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**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-K**

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**(MarkOne)**
| **x**      | ** ** | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934 for the fiscal year ended December 31, 2008,** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                             |
| ** ** | ** ** | **or**                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                             |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.**                                              |

** **

**MERIT MEDICAL SYSTEMS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Utah**                     | ** ** | **0-18592**           | ** ** | **87-0447695**      |
|------------------------------|------------|-----------------------|------------|---------------------|
| (State or other jurisdiction |       | (Commission File No.) |       | (IRS Employer       |
| of incorporation)            |       |                  |       | Identification No.) |

** **

**1600 West Merit Parkway**

**South Jordan, Utah 84095**

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:  **(801) 253-1600**

 

Securities registered pursuant to Section 12(b) of theAct:  **Common Stock, No Par Value**

 

Securities registered pursuant to Section 12(g) of theAct:  **None**

 

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

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yes o  No x

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  Noo

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  Nox

 

The aggregate market value of the registrant’s common stock held bynon-affiliates of the registrant, on June 30, 2008, which is the last dayof the registrant’s most recently completed second fiscal quarter (based uponthe closing sale price of the registrant’s common stock on the NASDAQ NationalMarket System on June 30, 2008), was approximately $380 million.  Shares of common stock held by each officerand director of the registrant and by each person who may be deemed to be anaffiliate have been excluded.

 

As of February 27,2009, the registrant had 28,093,295 shares of the registrant’s common stockoutstanding.

 

 

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

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Portions of thefollowing document are incorporated by reference in Part III of thisReport: the registrant’s definitive proxy statement relating to the AnnualMeeting of Shareholders scheduled for May 20, 2009.

 

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**TABLE OF CONTENTS**

 
| PART I                  |                                                                                                               | 1      |
|------------------------------|--------------------------------------------------------------------------------------------------------------------|--------|
|                         |                                                                                                               |   |
| Item 1.                      | Business                                                                                                           | 1      |
|                         |                                                                                                               |   |
| Item 1A.                     | Risk Factors                                                                                                       | 8      |
|                         |                                                                                                               |   |
| Item 1B.                     | Unresolved  Staff Comments                                                                                         | 12     |
|                         |                                                                                                               |   |
| Item 2.                      | Properties                                                                                                         | 12     |
|                         |                                                                                                               |   |
| Item 3.                      | Legal Proceedings                                                                                                  | 13     |
|                         |                                                                                                               |   |
| Item  4.                     | Submission  of Matters to a Vote of Security Holders                                                               | 13     |
|                         |                                                                                                               |   |
| PART II                 |                                                                                                               | 14     |
|                         |                                                                                                               |   |
| Item 5.                      | Market for Registrant’s Common  Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | 14     |
|                         |                                                                                                               |   |
| Item 6.                      | Selected Financial Data                                                                                            | 17     |
|                         |                                                                                                               |   |
| Item 7.                      | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                        | 18     |
|                         |                                                                                                               |   |
| Item  7A.                    | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 22     |
|                         |                                                                                                               |   |
| Item  8.                     | Financial  Statements and Supplementary Data                                                                       | 23     |
|                         |                                                                                                               |   |
| Item  9.                     | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                              | 53     |
|                         |                                                                                                               |   |
| Item 9A.                     | Controls  and Procedures                                                                                           | 53     |
|                         |                                                                                                               |   |
| Item 9B.                     | Other  Information                                                                                                 | 55     |
|                         |                                                                                                               |   |
| PART III                |                                                                                                               | 55     |
|                         |                                                                                                               |   |
| Items 10, 11, 12, 13 and 14. | 55                                                                                                                 |
|                         |                                                                                                               |   |
| PART IV                 |                                                                                                               | 55     |
|                         |                                                                                                               |   |
| Item  15.                    | Exhibits  and Financial Statement Schedules                                                                        | 55     |
|                         |                                                                                                               |   |
| SIGNATURES                   |                                                                                                               | 59     |

 

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**PART I**

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*Unlessotherwise indicated in this report, “Merit”, “we,” “us,” “our,” and similarterms refer to Merit Medical Systems, Inc. and our consolidated subsidiaries*

*.*

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  All statementsother than statements of historical fact are “forward-looking statements” forpurposes of these provisions, including any projections of earnings, revenuesor other financial items, any statements of the plans and objectives ofmanagement for future operations, any statements concerning proposed newproducts or services, any statements regarding future economic conditions orperformance, and any statements of assumptions underlying any of theforegoing.  All forward-looking statements included in this report aremade as of the date hereof and are based on information available to us as ofsuch date.  We assume no obligation to update any forward-lookingstatement.  In some cases, forward-looking statements can be identified bythe use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negativethereof or other comparable terminology.  Although we believe that theexpectations reflected in the forward-looking statements contained herein arereasonable, there can be no assurance that such expectations or any of theforward-looking statements will prove to be correct, and actual results coulddiffer materially from those projected or assumed in the forward-lookingstatements.  Future financial condition and results of operations, as wellas any forward-looking statements, are subject to inherent risks and uncertainties,including risks relating to the closing ofthe proposed Alveolus, Inc. (“Alveolus”) and Biosearch MedicalProducts, Inc., a wholly-owned subsidiary of Hydromer, Inc. (“Biosearch”) transactions and the possibility that conditions to closing those transactionsmay not be satisfied or that either or both of those transactions may not becompleted; unanticipated consequencesof Merit’s proposed acquisition of the Alveolus and Biosearch assets;challenges associated with Merit’s efforts to pursue new market opportunities,including opportunities in the gastroenterology and pulmonary markets; infringement of Merit’s technology or the assertion that Merit’stechnology infringes the rights of other parties; product recalls andproduct liability claims; infringement of our technology or theassertion that our technology infringes the rights of other parties; productrecalls and product liability claims; downturn of the national economy and itseffect on our revenues, collections and supplier relations; termination ofsupplier relationships, or failure of suppliers to perform; inability tosuccessfully manage growth through acquisitions; delays in obtaining regulatoryapprovals, or the failure to maintain such approvals; concentration of ourrevenues among a few products and procedures; development of new products andtechnologies that could render our products obsolete; market acceptance of newproducts; delayed introduction of products; price and product competition;availability of labor and materials; cost increases; fluctuations in andobsolescence of inventory; volatility of the market price of our common stock;foreign currency fluctuations; changes in key personnel; work stoppage ortransportation risks; modification or limitation of governmental or privateinsurance reimbursement; changes in health care markets related to health carereform initiatives; failure to comply with environmental laws and regulationsand other factors referenced in our press releases and reports filed with theSecurities and Exchange Commission (the “SEC”). ****Allsubsequent forward-looking statements attributable to us or persons acting onour behalf are expressly qualified in their entirety by these cautionarystatements.  Additional factors that may have a direct bearing on ouroperating results are described under Item 1A. “Risk Factors” beginning on page 8.

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**Item 1.****         ****Business.**

** **

**GENERAL**

 

Merit MedicalSystems, Inc. was formed in 1987 by several members of our currentmanagement to produce high-quality, single-use medical products.  Ourinitial focus was on creating products to be used by doctors in diagnosing andtreating cardiovascular disease.  Our products are designed to enablephysicians and other health care professionals to perform interventional and diagnosticprocedures safely and effectively.  Early in our development, we were ableto introduce innovative new products and capture significant market sharebecause of our expertise in product design, our proprietary technology, and ourskills in injection and insert molding.  Later, we developed an innovativeline of angioplasty inflation products that included electronic sensing anddisplay features.  Angioplasty and stent placement are procedures used toclear out blockages and blood clots in arteries by inserting and inflating asmall balloon in the clogged arteries.  We market these devices, alongwith a group of sensor-based products designed to be used by hospital personnelin various diagnostic and interventional catheterization procedures. Recently, we have expanded our product offerings to include angiographiccatheters, dialysis catheters, micro catheters and micro access products, guidewires, needles, safety products, therapeutic infusion catheters andaccessories, drainage catheters and accessories, sheath introducers, pressureinfusion bags, syringes, safety scalpels, kits, and procedure trays. Additionally, we have sought to improve our line of core products.

 

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We offer a broadline of innovative, disposable products designed to assist physicians indiagnosing disease and intervening in the areas of radiology andcardiology.  During 2008, our sales of new and existing products increasedboth in the United States and in foreign markets.  We intend to create newproducts based on our sensor-based technologies, plastics molding, catheter,guide wire, and electronic capabilities, and to develop products for diagnosticand interventional procedures in additional markets.  Our sales ofstand-alone products, in combination with custom kits, have increased as wehave expanded our product lines.  In2008, our U.S. domestic sales force made approximately 41% of our sales directlyto U.S. hospitals and approximately 14% of sales through other channels such asU.S. customs packagers and distributors. Original equipment manufacturers, or “OEM,” companies accountedfor approximately 17% of our 2008 sales.  Approximately 32% of our salesin 2008 were made in international markets (of which OEM international salesaccounted for approximately 4%).

 

During the firstquarter of 2008, we entered into an asset purchase and supply agreement withMicrus Endovascular Corporation, a Delaware corporation (“Micrus”), wherein wepurchased threecatheter platforms, inventories, customer lists and developed technology.

 

In the thirdquarter of 2008, we entered into an agreement with Milamy Partners LLC, a Mainecorporation (“Milamy”), to terminate exclusive license rights with McKnightInvestments, LLC (“McKnight”) and substitute Merit as the exclusive licensee ofMilamy’s KanguruWeb® technology.  During2007, we entered into a distribution agreement with Milamy, wherein wepurchased the exclusive, worldwide right to distribute Milamy’s KanguruWeb®Abdominal Retraction System in vascular lab markets.

 

In the fourthquarter of 2008, we entered into an asset purchase agreement with Tran PA-C, Inc.,a Florida corporation (“Tran PA-C”), to purchase their catheter extraction products.  In connection with this agreement, wepurchased inventories, property and equipment, customer lists and developedtechnology.

 

Merit MedicalSystems, Inc. was organized in July 1987 as a Utah corporation.  We also conduct our operations through anumber of domestic and foreign subsidiaries.** **Our principal offices are locatedat 1600 West Merit Parkway, South Jordan, Utah, 84095, and our telephone numberis (801) 253-1600.   See Item 2. “Properties.”  We maintain an Internet website at *www.merit.com*.

** **

**PRODUCTS**

 

We develop,manufacture and market products that offer a high level of quality, value, andsafety to our customers, as well as the patients they serve.  In response to feedback from health careprofessionals, we have built an extensive product offering in the market forinterventional cardiology and interventional radiology procedures.  In addition, we are making our mark in theareas of dialysis and interventional nephrology, pain management (discography),vein therapy, and other areas of the health care industry.

 

The competitiveadvantages of our products are enhanced by our twenty-plus years of experiencein the health care industry; our experienced direct sales force anddistributors; our ability to combine and customize devices, kits, and trays atthe request of our customers; and our dedication to offering “stick to stitch”solutions in the markets we serve worldwide.

 

**InterventionalCardiology and Radiology Products**

 

Interventionalcardiology is a branch of the medical specialty of cardiology that dealsspecifically with the catheter-based diagnosis and treatment of heartdiseases.  A large number of procedurescan be performed by catheterization, and more commonly, involve the insertionof a sheath into the femoral, radial, or brachial artery. Fluoroscopy (X-ray)and computed tomography (CT) are most often used to visualize the vessels andchambers of the heart during these diagnostic and interventionalprocedures.  Percutaneous CoronaryInterventions (“PCI”) are used to treat coronary atherosclerosis and theresulting narrowing of the arteries of the heart.  Interventional Radiology is related to theminimally invasive treatment of disease in other (peripheral) vessels and organsof the body and Percutaneous Peripheral Intervention (“PPI”) is used to treatsimilar disease conditions outside the heart.

 

**InflationDevices. **During PCI and PPI procedures, balloons and/or stentsare placed within the vasculature.  Theballoons must be carefully placed, inflated, and deflated within the vessel inorder to achieve optimal results without injury to the patient.  For almost two decades, we have offered anextensive, innovative line of inflation devices. ** **Products like our IntelliSystem**®** and Monarch**®** (state of theart digital inflation systems), as well as the Basix**TM** COMPAK inflation device, offer the clinician a wide range offeatures and prices—along with the quality and ergonomic superiority for whichwe are known.  We estimate that wecurrently supply more than 50% of the worldwide inflation device market.

 

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**HemostasisValves. **We have developed a complete line of technicallysophisticated, clinically acclaimed hemostasis valves (also known asTouhy-Borst adaptors) and angioplasty accessories.  These valves connect to catheters and allowpassage of additional guide wires, balloon catheters, and other devices intothe vasculature while reducing the amount of blood loss during theprocedures.  We believe we currentlysupply more than 40% of the worldwide market for these devices.

 

**VascularAccess Products. **We offer a broad line of devices used togain and maintain vascular access while protecting the clinician fromaccidental cuts and needle-sticks during the procedure.  These effective and useful devices and kitsinclude the Futura**®** Safety Scalpeland an improved line of angiography needles (Merit Advance**®**), as well as the SecureLocTM AngiographicNeedle.  In addition, we offer anextensive line of sheath introducers (Prelude**®**)and mini access kits (MAK**TM**,****MAK-NV**TM** and S-MAK**TM**),which are designed to allow the clinician smooth, less traumatic, andconvenient access to the patient’s vasculature.

 

**DiagnosticCatheters, Guide Wires, and Torque Devices. ** We offer diagnostic catheters and guidewires for use during both cardiology and radiology angiographicprocedures.  In 2007, we introduced ournew IMPRESS**®** line of diagnosticradiology catheters and in 2008 we expanded the product line to includespecialty catheters for use in additional procedures such as fistulagrams wherea shorter angiographic catheter is easier to use.  These catheters offer interventionalradiologists superior performance during a variety of angiographyprocedures.  In addition, our diagnosticguide wires are used to traverse vascular anatomy and aid in placing cathetersand other devices.  Our pre-coated, highperformance InQwire**®** guide wiresare lubricious and are available in a wide range of configurations to meetclinicians’ diagnostic needs.  The MeritH2O®hydrophilic guide wire provides enhanced maneuverability through tortuousanatomy.  We also offer a line of torquedevices (guide wire steering tools) that can be used on both standard andhydrophilic guide wires—in both large and small diameters — and are oftenincluded as a component in our angioplasty packs.  In 2007, we released our new SeaDragonTMtorque device which is designed for use with hydrophilic guide wires.

 

**Angiographyand Angioplasty Accessories. **Since our introduction of the CCSTMdisposable coronary control syringe line in 1988, we have continued to developinnovative, problem-solving devices; accessories; kits; and procedure trays foruse during minimally invasive diagnosis and treatment of coronary artery andperipheral disease.  Additionally, weoffer an extensive line of kits containing manifolds, syringes, tubing, anddisposable pressure transducers (MeriTrans®) for measurement of pressures withinthe vessels and chambers of the heart. We also provide devices, kits, and procedure trays used to effectivelyand safely manage fluids, contrast media, and waste during angiography andinterventional procedures.  For example,in 2007, we introduced a new line of CT-Transfer Sets to address the growing CT angiography market.

 

**Safetyand Waste Management Systems.**** **We offer a variety of safety-related products andkits.  Our ShortStop® and ShortStopAdvantage® temporary sharps holders address the potential safety issuesassociated with accidental needle sticks. Our extensive line of color-coded Medallion® specialty syringes and thePALTM medication labeling system (which complies with the Joint Commission onAccreditation of Healthcare Organization’s (“JCAHO”) latest patient safetyinitiatives) help prevent mix-ups in administering medication.  We also offer waste management products toavoid accidental exposure to contaminated fluids.  These include our OSHA-compliant wastedisposal basins, including the BackStop®, BackStop PlusTM, MiniStopTM, MiniStop+TMand DugOut®.  These products have beendesigned to complement other Merit devices and are included in many of our kitsand procedure trays in order to make the clinical setting safer for bothclinicians and the patients.

 

**Obesity-RelatedProducts. **Patient obesity presents an ever-growingchallenge to clinicians and patients during vascular access, angiography, andinterventional procedures.  OurKanguruWeb® abdominal retraction device addresses this issue.  This device allows easier vessel access toclinicians while maintaining patient comfort and dignity during interventionalcardiology and radiology procedures.  Inaddition, we offer longer angiography and anesthesia needles, as well as miniaccess kits for improved vascular access of obese patients.

 

**SpecialtyProcedure Products**

** **

In addition to theprocedures and devices detailed above, interventional radiology (also referredto as the special procedures or specials lab) performs a variety of additionalminimally invasive diagnostic and interventional procedures.  We offer a variety of devices and accessoriesused during these procedures.

** **

**DrainageCatheters and Accessories. **We have a complete line of cathetersfor nephrostomy, abscess, and other drainage procedures.  Our ReSolve® non-locking and locking drainagecatheter line was expanded in 2006, 2007 and 2008.  These catheters’ unique, convenient lockingmechanisms are appreciated by clinicians and patients who often comment on theenhanced comfort that the catheter provides them.********** **We also offer a range of catheterfixation devices including the RevolutionTM catheter fixation devicewhich was designed to be cost effective, save time, and enhance patientcomfort.  In addition, we provide a wide selection of accessories thatcomplement our drainage catheters, 

 

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including tubingsets and drainage bags.  In 2007, weexpanded our Drainage DepotTM product line to include the new FZ Drainage DepotBagTM with soft cloth backing which is more comfortable for patients thantraditional bags.  In 2008, we introducedthe MAK-NVTM Introducer System (mini access introducer system for non-vascularapplications).  This popular device wasdesigned for easy visualization and quick access into the drainage area.  For enhanced visibility, the device featuresan echo enhanced needle and radiopaque marker tip on the introducer.

 

**Paracentesisand Pericardiocentesis Catheters. **Paracentesis is a procedure to remove fluid that hasaccumulated in the abdominal cavity (peritoneal fluid).  Merit’s One-StepTM centesis catheter and our Safety ParacentesisProcedure Tray, are designed to provide clinicians with a safe, convenient, andcost-effective alternative for paracentesis procedures.  Pericardiocentesis is a procedure in whichfluid is aspirated from the pericardium (the sac enveloping the heart).  In 2007, we introduced a new, large (8.3F)outer diameter pericardiocentesis catheter. Our Pericardiocentesis Kit is designed as an organized, ready-to-use,convenient tray to assist the clinician in draining fluid quickly from thepericardial sac.  In 2008, the One-StepTMproduct line was improved and expanded to include a slip-version of the devicethat we believe will make our products more competitive in the paracentesismarket.

** **

**TherapeuticInfusion Catheters. **We offer a complete line of therapeuticthrombolytic infusion systems featuring the Fountain® Infusion Systems and theMistique® Infusion Catheters.  Thesetechnically-advanced catheters are used to treat thrombus (blood clot)formation in the peripheral vessels of the body.

 

**Productsfor Dialysis and Interventional Nephrology. **In 2007,we acquired the ProGuideTM Chronic Dialysis Catheter product line from DatascopeCorporation.  The ProGuideTM is considereda “workhorse” catheter for long-term dialysis and provides a platform foradditional Merit products in the dialysis and interventional nephrologymarket.  For example, the new Prelude®Short Sheath provides vascular access to dialysis grafts, along with ourextensive line of micro access devices such as the MAKTM/S-MAKTM line of miniaccess kits.  We also offer a wide rangeof guide wires, diagnostic catheters, therapeutic infusion systems, and safetyproducts that are used during dialysis-related procedures.  In 2008, we acquired the TranscatheterExtractor® from Tran PA-C.  This noveldevice is used to remove tunneled chronic dialysis catheters from dialysispatients.  Also in 2008, we continued toadd to our offering of unique products for the dialysis and interventionalnephrology market.  The Slip-Not® SutureRetention Device provides a unique and effective method for securing apurse-string suture that controls bleeding after an arteriovenous (“AV”)fistula intervention. In addition, we introduced the new Impress® 30cmangiographic catheters, so we can now offer our customers almost everythingthey need for completing AV fistula interventions.

 

**DiscographyProducts. **Discography is a technique used todetermine whether a disc is the source of pain in patients with back or neckpain.  During discography, contrastmedium is injected into the disc and the patient’s response to the injection isnoted.  Due, in large part, to theirquality and accuracy, our digital inflation devices (IntelliSystem® andMonarch®) are used in many pain management clinics.

** **

**MARKETINGAND SALES**

 

**TargetMarket/Industry. **Our target markets include diagnostic andinterventional cardiology, interventional radiology, vascular surgery,interventional nephrology, cardiothoracic surgery and pain management(discography and kyphoplasty).

 

According togovernment statistics, coronary and peripheral vascular disease continues to bea leading health problem in the United States.** **Treatment options range fromdietary changes to surgery, depending on the nature of the specific disease ordisorder.  Endovascular techniques,including angioplasty, stenting, and endoluminal stent grafts, continue torepresent important therapeutic options for the treatment of vasculardisease.  We derive a large percentage ofour revenues from sales of products used during percutaneous (through the skin)diagnostic and interventional procedures such as angiography, angioplasty, andstent placement, and we intend to pursue additional sales growth by building onour existing market position in both catheter technology and accessoryproducts.

 

In addition toproducts used in the treatment of coronary and peripheral vascular disease, wecontinue our efforts to develop and distribute other devices used in the majormarkets we serve.  For example, we havedeveloped and are distributing products used for percutaneous abscessdrainage.  Prior to the widespread use ofCT or ultrasound imaging, major surgery was necessary to drain internal fluidcollections.  Now percutaneous drainageis frequently prescribed as the treatment of choice for many types of fluidcollections.  Our family of drainagecatheters and associated accessory devices are used by physicians in theinterventional radiology, vascular surgery, and cardiothoracic surgery marketsfor the percutaneous drainage of abscess fluid in the biliary system and theurinary tract.

 

We also service the growing interventional nephrologymarket.  Dialysis, or cleaning of theblood, is necessary in conditions such as acute renal failure, chronic renalfailure and end-stage renal disease, or ESRD. The kidneys remove excess waterand chemical wastes from blood, permitting clean blood to return to thecirculatory system.  When the 

 

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kidneys malfunction,waste substances are not properly excreted, creating an abnormal buildup ofwastes in the bloodstream.  Dialysismachines are used to treat this condition. Dialysis catheters, which connect the patient to the dialysis machine,are used at various stages in the treatment of dialysis patients.  In the past few years, we have added bothcatheters and accessories to our dialysis-related product offering.

 

In general, we serve in are characterized by rapidchange resulting from technological advances and scientific discoveries.  We plan to continue to develop and launchinnovative products to support these clinical trends.

 

**MarketStrategy.** Our marketing strategy is focused on identifying and introducing a continualflow of highly profitable differentiated products that meet customerneeds.  In order to stay abreast of customer needs, we seek suggestionsfrom hospital personnel working with our products in cardiology and radiologyapplications.  Suggestions for new products and product improvements maycome from engineers, sales people, physicians and technicians who perform theclinical procedures.

 

When we determinethat a product suggestion demonstrates a sustainable competitive advantage,meets customer needs, fits strategically and technologically with our business,and has a good potential financial return, we generally assemble a “projectteam” comprised of individuals from our sales, marketing, engineering,manufacturing, legal, and quality assurance departments.  This team worksto identify the customer requirements, integrate the design, compile necessarydocumentation and testing, and prepare the product for marketintroduction.  We believe that one of our marketing strengths is ourcapacity to rapidly conceive, design, develop, and introduce new products.

** **

**U.S. Sales.** Sales of our products in the United States accounted for 68%, 68% and 72% ofour total sales for the years ended December 31, 2008, 2007 and 2006,respectively.  Our direct sales force currently consists of a VicePresident of Sales, nine regional sales managers and 72 direct salesrepresentatives and clinical specialists located in major metropolitan areasthroughout the United States.  We consider training to be a criticalfactor in the success of our direct sales force.  Our sales people are trained by our personnelat our facilities, by a senior sales person in their respective territories, atregular national and regional sales meetings, by consulting cardiologists andby observation of procedures in catheterization laboratories.

** **

**InternationalSales.** Approximately 144 independent dealer organizations distribute our productsworldwide, including territories in Europe, Africa, the Middle East, Asia,South and Central America, and Canada.  We have appointed a Vice Presidentfor International Sales, based in South Jordan, Utah, who oversees Asia, Southand Central America, Australia and Canada. We also have a Vice President of European Sales who oversees Europe, theMiddle East and Africa from our facility located in Maastricht, TheNetherlands.  Approximately 24 direct sales representatives and countrymanagers presently sell our products in Germany, France, the United Kingdom,Belgium, The Netherlands, Denmark, Sweden, Ireland and Austria.  In 2008,our international sales grew approximately 12% over our total sales for theyear ended December 31, 2007 and accounted for approximately 32% of totalsales.  With the recent and planned additions to our product lines, webelieve that our international sales will continue to increase.

 

We require ourinternational dealers to inventory products and sell directly to customerswithin defined sales territories.  Each of our products must be approvedfor sale under the laws of the country in which it is sold.  Internationaldealers are responsible for compliance with all applicable laws and regulationsin their respective countries.

** **

**OEMSales.  **Wecurrently have an OEM division that sells molded components, sub-assembledgoods, and bulk non-sterile goods, which may be combined with other componentsand/or goods from other companies and then sold under a Merit or non-Meritlabel.   We engage in both international and domestic OEM sales.

** **

**CUSTOMERS**

 

We serve hospitaland clinic-based cardiologists, radiologists, anesthesiologists, physiatrists(pain management physicians), neurologists, nephrologists, vascular surgeons,technicians, and nurses, all of whom influence the purchasing decisions for ourproducts.   Hospitals and acute care facilities in the United Statespurchase our products through our direct sales force, distributors, OEMpartners, custom packagers and packers who assemble and combine our products incustom kits and packs.  Outside the United States, hospitals and acutecare facilities purchase our products through our direct sales force, or in theabsence of a sales force, through independent distributors or OEM partners.

 

In 2008, our U.S. domestic sales force made approximately 41% of oursales directly to U.S. hospitals, and they made approximately 14% of our salesthrough other channels such as U.S. custom packagers and distributors.  Approximately 45% of our sales were made by our directEuropean sales force, international distributors, and our OEM salesforce.  Sales to our single largest customer, an OEM partner, accountedfor approximately 7% of total sales during the year ended December 31,2008.  We generally manufacture products for other medical devicecompanies through our

 

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OEM division. During the year ended December 31, 2008, OEM sales representedapproximately 17% of our total revenue.

 

**RESEARCHAND DEVELOPMENT**

 

In 2008, we continued toinnovate in the treatment of cardiovascular disease by offering our customers anumber of new products.  We broadened ourPrelude® Sheath Introducer line by developing a number of radial artery accesssheaths and valves.  The Prelude® ShortSheath line was designed to meet customer expectations for dialysis graftaccess.  The MAK NVTM is a new productline developed to offer non-vascular access for our drainage products.  Two other novel products were created to addconvenience for the clinician.  TheSlip-Not® is a device for securing purse string sutures following proceduresinvolving dialysis grafts.  Also, theGrandstandTM is a temporary sharps holder which adds safety and innovation toour sharps container line.

 

Research and developmentexpenses were approximately $9.2 million, $8.7 million, and $8.6 million in2008, 2007, and 2006, respectively.  Ourfuture growth continues to be fueled with multiple product ideas guided by ourChief Executive Officer and our sales and marketing teams, as well as bycollaboration with physicians with whom we have longstandingrelationships.  We have research anddevelopment facilities in South Jordan, Utah; Angleton, Texas; Galway, Ireland;and Venlo, The Netherlands.  We are alsoexpanding our research and development efforts to include a variety of Europeantechnological sources.

** **

**MANUFACTURING**

 

We manufacturemany of our products utilizing our proprietary technology and our expertise inplastic injection and insert molding.  We generally contract with thirdparties for the tooling of molds, but we design and own all of our molds. We utilize our experience in injection and insert molding technologies in themanufacture of most of the custom components used in our products.

 

We either assemblethe electronic monitors and sensors used in our IntelliSystem® and Monarch®inflation devices from standard electronic components or we purchase them fromsuppliers.  Merit Sensor Systems, Inc., a wholly-owned subsidiary ofMerit Medical Systems, Inc., develops and markets silicon sensors. It is presently supplying all of the sensors we utilize in our digitalinflation devices.

 

Our products aremanufactured at several factories, including facilities located in South Jordanand Murray, Utah; Galway, Ireland; Venlo, The Netherlands; Angleton, Texas andChester, Virginia.  Our manufacturing capabilities are being expanded intoa contract manufacturing facility in Mexico.  See Item 2. “Properties.”

 

We havedistribution centers located in South Jordan, Utah; Angleton, Texas; Chester,Virginia and Maastricht, The Netherlands.

 

We believe thatour variety of suppliers for raw materials and components necessary for themanufacture of our products, as well as our long-term relationships with suchsuppliers, promote stability in our manufacturing process.  Historically,we have not been materially affected by interruptions with suchsuppliers.  Furthermore, we seek to develop back-up suppliers formaterials and components in the event of supply interruptions.

 

**COMPETITION**

 

We compete inseveral global markets, including diagnostic and interventional cardiology,interventional radiology, vascular surgery, interventional nephrology,cardiothoracic surgery and pain management. These markets encompass a largenumber of suppliers of varying sizes.

 

In theinterventional cardiology and radiology markets, we compete with largeinternational, multi-divisional medical supply companies such as CordisCorporation (Johnson & Johnson), Boston Scientific Corporation,Medtronic, C.R. Bard, and Terumo.  Medium-sizecompanies we compete with include Cook, Arrow, AngioDynamics, VascularSolutions, and ICU Medical.  Many of ourcompetitors have substantially greater financial, technical, and marketingresources than we do.

 

The principalcompetitive factors in the markets in which our products are sold are quality,price/value, device feature, customer service, breadth of line, and customerrelationships.  We believe that our products have achieved marketacceptance due to the quality of materials and workmanship of our products,innovative design, our willingness to customize to fit customer needs, and ourprompt attention to customer requests.  Our products are pricedcompetitively, but generally not below prices for competing products.  Oneof our primary competitive strengths is our 

 

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relative stability in themarketplace; a comprehensive, broad line of ancillary products; and our historyof introducing a variety of new products and product line extensions to themarket on a regular basis.

 

Based on availableindustry data, with respect to the number of procedures performed, we believewe are the leading provider of digital inflation technology in the world.  In addition, we are the world market leaderfor inflation devices, hemostasis devices, and torque devices.  Togetherwith Navilyst Medical, Inc. (formerly Boston Scientific, NAMIC) we are oneof two market leaders in the United States for control syringes, waste-disposalsystems, tubing, and manifold kits. We believe the recent and planned additionsto our product lines will enable us to compete even more effectively in boththe U.S. and international markets.  There is no assurance; however, thatwe will be able to maintain our existing competitive advantages or competesuccessfully in the future.

 

We derive a substantialmajority of our revenues from sales of products used in diagnostic angiographyand interventional cardiology and radiology stent procedures.  Medicalprofessionals are starting to use new diagnostic methods and interventionalprocedures and devices, as well as drugs for the treatment and prevention ofcardiovascular disease. These new methods, procedures and devices may rendersome of our products obsolete or limit the markets for our products. However, with the advent of vascular stents and other procedures, we haveexperienced continued growth in sales of our products.

 

**PATENTS,LICENSES, TRADEMARKS AND COPYRIGHTS**

 

We consider ourproprietary technology to be important in the development and manufacture ofour products.  We seek to protect our technology through a combination ofpatents, trademarks, trade secrets, copyrights, confidentiality agreements andnon-compete agreements.  We generally seek patent protection of ourtechnology in the United States and certain foreign countries where suchprotection appears to be advantageous.

 

As of December 31,2008, we owned 84 U.S. patents and had licenses to 13 U.S. patents.  Additionally, we either owned or hadexclusive rights to 51 pending U.S. patent applications.  Internationally, we owned 22 patents, andeither owned or had exclusive rights to 20 pending patent applications, all ofwhich are foreign counterparts of the U.S. cases.

 

We believe thatour patents and pending patent applications are materially important to ourbusiness, but we do not believe that our business is dependent upon securingsuch patents.  We also operate under licenses from other owners of certainpatents, patent applications, technology, trade secrets, know-how, copyrightsand trademarks.  We believe, however, that no single patent, patentapplication, technology, trade secret, know-how, copyright, trademark, or licenseis material in relation to our business as a whole.

 

Certain minor U.S.patents related to the locking mechanism in our inflation devices expired in2008 and other patent rights are scheduled to expire thereafter.  We expect that related patents will continueto be valuable, in part because of proprietary innovations made since theissuance of our first patent.  In 1992, we were granted a license to usepatented technology which we incorporated into our inflation devices.  Inreturn, we paid a 5.75% ongoing royalty to the licensee, not to exceed $450,000annually.** **Royalties paid forsuch license in each of 2008, 2007 and 2006 were $450,000.  The license agreement terminated in August 2008,upon the last expiration date of the licensed patents; however, we continue touse the technology in many of our devices.

 

We have alsoregistered or applied for registration of several trade names ortrademarks.  See “Products” above.  We have received 134 U.S. andforeign trademark registrations, and other U.S. and foreign trademarkapplications are currently pending. ****We****have registered copyrights relating to certain softwareused in our electronic inflation devices.

 

**REGULATION**

 

The U.S. Congresshas passed the Federal Food, Drug, and Cosmetic Act (the “Food, Drug and CosmeticAct”).  Under the Food, Drug and Cosmetic Act, and through its own rules,the U.S. Food and Drug Administration (“FDA”) regulates the development,testing, packaging, labeling, and marketing of medical devices andmanufacturing procedures relating to these devices.  In general, the FDArequires that manufacturers adhere to certain standards designed to ensure thesafety and effectiveness of medical devices.  We employ a Chief RegulatoryOfficer and a Vice President of Quality Systems who are responsible forcompliance with all applicable FDA regulations.

 

The FDA’s QualitySystems Regulations define the requirements for our manufacturing processes,require the maintenance of certain records, and provide for unscheduledinspections of our facilities.  We must also comply with certainrequirements of state, local, and foreign governments in the manufacture andmarketing of the Company’s products.

 

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New medicaldevices may also be subject to either the Section 510(k) Pre-MarketNotification regulations or the Pre-Market Approval (“PMA”) regulationspromulgated by the FDA and similar regulatory requirements in foreigncountries.  New products in either category require extensivedocumentation, careful engineering, and manufacturing controls to ensurequality.  Products needing PMA approval require extensive pre-clinical andclinical testing and approval by the FDA prior to marketing.  Productssubject to Section 510(k) of the Food Drug and Cosmetic Act requireFDA clearance prior to marketing.  To date, our products have requiredonly compliance with Section 510(k).  Most of our products aresubject to foreign regulatory approvals before they may be marketedabroad.  We place the “CE” mark on devices sold in Europe.  The CE mark represents that a product has metEU health, safety, and environmental requirements.  We have received ISO 13485 certification forour facilities in Utah, Texas, Virginia and Ireland.  We have alsoreceived ISO 9001:2000 certification for our Merit Sensor Systems facility inSouth Jordan, Utah.

 

**EMPLOYEES**

 

As of December 31,2008, we employed 1,654 people, including 1,255 in manufacturing; 176 in salesand marketing; 123 in engineering, research and development; and 100 inadministration.

 

Many of ourpresent employees are highly skilled.  Our failure or success will depend,in part, upon our ability to retain such employees.  We believe that an adequatesupply of skilled employees is available.  We have, from time-to-time,experienced rapid turnover among our entry-level assembly workers, as well asoccasional shortages of such workers, resulting in increased labor costs andadministrative expenses related to hiring and training replacement and newentry-level employees.  Our key employees are bound by agreements orpolicies of confidentiality.  None of our employees are representedby a union or other collective bargaining group.  We believe that ourrelations with our employees are generally good.

 

**AVAILABLEINFORMATION**

 

We file annual,quarterly and current reports and other information with the SEC.  Thesematerials can be inspected and copied at the SEC’s Public Reference Room at100 F Street, N.E., Washington, D.C. 20549.  Copies of these materials mayalso be obtained by mail at prescribed rates from the SEC’s Public Reference Room atthe above address.  Information about the Public Reference Room canbe obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintainsan Internet site that contains reports, proxy and information statements, andother information regarding issuers that file electronically with theSEC.  The address of the SEC’s Internet website is www.sec.gov.

 

We make available,free of charge, on our Internet website, located at www.merit.com, our mostrecent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q,any current reports on Form 8-K filed since our most recent Annual Reporton Form 10-K, and any amendments to such reports as soon as reasonablypracticable following the electronic filing of such report with the SEC. In addition, we provide electronic or paper copies of such filings free ofcharge upon request.

 

**FINANCIALINFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES**

 

For financialinformation relating to our foreign and domestic sales, transfers betweengeographic areas, net income and identifiable assets, see Note 11 to ourconsolidated financial statements set forth in Item 8 of this report.

 

**Item 1A.****         ****Risk Factors.**

** **

Our business,operations, and financial condition are subject to certain risks anduncertainties.  Should one or more of these risks or uncertaintiesmaterialize, or should any underlying assumptions prove incorrect, our actualresults will vary, and may vary materially from those anticipated, estimated,projected or expected.  Among the key factors that may have a directbearing on our business, operations, or financial condition are the factorsidentified below:

 

**We maybe unable to protect our proprietary technology or may infringe on theproprietary technology of others.**

 

We have obtainedU.S. patents and filed additional U.S. and foreign patent applications;however, there can be no assurance that any patents we hold or for which wehave applied will provide us with any significant competitive advantages, thatthird parties will not challenge our patents, or that patents owned by otherswill not have an adverse effect on our ability to conduct business.  Wecould incur substantial costs in preventing patent infringement, in curbing theunauthorized use of our proprietary technology by others, or in defendingagainst similar claims of others.  Since we rely on trade secrets andproprietary know-how to maintain our competitive position, there can be noassurance that others may not independently develop similar or superiortechnologies.

 

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We operate in anincreasingly competitive medical technology marketplace.  There has alsobeen substantial litigation regarding patent and other intellectual propertyrights in the medical device industry.  Our activities may require us todefend against claims and actions alleging infringement of the intellectualrights of others.  If a court rules against us in any patentlitigation, any of several negative outcomes could occur: we could be subjectto significant liabilities, we could be forced to seek licenses from thirdparties, or we could be prevented from marketing certain products.  Any ofthese outcomes could have a material adverse effect on our financial conditionand operating results.

 

Our ability toremain competitive is dependent, in part, upon our ability to prevent othercompanies from using our proprietary technology incorporated into ourproducts.  We seek to protect our technology through a combination ofpatents, trademarks, and trade secrets, as well as licenses, proprietaryknow-how and confidentiality agreements.  We may be unable, however, toprevent others from using our proprietary information, or continue to use suchinformation our self, for numerous reasons, including the following, any ofwhich could have a material adverse effect on the Company’s business,operations, or financial condition:

 

·                  Our issued patents may not be sufficiently broad toprevent others from copying our proprietary technologies;

 

·                  Our issued patents may be challenged by third partiesand deemed to be overbroad or unenforceable;

 

·                  Our products may infringe on the patents or otherintellectual property rights of other parties, requiring us to alter ordiscontinue our manufacture or sale of such products;

 

·                  Costs associated with seeking enforcement of ourpatents against infringement, or defending our self against allegations ofinfringement, may be significant;

 

·                  Our pending patent applications may not be granted forvarious reasons, including over breadth or conflict with an existing patent;and

 

·                  Other persons may independently develop, or havedeveloped, similar or superior technologies.

 

**Economicand industry conditions constantly change, and negative economic conditions inthe United States and other countries could materially and adversely affect ourbusiness and results of operations.**

 

Our business andour results of operation are affected by many changing economic and otherconditions beyond our control.  Actual orpotential changes in international, national, regional and local economic,business and financial conditions, including recession and inflation, maynegatively affect consumer preferences, perceptions, spending patterns ordemographic trends, any of which could adversely affect our business andresults of operations.  We may alsoexperience higher bad-debt rates and slower receivable collection rates in ourdealings with our customers.  Inaddition, recent disruptions in the credit markets have resulted in greatervolatility, less liquidity, widening of credit spreads, and decreasedavailability of financing.  As a resultof these factors, there can be no assurance that financing will be available tous on acceptable terms, if at all. An inability to obtain necessary additionalfinancing on acceptable terms may have an adverse impact on us and on ourability to grow our business.

 

**Terminationor interruption of relationships with our suppliers, or failure of suchsuppliers to perform, could disrupt our business.**

 

We rely on rawmaterials, component parts, finished products, and services supplied by outsidethird parties in connection with our business.  For example, substantiallyall of our products are sterilized by only a few different entities.  Inaddition, some of our products are manufactured or assembled by thirdparties.  If a supplier of significant raw materials, component parts,finished goods, or services were to terminate its relationship with us, orotherwise cease supplying raw materials, component parts, finished goods, orservices consistent with past practice, our ability to meet our obligations toour end customers may be disrupted.  A disruption with respect to numerousproducts, or with respect to a few significant products, could have a materialadverse effect on our business, operations or financial condition.

 

**Ourproducts may be subject to recall or product liability claims.**

 

Our products areused in connection with invasive procedures and in other medical contexts inwhich it is important that those products function with precision and accuracy. If our products do not function as designed, or are designed improperly, we maychoose to or be forced by regulatory agencies to withdraw such products fromthe market.  In addition, if medical personnel or their patients sufferinjury as a result of any failure of our products to function as designed, oran inappropriate design, we could be subject to lawsuits seeking significantcompensatory and punitive 

 

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damages.  Anyproduct recall or lawsuit seeking significant monetary damages may have amaterial adverse effect on our business, operations or financial condition.

 

We generally offera limited warranty for product returns which are due to defects in quality andworkmanship.  We attempt to estimate ourpotential liability for future product returns and establish reserves on ourfinancial statements in amounts that we believe will be sufficient to addressour warranty obligations; however, our actual liability for product returns maysignificantly exceed the amount of our reserves.  If we underestimate our potential liabilityfor future product returns, or if unanticipated events result in returns orwarranty obligations that exceed our historical experience, our financialcondition and operating results could be materially and adversely affected.

** **

**We maybe unable to successfully manage growth, particularly if accomplished throughacquisitions.**

 

Successful implementationof our business strategy will require that we effectively manage any associatedgrowth.  To manage growth effectively, our management will need tocontinue to implement changes in certain aspects of our business, to improveour information systems and operations to respond to increased demand, toattract and retain qualified personnel, and to develop, train, and manage anincreasing number of management-level and other employees.  Growth couldplace an increasing strain on our management, financial, product design,marketing, distribution and other resources, and we could experience operatingdifficulties.  Any failure to managegrowth effectively could have a material adverse effect on our business,operations or financial condition.

 

To the extent thatwe grow through acquisition, we will face the additional challenges ofintegrating our current operations, culture, information management systems andother characteristics with that of the acquired entity.  We may incursignificant expenses in connection with negotiating and consummating one ormore transactions, and we may inherit certain liabilities in connection witheach acquisition.  In addition, we may not realize competitive advantages,synergies or other benefits anticipated in connection with suchacquisition(s).  If we do not adequately identify targets for, or manageissues related to, our future acquisitions, such acquisitions may have anegative adverse effect on our business and financial results.

 

**Asignificant adverse change in, or failure to comply with, governing regulationscould adversely affect our business.**

 

Substantially allof our products are “devices,” as defined in the Federal Food, Drug andCosmetic Act, and the manufacture, distribution, record keeping, labeling andadvertisement of our products are subject to regulation by the FDA in theUnited States and its equivalent regulatory agencies in various foreigncountries in which our products are manufactured, distributed, labeled, offeredor sold.  Further, we are subject to continual review and periodicinspections at our current facilities with respect to the FDA’s Quality SystemRegulations and similar requirements of foreign countries.  In addition,we are subject to certain export control restrictions governed by the U.S.Department of the Treasury and may be governed by other regulatory agencies invarious foreign countries to which our products are exported.  Although webelieve we are currently in material compliance with these requirements, anyfailure on our part to comply with all applicable current and futureregulations could adversely affect our business, operations, or financialcondition.

 

**Asignificant portion of our revenues are derived from a few products, proceduresand/or customers.**

** **

A significantportion of our revenues are attributable to sales of our inflationdevices.  During the year ended December 31, 2008, sales of ourinflation devices (including inflation devices sold in custom kits and throughOEM channels) accounted for approximately 27% of our total revenues. Sales of our inflation devices to a single OEM customer, representing ourlargest customer, were approximately 6% of our total inflation device sales forthe year ended December 31, 2008. Any material decline in market demand, or change in OEM supplierpreference, for our inflation devices could have an adverse effect on ourbusiness, operations or financial condition.

 

In addition, theproducts that have accounted for a majority of our historical revenues aredesigned for use in connection with a few related medical procedures, includingangioplasty, stent placement procedures, and spinal procedures.  Ifsubsequent developments in medical technology or drug therapy make suchprocedures obsolete, or alter the methodology of such procedures so as toeliminate the usefulness of our products, we may experience a material decreasein demand for our products and experience deteriorating financial performance.

 

**We maybe unable to compete in our markets, particularly if there is a significantchange in relevant practices and technology.**

 

The market foreach of our products is highly competitive.  We face competition from manycompanies which are larger, better established and have greater financial,technical and other resources and greater market presence than 

 

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we do.  Suchresources and market presence may enable our competition to more effectivelymarket competing products or to market competing products at reduced prices inorder to gain market share.

 

In addition, ourability to compete successfully is dependent, in part, upon our response tochanges in technology and to our efforts to develop and market new productswhich achieve significant market acceptance.  Competing companies withsubstantially greater resources than us are actively engaged in research anddevelopment of new methods, treatments, drugs, and procedures to treat orprevent cardiovascular disease that could limit the market for our products andeventually make some of our products obsolete.  A reduction in the demandfor a significant number of our products, or a few key products, could have amaterial adverse effect on our business, operations or financial condition.

 

**Themarket price of our common stock has been, and may continue to be, volatile.**

 

The market priceof our common stock has been, and may continue to be, volatile for variousreasons, including the following, which could have a material adverse effect onour business, operations or financial condition:

 

·                  Our announcement of new products or technicalinnovations, or similar announcements by our competitors;

 

·                  Development of new procedures that use, or do not use,our technology;

 

·                  Quarter-to-quarter variances in our financial results;

 

·                  Claims involving potential infringement of patents andother intellectual property rights;

 

·                  Analysts’ and other projections or recommendationsregarding our common stock or medical technology stocks generally;

 

·                  Any restatement of our financial statements or anyinvestigation of us by the SEC, the FDA or another domestic or foreignregulatory authority; and

 

·                  A decline, or rise, of stock prices in the capitalmarkets generally.

 

**Fluctuationsin Euro and GBP exchange rates may negatively impact our financial results.**

 

Fluctuations inthe rate of exchange between the Euro and GBP relative to the value of the U.S.Dollar could have a negative impact on our margins and financial results. For example, during 2008, the exchange rate between the Euro and the U.S. Dollarresulted in an increase in our gross revenues of approximately $1.3 million and0.10% in our gross profit.

 

For the year endedDecember 31, 2008, approximately $25.6 million, or 11%, of our sales, weredenominated in Euros and GBP.  If the rate of exchange between the Euroand the GBP declines, against the U.S. Dollar, we may not be able to increasethe prices we charge our European customers for products whose prices aredenominated in Euros and GBP.  Furthermore, we may be unable or elect notto enter into hedging transactions which could mitigate the effect of decliningexchange rates.  As a result, if the rate of exchange between Euros andGBP declines, against the U.S. Dollar, our financial results may be negativelyimpacted.

 

**We aredependent upon key personnel.**

** **

Our success isdependent on key management personnel, including Fred P. Lampropoulos, ourChairman of the Board, President and Chief Executive Officer.  Mr. Lampropoulosis not subject to any agreement prohibiting his departure, and we do not maintainkey man life insurance on his life.  The loss of Mr. Lampropoulos, orof certain other key management personnel, could have a materially adverseeffect our business and operations.  Our success also depends on, amongother factors, the successful recruitment and retention of key operating,manufacturing, sales and other personnel.

 

**We aresubject to work stoppage, transportation and related risks.**

 

We manufactureproducts at various locations in the United States and international locations,and sell our products worldwide.  We depend on third-party transportationcompanies to deliver supplies necessary to manufacture our products fromvendors to our various facilities and to move our products to customers,operating divisions, and other subsidiaries located worldwide.  Ourmanufacturing operations, and the operations of the transportation companies on

 

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which we depend, may beadversely affected by natural disasters or significant human events, such as awar, terrorist attack, riot, strike, slowdown or similar event.  Anydisruption in our manufacturing or transportation could materially adverselyaffect our ability to meet customer demands or our operations.

 

**Limitson reimbursement imposed by governmental and other programs may adverselyaffect our business.**

 

The cost of asignificant portion of medical care is funded by governmental, social securityor other insurance programs.  Limits on reimbursement imposed by suchprograms may adversely affect the ability of hospitals and others to purchaseour products.  In addition, limitations on reimbursement for procedureswhich utilize our products could adversely affect sales.

 

**Operations at our manufacturingfacilities may be negatively impacted by certain factors, including severeweather conditions and the impact of natural disasters.**

 

Our operations can beaffected by many factors beyond our control, including severe weatherconditions and the impact of natural disasters, including hurricanes andtornados.  These conditions can causesubstantial damage to facilities, interrupt production and disrupt our abilityto deliver products to our customers.

 

Our operations inAngleton, Texas have been suspended due to hurricanes in recent years.  In September 2008 we shut down ouroperations in Angleton in anticipation of Hurricane Ike and production wasrestored shortly thereafter.  While weincurred minimal damage to our facility, we experienced greater financialdamage as a result of the production disruption.  Although our insurance covered some of thelosses associated with the event, future natural disasters could increase thecost of insurance.  We cannot be certainthat any losses from business interruption or property damages, along with theincreases in insurance costs, will not have a material adverse effect on ourresults of operations or financial condition.

 

**Our failure to comply withapplicable environmental laws and regulations could affect our business andresults of operations.**

 

One of our wholly-ownedsubsidiaries, Merit Sensor Systems, Inc. (“Merit Sensor Systems”),manufactures and assembles certain products that require the use of hazardousmaterials that are subject to various federal, state and local laws andregulations governing the protection of the environment.  While the cost of compliance with such lawsand regulations has not had a material adverse effect on our results ofoperations historically, compliance with future regulations may requireadditional capital investments in pollution control equipment or changes in theway Merit Sensor Systems makes its products. Additionally, because Merit Sensor Systems uses hazardous and otherregulated materials in its manufacturing processes, we are subject to certainrisks of liabilities and claims resulting from any accidental releases.  While we believe the precautions andinfrastructure Merit Sensor Systems has put in place are sufficient, anyaccidental release may have an adverse affect on our business and results ofoperations.

 
| **Item  1B.** | **Unresolved Staff Comments.** |
|---------------|--------------------------------|
| ** **    | ** **                     |
| ** **    | None.                          |

** **
| **Item  2.** | **Properties.** |
|--------------|-----------------|

** **

We ownapproximately 23 acres of real property situated in the city of South Jordan,Utah, surrounding an additional ten acres of leased real property on which ourprincipal office and manufacturing facility is located which totalsapproximately 200,000 square feet.  We sold the ten-acre site to anunrelated developer in order to facilitate construction of the facility andentered into a 25-year lease agreement (beginning in 1995) to finance thefacility.  Monthly lease payments attributable to the ten-acre parcel areapproximately $138,000.  We also hold an option to purchase the facility,exercisable at market value after 25 years.  During 2004, we acquired anadditional four acres of property south of and adjacent to our main property inSouth Jordan.  During 2005, we acquired an additional seven acres ofproperty just west of our current facility in South Jordan.  We believethe acquisition of these additional properties will potentially enable us toexpand our operations in the future as property surrounding our existingfacilities is limited due to increased development.

 

At the end of2004, we completed construction of an approximately 47,000 square footmanufacturing facility in South Jordan, Utah.  This facility is used forresearch, development and pilot production clean rooms and for production ofsensors.  In the fourth quarter of 2007,our wholly-owned subsidiary, Merit Sensor Systems, Inc., relocated to ourSouth Jordan campus for the anticipated purpose of long-term improvements incosts, quality, efficiency and capacity.

 

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We completed anapproximately 140,000 square foot manufacturing facility located in SouthJordan, Utah in September 2005.  This facility is used for injectionand insert molding production, as an automated finished goods warehouse, and asthe locale for management information system employees.  The new facilities in South Jordan aredesigned to increase our clean room production capacity and administrativeoffice space to meet current and projected demand that we anticipate we willexperience over the next several years.

 

We own a buildingof approximately 65,000 square feet with approximately three acres of land, inGalway, County Galway, Republic of Ireland, which serves as our principal officeand manufacturing facility for our European operations.  The facilityhouses a research and development team, which developed our diagnostic guidewire, and is working to develop other new products.  We also manufactureother products at the Galway facility.

 

We lease amanufacturing facility of approximately 52,000 square feet located in Murray,Utah.  The Murray facility is used for production of several of ourproducts.  The leases related to seven of the units at the Murray facilityexpired in 2007.  Given the expiration of these leases, we currently usethe seven units on a month-to-month basis. The aggregate lease payments on these Murray facilities areapproximately $29,000 per month.

 

We own approximately19 acres of land and an approximately 75,000 square foot building in Angleton,Texas.  The facility is used for the production of catheter-relatedproducts.

 

We ownapproximately 12 acres of land and an approximately 100,000 square foot buildingin Chester, Virginia.  The facility is used for production of customprocedure trays used in the medical industry.

 

We relocated ourMCTec operations to a leased manufacturing facility of approximately 10,000square feet located in Venlo, The Netherlands.  The facility is used forthe coating of wires and tubing for medical devices.  The lease willexpire in January 2011.  The current monthly lease payment isapproximately $7,000.

 

In May 2008,we completed construction of a new European headquarters in Beek, TheNetherlands.  The new 31,000 square footfacility is designed to provide for anticipated growth in our Europeanoperations.

 

We believe thatour existing and proposed facilities will generally be adequate for our presentand future anticipated levels of operations.

 
| **Item  3.** | **Legal Proceedings.** |
|--------------|------------------------|

 

In the course ofconducting our business operations, we are, from time to time, involved inlitigation and other disputes.  Our management does not currentlyanticipate that any pending litigation or dispute against us will have amaterially adverse effect on our business, operations or financial condition.

 
| **Item  4.** | **Submission of Matters to a Vote of Security Holders.** |
|--------------|----------------------------------------------------------|

 

No matters weresubmitted to a vote of our security holders during the fourth quarter of theyear ended December 31, 2008.

 

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** **

**PART II**

** **
| **Item 5.** | **Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities.** |
|-------------|--------------------------------------------------------------------------------------------------------------------------|

** **

**MARKETPRICE FOR THE COMMON STOCK**

 

Our common stock(the “Common Stock”) is traded on the NASDAQ National Market System under thesymbol “MMSI.”  The following table sets forth high and low sale pricesfor the Common Stock for the periods indicated.

 
| **For the year ended December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                                          |       | $        | 17.41      |    | $          | 13.71 |   |
| Second Quarter                                                         |       | $        | 16.97      |    | $          | 14.00 |   |
| Third Quarter                                                          |       | $        | 21.36      |    | $          | 14.18 |   |
| Fourth Quarter                                                         |       | $        | 19.99      |    | $          | 12.35 |   |

 
| **For the year ended December 31, 2007** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                                          |       | $        | 15.74      |    | $          | 11.90 |   |
| Second Quarter                                                         |       | $        | 13.41      |    | $          | 10.89 |   |
| Third Quarter                                                          |       | $        | 13.38      |    | $          | 11.25 |   |
| Fourth Quarter                                                         |       | $        | 16.50      |    | $          | 12.36 |   |

 

**OUTSTANDINGSHARES AND NUMBER OF SHAREHOLDERS**

 

As of February 27,2009, the number of shares of Common Stock outstanding was 28,093,295 held byapproximately 167 shareholders of record, not including shareholders whoseshares are held in securities position listings.

 

**DIVIDENDS**

 

We have neverdeclared or paid cash dividends on the Common Stock.  We presently intendto retain any future earnings for use in our business and, therefore, do notanticipate paying any dividends on the Common Stock in the foreseeablefuture.  In addition, our revolving line of credit contains covenantsprohibiting the declaration and distribution of a cash dividend at any timeprior to the termination of such line of credit.

 

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** **

**PERFORMANCEGRAPH**

 

The followinggraph compares the performance of the Common Stock with the performance of theNASDAQ Stock Market (U.S. Companies) and NASDAQ Stocks (SIC 3840-3849 U.S.Companies - Surgical, Medical and Dental Instruments and Supplies) for afive-year period by measuring the changes in Common Stock prices from December 31,2003 to December 31, 2008.

 

**Comparison of 5 YearCumulative Total Return**

**Among Merit MedicalSystem, Inc., NASDAQ Stock Market (U.S.)**

**and NASDAQ Stocks (SIC3840-3849)**

 

 
| ** **                                    | ** ** | **12/2003** | ** ** | **12/2004** | ** ** | **12/2005** | ** ** | **12/2006** | ** ** | **12/2007** | ** ** | **12/2008** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Merit Medical  System Inc.                    |       | $           | 100        |        | $          | 69          |       | $           | 55         |        | $          | 71          |       | $ | 62 |   | $ | 81 |   |
| NASDAQ Stock  Market (U.S. Companies)         |       |        | 100        |        |       | 109         |       |        | 111        |        |       | 122         |       |   | 132 |   |   | 64 |   |
| NASDAQ Stocks  (SIC 3840-3849 U.S. Companies) |       |        | 100        |        |       | 116         |       |        | 134        |        |       | 138         |       |   | 177 |   |   | 92 |   |

 

The stock performancegraph assumes for comparison that the value of the Common Stock and of eachindex was $100 on December 31, 2003 and that all dividends werereinvested.  Past performance is not necessarily an indicator of futureresults.

 

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** **

**SECURITIESAUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**

 

The followingtable contains information regarding our equity compensation plans as of December 31,2008 (in thousands):

 
| ** **                                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                      | ** ** | **(a)**                                                                                                                                          | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
| Equity  compensation Plans approved by security holders     |       | 3,833                                                                                                                                            | (1),(3)    | $                                                                                                           | 12.12      |                                                                                                                                                                                                             | 1,044      | (2),(3) |
| Equity  compensation Plans not approved by security holders |       | 51                                                                                                                                               | (4)        | $                                                                                                           | 10.13      |                                                                                                                                                                                                             |       |   |
| Total                                                       |       | 3,884                                                                                                                                            |       | $                                                                                                           | 12.10      |                                                                                                                                                                                                             | 1,044      |   |

 

----

(1)   Consists of 3,832,953 shares of Common Stocksubject to the options granted under the Merit Medical Systems, Inc. 2006Long-Term Incentive Plan.

 

(2)   Consists of 360,395 shares available to beissued under the Merit Medical Systems, Inc. Qualified and Non-QualifiedEmployee Stock Purchase Plan and 684,619 shares available to be issued underthe Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan**.**

 

(3)   See Note 10 to our consolidated financialstatements set forth in Item 8 of this report for additional informationregarding these plans.

 

(4)   Consists of warrants issued in theacquisition of MedSource Packaging Concepts LLC (“MedSource”) in 2004.

 

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** **
| **Item 6.** | **Selected  Financial Data  (in thousands).** |
|-------------|----------------------------------------------------|

 
| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| OPERATING DATA:                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Sales                            |       | $                                           | 227,143    |   | $ | 207,768 |   | $ | 190,674 |   | $ | 166,585 |   | $ | 151,398 |   |
| Cost of Sales                        |       | 133,872                                     |       | 127,977 |   | 117,596 |   | 97,493 |   | 83,908 |   |
| Gross Profit                         |       | 93,271                                      |       | 79,791 |   | 73,078 |   | 69,092 |   | 67,490 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Operating  Expenses:                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative |       | 53,127                                      |       | 48,133 |   | 45,486 |   | 38,579 |   | 35,071 |   |
| Research and  development            |       | 9,160                                       |       | 8,688 |   | 8,582 |   | 6,992 |   | 5,079 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Total operating  expenses            |       | 62,287                                      |       | 56,821 |   | 54,068 |   | 45,571 |   | 40,150 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Income From  Operations              |       | 30,984                                      |       | 22,970 |   | 19,010 |   | 23,521 |   | 27,340 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Other Income  (Expense):             |       |                                        |       |   |   |   |   |   |   |   |   |
| Litigation  settlement               |       |                                        |       |   |   |   |   |   |   | 100 |   |
| Interest income                      |       | 781                                         |       | 393 |   | 250 |   | 491 |   | 556 |   |
| Interest expense                     |       | (17                                         | )          | (3 | ) | (12 | ) | (18 | ) | (6 | ) |
| Other income  (expense)              |       | 97                                          |       | 39 |   | (64 | ) | (94 | ) | 16 |   |
| Other income—net                |       | 861                                         |       | 429 |   | 174 |   | 379 |   | 666 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Income before  income taxes          |       | 31,845                                      |       | 23,399 |   | 19,184 |   | 23,900 |   | 28,006 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Income Tax Expense                   |       | 11,118                                      |       | 7,811 |   | 6,883 |   | 8,122 |   | 10,074 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Income                           |       | $                                           | 20,727     |   | $ | 15,588 |   | $ | 12,301 |   | $ | 15,778 |   | $ | 17,932 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Earnings Per  Common Share:          |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                              |       | $                                           | 0.73       |   | $ | 0.55 |   | $ | 0.44 |   | $ | 0.57 |   | $ | 0.65 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Average Common  Shares:              |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                              |       | 28,550                                      |       | 28,204 |   | 28,245 |   | 27,847 |   | 27,691 |   |
|                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| BALANCE SHEET  DATA:                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Working capital                      |       | $                                           | 84,283     |   | $ | 60,194 |   | $ | 54,972 |   | $ | 43,693 |   | $ | 54,944 |   |
| Total assets                         |       | 231,776                                     |       | 200,420 |   | 182,668 |   | 162,247 |   | 139,877 |   |
| Long-term debt                       |       | 0                                           |       | 0 |   | 0 |   | 2 |   | 5 |   |
| Stockholders’  equity           |       | $                                           | 194,305    |   | $ | 164,368 |   | $ | 151,212 |   | $ | 132,484 |   | $ | 111,052 |   |

 

During the quarterended December 31 2006, we determined it was not likely that we would pursuethe product associated with the intellectual property and assets acquired fromSub-Q, Inc. (“Sub-Q”) due to other priorities and opportunities. Therefore, we recorded an impairment charge of approximately $929,000, duringthe quarter primarily relating to intellectual property assets acquired fromSub-Q in March 2005.

 

During the quarterended December 31, 2005, we adopted Statement of Financial AccountingStandards (“SFAS”) No. 151, *InventoryCosts*,**and recorded additional expensesto cost of sales of $415,000, research and development expense of $83,000 andselling, general and administrative expense of $37,000.

 

During the yearended December 31, 2004, we accrued severance costs totaling approximately$663,000 related to the employment termination of certain executive employees.

 

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** **
| **Item 7.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.** |
|-------------|--------------------------------------------------------------------------------------------------|

** **

**OVERVIEW**

 

Despite difficultworldwide economic conditions during 2008, we reported record sales andearnings for the twelve months ended December 31, 2008.  This improvement, compared to our 2007results, was largely the result of a 9% increase in sales, a substantialimprovement in gross margins of 270 basis points, and relatively flat operatingexpenses as a percentage of sales, and was partially offset by an increase inour effective tax rate of 150 basis points. All of these improvements produced record earnings of $20.7 million, up33% from the prior year.  During 2009, weplan to implement new automation and manufacturing cost saving improvementsrelated to logistics and product labeling, and introduce new products throughorganic growth and acquisitions, which we believe will increase our averageproduct margins.  Also, we plan toidentify a location outside the U.S. to locate a manufacturing site in aneffort to reduce our product costs.  Todate, the overall slowdown in the economy that began in 2008 and has continuedinto 2009 has not significantly affected our operations, as many of ourproducts are not used for elective procedures, and are not capital equipment.

 

For the year endedDecember 31, 2008, we reported net sales of $227.1 million, up $19.4million or 9% over 2007 net sales.  Net sales growth in 2008 was primarilydriven by increased sales of our custom kit and procedure tray products (up11%), stand-alone products (up 9%), including swabbable valves, stopcocks, OEMparts, tubing, and hemostasis valves and catheters (up 20%), particularly ourPrelude® sheath product line, Mini Access KitTM catheter product line, Micruscatheter product line and diagnostic cardiology catheters.

 

Our gross marginsas a percentage of sales were 41.1% for the year ended December 31, 2008,compared to 38.4% for year ended December 31, 2007.  This significantimprovement resulted primarily from lower average fixed overhead unit costsresulting from increased production (unit costs decreased as fixed costs wereshared over an increased number of units), lower unit costs for productsmanufactured in Mexico, price increases and production automation.  Theseimprovements also helped offset raw material and production labor costincreases that occurred during 2008.

 

Net income increased forthe year ended December 31, 2008 to $20.7 million, compared to $15.6 millionfor the prior year.  When compared to the prior year, net income for theyear ended December 31, 2008 was positively affected by increased salesvolumes and higher gross margins, and partially offset by a higher effectiveincome tax rate.

 

**RESULTSOF OPERATIONS**

 

The followingtable sets forth certain operational data as a percentage of sales for theperiods indicated:

 
| ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales                                         |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Gross profit                                  |       | 41.1     |       | 38.4     |       | 38.3     |       |
| Selling, general  and administrative expenses |       | 23.4     |       | 23.2     |       | 23.9     |       |
| Research and  development expenses            |       | 4.0      |       | 4.2      |       | 4.5      |       |
| Income from  operations                       |       | 13.6     |       | 11.1     |       | 10.0     |       |
| Income before  income tax expense             |       | 14.0     |       | 11.3     |       | 10.1     |       |
| Net income                                    |       | 9.1      |       | 7.5      |       | 6.5      |       |

 

Our net salesincreased by $19.4 million, or 9.3%, in 2008, compared to an increase of $17.1million, or 9.0%, in 2007, and an increase of $24.1 million, or 14.5%, in2006.  We report sales in four product categories.  Listed below arethe sales relating to these product categories for the years ended December 31,2008, 2007, 2006 and 2005:

 
| ** **                              | ** ** | **December  31,** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **% Change**           | ** ** | **2008** | ** ** | **% Change** | ** ** | **2007** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stand-alone  devices                    |       | 9%                          |       | $ | 68,005 |   | 12% |   | $ | 62,417 |   | 19% |   | $ | 55,824 |   | $ | 46,900 |   |
| Custom  kits & procedure trays |       | 11%                         |       | 66,584 |   | 7% |   | 60,013 |   | 15% |   | 56,009 |   | 48,740 |   |
| Inflation  devices                      |       | 3%                          |       | 61,656 |   | 5% |   | 59,595 |   | 9% |   | 56,978 |   | 52,319 |   |
| Catheters                               |       | 20%                         |       | 30,898 |   | 18% |   | 25,743 |   | 17% |   | 21,863 |   | 18,626 |   |
| Total                                   |       | 9%                          |       | $ | 227,143 |   | 9% |   | $ | 207,768 |   | 14% |   | $ | 190,674 |   | $ | 166,585 |   |

 

Our sales increasedduring 2008, notwithstanding the fact that the markets for many of our productsare experiencing slight pricing declines as our customers try to reduce theircosts.  Substantially all of the increase in our 

 

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revenues was attributableto increased unit sales, except for a slight increase in revenues attributableto an increase in the exchange rate between the Euro and the U.S. Dollar whichincreased sales by 0.6% in 2008 compared to 2007, 0.9% in 2007 compared to2006, and 0.1% in 2006 compared to 2005.  Historically, an important partof our revenue growth came from increases in the number of procedures performedfor patients in a given year.  Startingin April 2007, the growth rate of coronary stents and other relatedprocedures in the U.S. dropped significantly, reducing the traditional growthrate of our U.S. direct sales.  Newproducts are another source of revenue growth. In 2008, 2007 and 2006, our sales of new products represented 2%, 6% and9% of sales, respectively.  Included inthose sales are revenues from recent acquisitions of 1%, 3% and 3% for 2008,2007 and 2006, respectively.  The thirdmain source of revenue increases came from market share gains in our existingproduct lines.

 

Internationalsales in 2008 were approximately $72.5 million, or 32% of total sales;international sales in 2007 were approximately $64.9 million, or 31% of totalsales; international sales in 2006 were approximately $53.7 million, or 28% oftotal sales.  These increases primarily resulted from greater acceptanceof our products in international markets, ongoing growth in our European directsales, and increased sales related to improvement in the exchange rate betweenthe Euro and the U.S. Dollar, as discussed above.  Our total direct salesin France, Germany, the U.K., Belgium, The Netherlands, Denmark, Sweden,Austria and Ireland were $27.1 million, $23.8 million, and $20.0 millionin 2008, 2007 and 2006, respectively.

 

Our gross profitas a percentage of sales was 41.1%, 38.4%, and 38.3%, in 2008, 2007 and 2006,respectively.  The increase in grossmargins in 2008 resulted primarily from lower average fixed overhead unit costsresulting from increased production (unit costs decreased as fixed costs wereshared over an increased number of units), lower unit costs for productsmanufactured in Mexico, customer price increases and productionautomation.  These improvements also helped offset raw material andproduction labor cost increases that occurred during 2008.  The increase in gross margins in 2007 wasprincipally the result of production efficiencies resulting in lower headcount,product mix improvement, the transfer of the manufacturing process of fourproducts to Mexico, and certain automation projects.  The decline in gross margins in 2006 resultedprimarily from investments made during the second half of 2005 for newfacilities and related costs (i.e. utilities, maintenance, cleaning and taxes)and equipment.  Gross margins in 2006were also affected by the increased cost of direct labor, increased healthinsurance costs, our adoption of SFAS No. 123(R), *Share-BasedPayment*, (“SFAS No. 123(R)”), effective January 1, 2006,and increased procedure tray sales in 2006, which have lower gross margins thanour overall gross margins.

 

Our selling,general, and administrative expenses increased $5.0 million, or 10%, in 2008over 2007; $2.6 million, or 6%, in 2007 over 2006; $6.9 million, or 18%, in2006 over 2005.  Selling, general and administrative expenses as apercentage of sales increased slightly in 2008 when compared to the prioryear.  This increase was primarily theresult of higher commissions commensurate with higher sales, management andsales bonuses for meeting quarterly and annually objectives, increasedtravel-related expenses andincreased national account administration fees.Selling, general and administrative expenses for 2008 were also affected byapproximately $415,000 of damages (net of insurance reimbursement of $179,000)sustained by our Angleton, Texas facility during Hurricane Ike in September 2008.  The significant (70 basis points) decrease inselling, general and administrative expenses in 2007 as a percentage of sales,was primarily the result of operating leverage from reducing head count, whileincreasing sales.  The increase inselling, general, and administrative costs in 2006 as a percentage of sales,was primarily the result of a full year of costs associated with the hiring of17 additional sales representatives in the second half of 2005, approximately$945,000 attributable to the adoption of SFAS No. 123(R) and animpairment charge of approximately $929,000, primarily relating to intellectualproperty assets acquired from Sub-Q in March 2005.

 

Research anddevelopment expenses increased 5% to $9.2 million in 2008, compared to $8.7million in 2007.  Our R&D expense for2007 increased 1% to $8.7 million, compared to $8.6 million in 2006; R&Dexpenses for 2006 increased 23% to $8.6 million, compared to $7.0 million in2005.  The increase in R&D expenses in 2008, 2007 and 2006 was relatedprimarily to R&D head count additions and indirect costs to support anincrease in the number of new products we launched.  Our R&D expensesas a percentage of sales were 4.0% for 2008, 4.2% for 2007 and 4.5% for2006.  We have a full pipeline of newproducts and management believes that we have an effective level ofcapabilities and expertise to continue the flow of new internally-developedproducts into the future.

 

Our effectiveincome tax rates for 2008, 2007, and 2006 were 35%, 33%, and 36%,respectively.   The increase in the effective income tax rate for2008 over 2007 was primarily the result of investment losses sustained in ourdeferred compensation plan that are not deductible for tax purposes.  The decrease in the effective income tax ratefor 2007 over 2006 was primarily the result of the unrecognized tax benefits,related to Financial Accounting Standards Board Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes*,**which expired on our 2002 federal, state, and foreign taxreturns and a non-taxed gain related to corporate-owned variable life insurancecontracts for our deferred compensation plan. The increase in the effective tax rate for 2006 over 2005 was primarilythe result of our reimbursement of costs incurred by our Irish subsidiary forthe development of two new products which are taxed at a lower income tax ratethan our U.S. operations.

 

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Our other incomefor 2008, 2007, and 2006 was approximately $861,000, $429,000, and $174,000,respectively.  The increase in other income for 2008 over 2007 and 2007over 2006 was primarily the result of an increase in interest incomeattributable to higher average cash balances and higher interest rates.  The decrease in other income for 2006 over2005 was primarily the result of a decrease in cash balances and a correspondingdecrease in interest income of approximately $241,000.

 

Our net income for 2008,2007, and 2006 was approximately $20.7 million, $15.6 million and $12.3million, respectively.  Net income for 2008 was positively affected byincreased sales volumes and higher gross margins, and partially offset byhigher effective income tax rates.  Netincome for 2007 was positively affected by increased sales volumes, highergross margins, lower operating expenses as a percentage of sales and a lowereffective income tax rate.  Net incomefor 2006 was negatively affected by lower gross margins, higher research anddevelopment spending, increased selling, general and administrative expenses,and positively affected by increased sales volumes.

 

Under SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS No. 142”), which we adopted effective January 1,2002, we no longer amortize goodwill from business acquisitions, butreview annually the impairment of goodwill, or more frequently if impairmentindicators arise.  We completed our initial testing of goodwill as of January 1,2002 and determined that there was no impairment.  We have elected toperform our annual testing of goodwill impairment as of July 1 of theapplicable fiscal year.  As of July 1, 2008, we performed our annualtesting of goodwill for impairment and determined that there was noimpairment.  Also, as of December 31,2008, we concluded there were no events or circumstances indicating thatimpairment had occurred.  During the fourth quarter of 2006, we determinedthat it was unlikely we would pursue the product associated with theintellectual property acquired from Sub-Q due to our decision to pursue otherpriorities and opportunities that we believe are more favorable to us. Therefore, we recorded an impairment charge of approximately $929,000 inselling, general and administrative expense for 2006, which includedapproximately $500,000 related to goodwill.  We had no impairments ingoodwill for the years ended December 31, 2008 and 2007.  The remaining unamortized amount of goodwillat December 31, 2008 was approximately $13.0 million.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**CapitalCommitments and Contractual Obligations**

 

The followingtable summarizes our capital commitments and contractual obligations as of December 31,2008, including operating lease payments and office lease payments, as well asthe future periods in which such payments are currently anticipated to becomedue:

 
| ** **                       | ** ** | **Payment due by period (in thousands)** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                                         | ** ** | **Less than 1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
| Operating leases                 |       | 19,381                                                            |       | 2,122 |   | 3,791 |   | 3,362 |   | 10,106 |   |
| Royalty  obligations             |       | 258                                                               |       | 50 |   | 100 |   | 50 |   | 58 |   |
| Total  contractual cash          |       | 19,639                                                            |       | 2,172 |   | 3,891 |   | 3,412 |   | 10,164 |   |

 

We have approximately$2.8 million of unrecognized tax positions that have been recognized asliabilities in accordance with FIN 48 that have not been included in thecontractual obligations table due to uncertainty as to when such amounts may besettled.

 

Additional informationregarding our capital commitments and contractual obligations, includingroyalty payments, is contained in notes 7, 8, and 12 of the notes to ourconsolidated financial statements, set forth in Item 8.

 

**CashFlows**

** **

Our cash flow fromoperations was $28.0 million in 2008, a decrease, of $4.0 million over2007.  This decrease in cash flow fromoperations in 2008, when compared to 2007, came mostly from an increase ininventories compared to a decrease in 2007 (an approximate change of $9.1million), which was partially offset by an increase in net income in 2008 over2007.  Our working capital for 2008,2007, and 2006 was $84.3 million, $60.2 million, and $55.0 million,respectively.  The increase in working capital for 2008 over 2007 wasprimarily the result of an increase in cash generated from our net income andcash generated from the issuance of shares of Common Stock related to employeestock option exercises.  The increase inworking capital for 2007 over 2006 was primarily the result of an increase incash net of the reduction in inventories of $4.5 million as we focused onimproving our inventory turns.  Theincrease in working capital for 2006 over 2005 was primarily the result of anincrease in cash flow from operations of $8.0 million and a reduction in theamount of capital expenditures made, when compared to 2005.

 

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On December 7,2006, we entered into an unsecured loan agreement with Bank of America, N.A. (“Bankof America”), whereby Bank of America agreed to provide us a line of credit inthe amount of $30,000,000.  Prior to December 7, 2006, we maintaineda long-term revolving credit facility (the “Facility”) with Zions FirstNational Bank (“Zions”).  The Facility had a credit limit of $500,000 foryears 2005 and 2006.  The Facility expired on June 30, 2006.  OnDecember 8, 2006, we entered into an unsecured loan agreement with Zions,whereby Zions agreed to provide us a line of credit in the amount of$1,000,000.   We had $0 outstanding under our lines of credit as of December 31,2008, 2007 and 2006.

 

Historically, wehave incurred significant expenses in connection with product development andintroduction of new products.  Substantial capital has also been requiredto finance the increase in our receivables and inventories associated with ourincreased sales.  During 2008, we spentapproximately $7.8 million on various production equipment related toautomation, capacity increases, and product launches, and approximately $2.1million to complete our new customer service and distribution facility for ourEuropean operations in The Netherlands. During 2007, we spent approximately $9.4 million on various productionequipment related to automation and new product launches, approximately $3.0million for construction costs on a new customer service and distributionfacility for our European operations in The Netherlands and $2.0 million forimprovements made to a production clean room in South Jordan, Utah.  During 2006, we spent approximately $9.6million for various production equipment, approximately $2.1 million onbuilding and leasehold improvements, and approximately $1.7 million on thepurchase of real estate in The Netherlands to build a distributionfacility.  Our principal source of funding for these and other expenseshas been cash generated from operations, sales of equity, and bank lines ofcredit.  We currently believe that our present sources of liquidity andcapital are adequate for current operations and for the foreseeable future.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The SEC hasrequested that all registrants address their most critical accountingpolicies.  The SEC has indicated that a “critical accounting policy” isone which is both important to the representation of the registrant’s financialcondition and results and requires management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  We base our estimates onpast experience and on various other assumptions our management believes to bereasonable under the circumstances, the results of which form the basis for makingjudgments about carrying values of assets and liabilities that are not readilyapparent from other sources.  Actual results will differ, and may differmaterially from these estimates under different assumptions orconditions.  Additionally, changes in accounting estimates could occur inthe future from period to period.  Our management has discussed thedevelopment and selection of our most critical financial estimates with theaudit committee of our Board of Directors.  The following paragraphsidentify our most critical accounting policies:

 

**InventoryObsolescence Reserve****. **Our management reviews on a regular basis inventory quantities on hand forunmarketable and/or slow-moving products that may expire prior to beingsold.  This review of inventory quantities for unmarketable and/or slowmoving products is based on estimates of forecasted product demand prior toexpiration lives.  If market conditions become less favorable than thoseprojected by our management, additional inventory write-downs may be required. We believe that the amount included in our obsolescence reserve has been ahistorically accurate estimate of the unmarketable and/or slow moving productsthat may expire prior to being sold.  Our obsolescence reserve wasapproximately $2.3 million as of December 31, 2008.

 

**Allowancefor Doubtful Accounts****. ** Amajority of our receivables are with hospitals which, over our history, havedemonstrated favorable collection rates.  Therefore, we have experiencedrelatively minimal bad debts from hospital customers.  In limitedcircumstances, we have written off minimal bad debts as the result of thetermination of foreign distributors.  The most significant write-offs overour history have come from U.S. packers who bundle our products in surgicaltrays.

 

We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments.  The allowance isbased upon historical experience and a review of individual customerbalances.  If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.  Our bad debt reserve wasapproximately $505,000 at December 31, 2008 which is consistent withhistorical collection experience.

 

**Stock-BasedCompensation.** ****We account for stock-based compensation inaccordance with SFAS No. 123(R). Under the fair value recognition provisions of this statement, wemeasure share-based compensation cost at the grant date based on the value ofthe award and recognize the cost as an expense over the term of thevesting period.  Judgment is required in estimating the amount ofshare-based awards that are expected to be forfeited.  If actual resultsdiffer 

 

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significantly from theseestimates, stock-based compensation expense and our results of operations couldbe materially impacted.

 

**Income Taxes.**  We adopted the provisions of FIN 48 effective January 1, 2007.Under FIN 48, tax positions shall initially be recognized in the financialstatements when it is more likely than not the position will be sustained uponexamination by the tax authorities.  Suchtax positions shall initially and subsequently be measured as the largestamount of tax benefit that has a greater than 50% likelihood of being realizedupon ultimate settlement with the tax authorities assuming full knowledge ofthe position and all relevant facts.  Although we believe our provisionsfor FIN 48 unrecognized tax positions are reasonable, we can make no assurancethat the final tax outcome of these matters will not be different from thatwhich we have reflected in our income tax provisions and accruals.  The tax law is subject to variedinterpretations, and we have taken positions related to certain matters wherethe law is subject to interpretation.  Such differences could have amaterial impact on our income tax provisions and operating results in theperiod(s) in which we make such determination.

 
| **Item  7A.** | **Quantitative and Qualitative Disclosure About Market Risk.** |
|---------------|----------------------------------------------------------------|

** **

Our principalmarket risk relates to changes in the value of the Euro and Great Britain Pound(“GBP”) relative to the value of the U.S. Dollar.  Our consolidatedfinancial statements are denominated in, and our principal currency is, theU.S. Dollar.  A portion of our revenues ($25.6 million, representingapproximately 11% of aggregate revenues), for the year ended December 31,2008 was attributable to sales that were denominated in Euros and GBPs, allother international sales were denominated in U.S. Dollars.  Certainexpenses are also denominated in Euros and GBPs, which partially offsets risksassociated with fluctuations of exchanges rates between the Euro and GBP on theone hand, and the U.S. Dollar on the other hand.  Because of our Euro andGBP-denominated revenues and expenses, in a year in which our Euro andGBP-denominated revenues exceed our Euro and GBP-based expenses, the value ofsuch Euro and GBP-denominated net income increases if the value of the Euro andGBP increase relative to the value of the U.S. Dollar, and decreases if thevalue of the Euro and GBP decrease relative to the value of the U. S. Dollar. During the year ended December 31, 2008, the exchange rate between theEuro and GBP against the U.S. Dollar resulted in an increase of our grossrevenues of approximately $1.3 million and 0.10% in gross profit.

 

On November 28,2008, we forecasted a net exposure for December 31, 2008 representing thedifference between Euro and GBP denominated receivables and Euro and GBPdenominated payables of approximately 147,000 Euros and 264,000 GBPs,respectively.  In order to partially offset such risks, on November 28,2007, we entered into a 30-day forward contract for Euros and GBPs.  Wegenerally enter into similar economic transactions at various times during theyear to partially offset exchange rate risks we bear throughout the year. During the years ended December 31, 2008 and 2007, we experienced a netgain of approximately $52,000 and $29,000, respectively, from financingtransactions executed during 2008 and 2007 in an effort to limit our exposureto fluctuations in the exchange rates of the Euro and GBP relative to the U.S.Dollar.  We do not purchase or holdderivative financial instruments for speculative or trading purposes.

 

Another marketrisk relates to variable rate debt.  As of December 31, 2008, we hadno variable rate debt.  As long as we do not have variable rate debt, ourinterest expense would not be affected by changes in interest rates.

 

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| **Item  8.** | **Financial Statements and Supplementary Data.** |
|--------------|--------------------------------------------------|

** **

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Merit Medical Systems, Inc.:

 

We have audited the accompanying consolidated balance sheets of MeritMedical Systems, Inc., and subsidiaries (the “Company”) as of December 31,2008 and 2007, and the related consolidated statements of income, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2008.  Our audits also included thefinancial statement schedule listed in the Index at Item 15.  These financial statements and financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon the financial statements and financial statement schedule based on ouraudits.

 

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

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company as of December 31,2008 and 2007, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2008, in conformity withaccounting principles generally accepted in the United States of America.  Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

As discussed in Note 1 to theconsolidated financial statements, in 2006, the Company changed its method ofaccounting for stock-based compensation to conform to Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised 2004), *Share-BasedPayment*, in 2007, the Company changed its method of accounting foruncertain tax positions to conform to Financial Accounting StandardsBoard Interpretation (“FIN”)No. 48,  *Accountingfor Uncertainty in Income Taxes*, and in 2008, the Company adoptedSFAS No. 157, *Fair Value Measurements*.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of December 31, 2008, based on thecriteria established in *Internal Control**— Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 2,2009, expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

/s/  DELOITTE & TOUCHE LLP

 

Salt Lake City,UtahMarch 2, 2009

 

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** **

**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2008 AND 2007**

**(Inthousands)**

 
| ** **                                                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                          |       |     |       |     |       |
|                                                                                                                |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                     |       |     |       |     |       |
| Cash and cash  equivalents                                                                                          |       | $        | 34,030     |     | $          | 17,574 |   |
| Trade  receivables — net of allowance for uncollectible accounts — 2008 – $505 and  2007 – $497 |       | 27,749   |       | 26,619   |       |
| Employee  receivables                                                                                               |       | 126      |       | 144      |       |
| Other  receivables                                                                                                  |       | 818      |       | 1,140    |       |
| Inventories —  net                                                                                             |       | 38,358   |       | 34,106   |       |
| Prepaid expenses  and other assets                                                                                  |       | 985      |       | 1,297    |       |
| Deferred income  tax assets                                                                                         |       | 2,782    |       | 811      |       |
| Income tax  refund receivable                                                                                       |       | 607      |       | 297      |       |
|                                                                                                                |       |     |       |     |       |
| Total current  assets                                                                                               |       | 105,455  |       | 81,988   |       |
|                                                                                                                |       |     |       |     |       |
| PROPERTY AND  EQUIPMENT:                                                                                            |       |     |       |     |       |
| Land and land  improvements                                                                                         |       | 7,992    |       | 7,977    |       |
| Buildings                                                                                                           |       | 49,793   |       | 43,147   |       |
| Manufacturing  equipment                                                                                            |       | 68,184   |       | 61,448   |       |
| Furniture and  fixtures                                                                                             |       | 16,689   |       | 17,110   |       |
| Leasehold  improvements                                                                                             |       | 9,868    |       | 9,870    |       |
| Construction-in-progress                                                                                            |       | 7,599    |       | 10,680   |       |
|                                                                                                                |       |     |       |     |       |
| Total property  and equipment                                                                                       |       | 160,125  |       | 150,232  |       |
|                                                                                                                |       |     |       |     |       |
| Less accumulated  depreciation                                                                                      |       | (56,186  | )          | (50,536  | )          |
|                                                                                                                |       |     |       |     |       |
| Property and  equipment — net                                                                                  |       | 103,939  |       | 99,696   |       |
|                                                                                                                |       |     |       |     |       |
| OTHER ASSETS:                                                                                                       |       |     |       |     |       |
| Intangibles —  net of accumulated amortization — 2008 — $3,122 and 2007 – $2,171                |       | 6,913    |       | 6,163    |       |
| Goodwill                                                                                                            |       | 13,048   |       | 9,527    |       |
| Other assets                                                                                                        |       | 2,325    |       | 2,964    |       |
| Deferred income  tax assets                                                                                         |       | 23       |       | 4        |       |
| Deposits                                                                                                            |       | 73       |       | 78       |       |
|                                                                                                                |       |     |       |     |       |
| Total other  assets                                                                                                 |       | 22,382   |       | 18,736   |       |
|                                                                                                                |       |     |       |     |       |
| TOTAL                                                                                                               |       | $        | 231,776    |     | $          | 200,420 |   |

 
| See notes to  consolidated financial statements. |   |   |   | (Continued) |
|--------------------------------------------------|--------|--------|--------|-------------|

 

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**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2008 AND 2007**

**(Inthousands)**

 
| ** **                                                                                                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |     |       |     |       |
|                                                                                                                                                                   |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                                                                  |       |     |       |     |       |
| Trade payables                                                                                                                                                         |       | $        | 10,622     |     | $          | 10,275 |   |
| Accrued expenses                                                                                                                                                       |       | 9,973    |       | 9,492    |       |
| Advances from  employees                                                                                                                                               |       | 211      |       | 267      |       |
| Liabilities  related to unrecognized tax positions                                                                                                                     |       |     |       | 1,023    |       |
| Income taxes  payable                                                                                                                                                  |       | 366      |       | 737      |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Total current  liabilities                                                                                                                                             |       | 21,172   |       | 21,794   |       |
|                                                                                                                                                                   |       |     |       |     |       |
| DEFERRED INCOME  TAX LIABILITIES                                                                                                                                       |       | 8,771    |       | 6,082    |       |
|                                                                                                                                                                   |       |     |       |     |       |
| LIABILITIES  RELATED TO UNRECOGNIZED TAX POSITIONS                                                                                                                     |       | 2,818    |       | 2,588    |       |
|                                                                                                                                                                   |       |     |       |     |       |
| DEFERRED  COMPENSATION PAYABLE                                                                                                                                         |       | 2,348    |       | 3,063    |       |
|                                                                                                                                                                   |       |     |       |     |       |
| DEFERRED CREDITS                                                                                                                                                       |       | 1,994    |       | 2,105    |       |
|                                                                                                                                                                   |       |     |       |     |       |
| OTHER LONG-TERM  OBLIGATIONS                                                                                                                                           |       | 368      |       | 420      |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Total  liabilities                                                                                                                                                     |       | 37,471   |       | 36,052   |       |
|                                                                                                                                                                   |       |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES (Notes 2, 7, 8, 12 and 16)                                                                                                              |       |     |       |     |       |
|                                                                                                                                                                   |       |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                            |       |     |       |     |       |
| Preferred stock  — 5,000 shares authorized as of December 31, 2008 and 2007; no shares issued                                                                     |       |     |       |     |       |
| Common stock, no  par value; shares authorized — 2008 - 100,000 and 2007 - 50,000; issued  shares as of December 31, 2008 - 28,093 and December 31, 2007 - 27,413 |       | 61,689   |       | 52,477   |       |
| Retained  earnings                                                                                                                                                     |       | 132,674  |       | 111,947  |       |
| Accumulated  other comprehensive loss                                                                                                                                  |       | (58      | )          | (56      | )          |
|                                                                                                                                                                   |       |     |       |     |       |
| Total  stockholders’ equity                                                                                                                                       |       | 194,305  |       | 164,368  |       |
|                                                                                                                                                                   |       |     |       |     |       |
| TOTAL                                                                                                                                                                  |       | $        | 231,776    |     | $          | 200,420 |   |

 
| See notes to  consolidated financial statements. | (Concluded) |
|--------------------------------------------------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**YEARSENDED DECEMBER 31, 2008, 2007, AND 2006**

**(Inthousands except per share amounts)**

 
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |     |       |
| NET SALES                             |       | $        | 227,143    |     | $          | 207,768  |       | $ | 190,674 |   |
|                                  |       |     |       |     |       |     |       |
| COST OF SALES                         |       | 133,872  |       | 127,977  |       | 117,596  |       |
|                                  |       |     |       |     |       |     |       |
| GROSS PROFIT                          |       | 93,271   |       | 79,791   |       | 73,078   |       |
|                                  |       |     |       |     |       |     |       |
| OPERATING  EXPENSES:                  |       |     |       |     |       |     |       |
| Selling, general,  and administrative |       | 53,127   |       | 48,133   |       | 45,486   |       |
| Research and  development             |       | 9,160    |       | 8,688    |       | 8,582    |       |
|                                  |       |     |       |     |       |     |       |
| Total operating  expenses             |       | 62,287   |       | 56,821   |       | 54,068   |       |
|                                  |       |     |       |     |       |     |       |
| INCOME FROM  OPERATIONS               |       | 30,984   |       | 22,970   |       | 19,010   |       |
|                                  |       |     |       |     |       |     |       |
| OTHER INCOME (EXPENSE):               |       |     |       |     |       |     |       |
| Interest income                       |       | 781      |       | 393      |       | 250      |       |
| Interest expense                      |       | (17      | )          | (3       | )          | (12      | )          |
| Other income  (expense)               |       | 97       |       | 39       |       | (64      | )          |
|                                  |       |     |       |     |       |     |       |
| Other income —  net              |       | 861      |       | 429      |       | 174      |       |
|                                  |       |     |       |     |       |     |       |
| INCOME BEFORE  INCOME TAXES           |       | 31,845   |       | 23,399   |       | 19,184   |       |
|                                  |       |     |       |     |       |     |       |
| INCOME TAX  EXPENSE                   |       | 11,118   |       | 7,811    |       | 6,883    |       |
|                                  |       |     |       |     |       |     |       |
| NET INCOME                            |       | $        | 20,727     |     | $          | 15,588   |       | $ | 12,301 |   |
|                                  |       |     |       |     |       |     |       |
| EARNINGS PER  COMMON SHARE:           |       |     |       |     |       |     |       |
| Basic                                 |       | $        | 0.75       |     | $          | 0.57     |       | $ | 0.45 |   |
|                                  |       |     |       |     |       |     |       |
| Diluted                               |       | $        | 0.73       |     | $          | 0.55     |       | $ | 0.44 |   |
|                                  |       |     |       |     |       |     |       |
| AVERAGE COMMON  SHARES:               |       |     |       |     |       |     |       |
| Basic                                 |       | 27,769   |       | 27,425   |       | 27,333   |       |
|                                  |       |     |       |     |       |     |       |
| Diluted                               |       | 28,550   |       | 28,204   |       | 28,245   |       |

 

See notes toconsolidated financial statements.

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**YEARSENDED DECEMBER 31, 2008, 2007, AND 2006**

**(Inthousands)**

 
| ** **                                                                  | ** ** | ** ** | ** ** | ** **            | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|--------------|------------|-------------------|------------|-----------------|------------|
| ** **                                                                  | ** ** | ** ** | ** ** | ** **            | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**       | ** ** |
| ** **                                                                  | ** ** | ** ** | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                  | ** ** | **Total**  | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Earnings**      | ** ** | **Loss**        | ** ** |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| BALANCE —  January 1, 2006                                        |       | $          | 132,484    |                  | 27,163     |         | $          | 48,198            |       | $               | 84,668     |   | $ | (382 | ) |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Comprehensive  income:                                                      |       |       |       |                  |       |         |       |              |       |            |       |
| Net income                                                                  |       | 12,301     |       |                  |       |         |       | 12,301            |       |            |       |
| Foreign currency  translation adjustment                                    |       | 231        |       |                  |       |         |       |              |       | 231             |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Total  comprehensive income                                                 |       | 12,532     |       |                  |       |         |       |              |       |            |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Tax benefit  attributable to appreciation of common stock options exercised |       | 1,155      |       |                  |       | 1,155        |       |              |       |            |       |
| Stock-based  compensation expense                                           |       | 1,502      |       |                  |       | 1,502        |       |              |       |            |       |
| Issuance of  common stock under Employee Stock Purchase Plans               |       | 369        |       | 29                    |       | 369          |       |              |       |            |       |
| Options  exercised                                                          |       | 3,170      |       | 455                   |       | 3,170        |       |              |       |            |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| BALANCE —  December 31, 2006                                      |       | 151,212    |       | 27,647                |       | 54,394       |       | 96,969            |       | (151            | )          |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Comprehensive  income:                                                      |       |       |       |                  |       |         |       |              |       |            |       |
| Net income                                                                  |       | 15,588     |       |                  |       |         |       | 15,588            |       |            |       |
| Foreign currency  translation adjustment                                    |       | 95         |       |                  |       |         |       |              |       | 95              |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Total  comprehensive income                                                 |       | 15,683     |       |                  |       |         |       |              |       |            |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Cumulative  effect of a change in accounting principle - adoption of FIN 48 |       | (610       | )          |                  |       |         |       | (610              | )          |            |       |
| Tax benefit  attributable to appreciation of common stock options exercised |       | 500        |       |                  |       | 500          |       |              |       |            |       |
| Stock-based  compensation expense                                           |       | 1,130      |       |                  |       | 1,130        |       |              |       |            |       |
| Issuance of  common stock under Employee Stock Purchase Plans               |       | 323        |       | 27                    |       | 323          |       |              |       |            |       |
| Stock  repurchases                                                          |       | (5,407     | )          | (464                  | )          | (5,407       | )          |              |       |            |       |
| Options  exercised                                                          |       | 1,537      |       | 203                   |       | 1,537        |       |              |       |            |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| BALANCE —  December 31, 2007                                      |       | 164,368    |       | 27,413                |       | 52,477       |       | 111,947           |       | (56             | )          |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Comprehensive  income:                                                      |       |       |       |                  |       |         |       |              |       |            |       |
| Net income                                                                  |       | 20,727     |       |                  |       |         |       | 20,727            |       |            |       |
| Foreign currency  translation adjustment                                    |       | (2         | )          |                  |       |         |       |              |       | (2              | )          |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Total  comprehensive income                                                 |       | 20,725     |       |                  |       |         |       |              |       |            |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| Tax benefit  attributable to appreciation of common stock options exercised |       | 2,044      |       |                  |       | 2,044        |       |              |       |            |       |
| Stock-based  compensation expense                                           |       | 962        |       |                  |       | 962          |       |              |       |            |       |
| Issuance of  common stock under Employee Stock Purchase Plans               |       | 305        |       | 19                    |       | 305          |       |              |       |            |       |
| Warrants  exercised                                                         |       | 496        |       | 49                    |       | 496          |       |              |       |            |       |
| Options  exercised                                                          |       | 5,405      |       | 612                   |       | 5,405        |       |              |       |            |       |
|                                                                        |       |       |       |                  |       |         |       |              |       |            |       |
| BALANCE —  December 31, 2008                                      |       | $          | 194,305    |                  | 28,093     |         | $          | 61,689            |       | $               | 132,674    |   | $ | (58 | ) |

 

See notes to consolidated financial statements.

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2008, 2007, AND 2006**

**(Inthousands)**

 
| ** **                                                                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                               |       |     |       |     |       |     |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |     |       |     |       |     |       |
| Net income                                                                         |       | $        | 20,727     |     | $          | 15,588   |       | $ | 12,301 |   |
|                                                                               |       |     |       |     |       |     |       |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                     |       | 10,240   |       | 9,444    |       | 8,275    |       |
| Losses on sales  and/or abandonment of property and equipment                      |       | 526      |       | 317      |       | 242      |       |
| Impairment of  assets                                                              |       |     |       |     |       | 929      |       |
| Write-off of  certain patents and license agreement                                |       | 164      |       | 245      |       | 40       |       |
| Amortization of  deferred credits                                                  |       | (111     | )          | (135     | )          | (175     | )          |
| Purchase of  trading investments                                                   |       | (349     | )          | (267     | )          | (499     | )          |
| Proceeds from  sale of trading investments                                         |       |     |       | 218      |       |     |       |
| Unrealized  (gains) losses on trading investments                                  |       | 987      |       | (259     | )          | 206      |       |
| Deferred income  taxes                                                             |       | (183     | )          | 984      |       | 376      |       |
| Tax benefit  attributable to appreciation of common stock options exercised        |       | (2,044   | )          | (500     | )          | (1,155   | )          |
| Stock-based  compensation                                                          |       | 962      |       | 1,130    |       | 1,502    |       |
| Changes in  operating assets and liabilities net of effects from acquisitions:     |       |     |       |     |       |     |       |
| Trade  receivables                                                                 |       | (1,464   | )          | (496     | )          | 57       |       |
| Employee  receivables                                                              |       | 10       |       | 52       |       | (76      | )          |
| Other  receivables                                                                 |       | 304      |       | (930     | )          | (52      | )          |
| Inventories                                                                        |       | (4,036   | )          | 5,056    |       | (6,045   | )          |
| Prepaid expenses  and other assets                                                 |       | 301      |       | (258     | )          | 6        |       |
| Income tax  refund receivable                                                      |       | (93      | )          | (194     | )          |     |       |
| Other long-term  assets                                                            |       |     |       |     |       | 102      |       |
| Deposits                                                                           |       | 5        |       | 12       |       | 9        |       |
| Trade payables                                                                     |       | 758      |       | (671     | )          | 305      |       |
| Accrued expenses                                                                   |       | 554      |       | 872      |       | (178     | )          |
| Advances from  employees                                                           |       | (57      | )          | 11       |       | (81      | )          |
| Current  liabilities related to unrecognized tax positions                         |       | (1,023   | )          | 1,023    |       |     |       |
| Income taxes  payable                                                              |       | 1,692    |       | 1,595    |       | 2,724    |       |
| Non-current  liabilities related to unrecognized tax positions                     |       | 864      |       | (1,010   | )          |     |       |
| Deferred  compensation payable                                                     |       | (715     | )          | 194      |       | 506      |       |
| Other long-term  obligations                                                       |       | (52      | )          | (16      | )          |     |       |
|                                                                               |       |     |       |     |       |     |       |
| Total  adjustments                                                                 |       | 7,240    |       | 16,417   |       | 7,018    |       |
|                                                                               |       |     |       |     |       |     |       |
| Net cash  provided by operating activities                                         |       | 27,967   |       | 32,005   |       | 19,319   |       |
|                                                                               |       |     |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |     |       |     |       |     |       |
| Capital  expenditures for:                                                         |       |     |       |     |       |     |       |
| Property and  equipment                                                            |       | (14,476  | )          | (16,288  | )          | (14,715  | )          |
| Patents and  trademarks                                                            |       | (432     | )          | (450     | )          | (283     | )          |
| Proceeds from  the sale of property and equipment                                  |       | 45       |       | 11       |       | 27       |       |
| Cash paid in  acquisitions                                                         |       | (5,112   | )          | (4,726   | )          | (3,923   | )          |
|                                                                               |       |     |       |     |       |     |       |
| Net cash used in  investing activities                                             |       | (19,975  | )          | (21,453  | )          | (18,894  | )          |
|                                                                                    |            |          |            |          |            |          |            |  |  |  |

 
| See notes to  consolidated financial statements. |   |   |   |   |   | (Continued) |
|--------------------------------------------------|--------|--------|--------|--------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2008, 2007, AND 2006**

**(Inthousands)**

 
| ** **                                                                               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                     |       |     |       |     |       |     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                   |       |     |       |     |       |     |       |
| Proceeds from  issuance of common stock                                                  |       | $        | 6,206      |     | $          | 1,860    |       | $ | 3,539 |   |
| Excess tax  benefits from stock-based compensation                                       |       | 2,044    |       | 500      |       | 1,155    |       |
| Principal  payments on notes payable to financial institutions and capital leases        |       |     |       |     |       | (2       | )          |
| Common stock  repurchased and retired                                                    |       |     |       | (5,407   | )          |     |       |
|                                                                                     |       |     |       |     |       |     |       |
| Net cash  provided by (used in) financing activities                                     |       | 8,250    |       | (3,047   | )          | 4,692    |       |
|                                                                                     |       |     |       |     |       |     |       |
| EFFECT OF  EXCHANGE RATES ON CASH                                                        |       | 214      |       | 231      |       | 76       |       |
|                                                                                     |       |     |       |     |       |     |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                               |       | 16,456   |       | 7,736    |       | 5,193    |       |
|                                                                                     |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS:                                                              |       |     |       |     |       |     |       |
| Beginning of  year                                                                       |       | 17,574   |       | 9,838    |       | 4,645    |       |
|                                                                                     |       |     |       |     |       |     |       |
| End of year                                                                              |       | $        | 34,030     |     | $          | 17,574   |       | $ | 9,838 |   |
|                                                                                     |       |     |       |     |       |     |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION — Cash paid during the year for: |       |     |       |     |       |     |       |
| Interest                                                                                 |       | $        | 17         |     | $          | 5        |       | $ | 11 |   |
|                                                                                     |       |     |       |     |       |     |       |
| Income taxes                                                                             |       | $        | 9,853      |     | $          | 5,354    |       | $ | 3,736 |   |
|                                                                                     |       |     |       |     |       |     |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 |       |     |       |     |       |     |       |
| Fixed asset  purchases in accounts payable                                               |       | $        | 847        |     | $          | 1,173    |       | $ | 1,414 |   |
|                                                                                     |       |     |       |     |       |     |       |
| Adoption of FIN  48                                                                      |       |     |       | $        | 610        |     |       |   |

 
| See notes to  consolidated financial statements. |   |   |   |   |   | (Continued) |
|--------------------------------------------------|--------|--------|--------|--------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2008, 2007, AND2006**

 

SUPPLEMENTALDISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

·                 During 2008,Merit Medical Systems, Inc. (“Merit” or “we” or “us”) entered into anasset purchase and supply agreement with Tran PA-C to purchase catheter extraction products for $1.5million.  We also accrued $11,000 inacquisition costs.  The purchase pricewas preliminarily allocated to inventories for $71,228, property and equipmentfor $15,436, customer lists for $80,000, developed technology for $85,000, acovenant not to compete for $30,000 and goodwill for $1,229,336. See summarybelow (in thousands):

 
| Fair value of  assets acquired (including goodwill of $1,229) |   | $      | 1,511  |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Cash paid                                                     |   | (1,500 | )      |
| Accrued expenses                                              |   | (11    | )      |
|                                                          |   |   |   |
| Liabilities  assumed                                          |   | None   |   |

 

·                 During 2008, weentered into an asset purchase and supply agreement with Micrus EndovascularCorporation (“Micrus”) to purchase threecatheter platforms for $3.0 million.  Wealso paid $12,300 in acquisition costs. The purchase price was allocated to inventories for $143,939,customer lists for $270,000, developed technology for $330,000, and goodwillfor $2,268,361.  See summary below (inthousands):

 
| Fair value of  assets acquired (including goodwill of $2,268) |   | $      | 3,012  |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Cash paid                                                     |   | (3,012 | )      |
|                                                          |   |   |   |
| Liabilities  assumed                                          |   | None   |   |

 

·                 During2007, we negotiated a distribution agreement with Milamy Partners LLC, alimited liability company (“Milamy”), wherein we purchased the exclusive,worldwide right to distribute KanguruWeb® Abdominal Retraction System invascular lab markets for $350,000. During 2008, we entered into an agreement with Milamy whereby Milamyagreed to terminate its exclusive license rights with McKnight Investments, LLC(“McKnight”) and substitute Merit as the exclusive licensee of the KanguruWeb®technology in exchange for our payment of $100,000.  The purchase price was allocated to adistribution agreement for $450,000.  Seesummary below (in thousands):

 
| Fair value of  assets acquired |   | $      | 450    |   |
|--------------------------------|--------|--------|--------|--------|
| Cash paid in  2007             |   | (350   | )      |
| Cash paid in  2008             |   | (100   | )      |
|                           |   |   |   |
| Liabilities  assumed           |   | None   |   |

 

·                 During2008, we paid $500,000 to GMA Company, Ltd (“GMA”) for reaching a milestoneidentified in a distribution agreement we executed with GMA in 2007.  Pursuant to the distribution agreement, GMAgranted to us the exclusive distribution rights to sell a micro-catheter.  In 2007, we paid $1.0 million to GMA andincurred $4,000 for acquisition costs. An additional $500,000 is payable to GMA upon reaching a certainmilestone identified in the distribution agreement.  The purchase price was allocated to thedistribution agreement for $1,504,000. See summary below (in thousands):

 
| Fair value of  assets acquired |   | $      | 1,504  |   |
|--------------------------------|--------|--------|--------|--------|
| Cash paid in  2007             |   | (1,004 | )      |
| Cash paid in  2008             |   | (500   | )      |
|                           |   |   |   |
| Liabilities  assumed           |   | None   |   |

 
| See notes to  consolidated financial statements. | (Continued) |
|--------------------------------------------------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2008, 2007, AND2006**

 

·                 During2007, we entered into a patent assignment and royalty agreement with LightekCorporation (“Lightek”), to manufacture and sell a radio-opaque band.  We made an initial payment of $228,000 toLightek and accrued an additional $200,000, which is payable upon reachingcertain milestones identified in the patent assignment and royaltyagreement.  An additional $200,000payment has not been accrued for as it is contingent upon reaching certainsales levels in the future.  We paid$8,400 and accrued $1,600 for acquisition costs.  The purchase price was allocated to developedtechnology for $78,000, customer lists for $240,000, and goodwill for$120,000.  See summary below (in thousands):

 
| Fair value of  assets acquired (including goodwill of $120) |   | $      | 438    |   |
|-------------------------------------------------------------|--------|--------|--------|--------|
| Cash paid in  2007                                          |   | (236   | )      |
| Accrued purchase  price                                     |   | (202   | )      |
|                                                        |   |   |   |
| Liabilities  assumed                                        |   | None   |   |

 

·                 During2007, we acquired customer relationships of Medrad Sweden, AB (“Medrad”), in apurchase transaction for $124,036.  Thepurchase price was allocated to customer lists for $124,036.  See summary below (in thousands):

 
| Fair value of  assets acquired |   | $      | 124    |   |
|--------------------------------|--------|--------|--------|--------|
| Cash paid                      |   | (124   | )      |
|                           |   |   |   |
| Liabilities  assumed           |   | None   |   |

 

·                 During2007, we entered into an asset purchase agreement with Datascope Corporation (“Datascope”)to purchase its ProGuideTM catheter in a purchase transaction for $3,290,731,including future minimum royalty payments of $279,181.  The purchase price was allocated based onestimated fair values to property and equipment for $25,971, inventories for $778,659,a customer list for $300,000, developed technology for $150,000, a covenant notto compete for $20,000, atrademark for $150,000, and goodwill for $1,866,101.  See summary below (in thousands):

 
| Fair value of  assets acquired (including goodwill of $1,866) |   | $      | 3,291  |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Cash paid                                                     |   | (3,012 | )      |
| Accrued minimum  royalty                                      |   | (279   | )      |
|                                                          |   |   |   |
| Liabilities  assumed                                          |   | None   |   |

 
| See notes to  consolidated financial statements. | (Continued) |
|--------------------------------------------------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2008, 2007, AND2006**

 

·                 During 2006, we acquired certain assets of Millimed A/S in a purchasetransaction for $1,510,664.  The purchaseprice was allocated between property and equipment for $135,590, inventoriesfor $419,162, developed technology for $49,000, and goodwill for $906,912.  See summary below (in thousands):

 
| Fair value of  assets acquired (including goodwill of $907) |   | $      | 1,511  |   |
|-------------------------------------------------------------|--------|--------|--------|--------|
| Cash paid                                                   |   | (1,511 | )      |
|                                                        |   |   |   |
| Liabilities  assumed                                        |   | None   |   |

 

·                 During 2006, we acquired certain assets and customer relationships ofHypoguard USA, Inc. (“Hypoguard) in a purchase transaction for$1,290,077.  The purchase price wasallocated between property and equipment for $203,944, inventories for$119,324, developed technology for $350,000 and goodwill for $616,809.  See summary below (in thousands):

 
| Fair value of  assets acquired (including goodwill of $617) |   | $      | 1,290  |   |
|-------------------------------------------------------------|--------|--------|--------|--------|
| Cash paid                                                   |   | (1,290 | )      |
|                                                        |   |   |   |
| Liabilities  assumed                                        |   | None   |   |

 

·                 During 2006, we acquired certain know how and formulas for producingmedical products from a medical device company in a purchase transaction forapproximately $1.0 million.  During 2006, wemade three installment payments totaling $742,501.  During 2007, we made a final payment of$254,904.  The purchase price wasallocated to developed technology for $997,405. See summary below (in thousands):

 
| Fair value of  assets acquired |   | $      | 997    |   |
|--------------------------------|--------|--------|--------|--------|
| Cash paid in  2007             |   | (255   | )      |
| Cash paid in  2006             |   | (742   | )      |
|                           |   |   |   |
| Liabilities  assumed           |   | None   |   |

 

·                 During 2006, we acquired customer relationships of Q-Tech in a purchasetransaction for $380,054.  The purchaseprice was allocated to customer lists for $380,054.  See summary below (in thousands):

 
| Fair value of  assets acquired |   | $      | 380    |   |
|--------------------------------|--------|--------|--------|--------|
| Cash paid                      |   | (380   | )      |
|                           |   |   |   |
| Liabilities  assumed           |   | None   |   |

 
| See notes to  consolidated financial statements. | (Concluded) |
|--------------------------------------------------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2008, 2007, AND2006**

** **

**1.**                                      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

** **

**Organization**. Merit develops,manufactures and markets disposable medical products primarily used indiagnostic and interventional cardiology and radiology procedures.  We consider our operations as one segment,sales of disposable medical devices, as products follow the same production,marketing, sales distribution channels and technology strategies.  We manufacture our products in plants locatedin the United States, the Netherlands and in Ireland.  We export sales to dealers and have directsales forces in the United States and Western Europe (see Note 11).  Our consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thefollowing is a summary of the more significant of such policies.

** **

**Use of Estimates in Preparing Financial Statements**.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

** **

**Principlesof Consolidation**.  The consolidatedfinancial statements include our wholly-owned subsidiaries. Intercompanybalances and transactions have been eliminated.

** **

**Cash andCash Equivalents. **Forpurposes of the statements of cash flows, we consider interest bearing depositswith an original maturity date of three months or less to be cash equivalents.

 

**Receivables****. **The allowance foruncollectible accounts receivable is based on our historical bad debtexperience and on management’s evaluation of its ability to collect individualoutstanding balances.

 

**Reclassifications.**  Subsequent to the issuance of our Annual Report on Form 10-K forthe year ended December 31, 2007, we determined that changes to ourDeferred Compensation Plan balances should more properly be reflected as netcash provided by operating activities. Accordingly, we have reclassified such changes from investing activitiesand financing activities to operating activities.  Management has concluded that the error wasnot material to our financial statements, and accordingly the prior periodpresentation has been revised for 2007 by decreasing net cash provided byoperating activities by approximately $114,000 and increasing 2006 net cashprovided by operating activities by approximately $213,000.

 

**Inventories.**  We value ourinventories at the lower of cost, determined on a first-in, first-out method,or market value. Market value for raw materials is based on replacementcosts.  Inventory costs include material,labor and manufacturing overhead.  Wereview inventories on hand at least quarterly and record provisions forestimated excess, slow moving and obsolete inventory, as well as inventory witha carrying value in excess of net realizable value.  The regular and systematic inventoryvaluation reviews include a current assessment of future product demand,historical experience and product expiration.

 

**Goodwill and Intangible Assets. **Goodwill is tested forimpairment on an annual basis as of July 1, or whenever impairmentindicators arise.  We utilize severalreporting units in evaluating goodwill for impairment.  We assess the estimated fair value ofreporting units based on discounted future cash flows.  If the carrying amount of a reporting unitexceeds the fair value of the reporting unit, an impairment charge is recognizedin an amount equal to the excess of the carrying amount of the reporting unitgoodwill over the implied fair value of that goodwill.

 

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We evaluate the recoverability of intangible assets periodically andtake into account events or circumstances that warrant revised estimates ofuseful lives or that indicate that impairment exists.  All of our intangible assets are subject toamortization.  During 2006, we recordedan impairment charge of approximately $929,000, relating to intellectual assetsof $872,000 and production equipment of $57,000, which related to assets acquiredfrom Sub-Q, Inc. (“Sub-Q”).  Intangibleassets are amortized over a straight line basis except that customer lists aregenerally amortized on an accelerated basis over the following useful lives:

 
| Customer lists and developed technology |   | 5–15 years |
|-----------------------------------------|--------|-----------------|
| Distribution agreements                 |   | 3–11 years |
| License agreements and trademarks       |   | 5–15 years |
| Covenant not to compete                 |   | 3-10 years      |
| Patents                                 |   | 17 years        |
| Royalty income                          |   | 5 years         |

** **

**Long-LivedAssets**.  We periodically review the carrying amount ofour long-lived assets for impairment.  Anasset is considered impaired when estimated future cash flows are less than thecarrying amount of the asset.  In theevent the carrying amount of such asset is not considered recoverable, theasset is adjusted to its fair value. Fair value is generally determined based on discounted future cashflow.  There were no impairments oflong-lived assets during the years ended December 31, 2008, 2007 and 2006,except as described in the preceding paragraph.

** **

**Propertyand Equipment**. Property and equipment is stated at thehistorical cost of construction or purchase. Construction costs includepayroll-related costs capitalized during construction. Maintenance and repairsof property and equipment are charged to operations as incurred. Leaseholdimprovements are amortized over the lesser of the base term of the lease orestimated life of the leasehold improvements. Construction-in-process consists of various production equipment beingconstructed internally and externally. Assets in construction-in-process will commence depreciating once theasset has been placed in service. Depreciation and amortization are computed using the straight-linemethod over estimated useful lives as follows:

 
| Buildings                |   | 40 years         |   |
|--------------------------|--------|------------------|--------|
| Automobiles              |   | 4-7 years        |   |
| Manufacturing  equipment |   | 5–20 years  |   |
| Furniture and fixtures   |   | 3–10 years  |   |
| Land  improvements       |   | 10–20 years |   |
| Leasehold  improvements  |   | 4–25 years  |   |

** **

**DeferredCompensation**.  We have a deferred compensation plan thatpermits certain management employees to defer a portion of their salary untilthe future.  We established a Rabbi trustto finance obligations under the plan with corporate-owned variable lifeinsurance contracts.  The cash surrendervalue totaled approximately $2.3 million and $3.0 million, as of December 31,2008 and 2007, respectively, which is included in “Other assets” in ourconsolidated balance sheets.  We haverecorded a “Deferred Compensation Payable” of approximately $2.3 million and$3.1 million at December 31, 2008 and 2007, respectively, to reflect theliability to our employees under this plan.

 

**DeferredCredits**.  Deferredcredits consist of grant money received from the Irish government. Grant moneyis received for a percentage of expenditures on eligible property andequipment, specific research and development projects, and costs of hiring andtraining employees.  Amounts related tothe acquisition of property and equipment are amortized as a reduction ofdepreciation expense over the lives of the corresponding property andequipment.

 

**RevenueRecognition. **We sellour single-use disposable medical products through a direct sales force in theU.S., and through OEM relationships, custom packers and a combination of directsales force and independent distributors in international markets.  Revenues from these customers are recognizedwhen all of the following have occurred: (i) persuasive evidence of anarrangement exists, (ii) delivery has occurred or services have beenrendered, (iii) the price is fixed or determinable, and (iv) theability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when riskof loss and title passes to the customer. We have certain written agreements with group purchasing organizationsto sell our products to participating hospitals.  These agreements have destination shippingterms which require us to defer the recognition of a sale until the product hasarrived at the participating hospitals. We reserve for sales returns for defective products (i.e. warrantyliability) as a reduction in revenue, based on our historical experience.  We also offer sales rebates and discounts topurchasing groups.  These reserves arerecorded as a reduction in revenue and are not considered material to ourconsolidated statements of income for the years ended December 31, 2008,2007, and 2006.  In addition, we invoiceour customers for taxes assessed by governmental authorities such as sales taxand value added taxes.  We present thesetaxes on a net basis.

 

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**Shippingand Handling**.  We billour customers for shipping and handling charges, which are included in totalrevenues for the applicable period, and the corresponding shipping and handlingexpense is reported in cost of goods sold.

 

**Cost ofSales**.  We includeproduct costs (i.e. material, direct labor and overhead costs), shipping andhandling expense, product royalty expense, developed technology expense, productionrelated depreciation expense and product license agreement expense in cost ofgoods sold.

 

**Researchand Development**.  Researchand development costs are expensed as incurred.

 

**Income Taxes**.  We accountfor income taxes in accordance Statement of Financial Accounting Standards (“SFAS”)SFAS No. 109, *Accounting for IncomeTaxes*.  This statementutilizes an asset and liability approach for financial accounting and reportingfor income taxes.  Deferred income taxesare provided for temporary differences in the basis of assets and liabilitiesas reported for financial statement and income tax purposes.

 

In July 2006, the Financial Accounting Standards Board (“FASB”)issued FIN 48, which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes*.  Under FIN 48, tax positions shall initiallybe recognized in the financial statements when it is more likely than not theposition will be sustained upon examination by the tax authorities.  Such tax positions shall initially andsubsequently be measured as the largest amount of tax benefit that has agreater than 50% likelihood of being realized upon ultimate settlement with thetax authority assuming full knowledge of the position and all relevant facts.

 

**Earningsper Common Share**.** **Net income per common shareis computed by both the basic method, which uses the weighted average number ofour common shares outstanding, and the diluted method, which includes thedilutive common shares from stock options and warrants, as calculated using thetreasury stock method.

 

**FairValue Measurements. **Thefair value of a financial instrument is the amount that could be received uponthe sale of an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. Financial assets are marked to bid prices and financial liabilities aremarked to offer prices.  Fair valuemeasurements do not include transaction costs.  We adopted SFAS No. 157, *Fair Value Measurements*, on January 1, 2008.  This statement defines fair value, establishesa framework to measure fair value, and expands disclosures about fair valuemeasurements.  SFAS No. 157establishes a fair value hierarchy used to prioritize the quality andreliability of the information used to determine fair values.  Categorization within the fair valuehierarchy is based on the lowest level of input that is significant to the fairvalue measurement.  The fair valuehierarchy is defined into the following three categories:

 

Level 1: Quoted marketprices in active markets for identical assets or liabilities.

Level 2: Observablemarket based inputs or unobservable inputs that are corroborated by marketdata.

Level 3: Unobservableinputs that are not corroborated by market data.

 

In February 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-2, *Effective Date of FASB Statement No. 157,*which delays the effective date of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008.  We are currently reviewing the requirements of FSP No. FAS 157-2, and at this point in time, have not determined what impact, if any, FSP No. FAS 157-2 will have on our results of operations and financial condition.

 

In October 2008,the FASB issued FSP No. FAS 157-3, *Determiningthe Fair Value of a Financial Asset When the Market for That Asset is NotActive*.  This statementclarifies that determining fair value in an inactive or dislocated marketdepends on facts and circumstances and requires significant managementjudgment.  This statement specifies thatit is acceptable to use inputs based on management estimates or assumptions, orfor management to make adjustments to observable inputs to determine fair valuewhen markets are not active and relevant observable inputs are notavailable.  We currently have nofinancial assets categorized as level 3.

 

We adopted SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*, effective January 1, 2008, and elected not to establish a fair value for our financial instruments and certain other items under this statement.  Therefore, our adoption of this statement did not impact our financial statements during the year ended December 31, 2008.

 

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**Stock-BasedCompensation. **Effective January 1,2006, the fair value compensation cost relating to share-based paymenttransactions is recognized in financial statements in accordance with SFAS123(R), *Share-Based Payment* (“SFASNo. 123(R)”).  Under the provisionsof SFAS No. 123(R), share-based compensation cost is measured at the grantdate, based on the fair value of the award, and is recognized over the employee’srequisite service period, which is generally the vesting period.  The fair value of our stock options isestimated using a Black-Scholes option valuation model.  We adopted the fair value recognitionprovisions of SFAS No. 123(R) using the modified prospectivetransition method.  Under this transitionmethod, stock-based compensation cost is recognized beginning January 1,2006, for all options granted after the date of adoption, as well as theunvested portion of previously granted options based on the estimated fairvalue.  We elected to adopt thealternative transition method provided in the FASB Staff Position forcalculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R).  The alternative transition method includes asimplified method to establish the beginning balance of the additional paid-incapital pool (“APIC”) related to the tax effects of employee stock-basedcompensation, and to determine the subsequent APIC pool and ConsolidatedStatements of Cash Flows of the tax effects of employee stock-basedcompensation awards that are outstanding upon adoption of SFAS No. 123(R).  Stock-based compensation expense for theyears ended December 31, 2008, 2007 and 2006 was $1.0 million, $1.1million and $1.5 million, respectively.

** **

Staff Accounting Bulletin (‘SAB”) No. 110,*Share-Based Payment*, waseffective for us on January 1, 2008.  SAB No. 110 amended SAB No. 107,and allows for the continued use, under certain circumstances, of the “simplifiedmethod” in developing an estimate of the expected term on stock optionsaccounted for under SFAS No. 123(R). We believe we have sufficientemployee exercise behavior to estimate an expected term for our stock optiongrants and have elected not to use the simplified method under provisions ofSAB No. 110.

** **

**Concentrationof Credit Risk**. Financial instruments that potentially subject us to concentrations ofcredit risk consist primarily of cash and cash equivalents and accountsreceivable.  We provide credit, in thenormal course of business, primarily to hospitals and independent third-partypackers and distributors.  We performongoing credit evaluations of our customers and maintain allowances forpotential credit losses. Sales to our single largest customer approximated 7%,7%, and 6% of total sales for the years ended December 31, 2008, 2007, and2006, respectively.

** **

**ForeignCurrency**.  Thefinancial statements of our foreign subsidiaries are measured using localcurrencies as the functional currency, with the exception of Ireland which usesthe U.S. Dollar as its functional currency. Assets and liabilities are translated into U.S. Dollars at year-endrates of exchange and results of operations are translated at average rates forthe year. Gains and losses resulting from these translations are included inaccumulated other comprehensive loss as a separate component of stockholders’equity.  Foreign currency transactions denominated in acurrency other than the entity’s functional currency are included indetermining net income for the period. Such foreign currency transaction gainsand losses have not been significant.

** **

**ForeignCurrency Forward Contracts**.  On November 28,2008, we forecasted a net exposure for December 31, 2008 (representing thedifference between Euro and Great Britain Pound (GBP) denominated receivablesand Euro denominated payables) of approximately 147,000 Euros and 264,000GBPs.  In order to partially offset suchrisks at November 28, 2008, we entered into a 30-day forward contract forthe Euro and GBP with a notional amount of approximately 147,000 Euros andnotional amount of 264,000 GBPs.  Weenter into similar transactions at various times during the year to partiallyoffset exchange rate risks we bear throughout the year.  These contracts are marked to market at eachmonth-end.  During the year ended December 31,2008 and 2007, we recorded a net (loss)/gain of approximately ($1,000) and$16,000, respectively, which is included in other income/(expense), on theseforward contracts.  We do not purchase orhold derivative financial instruments for speculative or trading purposes.  The fair value of our open positions at December 31,2008 and 2007, was not material.

** **

**AccumulatedOther Comprehensive Loss**. Accumulated other comprehensive loss consists entirely of foreigncurrency translation adjustments.

** **

**Recently Issued Financial Accounting Standards.**  In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations*. SFAS 141(R) requiresall business combinations completed after the effective date to be accountedfor by applying the acquisition method (previously referred to as the purchasemethod).  Companies applying this methodwill have to identify the acquirer, determine the acquisition date and purchaseprice and recognize at their acquisition-date fair values of the identifiableassets acquired, liabilities assumed, and any noncontrolling interests in theacquiree.  In the case of a bargainpurchase, the acquirer is required to reevaluate the measurements of therecognized assets and liabilities at the acquisition date and recognize a gainon that date if an excess remains. SFAS No. 141(R) becomes effective for fiscal periodsbeginning after December 15, 2008. This accounting standard will beapplied to pending acquisitions as discussed in note 16.  The adoption of this statement will requireus to expense any costs related to an acquisitions made on or after January 1,2009.

 

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**2.**                                      ACQUISITIONS

 

On December 11,2008 we entered into an asset purchase agreement with Tran PA-C to purchase catheter extraction products for $1.5million.  We also accrued $11,000 inacquisition costs.  Additional paymentstotaling $1.5 million have not been accrued as they are contingent uponreaching future certain sales levels.  Inaddition, we agreed to a running royalty payment of 6% of net sales for thecatheter extractor for the next 10 years. The purchase price was preliminarily allocated to inventories for$71,228, property and equipment for $15,436, customer lists for $80,000,developed technology for $85,000, a covenant not to compete for $30,000, andgoodwill for $1.2 million.  We intend toamortize customer lists on an accelerated basis over 14 years, and developedtechnology over ten years.  This productcan used to extract chronic dialysis catheters, similar to our ProGuideTMdialysis catheter purchased from Datascope in 2007.

 

On January 29,2008, we entered into an asset purchase and supply agreement with Micrus topurchase threecatheter platforms for $3.0 million.  Wealso paid $12,300 in acquisition costs.  The purchase price was allocated toinventories for $143,939, customer lists for $270,000, developed technology for$330,000, and goodwill for approximately $2.3 million.  We intend to amortize customer lists on anaccelerated basis over fourteen years, and developed technology over fifteenyears.

 

During 2007, we enteredinto a distribution agreement with Milamy, wherein we purchased the exclusive,worldwide right to distribute the KanguruWeb® Abdominal Retraction System in vascularlab markets for $350,000.  During 2008,we entered into an agreement with Milamy whereby Milamy agreed to terminatetheir exclusive license rights with McKnight and substitute us as the exclusivelicensee of the KanguruWeb® technology in exchange for our payment of$100,000.  The purchase price wasallocated to a distribution agreement for $450,000 and will be amortized overfive years.

 

On August 7, 2007, we entered into a distribution agreement withGMA for the exclusive distribution rights to sell a micro-catheter.  We paid to GMA an initial payment of $500,000in September 2007, another payment of $500,000 in November 2007, and$500,000 in September 2008.  We paid$4,000 in acquisition costs.  Anadditional $500,000 is payable to GMA upon reaching a certain milestoneidentified in the Distribution Agreement. We have allocated the purchase price of $1.5 million as a distributionagreement and anticipate that it will be amortized over an estimated life ofeleven years.

 

On July 17, 2007, we entered into a patent assignment and royaltyagreement with Lightek to manufacture and sell a radio-opaque marker band.  We made an initial payment of $228,000 toLightek and accrued an additional $200,000 payable upon reaching certainmilestones identified in the patent assignment and royalty agreement.  Achievement of the milestones is reasonablyassured of occurring at this time.  Anadditional $200,000 payment has not been accrued for as it is contingent uponreaching certain sales levels in the future. In addition, we agreed to a running royalty payment of 3% of net salesbeginning with the issuance of the patent and continuing through the expirationof the patent.  We paid $8,400 in 2007and accrued $1,600 for acquisition costs. The purchase price was allocated to developed technology for $78,000,customer lists for $240,000, and goodwill for $120,000.  Customer lists will be amortized on anaccelerated basis over 14 years and developed technology over 15 years.

 

On February 26,2007, we entered into an asset purchase agreement with Datascope to purchasecertain assets for the manufacture and sale of the ProGuideTM catheter forapproximately $3.3 million, including future minimum royalty payments of$279,181.  In connection with thisagreement, we acquired assets, inventories, a customer list, patents, and atrademark.  The purchase price wasallocated to property and equipment for $25,971, inventories for $778,659, acustomer list for $300,000, developed technology for $150,000, a trademark for$150,000, a covenant not to compete for $20,000, and goodwill for approximately$1.9 million.  In addition, we agreed toa running royalty payment of 5% of net sales through 2014, with a minimumannual payment of $50,000. Based on management’s evaluation of the purchase agreement,we recorded the additional minimum earn-out payment as an assumed liability andan addition to the cost of the acquisition. The minimum running royalty payment of $350,000 to be paid through 2014was discounted using our incremental borrowing rate of 6% to arrive at anassumed liability of $279,181.  Customerlists will be amortized on an accelerated basis over 14 years and developedtechnology and trademark over 15 years, and a covenant not to compete over 3years.

 

On February 14,2007, we terminated our exclusive sales distributor agreement with Medrad andpurchased the customer list and information we believe will enable us toconduct direct sales in Sweden.  Thepurchase price of $124,036 was allocated to property and equipment and customerlists.  Customer lists will be amortizedon an accelerated basis over 14 years.

 

On November 2,2006, we entered into an agreement with our sales distributor, Q-Tech, topurchase customer lists for $380,054. The purchase price was allocated to customer lists for $380,054.  We commenced direct sales efforts

 

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in Denmark beginning in2007 with one sales representative.  Weexpect over time that we will be able to expand our market share inDenmark.  Customer lists will beamortized on an accelerated basis over 5 years.

 

On August 1,2006, we entered in an exclusive agreement with a medical device company topurchase the product know-how and formulas for certain medical products forapproximately $1.0 million.  During2006, we made three installment payments totaling $742,501.  During 2007, we made a final payment of$254,904.  The purchase price wasallocated to developed technology for $997,405 and will be amortized over 15years.

 

On April 7,2006, we entered into an asset purchase agreement with Hypoguard to purchasecertain assets for the manufacture and sale of auto-retractable safetyscalpels, for a purchase price including legal fees of approximately $1.3million.  The purchase price wasallocated between property and equipment for $203,944, inventories for$119,324, customer lists for $300,000, developed technology for $50,000, andgoodwill for $616,809.  Customer listswill be amortized on an accelerated basis over 5 years and developed technologywill be amortized over 5 years.

 

On March 31,2006, we entered into an asset purchase agreement with Millimed A/S to purchasecertain assets for the manufacture and sale of a hemostasis valve, for apurchase price, including legal fees of approximately $1.5 million.  The purchase price was allocated betweenproperty and equipment for $135,590, inventories for $419,162, developedtechnology for $49,000 and goodwill for $906,912. Developed technology will beamortized over 5 years.

 

Proforma consolidated financial results for the acquisitions discussed above havenot been included in our consolidated financial results because their effectwould not be material.

 

**3.**             INVENTORIES

** **

Inventoriesat December 31, 2008 and 2007, consisted of the following (in thousands):

 
| ** **      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Finished goods  |       | $        | 17,818     |     | $          | 17,090 |   |
| Work-in-process |       | 4,790    |       | 3,335    |       |
| Raw materials   |       | 15,750   |       | 13,681   |       |
|            |       |     |       |     |       |
| Total           |       | $        | 38,358     |     | $          | 34,106 |   |

 

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**4.**             INTANGIBLE ASSETS

** **

Intangibleassets at December 31, 2008 and 2007, consisted of the following (inthousands):

 
| ** **               | ** ** | **2008**     | ** ** |
|--------------------------|------------|--------------|------------|
| ** **               | ** ** | **Gross**    | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **               | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **               | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                     |       |         |       |   |   |   |   |
| Patents                  |       | $            | 2,704      |   | $ | (1,019 | ) | $ | 1,685 |   |
| Distribution  agreement  |       | 1,901        |       | (178 | ) | 1,723 |   |
| License  agreements      |       | 403          |       | (242 | ) | 161 |   |
| Trademark                |       | 515          |       | (314 | ) | 201 |   |
| Developed  technology    |       | 1,730        |       | (119 | ) | 1,611 |   |
| Covenant not to  compete |       | 50           |       | (18 | ) | 32 |   |
| Customer lists           |       | 2,465        |       | (1,073 | ) | 1,392 |   |
| Royalty  agreements      |       | 267          |       | (159 | ) | 108 |   |
|                     |       |         |       |   |   |   |   |
| Total                    |       | $            | 10,035     |   | $ | (3,122 | ) | $ | 6,913 |   |

 
| ** **               | ** ** | **2007**     | ** ** |
|--------------------------|------------|--------------|------------|
| ** **               | ** ** | **Gross**    | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **               | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **               | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                     |       |         |       |   |   |   |   |
| Patents                  |       | $            | 2,517      |   | $ | (909 | ) | $ | 1,608 |   |
| Distribution  agreement  |       | 1,354        |       | (81 | ) | 1,273 |   |
| License  agreements      |       | 283          |       | (174 | ) | 109 |   |
| Trademark                |       | 515          |       | (280 | ) | 235 |   |
| Developed  technology    |       | 1,374        |       | (51 | ) | 1,323 |   |
| Covenant not to  compete |       | 20           |       | (6 | ) | 14 |   |
| Customer lists           |       | 2,004        |       | (565 | ) | 1,439 |   |
| Royalty  agreements      |       | 267          |       | (105 | ) | 162 |   |
|                     |       |         |       |   |   |   |   |
| Total                    |       | $            | 8,334      |   | $ | (2,171 | ) | $ | 6,163 |   |

 

Aggregate amortization expense for the years ended December 31,2008, 2007, and 2006, was approximately $965,000, $807,000, and $475,000, respectively.

 

Estimated amortization expense for the intangibleassets for the next five years consisted of the following (in thousands):

 
| **Year Ending** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **December 31** | ** ** | ** ** | ** ** |
|                 |       |       |       |
| 2009                 |       | $          | 932        |   |
| 2010                 |       | 854        |       |
| 2011                 |       | 552        |       |
| 2012                 |       | 399        |       |
| 2013                 |       | 380        |       |
|                      |            |            |            |  |

 

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**5.**             INCOME TAXES

** **

For the years ended December 31, 2008, 2007, and2006, income before income taxes is broken out between U.S. and foreign-sourcedoperations and consisted of the following (in thousands):

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 28,184     |     | $          | 22,033   |       | $ | 16,756 |   |
| Foreign    |       | 3,661    |       | 1,366    |       | 2,428    |       |
|       |       |     |       |     |       |     |       |
| Total      |       | $        | 31,845     |     | $          | 23,399   |       | $ | 19,184 |   |

 

The components of the provision for income taxes forthe years ended December 31, 2008, 2007, and 2006 consisted of thefollowing (in thousands):

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Current expense:             |       |     |       |     |       |     |       |
| Federal                      |       | $        | 9,693      |     | $          | 5,660    |       | $ | 5,130 |   |
| State                        |       | 1,008    |       | 800      |       | 947      |       |
| Foreign                      |       | 600      |       | 367      |       | 430      |       |
|                         |       |     |       |     |       |     |       |
|                         |       | 11,301   |       | 6,827    |       | 6,507    |       |
|                         |       |     |       |     |       |     |       |
| Deferred  (benefit) expense: |       |     |       |     |       |     |       |
| Federal                      |       | (133     | )          | 752      |       | 102      |       |
| State                        |       | (44      | )          | 254      |       | 88       |       |
| Foreign                      |       | (6       | )          | (22      | )          | 186      |       |
|                         |       |     |       |     |       |     |       |
|                         |       | (183     | )          | 984      |       | 376      |       |
|                         |       |     |       |     |       |     |       |
| Total                        |       | $        | 11,118     |     | $          | 7,811    |       | $ | 6,883 |   |

 

The difference between the income tax expense reportedand amounts computed by applying the statutory Federal rate of 35.0% to pretaxincome for the years ended December 31, 2008, 2007, and 2006 consisted ofthe following (in thousands):

 
| ** **                                                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |     |       |
| Computed federal  income tax expense at statutory rate of 35%                    |       | $        | 11,146     |     | $          | 8,189    |       | $ | 6,714 |   |
| State income  taxes                                                              |       | 627      |       | 685      |       | 673      |       |
| Tax credits                                                                      |       | (271     | )          | (195     | )          | (135     | )          |
| Extraterritorial  income exclusion tax benefit and production activity deduction |       | (114     | )          | (118     | )          | (314     | )          |
| Income of  subsidiaries recorded at foreign tax rates                            |       | (822     | )          | (224     | )          | (227     | )          |
| Tax-exempt  interest income                                                      |       | (45      | )          | (82      | )          | (100     | )          |
| Uncertain tax  positions                                                         |       | 66       |       | 13       |       |     |       |
| Deferred  compensation insurance investments                                     |       | 398      |       | (210     | )          |     |       |
| Other —  including the effect of graduated rates                            |       | 133      |       | (247     | )          | 272      |       |
|                                                                             |       |     |       |     |       |     |       |
| Total income tax  expense                                                        |       | $        | 11,118     |     | $          | 7,811    |       | $ | 6,883 |   |

 

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Deferred income tax assets and liabilities at December 31,2008 and 2007, consisted of the following temporary differences andcarry-forward items (in thousands):

 
| ** **                                       | ** ** | **Current** | ** ** | **Long-Term** | ** ** |
|--------------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                       | ** ** | **2008**    | ** ** | **2007**      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                             |       |        |       |          |       |   |   |   |   |
| Deferred income  tax assets:                     |       |        |       |          |       |   |   |   |   |
| Allowance for  uncollectible accounts receivable |       | $           | 205        |          | $          | 200 |   | $ | — |   | $ | — |   |
| Accrued  compensation expense                    |       | 699         |       | 677           |       | 966 |   | 1,361 |   |
| Inventory  capitalization for tax purposes       |       | 531         |       | 315           |       |   |   |   |   |
| Inventory  obsolescence reserve                  |       | 510         |       | 607           |       |   |   |   |   |
| Net operating  loss carry-forwards               |       |        |       |          |       | 77 |   |   |   |
| Deferred revenue                                 |       |        |       |          |       | 173 |   | 135 |   |
| Intangible  assets                               |       |        |       |          |       | 487 |   | 319 |   |
| Stock based  compensation                        |       |        |       |          |       | 251 |   | 922 |   |
| Uncertain tax positions                          |       | 318         |       | 1,156         |       | 1,083 |   | 273 |   |
| Other                                            |       | 705         |       | 559           |       | 6 |   | 34 |   |
|                                             |       |        |       |          |       |   |   |   |   |
| Total deferred  income tax assets                |       | 2,968       |       | 3,514         |       | 3,043 |   | 3,044 |   |
|                                             |       |        |       |          |       |   |   |   |   |
| Deferred income  tax liabilities:                |       |        |       |          |       |   |   |   |   |
| Prepaid expenses                                 |       | (186        | )          | (2,615        | )          |   |   |   |   |
| Property and  equipment                          |       |        |       |          |       | (11,161 | ) | (8,812 | ) |
| Other                                            |       |        |       | (88           | )          | (630 | ) | (310 | ) |
|                                             |       |        |       |          |       |   |   |   |   |
| Net                                              |       | $           | 2,782      |          | $          | 811 |   | $ | (8,748 | ) | $ | (6,078 | ) |
|                                             |       |        |       |          |       |   |   |   |   |
| Reported as:                                     |       |        |       |          |       |   |   |   |   |
| Deferred income  tax assets                      |       | $           | 2,782      |          | $          | 811 |   | $ | 23 |   | $ | 4 |   |
| Deferred income  tax liabilities                 |       |        |       |          |       | (8,771 | ) | (6,082 | ) |
|                                             |       |        |       |          |       |   |   |   |   |
| Net                                              |       | $           | 2,782      |          | $          | 811 |   | $ | (8,748 | ) | $ | (6,078 | ) |

 

The long-term deferred income tax asset balances are not netted as theyrepresent deferred amounts applicable to different taxing jurisdictions.  Deferred income tax balances reflect theeffects of temporary differences between the carrying amounts of assets andliabilities and their tax bases and are stated at enacted tax rates expected tobe in effect when taxes are actually paid or recovered.

 

We have not provided U.S. deferred income taxes or foreign withholdingtaxes on the undistributed earnings of our non-U.S. subsidiaries since theseearnings are intended to be reinvested indefinitely in operations outside theUnited States, in accordance with Accounting Principles Board (“APB”) Opinion No. 23.  It is not practical to estimate the amount ofadditional taxes that might be payable on such undistributed earnings.

 

As of December 31, 2008, we had non-U.S. net operating losscarry-forwards of approximately $273,000, which have no expiration date.

 

We are subject toincome taxes in the United States and numerous foreign jurisdictions.Significant judgment is required in determining our worldwide provision forincome taxes and recording the related assets and liabilities.  In the ordinary course of our business, thereare many transactions and calculations where the ultimate tax determination isuncertain.  We are regularly under auditby tax authorities.  Our federal andstate income tax returns for 2005 through 2008 are open tax years.  We are in several foreign tax jurisdictionswhich have open tax years from 2003 through 2008.

 

We adopted theprovisions of FIN 48 on January 1, 2007. As a result of this adoption, we recognized a cumulative-effectadjustment of approximately $610,000, increasing our liability for unrecognizedtax benefits and reducing the January 1, 2007 balance of retainedearnings.

 

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The total liability for unrecognized tax benefits at December 31,2008 and 2007, including temporary tax differences, was approximately $2.8million and $3.6 million, respectively, of which approximately $2.3 million and$2.2 million, respectively, would favorably impact our effective tax rate ifrecognized.  As of December 31, 2008and 2007, we accrued approximately $242,000 and $402,000, respectively, ininterest and penalties related to unrecognized tax benefits.  We account for interest expense and penaltiesfor unrecognized tax benefits as part of our income tax provision.  We do not anticipate that unrecognized taxbenefits will significantly increase or decrease within 12 months of thereporting date.

 

During the yearended December 31, 2008, we reduced our liability for unrecognized taxbenefits by approximately $793,000.  Thisreduction in our unrecognized tax benefits was due primarily to the settlementof our Internal Revenue Service (“IRS”) audit. Included in this amount is a reduction of approximately $160,000 for theyear ended December 31, 2008 related to interest expense.  In addition, we recorded an unrecognized taxbenefit related to the lapse of applicable statute of limitations ofapproximately $627,000, of which approximately $543,000 favorably impacted oureffective tax rate.  We also addedapproximately $816,000 to our liability for unrecognized tax benefits, of whichwe believe approximately $449,000 would favorably impact our effective taxrate, if recognized.

 

During the year ended December 31,2007, the Company added approximately $816,000 to our liability forunrecognized tax benefits, of which approximately $321,000 would favorablyimpact our effective tax rate if recognized. Included in this amount is approximately $48,000 for the year ended December 31,2007, related to interest expense.  In addition, we recorded anunrecognized tax benefit related to the lapse of applicable statute oflimitations of approximately $645,000, of which approximately $308,000favorably impacted our effective tax rate.

 

Although webelieve our estimates are reasonable, we can make no assurance that the finaltax outcome of these matters will not be different from that which we havereflected in our historical income tax provisions and accruals. Such differencecould have a material impact on our income tax provision and operating resultsin the period in which we make such determination.

 

A reconciliation of thebeginning and ending amount of liabilities associated with uncertain taxpositions consisted of the following:

 
| **FIN 48 Tabular Rollforward**               | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                        |       |     |       |     |       |
| Unrecognized tax  benefits, opening balance                 |       | 3,611    |       | 3,212    |       |
| Gross increases  in tax positions taken in a prior year     |       | 257      |       | 131      |       |
| Gross decreases  in tax positions taken in a prior year     |       | (278     | )          | (4       | )          |
| Gross increases  in tax positions taken in the current year |       | 547      |       | 554      |       |
| Settlements with  taxing authorities                        |       | (842     | )          | —   |       |
| Lapse of  applicable statute of limitations                 |       | (627     | )          | (542     | )          |
| Unrecognized tax  benefits, ending balance                  |       | 2,668    |       | 3,351    |       |

 

The FIN48 tabularrollforward ending balance does not include interest expense (net of taxeffect) and penalties related to unrecognized tax benefits. During the yearended December 31, 2008, we settled two open audits with the IRS relatedto certain temporary deductions.  As aresult of these settlements, we paid an additional $2.2 million on our 2007federal and state extension payments. The reversal of these temporary differences and the payment of theadditional taxes did not have a material impact on our financial statements forthe year ended December 31, 2008, as the income tax liabilities hadalready been accrued in our financial statements.  Of the amounts paid, $1.0 million wasclassified as a current liability related to unrecognized tax positions on the December 31,2007 consolidated balance sheet.

 

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**6.**             ACCRUED EXPENSES

** **

Accrued expenses at December 31, 2008 and 2007,consisted of the following (in thousands):

 
| ** **              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Payroll taxes           |       | $        | 640        |     | $          | 735 |   |
| Payroll                 |       | 2,377    |       | 2,196    |       |
| Bonuses                 |       | 482      |       | 701      |       |
| Commissions             |       | 699      |       | 519      |       |
| Vacation                |       | 2,438    |       | 2,304    |       |
| Other accrued  expenses |       | 3,337    |       | 3,037    |       |
|                    |       |     |       |     |       |
| Total                   |       | $        | 9,973      |     | $          | 9,492 |   |

 

**7.**             REVOLVING CREDITFACILITY AND LONG-TERM DEBT

** **

On December 7, 2006, we entered into an unsecured loan agreementwith Bank of America, N.A. (“Bank of America”), whereby the Bank of America agreedto provide us with a line of credit in the amount of $30.0 million expiring on December 7,2010.  The loan agreement requires us topay interest at a rate equal to the lesser of (i) the maximum lawful rateof interest permitted under applicable usury laws, or (ii) the Bank ofAmerica’s prime rate, plus a negative margin, as defined in the loanagreement.  Alternatively, we may electoptional interest rates based on the London Inter-Bank Offered Rate (LIBOR)during interest periods agreed to by the Bank of America and us.  There were no outstanding borrowings on thisloan as of December 31, 2008 and 2007.

 

On December 8,2006, we entered into an unsecured loan agreement with Zions First NationalBank (“Zions”), whereby they agreed to provide us a line of credit in theamount of $1.0 million.  The Zions loanagreement requires we pay interest at a rate of prime minus 0.35% and willexpire on December 1, 2009.  Therewere no outstanding borrowings on this loan as of December 31, 2008 and2007.

 

We believe we are in compliance with the covenants in our loanagreements, which require the maintenance of certain financial ratios andminimum working capital, and also include, among other things, limitations onadditional indebtedness, the pledging or sale of assets and we are restrictedfrom paying dividends to shareholders.

 

**8.**             COMMITMENTS ANDCONTINGENCIES

** **

**Leases**.  We have non-cancelable operating leaseagreements for off-site office and production facilities and equipment.  The leases for the off-site office andproduction facilities are for one to five years and some have renewal optionsfor three years.  In September 2007,the leases for our Murray, Utah off-site and production facilities expired andare currently on a month-to-month lease. Total rental expense on these operating leases and on our manufacturingand office building (see below) for the years ended December 31, 2008,2007, and 2006, approximated $2.6 million, $2.6 million, and $3.2 million,  respectively.

 

In June 1993, we entered into a 25-year lease agreement with adeveloper for a manufacturing and office building.  Under the agreement, we were granted anoption to purchase the building at fair market value at the end of the leaseterm.

 

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The future minimum lease payments for operating leasesas of December 31, 2008, consisted of the following (in thousands):

 
| **Years Ending**         | ** ** | **Operating** | ** ** |
|-------------------------------|------------|---------------|------------|
| **December 31**          | ** ** | **Leases**    | ** ** |
|                          |       |          |       |
| 2009                          |       | $             | 2,122      |   |
| 2010                          |       | 1,986         |       |
| 2011                          |       | 1,805         |       |
| 2012                          |       | 1,697         |       |
| 2013                          |       | 1,665         |       |
| Thereafter                    |       | 10,106        |       |
|                          |       |          |       |
| Total minimum  lease payments |       | $             | 19,381     |   |

 

**IrishGovernment Development Agency Grants**.  As of December 31,2008, we had entered into several grant agreements with the Irish GovernmentDevelopment Agency.  We have recorded thegrants related to research and development projects and costs of hiring andtraining employees as a reduction of operating expenses in 2008 and 2007, inthe amounts of approximately $158,000 and $266,000, respectively.  Grants related to the acquisition of propertyand equipment purchased in Ireland are amortized as a reduction to depreciationexpense over lives corresponding to the depreciable lives of such property andequipment.  The balance of deferredcredits related to such grants as of December 31, 2008 and 2007, isapproximately $1,994,000 and $2,105,000, respectively.  During 2008, 2007, and 2006, approximately$111,000, $135,000, and $164,000, respectively, of the deferred credit wasamortized as a reduction of operating expenses.

 

There is a commitment to repay the Irish government for grants receivedif we were to cease production in Ireland prior to the expiration of the grantliability period.  The grant liabilityperiod is usually between 5-8 years from the last claim made on a grant.  As of December 31, 2008, the totalamount of grants that could be subject to refund was approximately$4.1 million.  Management does notbelieve it will ever have to repay any of these grant monies as we have nointention of ceasing operation in Ireland.

 

**Litigation**. In the ordinary course of business, we are involved in litigation andclaims which management believes will not have a materially adverse effect onour financial position or results of operations.

 

**9.**             EARNINGS PER COMMONSHARE (EPS)

** **

The computation of weighted average shares outstandingand the basic and diluted earnings per common share consisted of the following(in thousands except per share amounts):

 
| ** **                                     | ** ** | **Net**    | ** ** | ** ** | ** ** | **Per Share** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|
| ** **                                     | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount**         | ** ** |
|                                           |       |       |       |       |       |               |       |
| Year ended  December 31, 2008:            |       |       |       |       |       |               |       |
| Basic EPS                                      |       | $          | 20,727     |       | 27,769     |               | $          | 0.75 |   |
| Effect of  dilutive stock options and warrants |       |       |       | 781        |       |               |       |
|                                           |       |       |       |       |       |               |       |
| Diluted EPS                                    |       | $          | 20,727     |       | 28,550     |               | $          | 0.73 |   |
|                                           |       |       |       |       |       |               |       |
| Year ended  December 31, 2007:            |       |       |       |       |       |               |       |
| Basic EPS                                      |       | $          | 15,588     |       | 27,425     |               | $          | 0.57 |   |
| Effect of  dilutive stock options and warrants |       |       |       | 779        |       |               |       |
|                                           |       |       |       |       |       |               |       |
| Diluted EPS                                    |       | $          | 15,588     |       | 28,204     |               | $          | 0.55 |   |
|                                           |       |       |       |       |       |               |       |
| Year ended  December 31, 2006:            |       |       |       |       |       |               |       |
| Basic EPS                                      |       | $          | 12,301     |       | 27,333     |               | $          | 0.45 |   |
| Effect of  dilutive stock options and warrants |       |       |       | 912        |       |               |       |
|                                           |       |       |       |       |       |               |       |
| Diluted EPS                                    |       | $          | 12,301     |       | 28,245     |               | $          | 0.44 |   |

 

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For the years ended December 31, 2008, 2007, and 2006,approximately 984,000, 1,422,000, and 584,000, respectively, of stock optionswere not included in the computation of diluted earnings per share because theywould have been antidilutive.

 

**Repurchaseof Our Common Stock. **On February 24, 2007, our Board ofDirectors approved the repurchase of 344,084 shares of our common stock in aprivate transaction with a non-institutional private investor for $4.1 million,which occurred during the first quarter of 2007.  On April 30, 2007, our Board ofDirectors approved the repurchase of up to 1,400,000 shares of our commonstock.  During the second and thirdquarters of 2007, we repurchased a total of 119,900 shares for a total of $1.3million.

 

**10.**          EMPLOYEE STOCKPURCHASE PLAN AND STOCK OPTIONS AND WARRANTS.

** **

Our stock-based compensation primarily consists of thefollowing plans:

 

**StockIncentive Plan**.  During 1999, we adopted the Merit MedicalSystems, Inc. Stock Incentive Plan (formerly the 1999 Omnibus StockIncentive Plan), which provides for the issuance of incentive stock options,non-statutory stock options and certain corresponding stock appreciation rights(the “Stock Incentive Plan”). Options may be granted to directors, officers, outside consultants andkey employees and may be granted upon such terms and such conditions as thecompensation committee of our Board of Directors in their sole discretion shalldetermine.  Options typically vest 20%per year over either a 4.5 or 5 year life with contractual lives of 5, 7 and 10years.  The Plan also provides foroptions that vest 100% upon grant with contractual lives of 10 years.  In no event, however, may the exercise pricebe less than the fair market value on the date of grant. Under a provision ofour stock incentive plan, participants are allowed to surrender mature sharesof our common stock for the payment of the option price and minimum statutorytaxes associated with the exercise of options. The shares surrendered must be shares the participant has held for morethan six months.  The value of the matureshares surrendered is based on the closing price of our common stock on thedate of exercise by the participant.  Asof December 31, 2008, a total of 206,000 shares remained available to beissued under the Stock Incentive Plan.

 

**2006 Long-Term Incentive Plan**. Our Board of Directors adopted and the shareholders approved the MeritMedical Systems, Inc. 2006 Long-Term Incentive Plan (the “2006Incentive Plan”) in May 2006.  The2006 Incentive Plan provides for the granting of stock options, stockappreciation rights, restricted stock, stock units (including restricted stockunits) and performance awards.  Optionsmay be granted to directors, officers, outside consultants and key employeesand may be granted upon such terms and such conditions as the compensationcommittee of our Board of Directors shall determine.  Options will typically vest on an annualbasis over a 3 to 5 year life (or 1 year if performance based) with contractuallives of 7-10 years.  As of December 31,2008, a total of 478,000 shares remained available to be issued under the 2006Long-Term Incentive Plan.

 

**Employee Stock Purchase Plan**. We have a qualified and a non-qualified Employee Stock Purchase Plan (“ESPP”),which will expire on June 30, 2016. As of December 31, 2008, the total number of shares that remainedavailable to be issued under our qualified plan was approximately 274,000shares and 86,000 shares for our non-qualified plan.  ESPP participants purchase shares on aquarterly basis at a price equal to 95% of the market price of the common stockat the end of the applicable offering period.

 

**Stock-Based Compensation Expense**. The stock-based compensation expense before income tax expense for theyears ended December 31, 2008, 2007 and 2006 consisted of the following(in thousands):

 
| ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |     |       |
| Cost of goods  sold                            |       | $        | 101        |     | $          | 261      |       | $ | 399 |   |
| Research and  development                      |       | 37       |       | 81       |       | 158      |       |
| Selling, general  and administrative           |       | 824      |       | 788      |       | 945      |       |
| Stock-based  compensation expense before taxes |       | $        | 962        |     | $          | 1,130    |       | $ | 1,502 |   |

 

We recognize stock-based compensation expense (net of a forfeiturerate) for those awards which are expected to vest on a straight-line basis overthe requisite service period.  Weestimate the forfeiture rate based on our historical experience andexpectations about future forfeitures. As of December 31, 2008, the total remaining unrecognizedcompensation cost related to non-vested stock options, net of forfeitures, wasapproximately $4.1 million and is expected to be recognized over aweighted average period of 3.88 years. The total 2008 and 2007 income tax benefit related to share-basedcompensation recorded in capital in excess of par value was approximately$2.0 million and $500,000, respectively, and was shown as a cash inflowfrom financing activities in our cash flow statement.

 

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In applying the Black-Scholes methodology to theoption grants, the fair value of our stock-based awards granted were estimatedusing an expected annual dividend yield of 0% and the following assumptions:

 
| ** **                 | ** ** | **2008**      | ** ** | **2007**    | ** ** | **2006**  | ** ** |
|----------------------------|------------|---------------|------------|-------------|------------|-----------|------------|
|                       |       |          |       |        |       |      |       |
| Risk-free  interest rate   |       | 3.24%-3.55%   |       | 3.64%-5.00% |       | 4.98%     |       |
| Expected option  life      |       | 4.2-6.0 years |       | 6.0 years   |       | 6.1 years |       |
| Expected price  volatility |       | 38.0%-41.7%   |       | 44.3%-47.8% |       | 41.9%     |       |

 

The average risk-free interest rate is determined using the U.S.Treasury rate in effect as of the date of grant, based on the expected term ofthe stock option.  We determine theexpected term of the stock options using the historical exercise behavior ofemployees.  The expected price volatilitywas determined using a weighted average of daily historical volatility of ourstock price over the corresponding expected option life and implied volatilitybased on recent trends of the daily historical volatility.  For options with a vesting period,compensation expense is recognized on a straight-line basis over the serviceperiod, which corresponds to the vesting period.  Compensation expense is recognizedimmediately for options that are fully vested on the date of grant.  During the years ended December 31,2008, 2007, and 2006, 499,000, 425,500, and 105,000 stock-based compensationgrants were made for a total fair value of approximately $2.5 million,$2.5 million, and $0.5 million, net of estimated forfeitures, respectively.

 

The table below presents information related to stockoption activity for the years ended December 31, 2008, 2007, and 2006 (inthousands):

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                        |       |     |       |     |       |     |       |
| Total intrinsic  value of stock options exercised           |       | $        | 6,150      |     | $          | 1,471    |       | $ | 3,195 |   |
| Cash received  from stock option exercises                  |       | 5,405    |       | 1,537    |       | 3,170    |       |
| Net income tax  benefit from the exercises of stock options |       | 2,044    |       | 500      |       | 1,155    |       |
|                                                             |            |          |            |          |            |          |            |  |  |  |

 

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Changes in stock options for the years ended December 31,2008, 2007, and 2006 consisted of the following (in thousands):

 
| ** **                                                  | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**       | ** ** | ** **    | ** ** |
|-------------------------------------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|---------------|------------|
| ** **                                                  | ** ** | **Number** | ** ** | **Average**  | ** ** | **Contractual**     | ** ** | ** **    | ** ** |
| ** **                                                  | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Term**            | ** ** | **Intrinsic** | ** ** |
| ** **                                                  | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in Years)** | ** ** | **Value**     | ** ** |
|                                                        |       |       |       |         |       |                |       |          |       |
| 2006:                                                       |       |       |       |         |       |                |       |          |       |
| Beginning  balance                                          |       | 4,288      |       |         |       |                |       |          |       |
| Granted                                                     |       | 105        |       | $            | 11.52      |                |       |          |       |   |
| Exercised                                                   |       | 455        |       | 7.48         |       |                |       |          |       |
| Forfeited/expired                                           |       | 141        |       | 11.90        |       |                |       |          |       |
| Outstanding at  December 31                            |       | 3,797      |       | 11.03        |       | 6.5                 |       | $             | 20,615     |   |
| Exercisable                                                 |       | 3,433      |       | 11.11        |       | 6.5                 |       | 18,605        |       |
| Ending vested  and expected to vest                         |       | 3,788      |       | 11.03        |       | 6.5                 |       | 20,568        |       |
|                                                        |       |       |       |         |       |                |       |          |       |
| Weighted average  fair value of options granted during year |       |       |       | $            | 5.58       |                |       |          |       |   |
|                                                        |       |       |       |         |       |                |       |          |       |
| 2007:                                                       |       |       |       |         |       |                |       |          |       |
| Beginning  balance                                          |       | 3,797      |       |         |       |                |       |          |       |
| Granted                                                     |       | 426        |       | $            | 12.14      |                |       |          |       |   |
| Exercised                                                   |       | 203        |       | 6.40         |       |                |       |          |       |
| Forfeited/expired                                           |       | 69         |       | 14.27        |       |                |       |          |       |
| Outstanding at  December 31                            |       | 3,951      |       | 11.34        |       | 5.7                 |       | $             | 13,754     |   |
| Exercisable                                                 |       | 3,353      |       | 11.28        |       | 5.7                 |       | 12,405        |       |
| Ending vested  and expected to vest                         |       | 3,908      |       | 11.33        |       | 5.6                 |       | 13,669        |       |
|                                                        |       |       |       |         |       |                |       |          |       |
| Weighted average  fair value of options granted during year |       |       |       | $            | 6.34       |                |       |          |       |   |
|                                                        |       |       |       |         |       |                |       |          |       |
| 2008:                                                       |       |       |       |         |       |                |       |          |       |
| Beginning  balance                                          |       | 3,951      |       |         |       |                |       |          |       |
| Granted                                                     |       | 499        |       | $            | 14.41      |                |       |          |       |   |
| Exercised                                                   |       | 612        |       | 8.85         |       |                |       |          |       |
| Forfeited/expired                                           |       | 5          |       | 18.84        |       |                |       |          |       |
| Outstanding at  December 31                            |       | 3,833      |       | 12.12        |       | 5.0                 |       | $             | 23,579     |   |
| Exercisable                                                 |       | 2,964      |       | 11.74        |       | 4.7                 |       | 19,665        |       |
| Ending vested  and expected to vest                         |       | 3,785      |       | 12.11        |       | 5.0                 |       | 23,367        |       |
|                                                        |       |       |       |         |       |                |       |          |       |
| Weighted average  fair value of options granted during year |       |       |       | $            | 5.32       |                |       |          |       |   |

 

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On November 17, 2004, we acquired all of the assets and assumedcertain liabilities of MedSource Packaging Concepts LLC (“MedSource”).  In connection with this acquisition we issued100,000 warrants to MedSource at a fair value of approximately $323,170.  Changes in these warrants for the years endedDecember 31, 2008, 2007, and 2006, consisted of the following (inthousands):

 
| ** **                       | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**       | ** ** | ** **    | ** ** |
|----------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|---------------|------------|
| ** **                       | ** ** | **Number** | ** ** | **Average**  | ** ** | **Contractual**     | ** ** | ** **    | ** ** |
| ** **                       | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Term**            | ** ** | **Intrinsic** | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in Years)** | ** ** | **Value**     | ** ** |
|                             |       |       |       |         |       |                |       |          |       |
| 2006:                            |       |       |       |         |       |                |       |          |       |
| Beginning  balance               |       | 100        |       |         |       |                |       |          |       |
| Outstanding at  December 31 |       | 100        |       | $            | 10.13      |                | 2.9        |          | $          | 571 |   |
| Exercisable                      |       | 100        |       | 10.13        |       | 2.9                 |       | 571           |       |
|                             |       |       |       |         |       |                |       |          |       |
| 2007:                            |       |       |       |         |       |                |       |          |       |
| Beginning  balance               |       | 100        |       |         |       |                |       |          |       |
| Outstanding at  December 31 |       | 100        |       | $            | 10.13      |                | 1.9        |          | $          | 377 |   |
| Exercisable                      |       | 100        |       | 10.13        |       | 1.9                 |       | 377           |       |
|                             |       |       |       |         |       |                |       |          |       |
| 2008:                            |       |       |       |         |       |                |       |          |       |
| Beginning  balance               |       | 100        |       |         |       |                |       |          |       |
| Exercised                        |       | 49         |       | $            | 10.13      |                |       |          |       |   |
| Outstanding at  December 31 |       | 51         |       | $            | 10.13      |                | 0.9        |          | $          | 369 |   |
| Exercisable                      |       | 51         |       | 10.13        |       | 0.9                 |       | 369           |       |

 

The following table summarizes information about stock optionsoutstanding at December 31, 2008 (shares in thousands):

 
| ** **         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **         | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **                   | ** ** | **Average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of**  | ** ** | ** **                   | ** ** | **Contractual**              | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise**       | ** ** | **Number**                   | ** ** | **Life**                     | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**         | ** ** | **Outstanding**              | ** ** | **(in years)**          | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|               |       |                         |       |                         |       |   |   |   |   |   |   |
| $2.07—$9.74   |       | 1,157                        |       | 3.1                          |       | $ | 6.68 |   | 1,157 |   | $ | 6.68 |   |
| $10.47—$12.14 |       | 1,049                        |       | 5.7                          |       | 11.77 |   | 686 |   | 11.61 |   |
| $13.22—$15.03 |       | 1,187                        |       | 6.1                          |       | 14.49 |   | 683 |   | 14.56 |   |
| $15.12—$21.67 |       | 440                          |       | 5.2                          |       | 20.90 |   | 438 |   | 20.91 |   |
|               |       |                         |       |                         |       |   |   |   |   |   |   |
| $2.07—$21.67  |       | 3,833                        |       | 5.0                          |       | $ | 12.12 |   | 2,964 |   | $ | 11.74 |   |

 

**11.**          SEGMENT REPORTING ANDFOREIGN OPERATIONS

** **

We report sales in four product categories.  Sales relating to these product categoriesfor the years ended December 31, 2008, 2007, and 2006 consisted of thefollowing (in thousands):

 
| ** **                              | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **December 31,**             | ** ** |
| ** **                              | ** ** | **% Change**                 | ** ** | **2008** | ** ** | **% Change** | ** ** | **2007** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stand-alone  devices                    |       | 9%                                |       | $ | 68,005 |   | 12% |   | $ | 62,417 |   | 19% |   | $ | 55,824 |   | $ | 46,900 |   |
| Custom  kits & procedure trays |       | 11%                               |       | 66,584 |   | 7% |   | 60,013 |   | 15% |   | 56,009 |   | 48,740 |   |
| Inflation  devices                      |       | 3%                                |       | 61,656 |   | 5% |   | 59,595 |   | 9% |   | 56,978 |   | 52,319 |   |
| Catheters                               |       | 20%                               |       | 30,898 |   | 18% |   | 25,743 |   | 17% |   | 21,863 |   | 18,626 |   |
| Total                                   |       | 9%                                |       | $ | 227,143 |   | 9% |   | $ | 207,768 |   | 14% |   | $ | 190,674 |   | $ | 166,585 |   |

 

During the years ended December 31, 2008, 2007, and 2006, we hadforeign sales of approximately $72,500,000, $64,900,000, and $53,700,000 orapproximately 32%, 31%, and 28%, respectively, of total sales, primarily

 

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inJapan, Germany, France and the United Kingdom. Foreign sales are attributed based on location of the customer receivingthe product.

 

Weoperate primarily in one segment in which we develop, manufacture and marketdisposable medical products, principally for use in the diagnosis and treatmentof cardiovascular disease. Major operations outside the United States include amanufacturing facility in Ireland, a distribution facility in The Netherlands,and sales subsidiaries in Europe.  Thefollowing is a summary of how we managed and reported our worldwide operationsfor fiscal years 2008, 2007, and 2006 (in thousands):

 
| ** **                                            | ** ** | ** **        | ** ** | **Transfers**  | ** ** | ** ** | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|----------------|------------|------------|------------|------------------|------------|
| ** **                                            | ** ** | **Sales to** | ** ** | **Between**    | ** ** | ** ** | ** ** | ** **       | ** ** |
| ** **                                            | ** ** | **Unaffiliated**  | ** ** | **Geographic** | ** ** | **Net**    | ** ** | **Identifiable** | ** ** |
| ** **                                            | ** ** | **Customers**     | ** ** | **Areas**      | ** ** | **Sales**  | ** ** | **Assets**       | ** ** |
|                                                  |       |              |       |           |       |       |       |             |       |
| Year ended  December 31, 2008:                   |       |              |       |           |       |       |       |             |       |
| United States,  Canada and international distributors |       | $                 | 184,708    |           | $          |       | $          | 184,708          |       | $ | 188,579 |   |
| Europe direct  and European distributors              |       | 42,435            |       | 20,889         |       | 63,324     |       | 43,197           |       |
| Eliminations                                          |       |              |       | (20,889        | )          | (20,889    | )          |             |       |
|                                                  |       |              |       |           |       |       |       |             |       |
| Consolidated                                          |       | $                 | 227,143    |           | $          | —     |       | $                | 227,143    |   | $ | 231,776 |   |
|                                                  |       |              |       |           |       |       |       |             |       |
| Year ended  December 31, 2007:                   |       |              |       |           |       |       |       |             |       |
| United States,  Canada and international distributors |       | $                 | 169,704    |           | $          | 2,491      |       | $                | 172,195    |   | $ | 159,491 |   |
| Europe direct  and European distributors              |       | 38,064            |       | 16,487         |       | 54,551     |       | 40,929           |       |
| Eliminations                                          |       |              |       | (18,978        | )          | (18,978    | )          |             |       |
|                                                  |       |              |       |           |       |       |       |             |       |
| Consolidated                                          |       | $                 | 207,768    |           | $          | —     |       | $                | 207,768    |   | $ | 200,420 |   |
|                                                  |       |              |       |           |       |       |       |             |       |
| Year ended  December 31, 2006:                   |       |              |       |           |       |       |       |             |       |
| United States,  Canada and international distributors |       | $                 | 158,488    |           | $          | 2,423      |       | $                | 160,911    |   | $ | 147,134 |   |
| Europe direct  and European distributors              |       | 32,186            |       | 16,421         |       | 48,607     |       | 35,534           |       |
| Eliminations                                          |       |              |       | (18,844        | )          | (18,844    | )          |             |       |
|                                                  |       |              |       |           |       |       |       |             |       |
| Consolidated                                          |       | $                 | 190,674    |           | $          | —     |       | $                | 190,674    |   | $ | 182,668 |   |

 

Transfers between geographic areas are accounted for at amounts whichare generally above cost and consistent with the rules and regulations ofgoverning tax authorities. Such transfers are eliminated in the consolidatedfinancial statements. Net income by geographic areas reflects foreign earningsreported by the foreign entities. Identifiable assets are those assets that canbe directly associated with a particular foreign entity and thus do not includeassets used for general corporate purposes.

 

Our long-lived assets by geographic area consisted ofthe following (in thousands):

 
| ** **               | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| United States            |       | $        | 78,920     |     | $          | 76,880 |   |
| Ireland                  |       | 16,584   |       | 16,826   |       |
| Other foreign  countries |       | 8,435    |       | 5,990    |       |
|                     |       |     |       |     |       |
| Total                    |       | $        | 103,939    |     | $          | 99,696 |   |

 

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**12.**                               ROYALTY AGREEMENTS

** **

Pursuant to a 1992 settlement agreement, we entered into a licenseagreement with another medical product manufacturer (the “Licensor”), wherebythe Licensor granted to us a nonexclusive right and license to manufacture andsell products which are subject to the patents issued to the Licensor.  The license agreement terminated in August 2008upon the expiration of the last related patent. For the rights and license granted under the agreement, we paid theLicensor a nonrefundable prepaid royalty in the amount of $600,000.  In addition to the prepaid royalty, we agreedto pay the Licensor a continuing royalty of 5.75% of sales (which will notexceed $450,000 for any calendar year) made in the United States, of productscovered by the license agreement. Royalties of $450,000 were paid or accrued in each of the years ended December 31,2008, 2007, and 2006.

 

During 2006, in connection with the purchase of the Futura® safetyscalpel device from Hypoguard, we acquired a license agreement with a medicalproduct manufacturer (the “Licensor”), whereby the Licensor granted to usan exclusive worldwide license to manufacture and sell products which aresubject to the patents issued to the Licensor. For the rights and license granted under the agreement, we agreed to paythe Licensor a royalty of 4% of net sales, with annual minimum royalty paymentsof $144,000 for calendar years 2007 through 2014, and $108,000 for 2015.  During the years ended December 31,2008, 2007, and 2006, we paid or accrued a royalty of $108,000, $144,000, and$108,000 respectively, under this license agreement.  During January 2008, we negotiated topurchase from the Licensor the patents related to this product for$432,000.  The patent will amortize overthe remaining life of the patents, which is approximately five and one-halfyears.  In connection with the purchaseof the patents, the licensor forgave the three months ended December 31,2008 royalties due of $36,000.

 

During 2007, inconnection with the purchase of the ProGuideTM chronic dialysis catheter fromDatacope, we entered into a running royalty agreement as partial considerationof the assignment of acquired intellectual property to us. Under thisagreement, we agreed to pay Datascope a royalty of 5% of net sales, with annualminimum royalty payments of $50,000 for calendar years 2008 through 2013.  During the years ended December 31, 2008and 2007, we paid or accrued a royalty of $50,000 and $42,000, respectively,under this agreement.

 

**13.**                               EMPLOYEE BENEFITPLANS

** **

We have a contributory 401(k) savings and profit sharing plan (the “Plan”)covering all U.S. full-time employees who are at least 18 years of age.  The Plan has a-90 day minimum servicerequirement.  We may contribute, at ourdiscretion, matching contributions based on the employees’ compensation.  Contributions made by us to the Plan for theyears ended December 31, 2008, 2007, and 2006, totaled approximately $0,$510,000, and $845,000, respectively.  Wehave defined contribution plans covering some of our foreign employees.  We contribute 3-36% for certain foreignnon-management employees, 10-36% for certain foreign management employees, and48% for a foreign executive employee. Contributions made to these plans for the years ended December 31,2008, 2007, and 2006, totaled approximately $541,000, $635,000, and $389,000,respectively.

 

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**14.**                               QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)

** **

Quarterly data for the years ended December 31,2008, 2007, and 2006, consisted of the following (in thousands except per shareamounts):

 
| ** **                         | ** ** | **Quarter Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                               |       |                   |       |   |   |   |   |   |   |
| **2008**                           |       |                   |       |   |   |   |   |   |   |
|                               |       |                   |       |   |   |   |   |   |   |
| Net sales                          |       | $                      | 53,553     |   | $ | 57,441 |   | $ | 58,153 |   | $ | 57,996 |   |
| Gross profit                       |       | 21,592                 |       | 24,502 |   | 23,684 |   | 23,493 |   |
| Income from  operations            |       | 6,604                  |       | 9,009 |   | 7,169 |   | 8,202 |   |
| Income tax  expense                |       | 2,432                  |       | 3,337 |   | 2,198 |   | 3,151 |   |
| Net income                         |       | 4,317                  |       | 5,818 |   | 5,200 |   | 5,392 |   |
| Basic earnings  per common share   |       | 0.16                   |       | 0.21 |   | 0.19 |   | 0.19 |   |
| Diluted earnings  per common share |       | 0.15                   |       | 0.21 |   | 0.18 |   | 0.19 |   |
|                               |       |                   |       |   |   |   |   |   |   |
| **2007**                           |       |                   |       |   |   |   |   |   |   |
|                               |       |                   |       |   |   |   |   |   |   |
| Net sales                          |       | $                      | 51,030     |   | $ | 51,811 |   | $ | 50,584 |   | $ | 54,343 |   |
| Gross profit                       |       | 18,858                 |       | 19,536 |   | 19,783 |   | 21,614 |   |
| Income from  operations            |       | 4,479                  |       | 5,471 |   | 6,086 |   | 6,934 |   |
| Income tax  expense                |       | 1,598                  |       | 1,937 |   | 1,891 |   | 2,385 |   |
| Net income                         |       | 2,969                  |       | 3,596 |   | 4,295 |   | 4,728 |   |
| Basic earnings  per common share   |       | 0.11                   |       | 0.13 |   | 0.16 |   | 0.17 |   |
| Diluted earnings  per common share |       | 0.10                   |       | 0.13 |   | 0.15 |   | 0.17 |   |
|                               |       |                   |       |   |   |   |   |   |   |
| **2006**                           |       |                   |       |   |   |   |   |   |   |
|                               |       |                   |       |   |   |   |   |   |   |
| Net sales                          |       | $                      | 45,040     |   | $ | 48,121 |   | $ | 46,697 |   | $ | 50,816 |   |
| Gross profit                       |       | 17,050                 |       | 18,996 |   | 18,068 |   | 18,964 |   |
| Income from  operations*           |       | 3,705                  |       | 5,476 |   | 5,136 |   | 4,693 |   |
| Income tax  expense                |       | 1,351                  |       | 1,951 |   | 1,900 |   | 1,681 |   |
| Net income                         |       | 2,401                  |       | 3,522 |   | 3,325 |   | 3,053 |   |
| Basic earnings  per common share   |       | 0.09                   |       | 0.13 |   | 0.12 |   | 0.11 |   |
| Diluted earnings  per common share |       | 0.09                   |       | 0.13 |   | 0.12 |   | 0.11 |   |

 

----

*Income from operations was adjusted in the firstquarter of 2006, from what was reported, as the result of the reclassificationof losses on disposal of assets from other income (expense) to selling, generaland administrative expense.

 

During the quarter ended December 31, 2006, we determined it wasnot likely that we would pursue the product associated with the intellectualproperty and assets acquired from Sub-Q due to other priorities andopportunities.  Therefore, we recorded animpairment charge of approximately $929,000 during the fourth quarter,primarily relating to intellectual property assets acquired from Sub-Q in March 2005.

 

**15.****                               FAIR VALUE MEASUREMENTS**.

 

Our financial assets andliabilities carried at fair value measured on a recurring basis as of December 31,2008 consisted of the following (in thousands):

 
| ** **                             | ** ** | ** **                                                      | **Fair Value Measurements Using** | ** **                                                          |
|----------------------------------------|------------|-----------------------------------------------------------------|--------------------------------------------------|---------------------------------------------------------------------|
| **Description**                        | ** ** | **Total Fair  Value at  December 31, 2008** | ** **                                       | **Quoted prices in  active markets  (Level 1)** | ** ** | **Significant other  observable inputs  (Level 2)** | ** ** | **Significant  Unobservable inputs  (Level 3)** | ** ** |
|                                   |       |                                                            |                                             |                                                                |   |   |   |   |   |
| Commercial paper  (1)                  |       | $                                                               | 19,995                                           |                                                                |   |   | $ | 19,995 |   |   |   |
| Deferred  compensation investments (2) |       | 2,325                                                           |                                             | 274                                                                 |   | 2,051 |   |   |   |
|                                        |            |                                                                 |                                                  |                                                                     |  |  |  |  |  |  |  |

 

----

(1)  Thefair value of the commercial paper is based on a fixed-income approach over astraight-line basis.  In the event atransaction is observed on the same security in the market place, the price isadjusted to reflect the quoted market price.

 

(2)  Thedeferred compensation investments are held in a Rabbi trust under aninsurance-based deferred compensation plan. The investments of the Rabbi trust are valued based upon unit valuesmultiplied by the

 

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number of unitsheld.  The unit value is based upon theinvestment’s net asset value adjusted for some administrative fees.

 

During the yearended December 31, 2008, we had no significant measurements of assets orliabilities at fair value (as defined in SFAS No. 157) on a nonrecurringbasis subsequent to their initial recognition. As indicated in Note 1, of the notes to our consolidated financial statements,the aspects of SFAS No. 157 for which the effective date for us wasdeferred under FSP No. 157-2 until January 1, 2009 relate tononfinancial assets and liabilities that are measured at fair value, but arerecognized or disclosed at fair value on a nonrecurring basis.  This deferral applies to such items asnonfinancial assets and liabilities initially measured at fair value in abusiness combination (but not measured at fair value in subsequent periods) ornonfinancial long-lived asset groups measured at fair value for an impairmentassessment.  During the year ended December 31,2008, such measurements of fair value impacted by the deferral under FSP No. 157-2related primarily to the nonfinancial assets and liabilities with respect toall previous business combinations we have made.

 

**16.**                               SUBSEQUENT EVENTS

** **

On February 18,2009, we entered into an asset purchase agreement to acquire substantially allthe assets of Alveolus, Inc. (“Alveolus”), located in Charlotte, NorthCarolina, for approximately $19.0 million. We expect to close the Alveolus acquisition shortly after March 6,2009.  Alveolus produces non-vascularinterventional stents used for esophageal, tracheobronchial, and biliarystenting procedures.  Also, on February 19,2009, we entered into an asset purchase and supply agreement with BiosearchMedical Products, Inc., a wholly-owned subsidiary of Hydromer, Inc. (“Biosearch”),to acquire two products that are being sold on an OEM basis to major medicaldevice companies in the gastroenterology market.  The anticipated purchase price for theBiosearch assets is approximately $1.6 million. We made an initial payment ofapproximately $1.1 million on February 23, 2009.

 

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**SUPPLEMENTARY FINANCIAL DATA**

** **

The supplementaryfinancial information required by Item 302 of Regulation S-K is containedin Note 14 to the consolidated financial statements of the Company setforth above.

 

**Item 9.**                                                    Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.

** **

None

 

**Item 9A.**                                           Controlsand Procedures.

** **

**MERIT MEDICAL SYSTEMS, INC. ANDSUBSIDIARIESMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended.  Our internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in the UnitedStates of America.  Internal control overfinancial reporting includes those written policies and procedures that:

 

·                  Pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of Merit MedicalSystems, Inc.;

 

·                  Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America;

 

·                  Providereasonable assurance that our receipts and expenditures are being made only inaccordance with authorization of our management and directors; and

 

·                  Providereasonable assurance regarding prevention or timely detection of theunauthorized acquisition, use or disposition of assets that could have amaterial effect on the consolidated financial statements.

 

Internal control over financial reporting includes the controlsthemselves, monitoring and internal auditing practices and actions taken tocorrect deficiencies as identified. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2008.  In making this assessment, our managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *InternalControl-Integrated Framework*. Based on those criteria and management’s assessment, we believe that, asof December 31, 2008, our internal control over financial reporting iseffective.

 

Our independent registered public accountants have also issued an auditreport on the Company’s internal control over financial reporting.  This report appears below.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To theBoard of Directors and Stockholders of Merit Medical Systems, Inc.

 

We have audited the internal control over financial reporting of MeritMedical Systems, Inc. and subsidiaries (the “Company”) as of December 31,2008, based on criteria established in *Internal Control —Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control over Financial Reporting.  Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects.  Our audit included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectivenessof internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances.  We believethat our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, andeffected by the company’s board of directors, management, and other personnelto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis.  Also, projections of anyevaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008, basedon the criteria established in *Internal Control —Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended December 31,2008, of the Company and our report dated March 2, 2009 expressed anunqualified opinion on those financial statements and financial statementschedule and included an explanatory paragraph regarding the adoption ofStatement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004), *Share-Based Payment*, FinancialAccounting Standards Board Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income**Taxes,*and SFAS No. 157, *Fair Value Measurement*.

 
| /s/  DELOITTE & TOUCHE LLP |   |
|-------------------------------------|--------|
|                                |   |
| Salt  Lake City, Utah               |   |
| March 2,  2009                 |   |

 

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**Item 9B.                 OtherInformation.**

 

None.

 

**PART III**

 

**Items 10,11, 12, 13 and 14.**

** **

These items areincorporated by reference to our definitive proxy statement relating to ourAnnual Meeting of Shareholders scheduled for May 20, 2009.  We anticipate that our definitive proxystatement will be filed with the SEC not later than 120 days after December 31,2008, pursuant to Regulation 14A of the Securities Exchange Act of 1934, asamended.

 

**PART IV**

** **

**Item 15.                 Exhibit and Financial Statement Schedules.**

 

(a)           Documents filed aspart of this report:

 

(1)  FinancialStatements.  The followingconsolidated financial statements and the notes thereto, and the Reports ofIndependent Registered Public Accounting Firm are incorporated by reference asprovided in Item 8 and Item 9A of this report:

 

·           Reportof Independent Registered Public Accounting Firm — Internal Control

 

·           Reportof Independent Registered Public Accounting Firm — Financial Statements

 

·           ConsolidatedBalance Sheets as of December 31, 2008 and 2007

 

·           ConsolidatedStatements of Income for the Years Ended December 31, 2008, 2007 and 2006

 

·           ConsolidatedStatements of Stockholders’ Equity for the Years Ended December 31, 2008,2007 and 2006

 

·           ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2008, 2007 and2006

 

·           Notesto Consolidated Financial Statements

 

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(2)  FinancialStatement Schedule.

 

·           Schedule II - Valuation andqualifying accounts

 

**VALUATION AND QUALIFYING ACCOUNTS**

**YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

**(In Thousands)**

 
| **Description**                            | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  Charged to  Costs  Expenses (a)** | ** ** | **Deduction (b)** | ** ** | **Balance at  End of  Year** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|
|                                       |       |                                         |       |                                                     |       |                   |       |                                   |       |
| **ALLOWANCE  FOR UNCOLLECTIBLE ACCOUNTS:** |       |                                         |       |                                                     |       |                   |       |                                   |       |
|                                       |       |                                         |       |                                                     |       |                   |       |                                   |       |
| **2006**                                   |       | (767                                         | )          | (154                                                     | )          | 361                    |       | (560                                   | )          |
| **2007**                                   |       | (560                                         | )          | (19                                                      | )          | 82                     |       | (497                                   | )          |
| **2008**                                   |       | (497                                         | )          | (139                                                     | )          | 131                    |       | (505                                   | )          |

 

----

(a) TheCompany records a bad debt provision based upon historical experience and areview of individual customer balances.

(b) Whenan individual customer balance becomes impaired and is deemed uncollectible adeduction is made against the allowance for uncollectible accounts.

 
| **Description**                          | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  Charged to  Costs  Expenses (c)** | ** ** | **Deductions(d)** | ** ** | **Balance at  End of  Year** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|-------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | ** **                                   | ** ** | ** **                                               | ** ** | ** **        | ** ** | ** **                             | ** ** |
| **RESERVE  FOR INVENTORY OBSOLESCENCE:** |       |                                         |       |                                                     |       |              |       |                                   |       |
|                                     |       |                                         |       |                                                     |       |              |       |                                   |       |
| **2006**                                 |       | (1,708                                       | )          | (1,074                                                   | )          | 677               |       | (2,105                                 | )          |
| **2007**                                 |       | (2,105                                       | )          | (1,416                                                   | )          | 1,186             |       | (2,335                                 | )          |
| **2008**                                 |       | (2,335                                       | )          | (1,096                                                   | )          | 1,170             |       | (2,261                                 | )          |

 

----

(c) TheCompany writes down its inventory for estimated obsolescence for ummarketableand/or slow moving products that may expire prior to being sold.

(d) Whena previously reserved for inventory item is either disposed of or sold theCompany records a deduction to its reserve for obsolescence inventory.

 

All otherschedules have been omitted because they are not required, not applicable, orthe information is otherwise set forth in the financial statements or notesthereto.

 

(b)                                      none

 

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(c)                                       Exhibits:

 

The following exhibits required by Item 601 of Regulation S—K are filedherewith or have been filed previously with the SEC as indicated below:

 
| ** ** | ** ** | **Description**                                                                                                             | ** ** | **Exhibit No.**                                                                     |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|
| 3.1        |       | Articles of Incorporation of the Company, as amended  and restated*                                                         |       | [Form 10-Q filed August 14, 1996,  Exhibit No. 1]                    |
|       |       |                                                                                                                        |       |                                                                                     |
| 3.2        |       | Bylaws of the Company*                                                                                                      |       | [Form S—18 filed October 19, 1989,  Exhibit No. 2]              |
|       |       |                                                                                                                        |       |                                                                                     |
| 3.3        |       | Amended and Restated Bylaws of Merit Medical  Systems, Inc.*                                                           |       | [Form 10-Q filed November 8, 2007,  Exhibit No. 3.3]                 |
|       |       |                                                                                                                        |       |                                                                                     |
| 4          |       | Specimen Certificate of the Company’s Common Stock,  no par value*                                                     |       | [Form S—18 filed October 19, 1989,  Exhibit No. 10]             |
|       |       |                                                                                                                        |       |                                                                                     |
| 4.3        |       | Articles of Amendment of the Articles of  Incorporation dated May 14, 1993*                                            |       | [Form S-3 filed February 14, 2005,  Exhibit 4.3]                          |
|       |       |                                                                                                                        |       |                                                                                     |
| 4.4        |       | Articles of Amendment to Articles of Incorporation  dated June 6, 1996*                                                |       | [Form S-3 filed February 14, 2005,  Exhibit 4.4]                          |
|       |       |                                                                                                                        |       |                                                                                     |
| 4.5        |       | Articles of Amendment to Articles of Incorporation  dated June 12, 1997*                                               |       | [Form S-3 filed February 14, 2005,  Exhibit 4.5]                          |
|       |       |                                                                                                                        |       |                                                                                     |
| 4.7        |       | Articles of Amendment to the Articles of  Incorporation dated May 22, 2003*                                            |       | [Form S-3 filed February 14, 2005,  Exhibit 4.7]                          |
|       |       |                                                                                                                        |       |                                                                                     |
| 4.8        |       | Articles of Amendment  to the Articles of Incorporation of Merit Medical Systems, Inc., dated  May 23, 2008*      |       | [Form 8-K filed  May 28, 2008, Exhibit 3.1]                               |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.1       |       | Merit Medical Systems, Inc. Long Term Incentive  Plan (as amended and restated) dated March 25, 1996*             |       | [Form 10-Q filed August 14, 1996,  Exhibit No. 2]                    |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.2       |       | Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan (as amended effective January 1, 1991*               |       | [Form S—1 filed February 14, 1992,  Exhibit No. 8]              |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.3       |       | License Agreement, dated April 8, 1992 between  the Company and Utah Medical Products, Inc.*                      |       | [Form S—1 filed February 14, 1992,  Exhibit No. 5]              |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.4       |       | Lease Agreement dated as of June 8, 1993 for  office and manufacturing facility*                                       |       | [Form 10—K for year ended December 31,  1994, Exhibit No. 10.4] |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.12      |       | Amended and Restated  Deferred Compensation plan*                                                                           |       | [Form 10-K for  year ended December 31, 2003, Exhibit No. 10.12]          |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.13      |       | Purchase agreement dated  November 17, 2004 between the Company and MedSource Packaging Concepts  LLC*                 |       | [Form 10-K for  year ended December 31, 2004, Exhibit No. 10.13]          |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.17      |       | Unsecured Loan  Agreement with Bank of America, N.A.*                                                                       |       | [Form 8-K filed  December 7, 2006, Exhibit 10.1]                          |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.18      |       | Seventh Amendment to  the First Restatement of the Merit Medical Systems, Inc.  401(k) Profit Sharing Plan*       |       | [Form 10-K for  year ended December 31, 2006, Exhibit No. 10.18]          |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.19      |       | Stock Purchase  Agreement by and between Merit Medical Systems, Inc. and Sheen Man Co.  LTD, dated April 1, 2007* |       | [Form 10-Q filed  May 9, 2007, Exhibit No. 10.19]                    |
|       |       |                                                                                                                        |       |                                                                                     |
| 10.20      |       | Eighth Amendment to the  First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan*        |       | [Form 10-K for  year ended December 31, 2007, Exhibit No. 10.20]          |

 

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| 10.21  |   | Ninth Amendment to the  First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan*               |   | [Form 10-K for  year ended December 31, 2007, Exhibit No. 10.21] |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|
|   |   |                                                                                                                              |   |                                                                            |
| 10.22  |   | Tenth Amendment to the  First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan*               |   | [Form 10-K for  year ended December 31, 2007, Exhibit No. 10.22] |
|   |   |                                                                                                                              |   |                                                                            |
| 10.23  |   | Merit Medical Systems, Inc.  Amended and Restated Deferred Compensation Plan, Effective January 1,  2008*               |   | [Form 8-K filed December 18,  2008, Exhibit 10.1]                |
|   |   |                                                                                                                              |   |                                                                            |
| 10.24  |   | Employment  Agreement, made on December 31, 2008, by and between Merit Medical  Systems, Inc. and Fred P. Lampropoulos* |   | [Form 8-K filed January 7,  2009, Exhibit 10.1]                  |
|   |   |                                                                                                                              |   |                                                                            |
| 10.25  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical Systems, Inc.  and Kent W. Stanger*      |   | [Form 8-K filed January 7,  2009, Exhibit 10.2]                  |
|   |   |                                                                                                                              |   |                                                                            |
| 10.26  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical Systems, Inc.  and Martin R. Stephens*   |   | [Form 8-K filed January 7,  2009, Exhibit 10.3]                  |
|   |   |                                                                                                                              |   |                                                                            |
| 10.27  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical Systems, Inc.  and Arlin D. Nelson*      |   | [Form 8-K filed January 7,  2009, Exhibit 10.4]                  |
|   |   |                                                                                                                              |   |                                                                            |
| 10.28  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical Systems, Inc.  and Rashelle Perry*       |   | [Form 8-K filed January 7,  2009, Exhibit 10.5]                  |
|   |   |                                                                                                                              |   |                                                                            |
| 10.29  |   | Eleventh Amendment to  the First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan             |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 10.30  |   | Twelfth Amendment to  the First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan              |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 21     |   | Subsidiaries Of Merit  Medical Systems, Inc                                                                                       |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 23.1   |   | Consent of  Independent Registered Public Accounting Firm                                                                         |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 31.1   |   | Certification of  Chief Executive Officer                                                                                         |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 31.2   |   | Certification  of Chief Financial Officer                                                                                         |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 32.1   |   | Certification  of Chief Executive Officer                                                                                         |   | Filed herewith                                                                  |
|   |   |                                                                                                                              |   |                                                                            |
| 32.2   |   | Certification  of Chief Financial Officer                                                                                         |   | Filed herewith                                                                  |

 

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*      Theseexhibits are incorporated herein by reference.

 

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Tableof Contents

 

**SIGNATURES**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized, on March 4, 2009.

 
|   | MERIT MEDICAL SYSTEMS,  INC.                                  |
|--------|---------------------------------------------------------------|
|   |                                                          |
|   |                                                          |
|   | By:                                                           |   /s/ FRED P.  LAMPROPOULOS |
|   | Fred P.  Lampropoulos, President and  Chief Executive Officer |

 

**ADDITIONALSIGNATURE AND POWER OF ATTORNEY**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on March 4, 2009. In addition, each person whose signature to this report appears below herebyconstitutes and appoints Fred P. Lampropoulos and Kent W. Stanger, and each ofthem, as his true and lawful attorney-in-fact and agent, with full power ofsubstitution, to sign on his behalf individually and in the capacity statedbelow and to perform any acts necessary to be done in order to file allamendments and post-effective amendments to this report, and any and allinstruments or documents filed as part of or in connection with this report orthe amendments thereto and each of the undersigned does hereby ratify andconfirm all that said attorney-in-fact and agent, or his substitutes, shall door cause to be done by virtue hereof.

 
| **Signature**                | ** ** | **Capacity in Which Signed**                           |
|------------------------------|------------|--------------------------------------------------------|
| ** **                   | ** ** | ** **                                             |
| ** **                   | ** ** | ** **                                             |
| /s/: FRED P.  LAMPROPOULOS   |       | President, Chief  Executive Officer and Director       |
| Fred P. Lampropoulos         |       | (Principal  executive officer)                         |
|                         |       |                                                   |
|                         |       |                                                   |
| /s/: KENT W. STANGER         |       | Chief Financial  Officer, Secretary, Treasurer and     |
| Kent W. Stanger              |       | Director (Principal  financial and accounting officer) |
|                         |       |                                                   |
|                         |       |                                                   |
| /s/: RICHARD W. EDELMAN      |       | Director                                               |
| Richard W. Edelman           |       |                                                   |
|                         |       |                                                   |
|                         |       |                                                   |
| /s/: REX C. BEAN             |       | Director                                               |
| Rex C. Bean                  |       |                                                   |
|                         |       |                                                   |
|                         |       |                                                   |
| /s/: JAMES J. ELLIS          |       | Director                                               |
| James J. Ellis               |       |                                                   |
|                         |       |                                                   |
|                         |       |                                                   |
| /s/: MICHAEL E.  STILLABOWER |       | Director                                               |
| Michael E. Stillabower       |       |                                                   |
|                         |       |                                                   |
|                         |       |                                                   |
| /s/: FRANKLIN J. MILLER      |       | Director                                               |
| Franklin J. Miller           |       |                                                   |

 

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