain other countries for a five year term renewable by
Bard Radiology for additional five year terms thereafter.  The Company also
granted Bard Radiology a right of first offer to obtain exclusive distribution
rights in the United States for any new devices developed by the Company that
may be marketed to interventional radiologists and for which NMT desires to
enter into an exclusive distributorship within the United States. The Company
sells the SNF to Bard Radiology at determined prices and Bard Radiology is
required to purchase certain minimums to maintain its exclusivity.  Bard
Radiology has further agreed not to compete with the Company in the vena cava
filter market during the term of the agreement and for two years after
termination.  The Company has agreed not to make or sell any competing device as
long as Bard maintains its exclusivity under the agreement.

The Bard International Agreement, signed in November 1995, grants Bard
International the exclusive right to distribute the Simon Nitinol Filter, and
any changes, improvements or modifications thereto, worldwide (excluding the
United States and certain other countries) for a five year term which is
automatically renewed for successive one year periods unless terminated by
either party.  The Company sells the SNF to Bard International at determined
prices and Bard International is required to make certain minimum purchases
which, if not met, could result in termination of the agreement by the Company.
Bard International has further agreed not to compete with the Company in the
vena cava filter market during the term of the Bard International Agreement.

                                      -15-
<PAGE>
 
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 (the "FDA Act") and generally require pre-market
clearance or pre-market approval prior to commercial distribution. In addition,
certain material changes or modifications to medical devices also are 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, distribution and production 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, 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 cost of any
device manufactured or distributed by the Company.

Medical devices are classified into one of three classes, Class I, II or III, on
the basis of the controls deemed by the FDA to be necessary to reasonably ensure
their safety and effectiveness.  Generally, Class III devices are those that
must receive pre-market approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have not been found to be substantially equivalent to
legally marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices. A
PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed predicate device or if it is a Class III device
for which the FDA has called for such applications.

If human clinical trials of a device are required and if the device presents a
"significant risk," the manufacturer or distributor of the device is required to
file an IDE application with the FDA prior to commencing human 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 agency.  Sponsors of
clinical trials are permitted to sell those devices distributed in the course of
the study provided such costs do not exceed recovery of the costs of
manufacture, research, development and handling.  The clinical trials must be
conducted under the auspices of an independent institutional review board
("IRB") established pursuant to FDA regulations.  If one or more IRBs determine
that a clinical trial involves a "nonsignificant risk" device, the sponsor of
the study is not required to obtain FDA approval of an IDE application before
beginning the study.  However, prior IRB approval of the study is required and
the study must be conducted in compliance with the applicable FDA regulations,
including, but not limited to, FDA regulations regarding the protection of human
subjects.

                                      -16-
<PAGE>
 
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 ("510(k) notification") submission or approval of a PMA
application.  If a medical device manufacturer or distributor 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 has not called for PMAs, the
manufacturer or distributor may seek clearance from the FDA to market the device
by filing a 510(k) notification.  The 510(k) notification may need to be
supported by appropriate data establishing the claim of substantial equivalence
to the satisfaction of the FDA.  The FDA recently has been requiring a more
rigorous demonstration of substantial equivalence.

If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek pre-market approval of the proposed device
through submission of a PMA application.  A PMA application must be supported by
extensive data, including preclinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device.
Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will "file" the application.  Under the FDC Act, the FDA has 180 days to review
a filed PMA application, although the review of an application more often occurs
over a protracted time period, and generally takes approximately two years or
more from the filing date to complete.

Certain Class III devices that were on the market before May 28, 1976
("preamendments Class III devices"), and devices that are determined to be
substantially equivalent to them, can be brought to market through the 510(k)
process until the FDA, by regulation, calls for PMA applications for the
devices.  Generally, the FDA will not grant 510(k) clearance for such devices
unless the facilities at which they are manufactured successfully undergo an FDA
pre-approval GMP inspection.  In addition, the FDC Act requires the FDA either
to down-classify preamendments Class III devices to Class I or Class II, or to
publish a classification regulation retaining the devices in Class III.
Manufacturers of preamendments Class III devices that the FDA retains in Class
III must have PMA applications accepted by the FDA for filing within 90 days
after the publication of a final regulation in which the FDA calls for PMAs.  If
the FDA calls for a PMA for a preamendments Class III device, a PMA must be
submitted for the device even if the device has already received 510(k) pre-
market clearance; however, if the FDA down-classifies a preamendments Class III
device to Class I or Class II, a PMA application is not required.  The FDA's
reclassification determinations are to be based on safety and effectiveness
information that manufacturers of certain preamendments Class III devices are
required to submit to the FDA as set forth in two FDA orders published in August
1995.

The Company's first product, the SNF, underwent significant clinical
investigation under an IDE and received 510(k) clearance in 1990.  Subsequent
improvements and modifications to the SNF have also received 510(k) clearance
from the FDA.  The 510(k) 

                                      -17-
<PAGE>
 
clearances for the SNF were based on substantial equivalence of the device to
other cardiovascular intravascular filters, which are preamendments Class III
devices. The FDA has characterized cardiovascular intravascular filters as not
likely candidates for down-classification under the reclassification provisions
of the FDC Act pertaining to preamendments Class III devices. Thus, it is likely
that the FDA will call for PMAs for cardiovascular intravascular filters and
that the Company will be required to have a PMA for the SNF accepted for filing
by the FDA within 90 days after the date that the FDA calls for PMAs. The
Company believes it would be able to file a PMA within a 90 day time frame
utilizing its existing clinical data. If the FDA were to require the Company to
conduct a new clinical study to support the safety and efficacy of the SNF, the
preparation of the PMA would take substantially longer than 90 days. Upon timely
filing of a PMA, the Company believes, based on the FDA's announced position as
to certain other preamendments Class III medical devices, that the FDA would
permit continued commercial distribution of the SNF during the time necessary to
review the PMA. On July 22, 1996, the Company submitted safety and effectiveness
data to the FDA in accordance with one of the August 1995 FDA orders addressing
the classification of preamendments Class III devices. The FDA will use this
data, along with data furnished by manufacturers of similar devices, in
determining the final classification of the SNF.

Boston Scientific is responsible for applying for registrations and regulatory
approvals it deems necessary for NMT's stents. It is believed that each of the
vascular indications for the stent (coronary arteries, carotid arteries,
peripheral vascular, AAA and peripheral vascular stent grafts) will require
separate PMA applications prior to commercialization in the United States.
Boston Scientific has completed clinical trials in Europe of NMT's stents for
peripheral vascular applications and has initiated clinical trials for
peripheral vascular stent graft applications.

The septal repair device will also be subject to the PMA process in the United
States. NMT submitted an application for an IDE to the FDA in May 1996 which was
subsequently approved and the Company began a multi-center, pivotal clinical
trial in the United States for ASDs in October 1996.

The Company is currently manufacturing its septal repair device.  The Company's
manufacturing facilities is required to be registered with the FDA and is
subject to the GMP regulations.  FDA approval will be required before the
Company may begin commercial distribution in the United States of medical
devices from its own manufacturing facilities.

The advertising of most FDA-regulated products is subject to both FDA and
Federal Trade Commission jurisdiction.  The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.

Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.  The
time required to 

                                      -18-
<PAGE>
 
obtain approvals required by foreign countries may be longer or shorter than
that required for FDA approval, and requirements for licensing may differ from
FDA requirements.

The current regulatory environment in Europe for medical devices differs
significantly from that in the United States.  There is currently no universally
accepted definition of a medical device in Europe and there is no common
approach to medical device regulation among the various countries.  There are
several different regulatory regimes operating within the different European
countries.  Regulatory requirements for medical devices range from no
regulations in some countries to rigorous regulations approaching the
requirements of the FDA's regulations for Class III medical devices.  Several
countries require that device safety be demonstrated prior to approval for
commercialization.  The regulatory environment in certain European countries is
expected to undergo major changes as a result of the creation of medical device
directives by the European Union. In particular, the European Union has
promulgated rules which provide that, beginning in mid-1998, medical products
may not be marketed and sold commercially in the countries in the European
Economic Area unless they receive a CE mark.


THIRD PARTY REIMBURSEMENT

Health care providers in the United States, such as hospitals and physicians,
that purchase medical devices such as stents, generally rely on third party
payers, principally Medicare, Medicaid and private health insurance plans, to
reimburse all or part of the costs and fees associated with the Company's
devices.  Major third party payers reimburse inpatient medical treatment,
including all operating costs and all furnished items or services, including
devices such as the Company's, at a prospectively fixed rate based on the
diagnosis-related group ("DRG") that covers such treatment as established by the
federal Health Care Financing Administration.  For interventional procedures,
the fixed rate of reimbursement is based on the procedure or procedures
performed and is unrelated to the specific devices used in that procedure.  The
amount of profit relating to the procedure may be reduced by the use of the
Company's devices.  If a procedure is not covered by a DRG, certain third party
payers may deny reimbursement. Alternatively, a DRG may be assigned that does
not reflect the costs associated with the use of the Company's devices,
resulting in underreimbursement.  If, for any reason, the Company's products
were not to be reimbursed by third party payers, the Company's ability to sell
its 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 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.  The Company believes that domestic health care
providers currently are reimbursed for the cost of purchasing the 

                                      -19-
<PAGE>
 
Company's SNF. 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, the Company's ability to
achieve significant market penetration may depend upon the availability of third
party governmental reimbursement. The Company's independent distributors, and
the health care providers to whom such distributors sell, obtain any necessary
reimbursement approvals.

PRODUCT LIABILITY AND INSURANCE

The Company's business involves the risk of product liability claims.  The
Company has not experienced any product liability claims to date.  The Company
maintains product liability insurance with coverage limits of $10 million per
occurrence and an annual aggregate maximum of $10 million.

EMPLOYEES

As of December 31, 1996, NMT employed 39 full-time and two part-time employees.
Further staff will be added as required by the demands of the manufacturing
scale-up for the septal repair device and other development programs.  No
employees are covered by collective bargaining agreements, and the Company
believes it maintains good relations with its employees.


ITEM 2.   PROPERTIES

The Company currently leases an approximately 27,000 square foot manufacturing,
laboratory and administrative facility in Boston which it fully occupied
commencing in the third quarter of 1996.

The Company's principal executive offices are located at 27 Wormwood Street,
Boston, MA 02210, and its telephone number is (617) 737-0930.


ITEM 3.   LEGAL PROCEEDINGS

The Company has 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 fiscal year 1996.


EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------

     The executive officers of the Company and their ages as of March 7, 1997
are as follows:
<TABLE>
<CAPTION>
 
 
         NAME                AGE            POSITION
         ----                ---            --------
<S>                          <C>    <C>
 
Thomas M. Tully               51    President, Chief Executive
                                    Officer and Director
 
David A. Chazanovitz          46    President, Septal Repair
                                    Division
 
Theodore I. Pincus            54    Executive Vice President and
                                    Chief Financial Officer
</TABLE> 


THOMAS M. TULLY has served as President, Chief Executive Officer and Director of
NMT since January 1996.  From June 1995 to January 1996 Mr. Tully served as a
consultant to the Company.  From May 1994 to April 1995, Mr. Tully served as
President of the Institute of Molecular Biology, a biotechnology company focused
on tissue repair and regeneration and from August 1991 to March 1994, Mr. Tully
served as President of Organogenesis, Inc., a biotechnology company focused on
the commercialization of medical device applications of tissue engineering.
Prior to that Mr. Tully served for three years as the President of the Schneider
division of Pfizer, Inc., which concentrates on interventional radiology and
cardiology, and spent nine years in various executive positions in consumer
products and medical devices at Johnson & Johnson, Inc. and was founding
President of Johnson & Johnson Interventional Systems, an interventional
medicine company.

DAVID A. CHAZANOVITZ has served as President of NMT's Septal Repair Division
since January 1996.  He has over 20 years of experience in the medical products
business. Mr. Chazanovitz served as President and Chief Executive Officer of
InnerVentions from April 1995 until January 1996.  Mr. Chazanovitz was employed
by Bard from 1979 to 1995 in various positions including President of the USCI
Angiography Division, Bard Electrophysiology Division and Bard Ventures Division
where he was a founder. During his last two and one-half years at Bard Mr.
Chazanovitz had overall responsibility for the septal defect repair program.


THEODORE I. PINCUS has served as Chief Financial Officer of the Company, as a
part-time employee since June 1995 and became an Executive Vice President and a
full-time employee in May 1996.  From September 1993 to April 1996 he served as
Chief Financial Officer of Immunotherapy, Inc., a privately-held
biopharmaceutical company, and for the past six years until joining the Company
as a full-time employee he had been President of The Pincus Group, a management
consulting firm.  From August 1992 to March 1995 he also served as the Chief
Financial Officer of Biofield Corp., then a privately-held medical device
company.  Mr. Pincus is a Certified Public Accountant and from 1985 to 1989 he
was a partner at Ernst & Young, an accounting firm.

                                     -20-
<PAGE>
 
                                    PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Prices

The Company's Common Stock has been trading on the Nasdaq National Market under
the symbol "NMTI" since the Company's initial public offering on September 27,
1996. Prior to the Company's initial public offering, there was no established
public trading market for the Company's Common Stock.  There were 194
shareholders of record of the Company's Common Stock on February 28, 1997.  The
following table lists the high and low bid prices for the third quarter (for the
period from September 27, 1996 through September 30, 1996) and fourth quarter of
1996.

<TABLE>
<CAPTION>
     Period             High     Low
     ------             ----     ---
     <S>               <C>       <C>
 
     Third quarter     12 1/4     11
     Fourth quarter    12 1/2     10
</TABLE>

Dividend Policy

From the Company's inception through October 19, 1995, the Company was an "S"
corporation for federal and state income tax purposes.  As such, the Company
generally was not subject to federal or state income taxes, but its income was
taxable to its stockholders.  The Company declared and paid dividends in the
aggregate amount of $600,000 for such period.

The Company does not anticipate declaring or paying cash dividends in the
foreseeable future.  The Company expects that any earnings which it may realize
will be retained for use in its business.


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the
Company.  The selected consolidated financial data are derived from the
Company's Consolidated Financial Statements, which have been audited by Arthur
Andersen LLP, independent public accountants.  The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements and the Notes thereto and the other financial
information appearing elsewhere in this Annual Report on Form 10-K.

                                     -21-
<PAGE>
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,

                                            1992      1993      1994      1995      1996
                                            ----      ----      ----      ----      ----
<S>                                       <C>       <C>       <C>       <C>       <C>
In thousands, except per share data
STATEMENT OF OPERATIONS DATA:
Revenues:
   Product sales                          $ 2,073   $ 2,003   $ 1,837   $ 2,716   $ 4,557
   License fees                                --        --       773       625     2,375
   Product development                         --        --        38       492        92
                                          -------   -------   -------   -------   -------
                                            2,073     2,003     2,647     3,833     7,024
Expenses:
   Cost of product sales                      497       655       812     1,264     2,387
   Research and development                   210       272       555       871     2,662
   General and administrative                 536       468       770       871     2,284
   Selling and marketing                      454       285       182       169       311
   In-process research and development(1)      --        --        --        --     1,111
                                          -------   -------   -------   -------   -------
                                            1,697     1,680     2,319     3,175     8,755
                                          -------   -------   -------   -------   -------
Income(loss) from operations                  376       323       328       658    (1,731)
Interest income (expense), net               (136)      (62)      (39)      (29)      568
                                          -------   -------   -------   -------   -------
Income(loss) before provision for income  
   taxes                                      240       261       289       628    (1,163)
Provision for income taxes(2)                  --        --        --        44        --
                                          -------   -------   -------   -------   -------
Net income(loss)                           $  240   $   261   $   289   $   584   $(1,163)                     
                                          =======   =======   =======   =======   =======
Net income(loss) per common and           
   common equivalent share(2)              $  .04   $   .04   $   .04   $   .09   $  (.15)
                                          =======   =======   =======   =======   =======
Weighted average common and common        
   equivalent shares outstanding(3)         6,441     6,415     6,593     6,722     7,829
Cash dividends declared per common          
   share (4)...........................    $   --   $    --   $   .13   $   .03   $    --
                                          =======   =======   =======   =======   =======
</TABLE> 

<TABLE> 
<CAPTION>                                           
                                                         AT DECEMBER 31,

                                             1992      1993      1994      1995      1996
                                             ----      ----      ----      ----      ----
<S>                                       <C>       <C>       <C>       <C>       <C>
In thousands                                
BALANCE SHEET DATA:
 
Cash and cash equivalents                 $   205   $   644   $   715   $   533   $ 4,082
Short-term investments                         --        --        --        --    25,274
Working capital (deficit)                     415       512        68    (1,277)   30,301
Total assets                                1,207     1,152     1,253     1,661    34,930
Long-term obligations                       2,141     1,957     1,690        --       416
Stockholders' equity (deficit)             (1,457)   (1,190)   (1,331)     (844)   33,320
</TABLE> 
_______________________

(1) Relates to a write-off of in-process research and development incurred in
    connection with the Company's acquisition of the septal repair device
    technology.  See Note 3 of the Notes to Consolidated Financial Statements.
(2) In the periods prior to October 19, 1995 the Company elected to be taxed as
    an "S" corporation for income tax purposes. Accordingly, there was no
    provision for income taxes in these periods. See Note 4 of the Notes to
    Consolidated Financial Statements.
(3) Computed on the basis described in Note 2 of the Notes to Consolidated
    Financial Statements.
(4) Computed based on the actual number of common shares outstanding at the time
    the dividend was declared.  In the periods prior to October 19, 1995 the
    Company elected to be taxed as an "S" corporation for income tax purposes.

                                     -22-
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.  This Annual
Report on Form 10-K includes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements.  All such
forward-looking statements involve known and unknown risks, uncertainties or
other factors which may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.   There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."

OVERVIEW

Since its inception in 1986, the Company has focused its efforts on the design,
development and commercialization of medical devices which are delivered by
minimally invasive procedures.  The products developed or under development
include self-expanding stents, vena cava filters and septal repair devices.

The Company's initial product, a vena cava filter system, was given FDA
clearance in 1990.  This product is distributed in the United States and certain
other countries by Bard Radiology and in other markets outside the United States
by Bard International. Both distributors are obligated to make annual minimum
purchases.  The filter component of the current vena cava filter system is
manufactured by Lake Region Manufacturing Inc.  ("Lake Region").  The Company
currently purchases components of its delivery systems and final assembly of the
vena cava filter system under purchase orders with third party suppliers.  The
Company is in the process of bringing the final assembly of the vena cava filter
system into its own facility.

In November 1994, the Company entered into an agreement with Boston Scientific
pursuant to which Boston Scientific obtained exclusive worldwide rights to
develop, manufacture, market and distribute the Company's stent technology and
products which incorporate such technology.  Under this license agreement,
Boston Scientific is responsible for performing clinical trials for stents under
development and for reimbursing the Company for stent development costs incurred
by the Company.  These reimbursements are classified as product development
revenues in the Consolidated Statement of Operations.  The Company also receives
license fees, including milestone payments, from Boston Scientific under this
license agreement.  Upon commercialization, the Company will receive royalties
based upon product sales and certain manufacturing cost reduction incentives
from Boston Scientific under the license agreement.  The Company's revenues in
the periods discussed below include such license fees and 

                                     -23-
<PAGE>
 
reimbursements. Most of its costs associated with its stents are included in
research and development expenses.

In February 1996, the Company acquired, through the issuance of Common Stock,
the rights to develop and commercialize its septal repair device.  The Company
commenced sales of the CardioSEAL Septal Occluder at the end of September 1996
in connection with clinical trials of the device.  The Company manufactures this
device at its own facility.

In 1996, the Company significantly increased the scope of its operations,
including the addition of a new Chief Executive Officer, an Executive Vice
President and Chief Financial Officer and a President of the Septal Repair
Division, which was formed in February 1996.  In addition, in April 1996, the
Company entered into a lease for a new manufacturing, laboratory and
administrative space which increased the Company's annual facility lease
payments by approximately $400,000.  The Company took full occupancy of the
facility in September 1996.  The Company expects operating expenses to increase
significantly as it continues clinical trials for the CardioSEAL Septal
Occluder, accelerates its other product development programs and builds the
infrastructure necessary to commercialize its technologies.

The Company has agreed to make certain royalty payments to Children's Medical
Center Corporation based on net sales of the CardioSeal Septal Occluder.  The
Company has also agreed to pay certain royalties to Morris Simon, M.D., the
Company's Scientific Director and co-founder, based on sales of products using
the technology invented by Dr. Simon relating to the SNF.  In addition, pursuant
to the Company's employment agreements with Mr. Kleshinski and Dr. Harry,
respectively, the Company has agreed to pay certain royalties based on sales or
licenses of products where either Mr. Kleshinski or Dr. Harry, as the case may
be, was the sole or joint inventor.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

Revenues.  Revenues for the year ended December 31, 1996 increased to $7.0
million from $3.8 million for the year ended December 31, 1995 (an 84%
increase).  Product sales increased to $4.6 million for the year ended December
31, 1996 from $2.7 million for the year ended December 31, 1995 (a 70%
increase).  The increase in product sales was primarily due to increased unit
sales of vena cava filters, which in turn, was primarily due to the introduction
of the straight-line delivery system in November 1995, and the commencement of
sales of the CardioSEAL Septal Occluder in connection with clinical trials of
the device at the end of September 1996.  The Company recorded $2.5 million in
license fees from Boston Scientific related to its stent technology in the year
ended December 31, 1996, consisting of $1,625,000 in milestone payments and
$750,000 in  minimum royalty payments.  Product development revenues from Boston
Scientific (which consist of reimbursement of certain costs incurred by the
Company) decreased to $92,000 for the year ended December 31, 1996 from $492,000
for the year ended

                                     -24-
<PAGE>
 
December 31, 1995 (an 81% decrease), due to the completion of the Company's
transfer of its stent technology to Boston Scientific in November 1995 which has
reduced the stent development costs incurred by the Company on behalf of Boston
Scientific.

Cost of Product Sales.  Cost of product sales increased to $2.4 million for the
year ended December 31, 1996 from $1.3 million for the year ended December 31,
1995 (an 85% increase).  The cost of product sales in 1995 was entirely related
to sales of vena cava filters.  The cost of product sales in 1996 includes sales
of vena cava filters and CardioSEAL Septal Occluders.  The increase from 1995 to
1996 reflects the increase in vena cava filters sold in the year ended December
31, 1996 and the commencement of sales of the CardioSEAL Septal Occluder in
connection with clinical trials of the device at the end of September 1996.
Cost of product sales, as a percent of product sales, increased to 52% for the
year ended December 31, 1996 from 47% for the year ended December 31, 1995.
This increase reflects the impact of the introduction of the vena cava filter
straight-line delivery system in November 1995, which has a higher unit
manufacturing cost as a percent of the selling price, and start-up manufacturing
costs related to the commencement of sales of the CardioSEAL Septal Occluder in
connection with clinical trials of the device at the end of September 1996.

Research and Development.  Research and development expense increased to $2.7
million for the year ended December 31, 1996 from $871,000 for the year ended
December 31, 1995 (a 210% increase).  The increase reflects increased activity
in the Company's development programs for vena cava filters, the CardioSeal
Septal Occluder and other products under development.  Increased expenses
resulted primarily from increases in personnel and related costs, engineering
expenses and facilities related costs.  The Company received reimbursement from
Boston Scientific for $92,000 and $492,000 of these expenses in the years ended
December 31, 1996 and 1995, respectively, which amounts are included in
revenues.

General and Administrative.  General and administrative expenses increased to
$2.3 million for the year ended December 31, 1996 from $871,000 for the year
ended December 31, 1995 (a 164% increase).  The increase consisted primarily of
increases in personnel and related costs, legal and professional fees and
consulting expenses.  These increases resulted from the Company's expanded scope
of operations.

Selling and Marketing.  Selling and marketing expenses increased to $311,000 for
the year ended December 31, 1996 from $169,000 for the year ended December 31,
1995 (an 84% increase).  The increase related primarily to the introduction of
the vena cava filter straight-line delivery system in November 1995 and to pre-
marketing activities related to the CardioSEAL Septal Occluder.  Selling and
marketing expenses for the year ended December 31, 1995 were entirely related to
vena cava filters.

In-Process Research and Development.  For the year ended December 31, 1996, the
Company recorded a charge of $1.1 million for in-process research and
development related to the CardioSEAL Septal Occluder which was acquired in
February 1996.  See Note 3 of the Notes to Consolidated Financial Statements.

                                     -25-
<PAGE>
 
Interest Income (Expense), Net.  Interest income, net was $569,000 for the year
ended December 31, 1996 as compared to interest expense, net amounting to
$29,000 for the year ended December 31, 1995.  This increased net interest
income was primarily due to the receipt in February 1996 of $7.5 million in net
proceeds from the sale of Convertible Preferred Stock and the closing of the
Company's initial public offering of 3,150,000 shares of common stock (including
150,000 shares sold pursuant to the underwriters' exercise of the over-allotment
option) in October 1996, resulting in net proceeds to the Company of $31.2
million.  Interest expense in 1996 consisted primarily of interest on
subordinated debt to stockholders, which was fully repaid in April 1996, and
interest on capital lease obligations.  Interest expense in 1995 consisted
primarily of interest on subordinated debt to stockholders.

Income Taxes.  The Company had no income tax provision for the year ended
December 31, 1996 as it incurred an operating loss.  Prior to October 19, 1995,
the Company elected to be taxed as an "S" Corporation for federal and state
income tax purposes and, accordingly, the financial statements for the year
ended December 31, 1995 do not include a provision for income taxes for the
period from January 1, 1995 to October 19, 1995.  The provision for income taxes
relates to the period from October 19, 1995 to December 31, 1995 and consists of
certain state income taxes.  The Company has not recorded a pro forma tax
provision as there would have been sufficient net operating loss carry forwards
to offset income in 1995.  See Note 4 of the Notes to Consolidated Financial
Statements.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994

Revenues.  Revenues increased to $3.8 million in 1995 from $2.6 million in 1994
(a 46% increase).  Product sales of vena cava filters increased to $2.7 million
in 1995 from $1.8 million in 1994 (a 50% increase).  This increase is primarily
due to increased unit sales of vena cava filters which the Company attributes
primarily to the distribution agreements with Bard.  License fees, which consist
of payments from Boston Scientific related to the Company's stent technology,
decreased to $625,000 in 1995 from $773,000 in 1994 (a 19% decrease).  License
fees in 1995 represent amounts received upon the achievement of a contractual
milestone.  License fees in 1994 represented initial license fees received from
Boston Scientific upon entering into the license agreement in November 1994.
Product development revenues increased to $492,000 in 1995 from $38,000 in 1994.
The significant increase in 1995 reflects a full year of development efforts
funded by Boston Scientific under the agreements entered into in November 1994.

Cost of Product Sales.  Cost of product sales increased to $1.3 million in 1995
from $812,000 in 1994 (a 60% increase). The increase in cost of product sales
reflects the increase in vena cava filter units sold in 1995. Cost of product
sales, as a percent of product sales, increased to 47% in 1995 from 44% in 1994
primarily due to the introduction of the vena cava straight-line delivery system
in November 1995, which has a higher unit manufacturing cost as a percent of the
selling price.

                                     -26-
<PAGE>
 
Research and Development.  Research and development expenses increased to
$871,000 in 1995 from $555,000 in 1994 (a 57% increase).  The increase reflects
increased product development and patent registration costs associated with the
development of the Company's stent technology which was licensed to Boston
Scientific in November 1994. Increased expenses resulted primarily from
increases in personnel, engineering expenses and facilities related costs.  The
Company received reimbursement from Boston Scientific for $492,000 and $38,000
of these expenses in 1995 and 1994, respectively, which amounts are included in
revenues.

General and Administrative.  General and administrative expenses increased to
$871,000 in 1995 from $770,000 in 1994 (a 13% increase).  The increase is
primarily due to the expansion of the Company's infrastructure necessary to
support the growth of the Company and increases in product development
activities.  Increased expenses consisted primarily of increases in personnel
and related costs and consulting expenses.

Selling and Marketing.  Selling and marketing expenses decreased to $169,000 in
1995 from $182,000 in 1994 (a 7% decrease).  Selling and marketing expenses in
1995 and 1994 are entirely related to the Company's vena cava filter.

Interest Income (Expense), Net.  Interest expense, net decreased to $29,000 in
1995 from $39,000 in 1994 (a 26% decrease).  The decrease reflects the repayment
of subordinated debt to stockholders.  Interest income in 1995 and 1994 was not
significant.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations primarily through cash flows from
operations of $525,000 and $1.2 million in the years ended December 31, 1995 and
1994, respectively. In the year ended December 31, 1996, operations utilized
cash of $1.7 million which was used primarily to fund operating losses and for
working capital. Cash flows from operations reflect $500,000 of upfront license
fees and a $100,000 advance product development billing received from Boston
Scientific in 1994 and recorded as deferred revenue. Cash flow from operations
was used to fund increases in accounts receivable of $459,000 and $238,000 in
the years ended December 31, 1996 and December 31, 1995, respectively. Such
increases reflect the increases in product sales and the timing of such product
sales. 

In February 1996, the Company received approximately $7.5 million in net
proceeds from the sale of 3,787,104 shares of Convertible Preferred Stock, which
funds were used in part to accelerate its facilities and infrastructure
expansion. In the year ended December 31, 1996 and the year ended December 31,
1994, the Company made distributions to its stockholders of $100,000 and
$500,000, respectively. In 1994, the Company began repaying a $1.5 million loan
received in 1992 from Bard. Loan payments were based upon the number of domestic
vena cava units sold to Bard Radiology. The loan was fully repaid by the end of
1996. Payments during the years ended December 31, 1996, 1995 and 1994 amounted
to $781,000, $477,000 and $242,000, respectively. In addition, during the years
ended December 31, 1996, 1995 and 1994, the Company repaid subordinated debt to
its stockholders amounting to $309,000, $2,500, and $329,000, respectively.

                                     -27-
<PAGE>
 
Purchases and capitalized leases of property and equipment for use in its
research and development and general and administrative activities amounted to
$201,000 during the year ended December 31, 1995 and $2.2 million during the
year ended December 31, 1996.  In May 1996, the Company entered into a lease for
a new manufacturing, research and administrative facility which increased its
annual facility lease payments by approximately $400,000 beginning in the third
quarter of 1996.  In connection therewith, the Company incurred costs for
leasehold improvements of approximately $1 million in 1996, net of the
landlord's contribution. The Company entered into a $1.5 million equipment lease
line of credit agreement without covenants, which can be used through June 1997,
of which approximately $950,000 was unused at December 31, 1996. The Company
anticipates incurring costs for additional leasehold improvements and purchases
of equipment and furniture.

The Company is party to various other substantial contractual arrangements
including salaries and fees for current employees and consultants which are
likely to increase as additional agreements are entered into and additional
personnel are retained.  The Company has also committed to purchase certain
minimum quantities of the vena cava filter from a supplier through June 2001.
See Note 8 to the Notes to Consolidated Financial Statements.  All of these
arrangements require cash payments by the Company over varying periods of time.
Certain of these arrangements are cancelable on short notice and certain require
termination or severance payments as part of any early termination.

The Company believes that its existing resources and cash flow from current
operations will be sufficient to fund its current level of operations and
planned new product development, including increased working capital
requirements and capital expenditures, for the foreseeable future.  The Company
expects to expend substantial resources to complete development of the Company's
products, seek regulatory clearances or approvals, build its marketing, sales
and manufacturing organizations and conduct further research and development.

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

                                     -28-
<PAGE>
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.

Limited Commercialization; Uncertainties of Product Development and Market
Acceptance.  The Company currently markets two products, the Simon Nitinol
Filter, which is marketed worldwide, and a line of the Company's peripheral
vascular stents under the name Symphony, which is marketed by Boston Scientific
in Europe.  The Company's stents and CardioSeal Septal Occluder may require
substantial further investment in research, product development, preclinical and
clinical testing and governmental regulatory approvals prior to being marketed
and sold in the United States and other countries. There can be no assurance
that the Company's stents, septal repair devices, or any other products
developed by the Company will achieve market acceptance.  Certain of the medical
indications that can be treated by the Company's devices can also be treated by
surgery, drugs or other medical devices.  Many alternative treatments currently
are widely accepted in the medical community and have a long history of use.
There can be no assurance that the Company's devices and procedures will be able
to replace such established treatments or that physicians or the medical
community in general will accept and utilize the Company's devices or any other
medical products that may be developed by the Company.

Dependence Upon Collaborators.  The Company has entered into distribution
agreements with Bard Radiology and Bard International granting them exclusive
distribution rights to the Company's SNF, and a license agreement with Boston
Scientific granting Boston Scientific exclusive worldwide rights to develop,
manufacture, market and distribute the Company's stent technology and products
which incorporate such technology.  Although Bard Radiology and Bard
International have agreed not to sell competing filters, Boston Scientific is
not prohibited from selling other stents and, in fact, manufactures and licenses
from others a variety of stents that may compete with the Company's stents.
Boston Scientific may choose to emphasize such other stents in its developmental
and marketing efforts.  There can be no assurance that these arrangements will
be renewed or that the Company's existing relationships with Bard Radiology,
Bard International or Boston Scientific will continue in their current form.
The Company's business could be materially adversely affected if its
arrangements with Bard Radiology, Bard International or Boston Scientific prove
unsuccessful or if such companies terminate their arrangements with the Company,
negotiate lower prices, sell additional competing products, whether manufactured
by themselves or others, or otherwise alter the nature of their relationships
with the Company.

Intense Competition; Rapid Technological Change.  The medical device industry is
characterized by rapidly evolving technology and intense competition.  Other
companies in the medical device industry are currently marketing products that
compete with the Company's devices and may be developing, or could in the future
develop, additional products that are competitive with the Company's.  Many of
the Company's competitors 

                                      -29-
<PAGE>
 
have substantially greater capital resources, greater research and development,
manufacturing and marketing resources and experience and greater name
recognition than the Company. The Company believes that other companies are
actively developing competitive septal repair devices. In addition, new surgical
procedures and medications could be developed that replace or reduce the
importance of current or future procedures that use the Company's products.

Expected Near-term Losses.  The Company expects operating losses in early 1997
as it continues to expend substantial resources to complete development of the
Company's products, seek regulatory clearances or approvals, build its
marketing, sales and manufacturing organizations and conduct further research
and development.

Limited Manufacturing History; Dependence on Third Party Manufacturers.  The
Company currently uses third parties to manufacture and distribute the SNF and
is in the process of bringing the final assembly of the vena cava filter system
into its own facility. Pursuant to an exclusive license agreement with Boston
Scientific, Boston Scientific manufactures and distributes the Company's stents.
The Company intends to continue to use third parties to manufacture and
distribute such products and certain other products which the Company may seek
to develop.  If the Company should encounter delays or difficulties with third
party manufacturers in producing, packaging or distributing its proposed
products, market introduction and subsequent sales of such products would be
adversely affected and the Company may have to seek alternative sources of
supply.  No assurance can be made that the Company will be able to enter into
alternative supply arrangements at commercially acceptable rates, if at all.  If
the Company is unable to obtain or retain third party manufacturers on
commercially acceptable terms, it may not be able to commercialize medical
products as planned.

The Company manufactures the CardioSeal Septal Occluder in its manufacturing
facility. The Company has had no previous experience in the scale-up or
manufacture of medical products. The Company's manufacturing facility will be
subject to Good Manufacturing Practice ("GMP") regulations, ISO 9000 and other
regulatory requirements, will be subject to risks regarding delays or
difficulties encountered in manufacturing any such medical products and will
require a substantial investment of capital.

Limited Marketing and Sales Experience.  Although the Company has limited
internal marketing and sales resources and personnel, and currently relies
primarily on third parties to market and sell its products, the Company plans to
market the CardioSeal Septal Occluder directly, if and when it receives the
required regulatory approvals.  In order to market the CardioSeal Septal
Occluder and any other products that it may develop, the Company will have to
develop a marketing and sales organization with technical expertise and
distribution capabilities.

Dependence on Patents and Proprietary Technology.  The Company's success will
depend, in part, on its ability to obtain patents, maintain trade secret
protection and operate without infringing on the proprietary rights of third
parties.  No assurance can be given that any pending patent applications or any
future patent application will result in issued patents, 

                                      -30-
<PAGE>
 
the scope of any patent protection will exclude competitors or provide
competitive advantages to the Company, any of the Company's 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 the Company. Furthermore,
there can be no assurances that others have not or will not develop similar
products, duplicate any of the Company's products or design around any patents
issued or that may be issued in the future to the Company or its licensors. In
addition, whether or not patents are issued to the Company or its licensors,
others may hold or receive patents which contain claims having a scope that
covers products developed by the Company. The Company could incur substantial
costs in defending any patent infringement suits or in asserting any patent
rights, including those granted by third parties. In addition, the Company 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.

Government Regulation; Product Approvals Uncertain.  The manufacture and sale of
medical devices intended for commercial distribution are subject to extensive
governmental regulations in the United States.  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 manufactured or distributed by the
Company are subject to continuing regulation by the FDA.  There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or clearances for its products on a timely basis or at all, and delays in
receipt of, or failure to receive, such approvals or clearances, the loss of
previously received approvals or clearances, limitations on intended use imposed
as a condition of such approvals or clearances, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial conditions and results of operations.

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 have a
material adverse effect on the Company's business, financial condition and
results of operations.

Uncertain Availability of Third Party Reimbursement.  In the United States,
suppliers of health care products and services are greatly affected by Medicare,
Medicaid and other government insurance programs, as well as by private
insurance reimbursement programs.  Third party payers may affect the pricing or
relative attractiveness of the Company's products by regulating the maximum
amount of reimbursement provided for by such payers to the physicians and
clinics using the Company's devices, or any other products that the Company may
develop, or by taking the position that such reimbursement is not available at
all.  If, for any reason, the Company's products were not to be reimbursed by
third party payers, the Company's ability to sell its products 

                                      -31-
<PAGE>
 
may be materially adversely affected. Mounting concerns about rising health care
costs may cause more restrictive coverage and reimbursement policies to the
implemented in the future. In the international market, reimbursement by private
third party medical insurance providers, and governmental insurers and providers
varies from country to country. In certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of third
party governmental reimbursement.

Uncertainties of Successful Redesign of the Septal Repair Device.  Between 1989
and 1991 Bard sponsored trials of an earlier version of the septal repair
device, known as the Clamshell.  In 1991, Bard discovered fractures of the
stainless steel framework in certain of the devices implanted during such
clinical trials and, following such discovery, suspended its clinical trials
worldwide except for patients at high risk for surgery.  It was determined that
the fractures were caused by metal fatigue resulting from higher than
anticipated forces acting on the Clamshell.  Redesign efforts were initiated,
resulting in the design of the current version of the septal repair device.
Although the CardioSeal Septal Occluder has undergone in vitro testing, there
can be no assurance that such testing accurately simulates the actual forces in
the human body or that similar fractures will not occur with the CardioSeal
Septal Occluder.  If such fractures occur with adverse clinical consequences,
the Company's efforts to commercialize the CardioSeal Septal Occluder may be
significantly delayed and the Company may be required to invest significant
resources in further designing and engineering the device or to discontinue its
development efforts.

Product Liability Risks; Insurance.  The testing, marketing and sale of
implantable devices and materials entail an inherent risk that product liability
claims will be asserted against the Company or its third party distributors in
the event that the use of the Company's devices is alleged to have adverse
effects on a patient.  A product liability claim or a product recall could have
a material adverse effect on the Company's business, financial condition and
results of operations.  Certain of the Company's devices are designed to be used
in life-threatening situations where there is a high risk of serious injury or
death. Although the Company currently maintains limited product liability
insurance coverage, there can be no assurance that in the future the Company
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, there can be no assurance that
the Company 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
the Company's business, financial condition, and result of operations.

Uncertain Future Capital Requirements.  The Company may require additional funds
for its research and product development programs, preclinical and clinical
testing, operating expenses, regulatory processes and manufacturing and
marketing programs.  The Company's capital requirements will depend on numerous
factors, including the sales of its products, the progress of its research and
development programs, the progress of preclinical and clinical testing, the time
and cost involved in obtaining regulatory 

                                      -32-
<PAGE>
 
approvals, the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, competing technological and
market developments, developments and changes in the Company's existing
research, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that the Company may establish.
There can be no assurance that additional financing will be available when
needed or, if available, will be available on acceptable or affordable terms.
Insufficient funds may prevent the Company from implementing its business
strategy or may require the Company to delay, scale back or eliminate certain of
its research and product development programs or to license to third parties
rights to commercialize products or technologies that the Company would
otherwise seek to develop itself. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

Dependence on Qualified Personnel.  There is intense competition for qualified
personnel in the medical device field, and there can be no assurance that the
Company will be able to continue to attract and retain qualified personnel
necessary for the development of its business.  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 the Company's anticipated growth and expansion into areas and
activities requiring additional expertise such as marketing.  The failure to
attract and retain such personnel could adversely affect the Company's business.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

All financial statements required to be filed hereunder are filed as Appendix A
                                                                     ----------
hereto, are listed under Item 14(a), and are incorporated herein by this
reference.

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

None.

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this Item is contained in part under the caption "Executive
Officers of the Company" in Part I of this Annual Report on Form 10-K and in
part in the Company's Proxy Statement for the Annual Meeting of Stockholders to
be held on June 19, 1997 (the "1997 Proxy Statement") under the caption
"Proposal 1 -- Election of Directors," which section is incorporated herein by
this reference.

Officers are elected on an annual basis and serve at the discretion of the 
Board.

The information required by this Item regarding compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, is contained in the 1997 Proxy
Statement under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by this reference.

                                      -33-
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

The response to this Item is contained in the 1997 Proxy Statement under the
caption "Proposal 1 -- Election of Directors," which section is incorporated
herein by this reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this Item is contained in the 1997 Proxy Statement under the
caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this Item is contained in the 1997 Proxy Statement under the
caption "Certain Transactions," which section is incorporated herein by this
reference.


                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a) 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:
        Report of Independent Public Accountants
        Consolidated Balance Sheets
        Consolidated Statements of Operations
        Consolidated Statements of Stockholders' Equity (Deficit)
        Consolidated Statements of Cash Flow
            Notes to Consolidated Financial Statements

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

  (c) Exhibits.  The list of Exhibits filed as a part of this Annual Report on
      --------                                                                
      Form 10-K are set forth on the Exhibit Index immediately preceding such
      Exhibits, and incorporated herein by this reference.

                                      -34-
<PAGE>
 
  (d) Reports on Form 8-K.  On November 25, 1996, the Company filed a Current
      -------------------                                                    
      Report on Form 8-K dated November 6, 1996 announcing that the Bard
      Radiology Division of C.R. Bard, Inc. ("Bard") had exercised its option to
      renew the term of the Distribution Agreement between Bard and the Company
      for a period of five years commencing on May 19, 1997.

                                      -35-
<PAGE>
 
                                  SIGNATURES

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

                         NITINOL MEDICAL TECHNOLOGIES, INC.

                         By:  /s/ Thomas M. Tully
                            ----------------------------------------
                            Thomas M. Tully,
                            President and Chief Executive Officer

                         Dated:  March 12, 1997

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


<TABLE> 
<CAPTION> 
SIGNATURE                           TITLE                              DATE
<S>                         <C>                                     <C>   
/s/ Thomas M. Tully         President and Chief Executive           March 12, 1997
--------------------------  Officer and Director (Principal
Thomas M. Tully             Executive Officer)
                            
 
/s/ Theodore I. Pincus      Executive Vice President, Secretary     March 12, 1997
--------------------------  and Chief Financial Officer (Principal
Theodore I. Pincus          Financial and Accounting Officer)
                            
 
/s/ C. Leonard Gordon       Director                                March 12, 1997
--------------------------
C. Leonard Gordon
 
/s/ Morris Simon, M.D.      Director                                March 12, 1997
--------------------------
Morris Simon, M.D.
 
/s/ Michael C. Brooks       Director                                March 12, 1997
--------------------------
Michael C. Brooks
 
                            Director                                
--------------------------
Robert A. Van Tassel
 
/s/ R. John Fletcher        Director                                March 12, 1997
--------------------------
R. John Fletcher
 
/s/ Jeffrey R. Jay, M.D.    Director                                March 12, 1997
--------------------------
Jeffrey R. Jay, M.D.
</TABLE> 
<PAGE>
 
                                                                      Appendix A
                                                                      ----------

              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S>                                                                             <C>
Report of Independent Public Accountants                                        A-2
 
Consolidated Balance Sheets as of December 31, 1996 and 1995                    A-3
 
Consolidated Statements of Operations for the Years Ended December 31, 1996,
     1995, and 1994                                                             A-4
 
Consolidated Statements of Stockholders' Equity (Deficit) for the Years 
     Ended December 31, 1996, 1995, and 1994                                    A-5
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
     1995, and 1994                                                             A-6
 
Notes to Consolidated Financial Statements                                      A-7
</TABLE>
 
                                     A-1 
                                        
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES:

We have audited the accompanying consolidated balance sheets of Nitinol Medical
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996.  These 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 generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nitinol Medical Technologies,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.


                                    Arthur Andersen LLP


Boston, Massachusetts
February 17, 1997

 
                                     A-2 
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                               AT DECEMBER 31,
                                              1996         1995
                                          ------------  -----------
<S>                                       <C>           <C>
     ASSETS
Current assets:
  Cash and cash equivalents               $ 4,082,486   $  533,247
  Marketable securities                    25,273,555           --
  Accounts receivable                         782,230      323,217
  Inventories                                 745,977      208,061
  Prepaid expenses and other 
   current assets                             610,017      163,326
                                          -----------   ----------
     Total current assets                  31,494,265    1,227,851
                                          -----------   ----------
Property and equipment, at cost:
  Leasehold improvements                    1,191,498      124,461
  Laboratory and computer equipment           925,166      393,171
  Equipment under capital lease               548,063           --
  Office furniture and equipment               93,031       76,030
                                          -----------   ----------
                                            2,757,758      593,662
  Less--Accumulated depreciation and          
   amortization                               504,909      208,777
                                          -----------   ----------
                                            2,252,849      384,885
                                          -----------   ----------
 
Long-term investments in marketable
  securities                                1,083,763           --
                                          -----------   ----------
 
Other assets                                   98,627       48,014
                                          -----------   ----------
                                          $34,929,504   $1,660,750
                                          ===========   ==========
 
     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
  Accounts payable                        $   420,424   $  498,816
  Accrued expenses                            678,164      215,983
  Current portion of capital lease             94,954           --
   obligation                         
  Distribution payable to stockholders             --      100,000
  Subordinated debt                                --      309,356
  Loan from distributor                            --      780,830
  Deferred revenue                                 --      600,000
                                          -----------   ----------
     Total current liabilities              1,193,542    2,504,985
                                          -----------   ----------
Capital lease obligation, net of              
 current portion                              415,591           --
                                          -----------   ----------
 
Commitments and contingencies (Note 8)
 
Stockholders' equity (deficit):
  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 and outstanding--9,435,922
      and 3,774,112 shares at December
       31,1996 and 1995, respectively           9,437        3,775
  Paid-in capital                          35,321,821           --
  Accumulated deficit                      (2,010,887)    (848,010)
                                          -----------   ----------
     Total stockholders' equity            
      (deficit)                            33,320,371     (844,235)
                                          -----------   ----------
                                          $34,929,504   $1,660,750
                                          ===========   ==========
</TABLE>

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

                                      A-3
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                              1996          1995         1994
                                          -------------  -----------  ---------
<S>                                       <C>            <C>          <C>
Revenues:
  Product sales                            $ 4,556,861   $2,716,022   $1,836,931
  License fees                               2,375,000      625,000      772,500
  Product development                           91,662      491,857       38,051
                                           -----------   ----------   ----------
                                             7,023,523    3,832,879    2,647,482
                                           -----------   ----------   ----------
Expenses:
  Cost of product sales                      2,386,896    1,263,951      812,204
  Research and development                   2,661,849      870,588      554,530
  General and administrative                 2,284,184      871,469      770,175
  Selling and marketing                        310,988      169,308      182,377
  Acquired in-process research and           1,111,134           --           --
   development                             -----------   ----------   ----------
                                             8,755,051    3,175,316    2,319,286
                                           -----------   ----------   ----------
     Income (loss) from operations          (1,731,528)     657,563      328,196
                                           -----------   ----------   ----------
Interest expense                               (42,179)     (37,629)     (52,838)
Interest income                                610,830        8,328       14,003
                                           -----------   ----------   ----------
                                               568,651      (29,301)     (38,835)
                                           -----------   ----------   ----------
     Income (loss) before provision for
       income taxes                         (1,162,877)     628,262      289,361
Provision for income taxes                          --       44,000           --
                                           -----------   ----------   ----------
     Net income (loss)                     $(1,162,877)  $  584,262   $  289,361
                                           ===========   ==========   ==========
Net income (loss) per common and common
 equivalent share                                $(.15)        $.09         $.04
                                           ===========   ==========   ==========
Weighted average common and common
 equivalent shares outstanding               7,828,685    6,722,215    6,592,841
                                           ===========   ==========    =========
</TABLE>

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

                                      A-4
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                              CONVERTIBLE
                                            PREFERRED STOCK           COMMON STOCK                                     TOTAL
                                            ---------------           ------------                         
                                                                                                                    STOCKHOLDER'S
                                           NUMBER      $  .001      NUMBER     $.001     PAID-IN      ACCUMULATED      EQUITY
                                          OF SHARES   PAR VALUE   OF SHARES  PAR VALUE   CAPITAL        DEFICIT       (DEFICIT)
                                         ----------   ---------   ---------  ---------   -------        -------        -------
<S>                                      <C>          <C>         <C>        <C>        <C>            <C>            <C> 
Balance, January 1, 1994                         --     $    --   3,605,691     $3,606   $   194,400    $(1,387,864)   $(1,189,858)
  Exercise of common stock
     options                                     --          --     152,631        153        68,847             --         69,000
  Distributions to stockholders
     ($.13 per share)                            --          --          --         --            --       (500,000)      (500,000)
  Net income                                     --          --          --         --            --        289,361        289,361
                                         ----------   ---------   ---------     ------   -----------    -----------    -----------
Balance, December 31, 1994                       --          --   3,758,322      3,759       263,247     (1,598,503)    (1,331,497)
  Exercise of common stock
     options                                     --          --      15,790         16         2,984             --          3,000
  Distributions to stockholders
     ($.03 per share)                            --          --          --         --            --       (100,000)      (100,000)
  Reclassification of S Corpora-
     tion losses to the extent of
     additional paid-in capital                  --          --          --         --      (266,231)       266,231             --
  Net income                                     --          --          --         --            --        584,262        584,262
                                         ----------   ---------   ---------     ------   -----------    -----------    -----------
Balance, December 31, 1995                       --          --   3,774,112      3,775            --       (848,010)      (844,235)
  Issuance of convertible
     preferred stock, net of
     issuance costs of
     approximately $989,000               3,787,104       3,787          --         --     3,257,211             --      3,260,998
  Common stock issued in
     connection with the
     purchase of technology
     and other assets                            --          --     514,651        515     1,104,442             --      1,104,957
  Exercise of common stock
     options                                     --          --       3,947          4         8,471             --          8,475
  Warrant grant in exchange
     for license                                 --          --          --         --        11,200             --         11,200
  Accretion of convertible
     preferred stock dividends                   --          --          --         --      (255,000)            --       (255,000)
  Proceeds from initial public
     offering, net of offering
      costs of approximately
      $ 1,028,000                                --          --   3,150,000      3,150    31,193,703             --     31,196,853
  Conversion of convertible
   preferred stock into common
   stock                                 (3,787,104)     (3,787)  1,993,212      1,993         1,794             --             --
   Net loss                                      --          --          --         --            --     (1,162,877)    (1,162,877)
                                         ----------   ---------   ---------     ------   -----------    -----------    -----------
Balance, December 31, 1996                       --     $    --   9,435,922     $9,437   $35,321,821    $(2,010,887)   $33,320,371
                                         ==========   =========   =========     ======   ===========    ===========    ===========
</TABLE>

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


                                      A-5
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                              1996          1995         1994
                                          -------------  ----------  ------------
<S>                                       <C>            <C>         <C> 
Cash flows from operating activities:
  Net income (loss)                       $ (1,162,877)  $ 584,262   $   289,361
  Adjustments to reconcile net income
   (loss) to net cash provided by (used
   in) operating activities--
    Depreciation and amortization              226,968      88,895        55,825
    Write off of leasehold improvements         75,000          --            --
    Common stock issued for in-process         
     research and development                  806,174          --            --
    Warrant grant in exchange for              
     license                                    11,200          --            --
    Changes in assets and liabilities--
      Interest receivable                     (237,643)         --            --
      Accounts receivable                     (459,013)   (238,421)       (8,308)
      Inventories                             (537,916)    (56,947)       12,386
      Prepaid expenses and other              
       current assets                         (209,048)   (152,512)        2,086
      Accounts payable                         (78,392)    379,347        24,171
      Accrued expenses                         462,181     (79,523)      190,121
      Deferred revenue                        (600,000)         --       600,000
         Net cash provided by (used in)   ------------   ---------   -----------
          operating activities              (1,703,366)    525,101     1,165,642
                                          ------------   ---------   ----------- 
Cash flows from investing activities:
         Purchases of marketable           
         securities and long-term
         investments                       (26,357,319)         --            -- 
  Purchases of property and equipment       (1,317,250)   (201,121)     (104,049)
  (Increase) decrease in other assets          (56,448)    (29,513)       12,100
                                          ------------   ---------   -----------   
         Net cash used in investing      
          activities                       (27,731,017)   (230,634)      (91,949) 
                                          ------------   ---------   -----------   
Cash flows from financing activities:    
  Proceeds from initial public offering, 
    net                                     31,196,853          --            --
  Redemption of preferred stock       
   including dividends                      (4,505,000)         --            -- 
  Payments of subordinated debt               (309,356)     (2,500)     (329,161)
  Payments of loan from distributor           (780,830)   (477,120)     (242,050)
  Proceeds from issuance of convertible      
   preferred stock, net                      7,510,998          --            -- 
  Proceeds from issuance of common stock         8,475       3,000        69,000
  Distributions to stockholders               (100,000)         --      (500,000)
  Payments of capital lease obligations        (37,518)         --            --
                                          ------------   ---------   -----------
         Net cash provided by (used in)     
          financing activities              32,983,622    (476,620)   (1,002,211)
                                          ------------   ---------   -----------
Net increase (decrease) in cash and          
 cash equivalents                            3,549,239    (182,153)       71,482 
Cash and cash equivalents, beginning of 
 period                                        533,247     715,400       643,918
                                          ------------   ---------   -----------
Cash and cash equivalents, end of period  $  4,082,486   $ 533,247   $  7 15,400
                                          ============   =========   ===========
Supplemental disclosure of cash flow
 information:
  Cash paid during the period for--
    Interest                              $     27,288   $  39,814   $    52,838
                                          ============   =========   ===========
    Taxes                                 $    186,500   $   2,135   $     1,862
                                          ============   =========   ===========
Supplemental disclosure of non-cash
 investing and financing transactions:
 Equipment acquired under capital lease   
  obligations                             $    548,063   $      --   $        --
                                          ============   =========   ===========
 Conversion of preferred stock into       
  common stock                            $      3,787   $      --   $        --
                                          ============   =========   =========== 
 Common stock issued for property and     
  equipment                               $    298,783   $      --   $        --
                                          ============   =========   =========== 
</TABLE> 

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

                                      A-6
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) OPERATIONS

   Nitinol Medical Technologies, Inc. (NMT or the Company) designs, develops and
   markets innovative medical devices that utilize advanced materials and are
   delivered by minimally invasive procedures. The Company's products are
   designed to offer alternative approaches to existing complex treatments,
   thereby reducing patient trauma, shortening procedure, hospitalization and
   recovery times, and lowering overall treatment costs. The Company's patented
   medical devices include self-expanding stents, vena cava filters and septal
   repair devices (the CardioSEAL Septal Occluder). At this time, the Company's
   stents have been commercially launched in Europe for certain indications, its
   vena cava filters are marketed in the United States and abroad, and the
   CardioSEAL device is in the clinical trials stage in U.S. and European
   markets. The Company is subject to a number of risks similar to those of
   other companies in this stage of development, including uncertainties
   regarding the development of commercially viable products, competition from
   alternative procedures and larger companies, dependence on key personnel and
   government regulation.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   (a) Principles of Consolidation

   The accompanying consolidated financial statements include the accounts of
   the Company and its wholly owned subsidiaries. All intercompany transactions
   and balances have been eliminated in consolidation.

   (b) Management Estimates

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

                                      A-7
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

(c) Cash and Cash Equivalents, Marketable Securities, and Long-Term Investments

In accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
has classified certain of its marketable securities and long-term investments as
held-to-maturity and certain of its marketable securities as available-for-sale.
Held-to-maturity securities represent those securities for which the Company has
the intent and ability to hold to maturity and are reported at amortized cost.
Available-for-sale securities represent those securities that do not meet the
classification of held-to-maturity, are not actively traded and are reported at
fair market value with unrealized gains and losses included in stockholders'
equity. The Company considers all investments with maturities of 90 days or less
from the date of purchase to be cash equivalents.

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

<TABLE>
<CAPTION>
                                   AT DECEMBER 31,
                                   1996        1995
                                   ----        ----
     <S>                         <C>          <C>
     Cash                        $  816,124   $ 381,733
     Cash equivalents--
        Commercial paper          2,994,829          --
        Money market                271,533     151,514
                                 ----------   ---------
                                 $4,082,486   $ 533,247
                                 ==========   =========
</TABLE>

Marketable securities, with a weighted average maturity of approximately 4 1/2
months, consists of the following at December 31, 1996:

<TABLE>
     <S>                                 <C> 
     Held-to-maturity--
          Commercial paper               $10,958,453
          Eurodollar bonds                11,084,143
          Medium-term notes                  501,596
          Corporate debt securities          329,363
                                         -----------
                                          22,873,555
     Available-for-sale--
          Taxable auction securities       2,400,000
                                         -----------
                                         $25,273,555
                                         ===========
</TABLE>

                                      A-8
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

(c) Cash and Cash Equivalents, Marketable Securities, and Long-Term Investments-
    (continued)

Long-term investments, which are carried at cost and approximate market, are
comprised entirely of Eurodollar bonds at December 31, 1996.

(d) Inventories

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

<TABLE>
<CAPTION>
                                    AT DECEMBER 31,
                                1996             1995
                                ----             ----
     <S>                      <C>              <C>
     Components               $307,778         $178,366
     Finished goods            438,199           29,695
                              --------         --------
                              $745,977         $208,061
                              ========         ========
</TABLE>

Finished goods consist of materials, labor and manufacturing overhead.

(e) Financial Instruments

The estimated fair values of the Company's financial instruments, which include
cash and cash equivalents, marketable securities, long-term investments,
accounts receivable and capital lease obligations approximate their reported
amounts.

(f) Concentration of Credit Risk

SFAS No. 105, Disclosure of Information About Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk,
requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of trade accounts receivable. The Company utilizes primarily
one distributor for the sales of its filter products. This distributor had
amounts due to the Company of approximately $408,000 and $267,000 as of December
31, 1996 and 1995, respectively. This distributor accounted for 89%, 95%, and
93% of product revenues for fiscal 1996, 1995 and 1994, respectively.

                                      A-9
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

(g) Depreciation and Amortization

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

<TABLE>
<CAPTION>
                                             ESTIMATED
          ASSET CLASSIFICATION               USEFUL LIFE
          --------------------               -----------
     <S>                                     <C>
     Leasehold improvements                  Life of Lease
     Laboratory and computer equipment           3-7 Years
     Equipment under capital lease           Life of Lease
     Office furniture and equipment             5-10 Years
</TABLE>

(h) Revenue Recognition

The Company records product sales upon shipment. Products sold to the Company's
primary distributor are not subject to a right of return for unsold product.
License fees and product development revenue are recognized as earned.

(i) Net Income (Loss) per Common and Common Equivalent Share

Net income (loss) per common and common equivalent share is based on the
weighted-average number of shares of common stock and common stock equivalents,
as applicable, outstanding during the respective periods. All shares of capital
stock, options and warrants issued during the 12 months immediately preceding
the Company's initial public offering on October 2, 1996 were treated as if they
had been outstanding for all periods, in accordance with the Securities and
Exchange Commission rules and regulations, calculated under the treasury-stock
method and based on the initial public offering share price of $11.00.

(j) Postretirement Benefits

The Company has no material obligations for postretirement benefits.

                                      A-10
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(3) PURCHASE OF TECHNOLOGY AND OTHER ASSETS

   In February 1996, the Company issued 514,651 shares of its common stock and
   warrants to purchase 111,818 shares of common stock at $2.15 per share for
   the purchase of certain technology and related fixed assets. The Company
   valued the common stock issued in this transaction at $2.15 per share, which
   represented the fair value as determined by its Board of Directors and
   supported by an appraisal. The Company is required to pay certain future
   royalties, as defined in the agreement. The acquired technology relates to
   the CardioSEAL device for which the Company is conducting human clinical
   trials. At the time of the acquisition, it was determined that the commercial
   feasibility of the purchased technology was uncertain, and accordingly, the
   Company charged the amount of the purchase price allocated to the technology
   to operations as in-process research and development. The amount allocated to
   laboratory and computer equipment represents the estimated fair value at the
   date of acquisition of the acquired laboratory and computer equipment that
   have alternative future uses. The aggregate purchase price and acquisition
   costs incurred of $1,409,917 were allocated as follows:

<TABLE>
          <S>                                       <C>
          Laboratory and computer equipment         $  298,783
          In-process research and development        1,111,134
                                                    ----------
                                                    $1,409,917
                                                    ==========
</TABLE> 

(4) INCOME TAXES

   The Company uses the liability method to account for income taxes in
   accordance with SFAS No. 109, Accounting for Income Taxes.

   Prior to October 19, 1995, the Company elected to be taxed as an S
   corporation for federal and state income tax purposes. Accordingly, the
   accompanying consolidated financial statements do not include a provision for
   income taxes for 1994 and the first 10 1/2 months of 1995. The provision for
   income taxes in the accompanying consolidated statement of operations for the
   period from October 19, 1995 to December 31, 1995 consists of the following:

<TABLE>
                              <S>                 <C> 
                              Federal             $    --
                              State (current)      44,000
                                                  -------
                                                  $44,000
                                                  =======
</TABLE>

                                      A-11
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(4) INCOME TAXES--(CONTINUED)

   The accompanying consolidated statements of operations do not contain a pro
   forma income tax adjustment for periods prior to the termination of the S
   corporation election. If the election to be treated as an S corporation was
   not made, the Company would have been subject to federal and state corporate
   income taxes. However, the Company would have had sufficient net operating
   loss carryforwards to offset income in all periods presented.  There is no
   provision for income taxes for the year ended December 31, 1996 as the
   Company incurred an operating loss during the year.

   The Company has net operating losses and credit carryforwards of
   approximately $396,000 and $231,000, respectively.  The carryforwards expire
   through 2011 and are subject to possible adjustment by federal and state tax
   authorities.

   The approximate income tax effect of each temporary difference constituting
   the deferred tax asset, which is included in prepaid expenses and other
   current assets in the accompanying consolidated balance sheets, is as
   follows:

<TABLE>
<CAPTION>
                                          DECEMBER 31,   DECEMBER 31,
                                              1996           1995
                                              ----           ----
         <S>                              <C>            <C>
         Deferred tax assets:
            Tax credit carryforwards         $ 231,000       $     --
            Net operating loss carryforwards   158,000             --
            Deferred revenue                        --        200,000
            Reserves and nondeductible          16,000         17,000
             accruals                        ---------       --------
                                               405,000        217,000
                                             ---------       --------
         Deferred tax liabilities:
            Depreciation                       (21,000)       (74,000)
                                             ---------       --------
                                               384,000        143,000
         Valuation allowance                  (241,000)            --
                                             ---------       --------
         Net deferred tax asset              $ 143,000       $143,000
                                             =========       ========
</TABLE>
The Company has provided a valuation allowance for a portion of its gross
deferred tax asset due to the uncertainty in its ability to fully utilize 
this asset.

                                     A-12
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(5) LOAN FROM DISTRIBUTOR

   The Company has an exclusive distribution agreement with an unrelated third
   party to provide for the sale and distribution of the Simon Nitinol Filter
   (SNF). In connection with this agreement, the Company received a loan of
   $1,500,000 from the distributor in 1992. The agreement called for the
   repayment of this loan by the Company through certain minimum purchases of
   the SNF by the distributor, as defined in the agreement. This loan was paid
   in full as of December 1996.

(6) DEFERRED REVENUE

   On November 22, 1994, the Company licensed exclusive, worldwide rights,
   including the right to sublicense to others, to develop, produce and market
   its stent technology to an unrelated third party (the Licensee). In
   connection with the signing of the license agreement, the Company received
   $500,000 in consideration for the license granted and an additional $500,000
   upon issuance of the United States patent for a specific stent. The Company
   was required to refund varying amounts of such payments based on the
   occurrence of certain events, as defined in the license agreement. The
   Company deferred recognition as revenue of amounts that were subject to
   refund until the expiration of the refund period. The final refund period
   expired in November 1996. During 1996 and 1995 the Company received
   $1,625,000 and $625,000, respectively, in additional nonrefundable license
   fees upon the achievement of certain milestones, as defined in the license
   agreement. These amounts are included in license fees in the accompanying
   consolidated statements of operations. In 1994, no such milestone revenues
   were received by the Company. In 1994 the Company also received $272,500 from
   the Licensee which was nonrefundable and is to be credited against future
   license fees payable to the Company, as defined. This amount is included in
   license fees in the accompanying consolidated statement of operations in
   1994.

   Under a product development program with the Licensee, the Company received
   reimbursement of costs incurred related to the activities of product
   development, registration and transfer of technology to the Licensee. For the
   years ended December 31, 1996, 1995 and 1994, the Company received $91,662,
   $491,857, and $38,051, respectively, of reimbursements for development
   program costs. These reimbursed amounts are included in revenues in the
   accompanying consolidated statements of operations.

                                     A-13
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(7) DEBT

   Subordinated debt consists of the following at December 31, 1995:

   Subordinated unsecured debt to various stockholders, 
     principal due in annual installments of $95,000 
     through July 1997, 
     bearing interest at 10%                                   $ 190,000
   Subordinated unsecured debt to various stockholders, 
     principal due in annual installments of $25,000
     through July 1997, 
     bearing interest at 10%                                      50,000
   Subordinated unsecured debt to various stockholders, 
     principal due in annual installments of $18,750 
     through July 1998,                                           
     bearing interest at 10%                                      56,250
   Deferred interest due to various stockholders and a  
     related party and associated pension plan,         
     principal due in annual installments of $6,553 
     through July 1997, bearing interest at 10%                   13,106
                                                                --------
                                                                $309,356
                                                                ========

   The Company repaid all outstanding subordinated debt in April 1996.

(8) COMMITMENTS AND CONTINGENCIES

   (a) Manufacturing Agreement

   The Company contracts with an unrelated third party for the manufacture of
   certain products. Under the amended agreement dated February 15, 1996, the
   Company is required to purchase minimum unit quantities through June 2001.
   The aggregate minimum purchases under the agreement are approximately
   $2,600,000. In addition, in the event of an order cancellation or product
   conversion, the Company has agreed to purchase all in-process materials and
   all special materials purchased by the manufacturer for use in the production
   of these products, limited to purchase orders through 180 days after
   cancellation.

   (b) Operating Leases

   The Company has entered into operating leases for office and laboratory
   space. These leases expire through 2006. The leases for office space require
   payment for all related operating expenses of the building, including real
   estate taxes and utilities.

                                      A-14



              
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(8) COMMITMENTS AND CONTINGENCIES--(CONTINUED)

   (b) Operating Leases--(continued)

   Future minimum rental payments due under operating lease agreements as of
   December 31, 1996 are approximately as follows:

<TABLE>
<CAPTION>
          YEAR ENDING               AMOUNT
          -----------               ------
          <S>                     <C>
             1997                 $  468,000
             1998                    468,000
             1999                    468,000
             2000                    468,000
             2001                    503,000
             Thereafter            2,524,000
                                  ----------
                                  $4,899,000
                                  ==========
</TABLE>

   Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to
   approximately $303,000, $103,000, and $84,000, respectively.

   (c) Capital Leases

   In June 1996, the Company entered into a $1.5 million lease finance facility
   agreement with a bank under which the Company leases equipment at an interest
   rate that is 200 basis points above the bank's cost of funds.  Leases under
   this agreement are payable in equal monthly installments over a period of 60
   months and expire through November 200l.

                                      A-15
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(8) COMMITMENTS AND CONTINGENCIES--(CONTINUED)

   (c) Capital Leases--(continued)

   Future minimum lease payments under these capital lease obligations as of
   December 31, 1996 are approximately as follows:

<TABLE>
<CAPTION>
          YEAR ENDING                                AMOUNT
          -----------                                ------
          <S>                                      <C>
              1997                                  $133,285
              1998                                   133,285
              1999                                   133,285
              2000                                   133,285
              2001                                    81,425
                                                    --------
                  Total minimum lease payments       614,565
              Less--Amount representing interest     104,020
                                                    --------
                                                     510,545
              Less--Current portion                   94,954
                                                    --------
                                                    $415,591
                                                    ========
</TABLE>

   (d) Profit Sharing

   Prior to 1995, the Company had entered into a distribution agreement with a
   distributor which provided for an annual profit sharing payment (not to
   exceed a specified aggregate amount) based on income before provision for
   income taxes, as defined in the agreement. In 1995, the Company terminated
   this agreement through a payment of $100,000 to the distributor. This payment
   was charged to operations and is included in the accompanying consolidated
   statement of operations.

   (e) Royalties

   The Company has entered into various agreements that require payment of
   royalties to be paid based on specified percentages of future sales, as
   defined (see Notes 3 and 12). In addition, the Company has agreed to pay
   royalties to certain employees based on sales or licenses of products where
   they were the sole or joint inventor. Future minimum commitments under these
   agreements are approximately $15,000 per year. Royalty expense under royalty
   agreements was $157,000, $64,000, and $66,000 for the years December 31,
   1996, 1995, and 1994, respectively.

                                     A-16
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(9) COMMON STOCK

   (a) Authorized Common Stock

   On July 9, 1996, the Company increased the number of authorized shares of
   common stock from 10,000,000 to 30,000,000.

   (b) Stock Split

   On July 9, 1996, the Company effected a 1-for-1.9 reverse stock split of its
   common stock. Accordingly, all share and per share amounts of common stock
   have been retroactively restated for all periods presented to reflect the
   reverse stock split.

   (c) Initial Public Offering

   On October 2, 1996, the Company completed an initial public offering (the
   "Offering") of 3,000,000 shares of the Company's common stock at $11.00 per
   share for net proceeds of approximately $29,662,000, net of underwriting
   discounts and related expenses.  Upon completion of the Offering, all
   outstanding shares of the Company's convertible preferred stock, par value
   $.001 per share, automatically converted into 1,993,212 and 3,787 shares of
   the Company's common stock and redeemable preferred stock, par value $.001
   per share, respectively.  A portion of the proceeds from the Offering was
   used to redeem the redeemable preferred stock for $4,505,000, which included
   dividends of $255,000.  Pursuant to an over-allotment option, on October 30,
   1996, the underwriters of the Offering purchased an additional 150,000 shares
   of the Company's common stock at $11.00 per share, resulting in additional
   net proceeds to the Company of approximately $1,535,000.

(10) PREFERRED STOCK

   In February 1996, the Board of Directors authorized 3,800,000 shares of
   convertible preferred stock and 38,000 shares of redeemable preferred stock.
   The Company then sold 3,787,104 shares of preferred stock at $2.24 per share,
   resulting in net proceeds to the Company of approximately $7,500,000. On July
   9, 1996, the Company authorized 3,000,000 shares of undesignated preferred
   stock. As a result of the Offering discussed in Note 9(c), the Company's
   convertible preferred stock was converted into common stock and redeemable
   preferred stock, and the redeemable preferred stock, including dividends, was
   redeemed for $4,505,000.

                                      A-17
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(11) STOCK OPTIONS AND WARRANTS

   (a) Nonqualified Stock Options

   The Company granted nonqualified options to various officers, directors,
   employees, and/or consultants to purchase shares of common stock. The options
   become exercisable in full or in part at issuance or within one to four years
   of the date of issuance. All unexercised grants expire on the earlier of
   approximately five to ten years from date of issuance or 90 days after
   termination of service as an officer, director, employee and/or consultant.

   (b) Stock Option Plans

   1994 Stock Option Plan. In May 1994, the Board of Directors approved a stock
   option plan (the 1994 Plan), which authorizes the Company to issue options to
   purchase up to 315,789 shares of the Company's common stock. The Company may
   grant options to officers, key employees, directors and consultants of the
   Company at an exercise price not less than fair market value as determined by
   the Board of Directors.

   1996 Stock Option Plan.   The Nitinol Medical Technologies, Inc. 1996 Stock
   Option Plan (the 1996 Plan) was approved by the Company's stockholders in
   July 1996.  The 1996 Plan provides for the grant of options to acquire a
   maximum of 600,000 shares of common stock. As of December 31, 1996, 223,276
   shares are subject to outstanding options at an exercise price of $8.93-
   $11.50 per share. The 1996 Plan permits the granting of incentive stock
   options or nonstatutory stock options at the discretion of the administrator
   of the 1996 Plan (the Plan Administrator). The Board of Directors has
   appointed a Stock Option Committee of the Board as the Plan Administrator.
   Subject to the terms of the 1996 Plan, the Plan Administrator determines the
   terms and conditions of options granted under the 1996 Plan. Subsequent to
   December 31, 1996, the Company granted options to purchase 44,500 shares of
   common stock at $10.63-$11.75 per share.

   The 1996 Directors Stock Plan.   The Nitinol Medical Technologies, Inc. 1996
   stock option plan for non-employee directors (the 1996 Directors' Stock Plan)
   was approved by the Company's stockholders in July 1996. The 1996 Directors'
   Stock Plan provides for the automatic grant of nonstatutory stock options to
   purchase shares of common stock to directors of the Company who are not
   employees of the Company and who do not otherwise receive compensation from
   the Company.

                                      A-18
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)

   (b)  Stock Option Plans--(continued)

   Under the 1996 Directors' Stock Plan, 150,000 shares of common stock have
   been reserved for issuance of options. Each eligible director serving on the
   Board on the effective date of the 1996 Directors' Stock Plan automatically
   received an option to purchase 10,000 shares of common stock at a price equal
   to the initial public offering price, subject to vesting in equal monthly
   installments over a period of three years. In the future, each nonemployee
   director who joins the Board will automatically receive an initial grant of
   options to purchase 10,000 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. In each year other
   than the year in which a director receives an initial grant of options, such
   director will automatically receive options to purchase 2,500 shares of
   common stock that shall become fully-vested six months after the date of
   grant.  As of December 31, 1996, 40,000 shares are subject to outstanding
   options at an exercise price of $10.50 per share, of which 1,112 shares are
   exerciseable.

   The following table summarizes all stock option activity under all of the
   Company's stock option plans, including grants outside of the 1996 and 1994
   Plans:

<TABLE>
<CAPTION>
                                                        EXERCISE
                                          NUMBER OF    PRICE PER
                                            SHARES       SHARE
                                          ----------  ------------
         <S>                              <C>         <C>
         Balance, January 1, 1994           247,367    $   .19-.76
            Granted                         297,368       .76-1.14
            Exercised                      (152,631)       .19-.57
                                          ---------    -----------
         Balance, December 31, 1994         392,104       .19-1.14
            Granted                         539,459           2.15
            Exercised                       (15,790)           .19
                                          ---------    -----------
         Balance, December 31, 1995         915,773       .76-2.15
            Granted                       1,060,431     2.15-11.50
            Exercised                        (3,947)          2.15
                                          ---------    -----------
         Balance, December 31, 1996       1,972,257    $.76-$11.50
                                          =========    ===========
         Exercisable, December 31, 1996     870,596    $.76-$10.50
                                          =========    ===========
</TABLE>

                                      A-19
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)

   The Company accounts for its stock-based compensation plans under APB Opinion
   No. 25, Accounting for Stock Issued to Employees.  In October 1995, the
   Financial Accounting Standards Board issued SFAS No. 123, Accounting for
   Stock-Based Compensation, which is effective for fiscal years beginning after
   December 15, 1995.  SFAS No. 123 establishes a fair-value based method of
   accounting for stock-based compensation plans.  The Company has adopted the
   disclosure-only alternative under SFAS No. 123, which requires disclosure of
   the pro forma effects on earnings and earnings per share as if SFAS No. 123
   had been adopted, as well as certain other information.

   The Company has computed the pro forma disclosures required under SFAS No.
   123 for all employee stock options granted in 1996 and 1995 using the Black-
   Scholes option pricing model prescribed by SFAS No. 123.
 
   The assumptions used and the weighted average information for the years ended
   December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                               DECEMBER 31,       DECEMBER 31,
                                                  1996               1995
                                                  ----               ----
     <S>                                     <C>                 <C>
     Risk-free interest rates                    5.14%-6.39%      5.39%-5.77%
     Expected dividend yield                             --               --
     Expected lives                               3-5 years          3 years
     Expected volatility                            48%               48%
     Weighted average grant-date fair value
      of options granted during the period          $1.68             $.82
     Weighted average exercise price                $4.15            $2.15
     Weighted average remaining contractual
      life of options outstanding                 8.35 years       7.45 years
     Weighted average exercise price of
      870,596 and 495,995 options 
      exercisable at December 31, 1996
      and 1995 respectively                         $1.89            $1.00
</TABLE>

                                      A-20
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                        

(11) STOCK OPTIONS AND WARRANTS--(CONTINUED)

   (b) Stock Option Plans--(continued)

   The effect of applying SFAS No. 123 would be as follows:

<TABLE>
<CAPTION>
                                               DECEMBER 31,   DECEMBER 31,
                                                  1996           1995
                                                  ----           ----
   <S>                                        <C>             <C>
   Pro forma net income (loss)                $(1,578,296)      $564,110
                                              ===========       ========
   Pro forma net income (loss) per share         $(.21)           $.09
                                                 ======           ====
</TABLE> 

   (c) Warrants

   In connection with the technology purchase discussed in Note 3, the Company
   issued warrants to purchase 111,818 shares of common stock at $2.15 per
   share. The warrants are fully exercisable and expire ten years from the date
   of grant.

   In February 1996, the Company issued warrants to purchase 164,439 shares of
   common stock at $4.26 per share to placement agents in connection with a
   private placement of the Company's convertible preferred stock. In April
   1996, the Company issued a warrant to purchase 5,263 shares of common stock
   at $.02 per share in connection with a patent license agreement. The warrants
   are fully exercisable and expire ten years from the date of grant.

(12) TECHNOLOGY PURCHASE AGREEMENT

   Pursuant to a technology purchase agreement (TPA), the Company purchased from
   a stockholder/founder the proprietary rights to the primary patent for the
   SNF and related technology. Under the terms of the TPA, the Company made an
   initial payment of $15,000 and agreed to pay royalties based upon various
   rates of cumulative net sales, as defined, with minimum royalties payable of
   $15,000 per year. Royalties are payable over the life of the primary patent
   and commenced after FDA approval. The Company has granted the
   stockholder/founder a security interest in substantially all proprietary
   rights acquired by the Company. In the event of unsecured defaults, as set
   forth in the TPA, the Company has agreed to immediately pay the
   stockholder/founder damages of $100,000.

                                      A-21
<PAGE>
 
              NITINOL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(13) RELATED PARTY TRANSACTIONS

     Three stockholders of the Company and related entities provide management
     consulting services to the Company. Total payments made during the years
     ended December 31, 1996, 1995 and 1994 in connection with such services
     were approximately $256,000, $242,000 and $210,000, respectively.

     At December 31, 1995, the Company had subordinated debt and deferred
     interest outstanding to various stockholders, a related party and an
     associated pension plan of $309,356. No amounts were outstanding at
     December 31, 1996 (see Note 7).

(14) ACCRUED EXPENSES:

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
 
                                      AT DECEMBER 31,
                                      1996       1995
                                    ---------  ---------
     <S>                            <C>        <C>
     Payroll and payroll related     $231,212   $ 50,000
     Leasehold improvements           108,553         --
     Royalties                         75,520     26,148
     Other accrued expenses           262,880    139,835
                                     --------   --------
       Total accrued expenses        $678,164   $215,983
                                     ========   ========
</TABLE>

                                      A-22
<PAGE>
 
                                 EXHIBIT INDEX


Exhibit No.              Description of Exhibit
----------               ----------------------

    3.1        Amended and Restated Certificate of Incorporation. (1)

    3.1.1      Certificate of Amendment of the Amended and Restated Certificate
               of Incorporation. (1)

    3.2        Amended and Restated By-laws. (1)

    4.1        Form of Common Stock Certificate.  (1)
  
    10.1       Stock Purchase Agreement by and among the Company, Whitney Equity
               Partners, L.P., Boston Scientific Corporation, David J. Morrison,
               Corporate Decisions, Inc., dated as of February 16, 1996. (1)

    10.2       Registration Rights Agreement by and among the Company, Whitney
               Equity Partners, L.P., Boston Scientific Corporation, David J.
               Morrison, Corporate Decisions, Inc., dated as of February 16,
               1996. (1)

    10.3       Agreement and Plan of Merger by and among the Company, NMT Heart,
               Inc., InnerVentions, Inc. and Fletcher Spaght, Inc., dated as of
               January 25, 1996. (1)

    10.4       Stock Purchase Warrant by and between the Company and Fletcher
               Spaght, Inc., dated February 14, 1996. (1)

    10.5       Pledge Agreement by and between the Company and Fletcher Spaght,
               Inc., dated February 14, 1996. (1)

    10.6       Registration Rights Agreement by and between the Company and
               Fletcher Spaght, Inc., dated as of February 14, 1996. (1)
    
    10.7       Distribution Agreement by and between the Company and the Bard
               Radiology division of C.R. Bard, Inc., dated May 19, 1992, as
               amended on February 1, 1993 and October 1, 1995. (1)(2) 

    10.8       International Distribution Agreement by and between the Company
               and Bard International, Inc., dated as of November 30, 1995.
               (1)(2) 

    10.9       License and Development Agreement by and between the Company and
               Boston Scientific Corporation, dated as of November 22, 1994.
               (1)(2)
    10.10      Manufacturing Agreement by and between the Company and Lake
               Region Manufacturing Company, Inc., dated February 15, 1996.
               (1)(2)
<PAGE>
 
  10.11        Technology Purchase Agreement by and between the Company and
               Morris Simon, M.D., dated as of April 14, 1987. (1)(2)

  10.12        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. (1)

  10.13        Stock Transfer Agreement by and between Children's Medical Center
               Corporation and InnerVentions, Inc., dated as of June 19, 1995.
               (1)

  10.14        License Agreement by and between Children's Medical Center
               Corporation and InnerVentions, Inc., dated June 19, 1995. (1)(2)

  10.15        Sublicense Agreement by and between Children's Medical Center
               Corporation and InnerVentions, Inc., dated June 19, 1995. (1)
                                       
  10.16        Assignment Agreement by and between the Company and The Beth
               Israel Hospital Association, dated June 30, 1994. (1)

  10.17        License Agreement by and between the Company and Lloyd A. Marks,
               dated as of April 15, 1996. (1)(2)

  10.18        Share Purchase Warrant by and between the Company and Lloyd A.
               Marks, dated April 15, 1996. (1)

  10.19        Registration Rights Agreement by and between the Company and
               Lloyd A. Marks, dated as of April 15, 1996. (1)

  10.20        Employment Agreement by and between the Company and Thomas M.
               Tully, dated February 13, 1996. (1)(**) 

  10.21        Registration Rights Agreement by and between the Company and
               Thomas M. Tully, dated as of February 13, 1996. (1)

  10.22        Employment Agreement by and between the Company and David
               Chazanovitz, dated February 13, 1996, as amended as of June 15,
               1996. (1)(**)

  10.22.1      Amendment to Employment Agreement by and between the Company and
               David Chazanovitz, dated July 9, 1996. (1)(**)

  10.23        Employment Agreement by and between the Company and Jason Harry,
               dated as of July 1, 1994. (1)(2)(**)

  10.24        Employment Agreement by and between the Company and Stephen J.
               Kleshinski, dated July 22, 1993, as supplemented by agreement
               dated as of June 1, 1994. (1)(2)(**)

  10.25        Employment Agreement by and between the Company and Theodore I.
               Pincus, dated as of May 17, 1996. (1)(**)
<PAGE>
 
  10.26        Form of Registration Rights Agreement between the Company and
               certain of its existing stockholders, dated as of February 14,
               1996. (1)

  10.27        Agreement of Lease by and between the Company and the Trustees of
               Wormwood Realty, dated as of May 8, 1996. (1)

  10.28        Company 1994 Stock Option Plan. (1)(**)

  10.29        Company 1996 Stock Option Plan. (1)(**)

  10.30        Company 1996 Stock Option Plan for Non-Employee Directors.
               (1)(**)

  10.31        Registration Rights Agreement between the Company and Junewicz &
               Co., Inc. dated as of February 16, 1996. (1)

  10.32        Registration Rights Agreement between the Company and Furman
               Selz, LLC, dated as of February 16, 1996. (1)

  11.1         Statement re:  Company's Earnings Per Share.

  21.1         Subsidiaries of the Registrant.

  27.1         Financial Data Schedule.
 
________________________
(1)    Incorporated by reference to Exhibits to the Registrant's Registration
       Statement on Form S-1 (File No. 333-06463).

(2)    Confidential treatment requested as to certain portions, which portions
       are omitted and filed separately with the Commission.

(**)   Management contract or compensatory plan or arrangement required to be
       filed as an Exhibit to this Annual Report on Form 10-K.