10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004

or

¨ Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission File No. 000-21001

NMT MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

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

27 Wormwood Street, Boston, Massachusetts	02210-1625
(Address of Principal Executive Offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

As of August 5, 2004, there were 12,072,320 shares of Common Stock, $.001 par value per share, outstanding.

INDEX

	Page Number
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003	3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003	4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19
Part II. Other Information
Item 1. Legal Proceedings	20
Item 4. Submission of Matters to a Vote of Security Holders	20
Item 6. Exhibits and Reports on Form 8-K	21
Signatures	22

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NMT Medical, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	At June 30, 2004			At December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	16,755,400		$	28,724,767
Marketable securities		19,131,611			8,000,000
Accounts receivable, net		2,230,717			2,546,846
Inventories		2,207,097			1,931,941
Prepaid expenses and other current assets		2,774,472			2,078,531
Total current assets		43,099,297			43,282,085
Property and equipment, net		927,219			781,808
Other assets		43,910			58,557
	$	44,070,426		$	44,122,450
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,142,635		$	1,275,781
Accrued expenses		3,368,551			4,110,525
Discontinued operations liabilities		500,000			500,000
Total current liabilities		6,011,186			5,886,306
Commitments and Contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $.001 par value Authorized – 3,000,000 shares Issued and outstanding – none		—			—
Common stock, $.001 par value Authorized—30,000,000 shares Issued—12,103,257 shares in 2004 and 11,914,787     shares in 2003		12,103			11,915
Additional paid-in capital		45,759,922			45,395,546
Less: Treasury stock – 40,000 shares at cost		(119,600	)		(119,600	)
Unrealized loss on marketable securities		(185,280	)		—
Accumulated deficit		(7,407,905	)		(7,051,717	)
Total stockholders’ equity		38,059,240			38,236,144
	$	44,070,426		$	44,122,450

See accompanying notes.

3

NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2004			2003			2004			2003
Revenues:
Product sales	$	4,755,962		$	5,275,708		$	9,536,987		$	10,190,545
Net royalty income		1,017,564			138,582			1,878,689			245,732
Total revenues		5,773,526			5,414,290			11,415,676			10,436,277
Costs and Expenses:
Cost of product sales		1,268,159			1,218,690			2,397,568			2,367,944
Research and development		2,066,792			1,791,311			4,091,383			2,967,784
General and administrative		1,217,723			1,649,316			2,514,047			2,928,429
Selling and marketing		1,466,766			1,725,830			3,010,537			2,877,567
Total costs and expenses		6,019,440			6,385,147			12,013,535			11,141,724
Loss from operations		(245,914	)		(970,857	)		(597,859	)		(705,447	)
Interest income, net		120,672			162,771			254,667			383,021
Foreign currency transaction (loss) gain		(4,031	)		(1,341	)		(12,996	)		7,474
Net loss	$	(129,273	)	$	(809,427	)	$	(356,188	)	$	(314,952	)
Net loss per common share:
Basic and diluted	$	(0.01	)	$	(0.07	)	$	(0.03	)	$	(0.03	)
Weighted average common shares outstanding:
Basic and diluted		12,019,094			11,794,340			11,968,401			11,777,679

See accompanying notes.

4

NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months Ended June 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(356,188	)	$	(314,952	)
Adjustments to reconcile net loss to net cash (used in) provided by     operating activities —
Depreciation and amortization		307,698			239,818
Stock-based employee compensation		(36,036	)		96,873
Changes in assets and liabilities —
Accounts receivable		316,129			(464,990	)
Receivable from sale of product line		—			3,000,000
Inventories		(275,156	)		(787,150	)
Prepaid expenses and other current assets		(695,941	)		(46,867	)
Accounts payable		866,854			(91,745	)
Accrued expenses		(741,974	)		(728,201	)
Net cash (used in) provided by continuing operations		(614,614	)		902,786
Net cash used in discontinued operations		—			(410,505	)
Cash flows from investing activities:
Purchases of property and equipment		(307,885	)		(122,734	)
Decrease in other assets		—			80,000
Purchase of marketable securities		(19,447,467	)		—
Proceeds from maturities of marketable securities		8,000,000			—
Net cash used in investing activities		(11,755,352	)		(42,734	)
Cash flows from financing activities:
Proceeds from exercise of common stock options and warrants		287,564			197,979
Proceeds from issuance of common stock pursuant to employee stock purchase plan		113,036			76,873
Payments of capital lease obligations		—			(20,198	)
Net cash provided by financing activities		400,600			254,654
Net (decrease) increase in cash and cash equivalents		(11,969,367	)		704,201
Cash and cash equivalents, beginning of period		28,724,767			19,933,931
Cash and cash equivalents, end of period	$	16,755,400		$	20,638,132
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest	$	911		$	4,671
Income taxes	$	465,000		$	101,386
Supplemental disclosure of noncash financing and investing transactions:
Receipt of treasury stock	$	—		$	119,600

See accompanying notes.

5

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Operations

NMT Medical, Inc. (together with its subsidiaries, the “Company” or “NMT”), founded in July 1986, designs, develops and markets proprietary implant technologies that allow interventional cardiologists to treat cardiac sources of stroke, and other potential brain attacks, such as migraine headaches, through minimally invasive, catheter-based procedures. Our products are designed to offer alternative approaches to existing complex treatments, thereby reducing patient trauma, shortening procedure, hospitalization and recovery times and lowering overall treatment costs. These products also serve the pediatric interventional cardiologist with a broad range of cardiac septal repair implants delivered with nonsurgical catheter techniques.

2. Interim Financial Statements

The accompanying consolidated financial statements at June 30, 2004 and for the three and six-month periods ended June 30, 2004 and 2003 are unaudited and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. In our opinion, these unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2003, and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2003. The results of operations for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results expected for the fiscal year ending December 31, 2004.

Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures in these financial statements are adequate to make the information presented not misleading.

3. Stock-Based Compensation

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Under APB No. 25, no compensation expense is recognized when the option price is equal to the market price of the underlying stock on the date of grant. Under an alternative method of accounting, Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, options are valued at the grant date using an option pricing model and compensation expense is recognized ratably over the vesting period.

The following table illustrates the pro forma effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2004			2003			2004			2003
Net loss as reported	$	(129,273	)	$	(809,427	)	$	(356,188	)	$	(314,952	)
Add: Stock-based employee compensation included in net loss as reported		(83,600	)		70,150			(36,036	)		96,873
Less: Total stock-based employee compensation expense determined under fair value based methods for all awards		(309,663	)		(280,505	)		(637,146	)		(563,075	)
Pro forma net loss	$	(522,536	)	$	(1,019,782	)	$	(1,029,370	)	$	(781,154	)
Basic and diluted net loss per common share:
As reported	$	(0.01	)	$	(0.07	)	$	(0.03	)	$	(0.03	)
Pro forma	$	(0.04	)	$	(0.09	)	$	(0.09	)	$	(0.07	)

6

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

3. Stock-Based Compensation (continued)

Our stock option grants generally vest over several years and we intend to grant varying levels of stock options in future periods. Therefore, the proforma effects of applying SFAS No. 123 for the three and six-month periods ended June 30, 2004 and 2003 are not necessarily indicative of the effects expected in future periods.

4. Cash, Cash Equivalents and Marketable Securities

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

Available-for-sale marketable securities at June 30, 2004 consisted of approximately $19.1 million of debt instruments with maturities ranging from July 15, 2005 to March 30, 2006. Approximately $185,000 of accumulated unrealized losses were recorded at June 30, 2004 as an adjustment to stockholders’ equity. Accrued interest receivable of approximately $350,000 and $61,000 were included in prepaid expenses and other current assets in the accompanying consolidated balance sheets at June 30, 2004 and December 31, 2003, respectively.

5. Inventories

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

	At June 30, 2004		At December 31, 2003
Raw materials and work-in-process	$	1,097,886	$	1,065,377
Finished goods		1,109,211		866,564
	$	2,207,097	$	1,931,941

Finished goods and work-in-process consisted of materials, labor and manufacturing overhead.

6. Net Royalty Income

Royalties earned from C.R. Bard, Inc. (“Bard”) and Boston Scientific Corporation (“BSC”) are reported in the accompanying consolidated statements of operations net of related royalty obligations due to third parties. Net royalty income was approximately $1.0 million and $1.9 million during the three and six-month periods ended June 30, 2004, respectively, and approximately $138,000 and $246,000 during the three and six-month periods ended June 30, 2003, respectively.

7. Net Loss per Common and Common Equivalent Share

Basic and diluted net loss per share are presented in conformity with SFAS No. 128, “Earnings per Share”, for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per share were determined by dividing net loss by the weighted average common shares outstanding during the periods presented. Options and warrants to purchase a total of 1,798,596 and 2,096,328 common shares have been excluded from the computation of diluted weighted average shares outstanding for the three and six-month periods ended June 30, 2004 and 2003, respectively, because they were not dilutive.

7

NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Comprehensive (Loss) Income

We apply the provisions of SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and displaying comprehensive (loss) income and its components in the consolidated financial statements. Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2004			2003			2004			2003
Net loss	$	(129,273	)	$	(809,427	)	$	(356,188	)	$	(314,952	)
Increase in unrealized loss on marketable securities		(182,633	)		(60,000	)		(185,280	)		(110,000	)
Comprehensive loss	$	(311,906	)	$	(869,427	)	$	(541,468	)	$	(424,952	)

9. Commitments and Contingencies

Litigation

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

CLOSURE I

In June 2003, the U.S. Food and Drug Administration (“FDA”) approved our investigational device exemption clinical trial (“CLOSURE I”) comparing our fourth generation STARFlex^® cardiac septal repair implant with medical therapy in preventing recurrent stroke and transient ischemic attack. In connection with CLOSURE I, we have entered into various contractual obligations with third party service providers and the participating clinical sites. Including the internal costs of our clinical department and the manufacturing costs of our STARFlex^® products to be implanted, we currently estimate total CLOSURE I costs to be approximately $24 million through the completion of the trial and submission to the FDA, which we currently expect to be completed in 2008. Of this total, approximately $2.5 million of costs were incurred in 2003 and approximately $1.7 million was incurred during the six months ended June 30, 2004. The timing and amount of these obligations are dependent on various factors, including the timing of patient enrollment and patient monitoring. Under certain agreements with third party service providers, we have the right to terminate, in which case the remaining obligations under such agreements would be limited to costs incurred as of that date.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K, as amended, for the year ended December 31, 2003. This Quarterly Report on Form 10-Q contains forward-looking statements based on our current expectations, assumptions, estimates and projections about the Company and our industry. These forward-looking statements are usually accompanied by words such as “believes”, “anticipates”, “plans”, “expects” and similar expressions. Forward-looking statements involve risks and uncertainties, and our actual results may differ materially from the results anticipated in these forward-looking statements as a result of certain factors, as more fully described in this section under the caption “Certain Factors That May Affect Future Results”.

8

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are particularly important to the portrayal and understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, we use our judgment in making certain assumptions and estimates. Our critical accounting policies, which consist of revenue recognition, accounts receivable reserves, inventories, income taxes, legal contingencies and expenses associated with clinical trial, are described in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2003. There have been no material changes to our critical accounting policies as of June 30, 2004.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003

The following table presents consolidated statements of operations information as a reference for management’s discussion which follows thereafter. This table presents dollar and percentage changes for each listed line item for the three months ended June 30, 2004 compared to the three months ended June 30, 2003, as well as consolidated statements of operations information as a percentage of total revenues (except for cost of product sales, which is stated as a percentage of total product sales) for such periods.

	Three Months Ended June 30,										Increase (Decrease) 2003 to 2004			% Change 2003 to 2004
	2004			%		2003			%
	(In thousands, except percentages)
Revenues:
Product sales	$	4,756		82.4	%	$	5,276		97.5	%	$	(520	)	(9.9	)%
Net royalty income		1,018		17.6	%		138		2.5	%		880		637.7	%
Total revenues		5,774		100.0	%		5,414		100.0	%		360		6.6	%
Costs and expenses:
Cost of product sales		1,268		26.7	%		1,219		23.1	%		49		4.0	%
Research and development		2,067		35.8	%		1,791		33.1	%		276		15.4	%
General and administrative		1,218		21.1	%		1,649		30.5	%		(431	)	(26.1	)%
Selling and marketing		1,467		25.4	%		1,726		31.9	%		(259	)	(15.0	)%
Total costs and expenses		6,020		104.3	%		6,385		117.9	%		(365	)	(5.7	)%
Loss from operations		(246	)	(4.3	)%		(971	)	(17.9	)%		725		(74.7	)%
Interest income, net		121		2.1	%		163		3.0	%		(42	)	(25.8	)%
Foreign currency transaction loss		(4	)	(0.1	)%		(1	)	(0.0	)%		(3	)	300.0	%
Net loss	$	(129	)	(2.2	)%	$	(809	)	(14.9	)%	$	680		(84.1	)%

9

Revenues. Total revenues for the three months ended June 30, 2004 and 2003 were as follows:

	For The Three Months Ended June 30,
	2004		2003
	(In thousands)
Product sales:
CardioSEAL® and STARFlex®:
North America	$	3,794	$	4,392
Europe		898		868
		4,692		5,260
Other		64		16
Total product sales		4,756		5,276
Net royalty income:
Bard		938		57
BSC		80		81
Total net royalty income		1,018		138
Total revenues	$	5,774	$	5,414

CardioSEAL^® and STARFlex^® product sales decreased by approximately $568,000, or 10.8%, for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. North American sales decreased approximately $598,000, or 13.6%, for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. Management believes that this sales trend has been influenced by (i) the FDA’s recent announcement that it is enforcing stricter end-user adherence to Humanitarian Device Exemption (“HDE”) guidelines, specifically related to off-label procedures; (ii) the impacts of CLOSURE I and competing clinical trials; and (iii) commercial sales competition. European sales increased approximately $30,000, or 3.5%, during the same period, primarily due to the strengthening of the euro and an increase in unit volume, partially offset by a higher proportion of distributor versus direct sales. European sales represented approximately 19.1% and 16.5% of total CardioSEAL^® and STARFlex^® product sales for the three months ended June 30, 2004 and 2003, respectively.

Based upon current sales trends, North American CardioSEAL^® and STARFlex^® implant sales for the remainder of 2004 are currently expected to decrease slightly compared to the same period of 2003. European sales are currently expected to increase during the same period compared to 2003. As a result, management currently expects worldwide implant sales to decrease approximately 6% for 2004 compared to 2003. Continued strengthening or weakening of the euro against the U.S. dollar will have either a favorable or unfavorable impact, respectively, on the trend of European product sales.

The increase in net royalty income in 2004 was directly attributable to significantly higher sales by Bard of its Recovery^™ Filter (“RNF”) product, for which Bard received FDA regulatory approval for commercial sale and use as of December 31, 2002. Future royalty income levels earned from Bard will be largely dependent upon continued market acceptance and penetration of their new generation RNF product. In addition, we currently anticipate that future royalties earned from BSC during 2004 will remain flat compared to 2003 levels.

Cost of Product Sales. The increase in cost of product sales, as a percentage of total product sales, in 2004 was due to lower production levels and fixed overhead costs in the second quarter of 2004, resulting in unfavorable overhead variances. This reduced production was primarily the result of a sufficient supply of STARFlex^® inventory for use in CLOSURE I. Incrementally higher production levels of STARFlex^® are currently anticipated during the remaining quarters of fiscal 2004, compared to the quarter ended June 30, 2004, based upon expected increases in European product sales and CLOSURE I patient enrollment. As a result, we currently expect cost of total product sales as a percentage of total product sales to decrease from 26.7% in the quarter ended June 30, 2004 to approximately 25.5% during the reminder of 2004. For the full year 2004, we currently expect cost of product sales as a percentage of total product sales to be approximately 25%, compared to 24.6% for fiscal 2003, primarily as a result of lower production levels, higher projected European product sales as a percentage of total product sales and the higher unit cost of our Rapid Transport^TM System (“RTS”) product that we launched in Europe during the second half of 2003. Included in cost of product sales were royalty expenses of approximately $455,000 and $556,000 for the three months ended June 30, 2004 and 2003, respectively.

10

Research and Development. The increase in research and development expense in 2004 was largely attributable to CLOSURE I and patent application legal costs. CLOSURE I costs, including third party contracts, agreements with participating clinical sites, the personnel and operating costs of our clinical department and the costs of the STARFlex^® devices implanted, totaled approximately $755,000 for the three months ended June 30, 2004. This compared to approximately $609,000 of CLOSURE I costs in the comparable period of 2003.

We currently expect fiscal year 2004 research and development expense to increase by approximately 30% to 40% compared to 2003, primarily attributable to an estimated $3.5 million to $4.5 million of costs for CLOSURE I, which amounts are largely dependent upon the rate of patient enrollment. Our current estimate of CLOSURE I costs for fiscal 2004 has been substantially reduced from our previous estimate due to continued lower than anticipated patient enrollment. We currently expect the enrollment phase to be completed by the end of 2006. We continue to estimate that total costs of CLOSURE I will approximate $24 million through the end of the clinical trial and submission to the FDA, which we currently expect to be completed in 2008. In addition, we continue to evaluate the potential connection between a patent foreman ovale (“PFO”) and migraine headaches and currently expect to commence a migraine study (“MIST I”) in Europe later this year. Research and development expense as a percentage of total revenues, which was 35.8% for the three months ended June 30, 2004, is currently expected to be approximately 40% for fiscal year 2004.

General and Administrative. The decrease in general and administrative expense in 2004 was primarily attributable to (i) lower corporate legal fees, related principally to an arbitration proceeding that was settled in September 2003; and (ii) reduced stock-based compensation associated with our 2001 stock option re-pricing. We currently expect general and administrative expense to be approximately flat in 2004 when compared to 2003. This reduction from our previous estimate is primarily related to lower than anticipated insurance premium renewals and lower stock-based compensation.

Selling and Marketing. The decrease in selling and marketing expense in 2004 was primarily attributable to reductions in marketing programs and travel related expenses, partially offset by ongoing 2004 costs related to our collaboration with the National Stroke Association and product marketing programs. During the second quarter of 2003 we incurred substantial costs in Europe in connection with our participation at simultaneous interventional cardiology and stroke neurology meetings, including a satellite broadcast of a live PFO closure case. We currently expect selling and marketing expense to increase by approximately 7% to 10% for fiscal 2004 compared to 2003. The reduced rate of increase from our previous estimate is primarily related to a later than planned commencement of geographical expansion into the Asia/Pacific region.

Interest Income, Net. The decrease in interest income, net in 2004 was primarily attributable to lower interest rates earned on marketable securities and money market funds and, to a lesser degree, a reduction of average interest-bearing assets. We currently expect average interest bearing assets during the remainder of 2004 to decrease as a result of the ongoing costs of CLOSURE I. As a result, we currently expect interest income, net to decrease by approximately $50,000 for fiscal 2004 compared to 2003, assuming interest rates remain the same.

Income Tax Provision. In accordance with U.S. generally accepted accounting principles, we provide for income taxes on an interim basis using our estimated annual effective tax rate. We recorded no income tax provision for each of the three-month periods ended June 30, 2004 and 2003 on the basis that our planned investments in CLOSURE I were expected to result in net operating losses for each of these fiscal years. Accordingly, we expect a nominal income tax provision, if any, for the year ending December 31, 2004.

11

SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003

The following table presents consolidated statements of operations information as a reference for management’s discussion which follows thereafter. This table presents dollar and percentage changes for each listed line item for the six months ended June 30, 2004 compared to the six months ended June 30, 2003, as well as consolidated statements of operations information as a percentage of total revenues (except for cost of product sales, which is stated as a percentage of total product sales) for such periods.

	Six Months Ended June 30,										Increase (Decrease) 2003 to 2004			% Change 2003 to 2004
	2004			%		2003			%
	(In thousands, except percentages)
Revenues:
Product sales	$	9,537		83.5	%	$	10,190		97.6	%	$	(653	)	(6.4	)%
Net royalty income		1,879		16.5	%		246		2.4	%		1,633		663.8	%
Total revenues		11,416		100.0	%		10,436		100.0	%		980		9.4	%
Costs and expenses:
Cost of product sales		2,398		25.1	%		2,368		23.2	%		30		1.3	%
Research and development		4,091		35.8	%		2,968		28.4	%		1,123		37.8	%
General and administrative		2,514		22.0	%		2,928		28.1	%		(414	)	(14.1	)%
Selling and marketing		3,011		26.4	%		2,877		27.6	%		134		4.7	%
Total costs and expenses		12,014		105.2	%		11,141		106.8	%		873		7.8	%
Loss from operations		(598	)	(5.2	)%		(705	)	(6.8	)%		107		(15.2	)%
Interest income, net		255		2.2	%		383		3.7	%		(128	)	(33.4	)%
Foreign currency transaction (loss) gain		(13	)	(0.1	)%		7		0.1	%		(20	)	(285.7	)%
Net loss	$	(356	)	(3.1	)%	$	(315	)	(3.0	)%	$	(41	)	13.0	%

Revenues. Total revenues for the six months ended June 30, 2004 and 2003 were as follows:

	For The Six Months Ended June 30,
	2004		2003
	(In thousands)
Product sales:
CardioSEAL® and STARFlex®:
North America	$	7,625	$	8,484
Europe		1,758		1,676
		9,383		10,160
Other		154		30
Total product sales		9,537		10,190
Net royalty income:
Bard		1,706		86
BSC		173		160
Total net royalty income		1,879		246
Total revenues	$	11,416	$	10,436

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CardioSEAL^® and STARFlex^® product sales decreased by approximately $777,000, or 7.6%, for the six months ended June 30, 2004 compared to the six months ended June 30, 2003. North American sales decreased approximately $859,000, or 10.1%, for the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Management believes that this sales trend has been influenced by (i) the FDA’s recent announcement that it is enforcing stricter end-user adherence to HDE guidelines, specifically related to off-label procedures; (ii) the impacts of CLOSURE I and competing clinical trials; and (iii) commercial sales competition. European product sales for the six months ended June 30, 2004 increased approximately $82,000, or 4.9%, compared to the six months ended June 30, 2003, primarily due to the strengthening of the euro. European sales represented approximately 18.7% and 16.5% of total CardioSEAL^® and STARFlex^® product sales for the six months ended June 30, 2004 and 2003, respectively.

The increase in net royalty income in 2004 was directly attributable to significantly higher sales by Bard of its RNF product, for which Bard received FDA regulatory approval for commercial sale and use as of December 31, 2002. In addition, royalties earned from BSC in 2004 were consistent with 2003.

Cost of Product Sales. The increase in cost of product sales, as a percentage of total product sales, in 2004 was impacted by several factors, including (i) reduced production levels and fixed overhead, resulting in unfavorable overhead variances in the second quarter of 2004; (ii) a 1% increase in the CardioSEAL^® and STARFlex^® royalty rate effective during February 2003; and (iii) proportionately higher international product sales, which have a lower average selling price than North American product sales. Included in cost of product sales were royalty expenses of approximately $916,000 and $1.0 million for the six months ended June 30, 2004 and 2003, respectively.

Research and Development. The increase in research and development expense in 2004 was largely attributable to CLOSURE I and patent application legal costs. CLOSURE I costs, including third party contracts, agreements with participating clinical sites, the personnel and operating costs of our clinical department and the costs of the STARFlex^® devices implanted, totaled approximately $1.6 million for the six months ended June 30, 2004. This compared to approximately $763,000 of CLOSURE I costs in the comparable period of 2003.

General and Administrative. The decrease in general and administrative expense in 2004 was primarily attributable to (i) lower corporate legal fees, related principally to an arbitration proceeding that was settled in September 2003 and; (ii) reduced stock-based compensation in connection with our 2001 stock option re-pricing.

Selling and Marketing. The increase in selling and marketing expense in 2004 was primarily attributable to increased personnel costs and our collaboration with the National Stroke Association, partially offset by reductions in other marketing programs. In addition, the relative strengthening of the euro during the six months ended June 30, 2004 compared to the six months ended June 30, 2003 had the effect of increasing reported international costs, primarily denominated in euros, by approximately $85,000.

Interest Income, Net. The decrease in interest income, net in 2004 was attributable to lower interest rates earned on marketable securities and money market funds and, to a lesser degree, a reduction of average interest-bearing assets.

Income Tax Provision. In accordance with U.S. generally accepted accounting principles, we provide for income taxes on an interim basis using our estimated annual effective tax rate. We recorded no income tax provision for each of the six-month periods ended June 30, 2004 and 2003 on the basis that our planned investments in CLOSURE I were expected to result in net operating losses for each of these fiscal years. Accordingly, we expect a nominal income tax provision, if any, for the year ending December 31, 2004.

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LIQUIDITY AND CAPITAL RESOURCES

	For the Six Months Ended June 30,
	2004			2003
	(In thousands)
Cash, cash equivalents and marketable securities	$	35,887		$	36,795
Net cash (used in) provided by continuing operations		(615	)		903
Net cash used in discontinued operations		—			(411	)
Net cash used in investing activities		(11,755	)		(43	)
Net cash provided by financing activities		401			255

Net Cash (Used in) Provided by Continuing Operations:

Net cash used in continuing operations for the six months ended June 30, 2004 totaled approximately $615,000 and consisted of a net loss of approximately $356,000 and net decreases in components of working capital of approximately $531,000, partially offset by various non-cash charges to operations of approximately $272,000.

The non-cash charges of approximately $272,000 during the six months ended June 30, 2004 consisted primarily of amortization of bond premium and depreciation of property and equipment, partially offset by a net credit to stock-based compensation, principally related to our stock option re-pricing in 2001.

The primary elements of the $531,000 net decrease in components of working capital during the six months ended June 30, 2004 consisted of the following:

(a) Net trade accounts receivable decreased by approximately $316,000, primarily due to a decrease of approximately $1.2 million in total product sales for the three months ended June 30, 2004 compared to the three months ended December 31, 2003.

(b) Our inventories increased by approximately $275,000 during the first six months ended June 30, 2004, primarily due to lower than anticipated total product sales and lower than anticipated CLOSURE I patient enrollment. Based upon our adjusted production plan, we currently anticipate that inventory balances will trend downward during the remainder of 2004.

(c) Prepaid expenses and other current assets increased by approximately $696,000. Of this total, approximately $524,000 represented increased second quarter royalties earned from Bard compared to the fourth quarter of 2003. Accrued interest income receivable increased by approximately $289,000 during the six months ended June 30, 2004 due to net purchases of marketable securities of approximately $11.4 million.

(d) Current liabilities increased by approximately $125,000, primarily related to increased CLOSURE I related costs, partially offset by payments of approximately $470,000 for estimated fiscal 2003 income and franchise tax accruals.

Net cash used in continuing operations for the six months ended June 30, 2004 decreased by approximately $1.5 million from the same period ended June 30, 2003. This decrease was primarily attributable to the $3.0 million cash consideration received from Bard during the first quarter of 2003, representing the final milestone payment related to our 2001 sale of the vena cava filter product line to Bard.

Net Cash Used in Discontinued Operations

Net cash used in discontinued operations of approximately $411,000 during the six months ended June 30, 2003 related to the payment of a judgment against the Company in an arbitration proceeding related to a former employee of the neurosciences business unit.

Net Cash Used In Investing Activities

Net cash used in investing activities of approximately $11.8 million during the six months ended June 30, 2004 consisted primarily of approximately $19.4 million of purchases of marketable securities, with maturity dates ranging from July 15, 2005 to March 30, 2006, offset by $8.0 million of proceeds from maturing securities. Purchases of property and equipment for use in our manufacturing, research and development and general and administrative activities totaled approximately $308,000 during the six months ended June 30, 2004.

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Net Cash Provided By Financing Activities

Net cash provided by financing activities were approximately $401,000 for the six months ended June 30, 2004. This was primarily attributable to proceeds from the exercise of common stock options and the issuance of common stock under our employee stock purchase plan.

Primarily as a result of the currently anticipated costs of CLOSURE I, we currently expect to incur operating losses at least through 2005. We currently estimate the total cost of our CLOSURE I clinical trial to be approximately $24 million through completion of the trial and submission to the FDA, which we currently expect to be completed in 2008. Of this amount, approximately $2.5 million was incurred in 2003 and we currently expect to incur approximately $3.5 million to $4.5 million in 2004, which estimate is largely dependent upon the rate of patient enrollment.

We currently project capital expenditures to total approximately $500,000 during 2004, primarily for manufacturing and research and development equipment.

We currently believe that aggregate cash, cash equivalents and marketable securities balances of approximately $35.9 million at June 30, 2004 will be sufficient to meet our working capital, financing and capital expenditure requirements through at least the completion of CLOSURE I and submission to the FDA, which we currently expect to be completed in 2008. Based upon current projections of CLOSURE I costs during 2004, we currently expect that cash, cash equivalents and marketable securities will exceed $31 million at the end of 2004.

OFF-BALANCE SHEET FINANCING

During the quarter ended June 30, 2004, we have not engaged in material off-balance sheet activities, including the use of structured finance or specific purpose entities.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

Upon receipt of final FDA approval, we commenced CLOSURE I in June 2003. Although approximately 80 of the 100 clinical sites have completed the Institutional Review Board approval process and approximately 70 of those 80 clinical sites have concluded the initiation process allowing them to begin patient enrollment, the initial rate of patient enrollment has been disappointing. Based upon our current estimates, we expect that enrollment of the 1,600 patients will be completed by the end of 2006. We currently estimate the total costs of CLOSURE I to be approximately $24 million through completion of the clinical trial and submission to the FDA, which we currently expect to be completed in 2008. We have no direct experience conducting a clinical trial of this magnitude. We cannot be certain that patient enrollment will be completed within our revised time expectation or at all. We cannot be certain that the projected costs of CLOSURE I will not need to be adjusted upwards further. Furthermore, we cannot be certain that we will obtain a Pre-Market Approval (“PMA”) from the FDA based upon the final results of the trial. If CLOSURE I does not result in a PMA, we may face uncertainties and/or limitations as to the continued growth of revenues of our CardioSEAL^® and STARFlex^® products, which would impact our ability to be profitable.

CIRCUMSTANCES COULD CAUSE THE LOSS OF OUR HDE APPROVAL FOR USE OF CARDIOSEAL^® IN TREATING PFO PATIENTS.

All of our U.S. commercial sales of CardioSEAL^® are made pursuant to either (a) the PMA granted by the FDA in December 2001 covering the ventricular septal defect (“VSD”) indication; or (b) the HDE granted by the FDA in February 2000 covering the PFO indication. We believe that PFO is the much larger market opportunity. If the first PMA for the PFO indication were to be granted by the FDA to one of our competitors, our HDE approval for PFO would be deactivated by the FDA. Such a loss of our PFO HDE would cause a very material reduction in U.S. sales, resulting in significant operating losses based upon our current operational structure. Under these circumstances, and in the absence of substantial sources of new financing, our future prospects would be severely limited, including our ability to complete the CLOSURE I clinical trial that is required to apply for a PFO PMA.

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

We derive a substantial portion of our ongoing revenues from sales of our CardioSEAL^® and STARFlex^® products. In the United States, the FDA limits sales under an HDE to 4,000 units per year. As demand for, and costs associated with, these products fluctuates, including the potential impact of our non-revenue producing PFO Investigational Device Exemption clinical trial on

15

product sales, our financial results on a quarterly or annual basis may be significantly impacted. Accordingly, events or circumstances adversely affecting the sales of either of these products will directly and adversely impact our business. These events or circumstances may include reduced demand for our products, lack of regulatory approvals, product liability claims and/or increased competition.

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

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

WE MAY FACE CHALLENGES IN EXECUTING OUR FOCUSED BUSINESS STRATEGY.

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

• achieving a successful CLOSURE I clinical trial;

• implementing a pilot study that demonstrates clinical relevancy of a PFO / migraine connection;

• improving our sales and marketing capabilities;

• continuing to train, motivate and manage our employees; and

• developing and improving our operational, financial and other internal systems.

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

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

• any of our pending patent applications or any future patent applications will result in issued patents;

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

• any of our patents will be held valid if subsequently challenged; or

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

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

Our issued U.S. patents, and corresponding foreign patents, expire at various dates ranging from 2011 to 2019. When each of our patents expires, competitors may develop and sell products based on the same or similar technologies as those covered by the expired patent. We have invested in significant new patent applications and we cannot be certain that any of these applications will result in an issued patent to enhance our intellectual property rights.

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WE CANNOT BE CERTAIN THAT THE RECENT TREND OF NET ROYALTY INCOME WILL CONTINUE.

For the three months ended June 30, 2004, net royalty income increased more than 600% compared to the comparable period of 2003 and increased approximately 18.2% compared to the three months ended March 31, 2004. As a percentage of our total revenues, net royalty income has increased from approximately 6.0% for fiscal year 2003 to approximately 16.5% for the six months ended June 30, 2004. These increases have been directly attributable to higher sales by Bard of its RNF product, for which Bard received FDA approval for commercial sales and use as of December 31, 2002. We cannot be certain that the recent trend of Bard’s RNF sales can be sustained or even maintained at its current level. Furthermore, theses sales levels could fluctuate on a quarter to quarter basis. We incur virtually no operating expenses related to our net royalty income and, therefore, future increases or decreases, if any, in the level of Bard’s RNF sales could have a material effect on net income (loss) in future periods. In addition, commencing in 2008, the royalty rate earned on Bard’s RNF sales will decrease substantially from its current rate.

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

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

• delays in receipt of, or failure to receive, regulatory approvals or clearances;

• the loss of previously received approvals or clearances;

• limitations on the intended use of a device imposed as a condition of regulatory approvals or clearances; or

• our failure to comply with existing or future regulatory requirements.

In addition, sales of medical device products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Failure to comply with foreign regulatory requirements also could have a material adverse effect on our business, financial condition and results of operations.

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

Our cardiac septal repair implant devices are marketed primarily through our direct sales force. Since December 31, 2001, we have approximately doubled our combined U.S. and European sales and marketing organization headcount. Due to our relatively new sales staff, and because we have marketed our initial products (such as stents and vena cava filters) through third parties, we have limited experience marketing our products directly. We are uncertain that we can successfully expand geographically into Asia/Pacific or other potential markets for our products. In order to market directly our CardioSEAL^® and STARFlex^® septal implants and any related products, we will have to continue to develop a marketing and sales organization with technical expertise and distribution capabilities.

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

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

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

The medical device industry is characterized by rapidly evolving technology and intense competition. Existing and future products, therapies, technological approaches and delivery systems will continue to compete directly with our products. Many of our competitors have substantially greater capital resources, greater research and development, manufacturing and marketing

17

resources and experience and greater name recognition than we do. In addition, new surgical procedures and medications could be developed that replace or reduce the importance of current or future procedures that utilize our products. As a result, any products that we develop may become obsolete before we recover any expenses incurred in connection with development of these products.

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

We have a limited history in manufacturing our products, including our CardioSEAL^® and STARFlex^® cardiac septal repair implant devices, and we may face difficulties as the commercialization of our products and the medical device industry changes. Increases in our manufacturing costs, or significant delays in our manufacturing process, could have a material adverse effect on our business, financial condition and results of operations.

The FDA and other regulatory authorities require that our products be manufactured according to rigorous standards including, but not limited to, Good Manufacturing Practices and International Standards Organization (“ISO”) standards. These regulatory requirements may significantly increase our production or purchasing costs and may even prevent us from making or obtaining our products in amounts sufficient to meet market demand. If we or a third-party manufacturer change our approved manufacturing process, the FDA will require a new approval before that process could be used. Failure to develop our manufacturing capabilities may mean that even if we develop promising new products, we may not be able to produce them profitably, as a result of delays and additional capital investment costs.

INTENSE INDUSTRY COMPETITION FOR QUALIFIED EMPLOYEES COULD AFFECT OUR ABILITY TO ATTRACT AND RETAIN NECESSARY, QUALIFIED PERSONNEL.

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

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

We are currently involved in the litigation of a dispute as described in Item 1 of Part II (Legal Proceedings). An adverse outcome in this dispute could result in substantial monetary damages and, therefore, negatively impact our financial condition or results of operations.

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

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

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

In the future, we may require additional funds for our research and product development programs, regulatory processes, preclinical and clinical testing, sales and marketing infrastructure and programs and potential licenses and acquisitions. Any additional equity financing may be dilutive to our stockholders, and additional debt financing, if available, may involve restrictive covenants. Our capital requirements will depend on numerous factors, including the level of sales of our products, the progress of our research and development programs, the progress of clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, developments and changes in our existing research, licensing and other relationships and the terms of any collaborative, licensing and other similar arrangements that we may establish. We do not currently have any existing line of credit arrangements, and we may not be able to obtain any such credit facilities on acceptable terms, if at all.

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THE SIGNIFICANT CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK COULD LIMIT INVESTORS’ ABILITY TO INFLUENCE CORPORATE ACTIONS.

A few of our stockholders, including Whitney & Co. and related entities, own a significant percentage of our outstanding common stock. As a result, these stockholders may be able to influence the outcome of matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership of our common stock may have the effect of impacting the probability and timing of a change in control of the Company. This could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the Company and might otherwise affect the market price of our common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2004 and December 31, 2003, we did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”. Our investments are primarily short-term money market accounts that are carried on our books at cost, which approximates fair market value, and U.S. Government agency and corporate bond debt instruments that are carried on our books at amortized cost, increased or decreased by unrealized gains or losses, respectively, which amounts are recorded as a component of stockholders’ equity in our consolidated balance sheets. Accordingly, we have no quantitative information concerning the market risk of participating in such investments.

We are subject to market risk in the form of foreign currency risk. Although we have decreased the scope of our international operations following the sale of the neurosciences business unit in July 2002, we continue to denominate certain product sales and operating expenses in non-U.S. currencies. Accordingly, we face exposure to adverse movements in foreign currency exchange rates. This exposure may change over time and could have a material adverse impact on our financial condition.

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

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”), as of June 30, 2004. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On or about September 24, 2001, the three French subsidiaries of our former neurosciences business unit, NMT Neurosciences Instruments SARL, NMT Neurosciences Holdings SA and NMT Neurosciences Implants SA, each received a Notification of Reassessment Following Verification of the Accounts (Notification de redressements suite a une verification de comptabilite) from the French Direction de Controle Fiscal Sud-est (Nice) (“Reassessment”). The French authorities are seeking from the above-named NMT entities in excess of FF11 million, which is the currency in which the assessment was made (approximately $2.0 million, based upon the exchange rate at June 30, 2004), in back taxes, interest and penalties. We are appealing the Reassessment. In connection with our sale of the neurosciences business unit in July 2002, we agreed to specifically indemnify Integra LifeSciences Holding Corporation against any liability in connection with these tax claims. Pursuant to the terms of a settlement agreement with Elekta AB, completed in early 2002, a portion of any resulting tax claim may be recoverable from Elekta AB.

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

Our 2004 annual meeting of stockholders was held on June 22, 2004. Present at the annual meeting in person or through representation by proxy were 8,909,234 out of a total of 12,007,582 shares of our common stock entitled to vote, thereby constituting a quorum. The actions taken at the meeting consisted of:

(1) election of eight members to our board of directors, each to serve for a one-year term;

(2) approval of an amendment to our 2001 Stock Incentive Plan to increase the number of shares of our common stock authorized for issuance thereunder from 700,000 to 1,100,000 shares; and

(3) ratification of the appointment of Ernst & Young LLP as our independent auditors for the upcoming fiscal year.

The results of the voting on the matters presented to the stockholders at the annual meeting are as set forth below; there were no broker non-votes for any of the matters.

DIRECTORS	VOTES FOR	VOTES WITHHELD
John E. Ahern	8,851,611	57,623
Robert G. Brown	7,517,844	1,391,390
Cheryl L. Clarkson	7,661,774	1,247,460
R. John Fletcher	7,609,971	1,299,263
Daniel F. Hanley, M.D.	8,775,974	133,260
James E. Lock, M.D.	8,871,001	38,233
Francis J. Martin	6,632,274	2,276,960
Harry A. Schult	7,842,701	1,066,533

	VOTES FOR	VOTES AGAINST	VOTES ABSTAINED
AMENDMENT TO 2001 STOCK INCENTIVE PLAN	2,531,392	2,528,132	391,000
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP	7,854,534	1,053,700	1,000

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Number	Description of Exhibit
10.1	2001 Stock Incentive Plan, as amended.
10.2 (1)	Amended and Restated Employment Agreement by and between the Company and Richard E. Davis, dated as of May 20, 2004. (**)
31.1	Certification of John E. Ahern, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Richard E. Davis, Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of John E. Ahern, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Richard E. Davis, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

(b) Reports on Form 8-K

On May 6, 2004 we furnished a Current Report on Form 8-K containing a copy of our earnings release for the quarter ended March 31, 2004 (including financial statements) pursuant to Item 12 (Results of Operations and Financial Condition).

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SIGNATURES

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

	NMT MEDICAL, INC.
Date: August 10, 2004	By:	/s/ JOHN E. AHERN
		John E. Ahern
		President and Chief Executive Officer
Date: August 10, 2004	By:	/s/ RICHARD E. DAVIS
		Richard E. Davis
		Vice President and Chief Financial Officer

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EXHIBIT INDEX

Number	Description of Exhibit
10.1	2001 Stock Incentive Plan, as amended.
10.2 (1)	Amended and Restated Employment Agreement by and between the Company and Richard E. Davis, dated as of May 20, 2004. (**)
31.1	Certification of John E. Ahern, President and Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Richard E. Davis, Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of John E. Ahern, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Richard E. Davis, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

EX-10.1

Exhibit 10.1

NMT Medical, Inc.

2001 STOCK INCENTIVE PLAN

1. Purpose

The purpose of this 2001 Stock Incentive Plan (the “Plan”) of NMT Medical, Inc., a Delaware corporation (the “Company”), is to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company’s stockholders. Except where the context otherwise requires, the term “Company” shall include any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”) and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a significant interest, as determined by the Board of Directors of the Company (the “Board”).

2. Eligibility

All of the Company’s employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted options or restricted stock awards (each, an “Award”) under the Plan. Each person who has been granted an Award under the Plan shall be deemed a “Participant”.

3. Administration and Delegation

(a) Administration by Board of Directors. The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board’s sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith.

(b) Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a “Committee”). All references in the Plan to the “Board” shall mean the Board or a Committee of the Board to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee.

4. Stock Available for Awards

(a) Number of Shares. Subject to adjustment under Section 7, Awards may be made under the Plan for up to 500,000 shares of common stock, $.001 par value per share, of the Company (the “Common Stock”). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitations under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.

(b) Per-Participant Limit. Subject to adjustment under Section 7, the maximum number of shares of Common Stock with respect to which Awards may be granted to any Participant under the Plan shall be 200,000 per calendar year. The per-Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code (“Section 162(m)”).

5. Stock Options

(a) General. The Board may grant options to purchase Common Stock (each, an “Option”) and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a “Nonstatutory Stock Option”.

(b) Incentive Stock Options. An Option that the Board intends to be an “incentive stock option” as defined in Section 422 of the Code (an “Incentive Stock Option”) shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option.

(c) Exercise Price. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement.

(d) Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement.

(e) Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised.

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(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows:

(1) in cash or by check, payable to the order of the Company;

(2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding;

(3) when the Common Stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”), by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board in good faith (“Fair Market Value”), provided (i) such method of payment is then permitted under applicable law and (ii) such Common Stock, if acquired directly from the Company was owned by the Participant at least six months prior to such delivery;

(4) to the extent permitted by the Board, in its sole discretion by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or

(5) by any combination of the above permitted forms of payment.

(g) Substitute Options. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Options in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof. Substitute Options may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Options contained in the other sections of this Section 5 or in Section 2.

6. Restricted Stock.

(a) Grants. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a “Restricted Stock Award”).

(b) Terms and Conditions. The Board shall determine the terms and conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any.

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(c) Stock Certificates. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death (the “Designated Beneficiary”). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant’s estate.

7. Adjustments for Changes in Common Stock and Certain Other Events

(a) Changes in Capitalization. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per-Participant limit set forth in Section 4(b), (iii) the number and class of securities and exercise price per share subject to each outstanding Option, and (iv) the repurchase price per share subject to each outstanding Restricted Stock Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 7(a) applies and Section 7(c) also applies to any event, Section 7(c) shall be applicable to such event, and this Section 7(a) shall not be applicable.

(b) Liquidation or Dissolution. In the event of a proposed liquidation or dissolution of the Company, the Board shall upon written notice to the Participants provide that all then unexercised Options will (i) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or dissolution and (ii) terminate effective upon such liquidation or dissolution, except to the extent exercised before such effective date. The Board may specify the effect of a liquidation or dissolution on any Restricted Stock Award granted under the Plan at the time of the grant.

(c) Reorganization Events

(1) Definition. A “Reorganization Event” shall mean: (a) any merger or consolidation of the Company with or into another entity as a result of which all of the Common Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property or (b) any exchange of all of the Common Stock of the Company for cash, securities or other property pursuant to a share exchange transaction.

(2) Consequences of a Reorganization Event on Options. Upon the occurrence of a Reorganization Event, or the execution by the Company of any agreement with respect to a Reorganization Event, the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). For purposes hereof, an Option shall be considered to be assumed if,

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following consummation of the Reorganization Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the Reorganization Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Reorganization Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Reorganization Event.

Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Options, then the Board shall, upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time prior to the Reorganization Event and will terminate immediately prior to the consummation of such Reorganization Event, except to the extent exercised by the Participants before the consummation of such Reorganization Event; provided, however, that in the event of a Reorganization Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Reorganization Event (the “Acquisition Price”), then the Board may instead provide that all outstanding Options shall terminate upon consummation of such Reorganization Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. To the extent all or any portion of an Option becomes exercisable solely as a result of the first sentence of this paragraph, upon exercise of such Option the Participant shall receive shares subject to a right of repurchase by the Company or its successor at the Option exercise price. Such repurchase right (1) shall lapse at the same rate as the Option would have become exercisable under its terms and (2) shall not apply to any shares subject to the Option that were exercisable under its terms without regard to the first sentence of this paragraph.

(3) Consequences of a Reorganization Event on Restricted Stock Awards. Upon the occurrence of a Reorganization Event, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company’s successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Reorganization Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award.

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8. General Provisions Applicable to Awards

(a) Transferability of Awards. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees.

(b) Documentation. Each Award shall be evidenced in such form (written, electronic or otherwise) as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c) Board Discretion. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly.

(d) Termination of Status. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant’s legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award.

(e) Withholding. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, when the Common Stock is registered under the Exchange Act, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however, that the total tax withholding where stock is being used to satisfy such tax obligations cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.

(f) Amendment of Award. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant’s consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant.

(g) Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all

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other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.

(h) Acceleration. The Board may at any time provide that any Award shall become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

9. Miscellaneous

(a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.

(b) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

(c) Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board, but no Award granted to a Participant that is intended to comply with Section 162(m) shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company’s stockholders to the extent stockholder approval is required by Section 162(m) in the manner required under Section 162(m) (including the vote required under Section 162(m)). No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company’s stockholders, but Awards previously granted may extend beyond that date.

(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that to the extent required by Section 162(m), no Award granted to a Participant that is intended to comply with Section 162(m) after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award, unless and until such amendment shall have been approved by the Company’s stockholders if required by Section 162(m) (including the vote required under Section 162(m)).

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(e) Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law.

Adopted by the Board of Directors on April 26, 2001.

Approved by the Stockholders of June 7, 2001.

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NMT MEDICAL, INC.

Amendment No. 1

to

2001 Stock Incentive Plan

The 2001 Stock Incentive Plan (the “Plan”) of NMT Medical, Inc. (the “Company”) is hereby amended as follows (capitalized terms used herein and not defined herein shall have the respective meaning ascribed to such terms in the Plan):

1. The first sentence of Section 4(a) of the Plan shall be deleted in its entirety and replaced with the following:

“Subject to adjustment under Section 7, Awards may be made under the Plan for up to 700,000 shares of common stock, $.001 par value per share, of the Company (the “Common Stock”).”

Except as aforesaid, the Plan shall remain in full force and effect.

Adopted by the Board of Directors on February 20, 2003.

Approved by the Stockholders on June 18, 2003.

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NMT MEDICAL, INC.

Amendment No. 2

to

2001 Stock Incentive Plan, as amended

The 2001 Stock Incentive Plan, as amended (the “Plan”), of NMT Medical, Inc. (the “Company”) is hereby amended as follows (capitalized terms used herein and not defined herein shall have the respective meaning ascribed to such terms in the Plan):

1. The first sentence of Section 4(a) of the Plan shall be deleted in its entirety and replaced with the following:

“Subject to adjustment under Section 7, Awards may be made under the Plan for up to 1,100,000 shares of common stock, $.001 par value per share, of the Company (the “Common Stock”).”

Except as aforesaid, the Plan shall remain in full force and effect.

Adopted by the Board of Directors on March 11, 2004.

Approved by the Stockholders on June 22, 2004.

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EX-10.2

Exhibit 10.2

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Asterisks denote omissions.

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (the “Agreement”) is entered into as of May 20, 2004, by and between Richard E. Davis (the “Executive”) and NMT Medical, Inc., a Delaware corporation (the “Company”).

WHEREAS, the Company and the Executive (together, the “Parties”) are parties to an Employment Agreement, dated as of February 14, 2001, as amended by Amendment No. 1 to Employment Agreement, dated as of April 28, 2003 (as amended, the “Prior Employment Agreement”), providing for the Executive’s employment by the Company as its Vice President and Chief Financial Officer;

WHEREAS, the Parties, acting in accordance with Section 22 of the Prior Employment Agreement, desire to amend and restate the Prior Employment Agreement to provide for, among other things, (i) the extension of the Employment Term (as defined below) until December 31, 2006; (ii) the increase of the annual base salary to $280,000 and (iii) the extension of the term of continued Salary in the event of an involuntary termination of the Executive’s employment without Cause (as defined below) to be a period of twelve months from the Termination Date (as defined below);

WHEREAS, the Company wishes to continue to employ the Executive as the Vice President and Chief Financial Officer of the Company under the terms and conditions set forth below; and

WHEREAS, the Executive wishes to accept such continued employment under those terms and conditions;

NOW, THEREFORE, in consideration of the provisions and mutual covenants contained in this Agreement and for other good and valuable consideration, the Parties agree as follows:

1. TERM OF EMPLOYMENT.

The Company agrees to employ the Executive, and the Executive agrees to serve, on the terms and conditions of this Agreement, for a period commencing as of February 14, 2001 (the “Effective Date”) and ending on December 31, 2006, or such shorter period as may be provided for herein. The employment term described above is hereinafter referred to as the “Employment Term”. The Employment Term may be extended only in writing signed by both the Company and the Executive.

2. POSITION, DUTIES, RESPONSIBILITIES.

During the Employment Term, the Executive shall serve as Vice President and Chief Financial Officer of the Company. In such capacity, the Executive shall report to the President and Chief Executive Officer of the Corporation (the “President”) and shall perform such duties and have such responsibilities of an executive nature as are set forth in the Company’s Amended and Restated By-Laws, as amended from time to time (the “By-Laws”), and as are customarily performed by a person holding such office, it being recognized that the Executive’s duties and

responsibilities, consistent with his titles hereunder, may be changed by the Board of Directors of the Company (the “Board of Directors”) from time to time. The Executive shall devote his full business time and attention to the performance of his duties under this Agreement.

3. BASE SALARY.

During the Employment Term and effective as of February 14, 2004, the Executive shall be paid an annual base salary of $280,000 (“Salary”), subject to deductions for social security, state payroll and unemployment and all other legally required or authorized deductions and withholding. The Executive’s Salary shall be payable in accordance with the Company’s standard payroll practice. The Joint Compensation and Options Committee of the Board of Directors (the “Compensation Committee”) shall review and establish the Executive’s Salary at least on an annual basis, on February 14 of each year during the Employment Term.

4. STOCK OPTIONS.

On the Effective Date (i.e., February 14, 2001), the Executive shall be granted a stock option (the “Options”) to purchase 85,000 shares of common stock, par value $.001 per share, of the Company (the “Common Stock”), under either the Company’s 1998 Stock Incentive Plan or 1996 Stock Option Plan. The exercise price for the Options shall be the closing price ($1.25) of the Common Stock on the date of grant, which date shall be the Effective Date. The Options shall, to the maximum extent permissible under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), constitute incentive stock options, with any balance of the Options to be treated as non-statutory stock options. The Options shall vest in 48 equal monthly installments on each monthly anniversary of the date of grant. Once exercisable, the Options shall remain exercisable for a period of ten (10) years from the date of grant (the “Final Exercise Date”). Notwithstanding the foregoing, the Options shall become immediately exercisable in the event of a Change of Control of the Company or the termination of the Executive’s employment without cause pursuant to Section 14. For purposes of this Agreement, a “Change of Control of the Company” shall be deemed to have occurred only upon (a) any merger or consolidation of the Company with or into another entity as a result of which the Common Stock is converted into or exchanged for the right to receive cash, securities or other property or (b) any exchange of all or substantially all shares of the Company for cash, securities or other property pursuant to a statutory share exchange transaction.

5. ANNUAL BONUS.

Commencing with the Company’s fiscal year 2001, after the completion of the Company’s fiscal year and as soon as the Company’s financial information required to be included in its Annual Report on Form 10-K for such fiscal year is available, but in no event later than 90 days after the end of such fiscal year, the Executive shall be entitled to receive an annual bonus (the “Annual Bonus”) consisting of a cash bonus of up to 30% of the Salary as then in effect for such fiscal year provided that (i) the Executive satisfies agreed-upon financial and other performance goals each as contained in an annual incentive plan for the Executive as established in good faith by the Compensation Committee after consultation with the President of the Company (the “President”) and the Executive on an annual basis (the “Incentive Plan”) and (ii) the Company achieves an agreed-upon profit target as contained in the Incentive Plan as

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established in good faith by the Compensation Committee after consultation with the President and the Executive on an annual basis; provided, however, that the Compensation Committee, in its reasonable discretion, shall determine whether the Executive has satisfied such goals. In the event that the Executive is entitled to the Annual Bonus, then the Executive shall receive the Annual Bonus prior to the Company filing its Annual Report on Form 10-K for such fiscal year.

6. CASH PAYMENT UPON A CHANGE OF CONTROL.

(a) Upon the consummation of a Change of Control of the Company, and subject to the provisions of this Section 6, the Executive shall be entitled to receive a cash payment equal to a percentage of the Total Deal Consideration (as defined below) in accordance with Schedule I attached hereto (the “Applicable Percentage”).

(b) For purposes of this Agreement, “Total Deal Consideration” shall mean the gross value of all cash, securities and other property actually paid directly or indirectly by an acquirer in a transaction constituting a Change of Control of the Company (including without limitation all amounts paid or distributed by the Company to the holders of its capital stock in anticipation of the transaction, but excluding all amounts paid, distributed or issued to the holders of convertible securities, options, warrants, stock appreciation rights or similar rights or securities of the Company in connection with such transaction). Total Deal Consideration shall also be deemed to include the aggregate principal amount of any indebtedness for borrowed money assumed (net of cash on hand) or extinguished in connection with such transaction. The value of any securities (whether debt or equity) or other property shall be determined as follows: (i) the value of securities for which there is an established public market will be equal to the closing market price on the day of closing of such transaction and (ii) the value of securities that have no established public market, and the value of consideration that consists of other property, shall be the fair market value thereof as determined in good faith by the Board of Directors of the Company.

(c) For purposes of this Section 6 only, “Change of Control of the Company” shall not include (A) a recapitalization of the Company, (B) a merger effected exclusively to change the domicile of the Company and (C) any “management buy-out” or other similar transaction in which the Company is acquired by an entity or group in which the Executive is a participant or equity holder.

(d) Nothing in this Agreement shall be deemed to obligate the Company to undertake any action that would result in the receipt by the Executive of a cash payment under this Section 6.

(e) If any part of the consideration payable in a transaction constituting a Change of Control of the Company consists of contingent payments to be calculated by reference to uncertain future occurrences, such as future financial or business performance, then the Applicable Percentage of such consideration that is actually paid shall not be payable to the Executive in accordance with Schedule I until the earlier of (A) the receipt of such consideration by the former holders of the Company’s capital stock and (B) the time that the amount of such consideration can be determined.

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(f) If any part of the consideration payable in a transaction constituting a Change of Control of the Company is withheld or placed into escrow for some period of time after the closing of such transaction, then the Applicable Percentage of such consideration shall not be payable to the Executive in accordance with Schedule I until and to the extent such consideration is received by the former holders of the Company’s capital stock.

(g) For purposes of determining the Total Deal Consideration and the corresponding Applicable Percentage, the value of any contingent payments or any escrowed or withheld amounts shall be determined in good faith by the Board of Directors of the Company at the time of the consummation of the transaction constituting a Change of Control of the Company.

7. EMPLOYEE BENEFITS.

(a) Benefit Programs. During the Employment Term, the Company shall provide the Executive and eligible family members with medical, dental, and disability insurance and such other benefits and perquisites as are provided in the Company’s applicable plans and programs to its employees generally; provided, that the Executive meets the qualifications therefor (“Benefits”).

(b) Vacation. During each twelve month period of the Employment Term, the Executive shall be entitled to three weeks of vacation; provided, however, that any vacation time not taken during any year shall be forfeited. The Executive shall also be entitled to all paid holidays given by the Company to its officers and employees.

(c) Continued Benefits. In the event the Executive dies during the Employment Term, normal employee medical and dental insurance benefits shall be continued on an insured basis for each of the Executive’s children who are under the age of 18 and the Executive’s spouse for a period of 24 months following the month in which the Executive’s death occurs.

8. REPRESENTATIONS AND WARRANTIES OF THE EXECUTIVE.

The Executive represents and warrants to the Company that the Executive is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder.

9. NON-COMPETITION; NON-SOLICITATION.

In view of the unique and valuable services it is expected Executive will render to the Company, Executive’s knowledge of the customers, trade secrets, and other proprietary information relating to the business of the Company and its customers and suppliers and similar knowledge regarding the Company it is expected Executive will obtain, and in consideration of the compensation to be received hereunder, Executive agrees that he will not, during the period he is employed by the Company under this Agreement or otherwise, and for a period of one year after he ceases to be employed by the Company under this Agreement or otherwise, compete with or be engaged in, or Participate In (as defined below) any other business or organization

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(which shall not include a university, hospital, or other non-profit organization) which during such one year period is or as a result of the Executive’s engagement or participation would become competitive with the Company’s business of designing, developing, manufacturing, marketing and selling neurosurgical devices, vena cava filters, stents, septal repair devices or other medical devices being designed, developed, manufactured, marketed or sold by the Company up to the time of such cessation; provided, however, that the provisions of this Section 9 shall not be deemed breached merely because the Executive owns less than 1% of the outstanding capital stock of a corporation, if, at the time of its acquisition by the Executive such stock is listed on a national securities exchange. The term “Participate In” shall mean: “directly or indirectly, for his own benefit or for, with or through any other person (including the Executive’s immediate family), firm or corporation, own, manage, operate, control, loan money to, or participate in the ownership, management, operation or control of, or be connected as a director, officer, employee, partner, consultant, agent, independent contractor, or otherwise with, or acquiesce in the use of his name in.”

The Executive will not, directly or indirectly, solicit or interfere with, or endeavor to entice away from the Company any of its suppliers, customers or employees within a period of one year after the date of termination of the Executive’s employment (the “Termination Date”). The Executive will not directly or indirectly employ any person who was an employee of the Company within a period of one year after such person leaves the employ of the Company.

If any restriction contained in this Section 9 shall be deemed to be invalid, illegal, or unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, geographical scope or other provisions hereof, and in its reduced form such restriction shall then be enforceable in the manner contemplated hereby.

10. INTELLECTUAL PROPERTY RIGHTS.

Any interest in patents, patent applications, inventions, technological innovations, copyrights, copyrightable works, developments, discoveries, designs and processes which the Executive during the period he is employed by the Company under this Agreement or otherwise may acquire, conceive of or develop, either alone or in conjunction with others, utilizing the time, material, facilities or information of the Company (“Inventions”) shall belong to the Company; as soon as the Executive owns, conceives of, or develops any Invention, he agrees immediately to communicate such fact in writing to the Board of Directors, and without further compensation, but at the Company’s expense, forthwith upon request of the Company, the Executive shall execute all such assignments and other documents (including applications for patents, copyrights, trademarks, and assignments thereof) and take all such other action as the Company may reasonably request in order (a) to vest in the Company all of the Executive’s right, title and interest in and to such Inventions, free and clear of liens, mortgages, security interests, pledges, charges and encumbrances and (b), if patentable or copyrightable, to obtain patents or copyrights (including extensions and renewals) therefor in any and all countries in such name as the Company shall determine.

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11. NONDISCLOSURE.

The Employee Nondisclosure and Secrecy Agreement dated as of February, 15 2001, between the Company and the Executive shall remain in full force and effect.

12. INJUNCTIVE RELIEF.

Because a breach of the provisions of any of Section 9, Section 10 and Section 11 could not adequately be compensated by money damages, the Company shall be entitled, in addition to any other right and remedy available to it, to an injunction restraining such breach or a threatened breach, and in either case no bond or other security shall be required in connection therewith. The Executive agrees that the provisions of each of Section 9, Section 10 and Section 11 are necessary and reasonable to protect the Company in the conduct of its business.

13. TERMINATION OF THE EXECUTIVE UPON DEATH OR DISABILITY.

(a) The term of the Executive’s employment shall terminate automatically upon his death. In addition, the Company shall have the right to terminate the Employment Term upon the Disability (as defined below) of the Executive. If the Executive’s employment is terminated by the Company due to the Executive’s death or Disability, then the Executive, his guardian or his estate, as applicable, shall be entitled to:

(i) Salary and Benefits earned to the Termination Date; and

(ii) other benefits as are provided under the applicable plans and programs of the Company as then in effect.

(b) For purposes of this Agreement, “Disability” shall mean any physical or mental disability or incapacity that renders the Executive incapable of performing his duties hereunder for a period of 180 consecutive calendar days or for shorter periods aggregating 180 calendar days during any consecutive twelve-month period.

14. INVOLUNTARY TERMINATION WITHOUT CAUSE.

(a) The Executive shall be deemed to have been involuntarily terminated without Cause (as defined below) if one of the following events occurs:

(i) The Company terminates the Executive’s employment at anytime without Cause (as defined below);

(ii) There occurs a substantial reduction by the Company in the Executive’s responsibilities, authorities, powers and duties from the responsibilities, authorities, powers and duties exercised by the Executive just prior to such reduction but excluding such reduction effected with the Executive’s prior consent or for reasons arising out of the Executive’s gross negligence or willful misconduct;

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(iii) The Company requires the Executive to be based principally at any office or location which is outside New England, unless the Executive consents to be based principally at such other office or location;

(iv) The Company’s failure to (x) maintain the Executive’s eligibility for participation in existing benefit plans then being made available by the Company to other employees of the Company having substantially similar levels of responsibility as the Executive or (y) provide to the Executive substantially the same benefits or other perquisites then being provided or paid to the other employees of the Company having substantially similar levels of responsibility as the Executive; or

(v) There occurs a breach of this Agreement by the Company which continues for more than seven (7) business days after the Executive gives written notice to the Company, setting forth in reasonable detail the nature of such breach.

(b) If the Executive’s employment is involuntarily terminated at any time without Cause (as defined below), the Executive shall be entitled to:

(i) Salary and Benefits earned to the Termination Date;

(ii) Annual Bonus for the fiscal year in which such termination is effected, notwithstanding the provisions of Section 5 and as if the Executive had served throughout such fiscal year and had satisfied the goals as set forth in the Incentive Plan for such fiscal year; and

(iii) Continued Salary for a period of twelve months from the Termination Date.

In addition, all exercisable Options shall expire 360 days after the Termination Date.

15. TERMINATION BY THE COMPANY FOR CAUSE.

(a) GENERAL. The Company shall have the right to terminate the Executive’s employment for Cause, as defined in subsection (b) below, in which event, the Executive shall be entitled only to Salary and Benefits earned to the Termination Date. In addition, all exercisable Options shall expire as of the Termination Date.

(b) CAUSE. For purposes of this Agreement, “Cause” shall mean:

(i) fraud, embezzlement or gross insubordination on the part of the Executive;

(ii) conviction of or the entry of a plea of nolo contendere by the Executive to any felony or crime of moral turpitude;

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(iii) a material breach of, or the willful failure or refusal by the Executive to perform and discharge, his duties, responsibilities or obligations under this Agreement that is not corrected within 20 days following written notice thereof to the Executive by the Company, such notice to state with specificity the nature of the breach, failure or refusal; provided, that if such breach, failure or refusal cannot reasonably be corrected within 20 days of written notice thereof, correction shall be commenced by the Executive within such period and shall be corrected as soon as practicable thereafter; or

(iv) any act of willful misconduct by the Executive which is intended to result in substantial personal enrichment of the Executive at the expense of the Company or any of its subsidiaries or affiliates.

16. TERMINATION BY THE EXECUTIVE WITHOUT CAUSE. The Executive may terminate this Agreement at any time with or without cause by providing thirty (30) days’ prior written notice to the Company, in which event, the Executive shall be entitled only to Salary and Benefits earned to the Termination Date. In addition, all exercisable Options shall expire 90 days after the Termination Date.

17. WITHHOLDING.

Anything to the contrary notwithstanding, all payments required to be made by the Company under this Agreement to the Executive, his spouse, his estate or beneficiaries, shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In addition, in the event that the Company reasonably determines that it is required to make any payments of withholding taxes as a result of Executive’s receipt of any other income pursuant to the terms of this Agreement, the Company may, as a condition to such receipt, require that the Executive provide the Company with an amount of cash sufficient to enable the Company to pay such withholding taxes.

18. LOCK-UP AGREEMENT.

In the event that the Company seeks to consummate a public offering of its securities during the Employment Term, the Executive shall execute an agreement in a form and substance satisfactory to the managing underwriter or underwriters of the Company’s securities, not to sell, pledge, contract to sell, grant any option or otherwise dispose of any shares of stock owned or acquired by the Executive for such period of time as requested by such underwriter of all other executive officers of the Company.

19. INDEMNIFICATION.

During the Employment Term, the Company agrees to (i) indemnify the Executive in his capacity as an officer of the Company and, to the extent applicable, as an officer and director of each subsidiary of the Company, as provided in Article Eighth of the Company’s Second Amended and Restated Certificate of Incorporation, as amended, and (ii) use its best efforts to maintain in effect its director and officer liability insurance policies.

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20. LEGAL FEES.

The Company shall reimburse the Executive all reasonable and documented legal fees, costs and expenses incurred by the Executive in contesting or disputing any breach of this Agreement by the Company or in seeking to obtain or enforce any right or benefit provided by this Agreement; provided, however, that the Company shall have no such obligation to reimburse the Executive for such legal fees, costs and expenses unless the final resolution of such matter is determined by a court of competent jurisdiction to be in the Executive’s favor.

21. ASSIGNABILITY; BINDING NATURE.

This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid, in the event of the Executive’s death, to the Executive’s estate, heirs and representatives. This Agreement shall inure to the benefit of, be binding upon, and be enforceable by, any successor, surviving or resulting company or other entity to which all or substantially all of the Company’s business and assets shall be transferred.

22. ENTIRE AGREEMENT.

This Agreement, together with the Employee Nondisclosure and Secrecy Agreement, contains the entire agreement between the Executive and the Company (each, a “Party”) concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations, and undertakings, whether written or oral, between the Parties with respect thereto, including without limitation the Prior Employment Agreement. The Prior Employment Agreement is hereby terminated and of no further force and effect.

23. AMENDMENTS AND WAIVERS.

This Agreement may not be modified or amended except by a writing signed by both Parties. A Party may waive compliance by the other Party with any term or provision of this Agreement, or any part thereof, provided that the term or provision, or part thereof, is for the benefit of the waiving Party. Any waiver will be limited to the facts or circumstances giving rise to the noncompliance and will not be deemed either a general waiver or modification with respect to the term or provision, or part thereof, being waived, or as to any other term or provision of this Agreement, nor will it be deemed a waiver of compliance with respect to any other facts or circumstances then or thereafter occurring.

24. NOTICE.

Any notice given under this Agreement shall be in writing and shall be deemed given when delivered personally or by courier, or five days after being mailed, certified or registered mail, duly addressed to the Party concerned at the address indicated below or at such other

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address as such Party may subsequently provide, in accordance with the notice and delivery provisions of this Section 24:

(a)	If to the Company:	NMT Medical, Inc. 27 Wormwood Street Boston, MA 02210 Attn: John E. Ahern
	with a copy to:	Hale and Dorr LLP 60 State Street Boston, MA 02109-1803 Attn: Steven D. Singer, Esq.
(b)	If to the Executive, at his address as it appears on the Company’s records,
	With a copy to:

25. SEVERABILITY.

In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement will be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.

26. SURVIVORSHIP.

The respective rights and obligations of the Parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

27. REFERENCES.

In the event of the Executive’s death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his legal representative or, where appropriate, to his beneficiary or beneficiaries.

28. GOVERNING LAW.

This Agreement shall be governed by and construed and interpreted in accordance with the laws of The Commonwealth of Massachusetts without reference to the principles of conflicts of law.

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29. HEADINGS.

The headings of sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

30. COUNTERPARTS AND FACSIMILE SIGNATURE.

This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.

[The remainder of this page has been intentionally left blank.]

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THE UNDERSIGNED have executed this Agreement effective as of the date first written above.

COMPANY:
NMT Medical, Inc.
By:	/s/ John E. Ahern
	John E. Ahern
	President and Chief Executive Officer
EXECUTIVE:
	/s/ Richard E. Davis
	Richard E. Davis

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SCHEDULE I

Cash Payment Upon Change of Control

The cash payment payable to the Executive in accordance with Section 6 of the Agreement shall be determined as follows:

Deal Consideration Per Share	Payment to Executive
Less than or equal to $[**] per share	.25% of the Total Deal Consideration
Greater than $[**] but less than or equal to $[**] per share	.625% of the Total Deal Consideration
Greater than $[**] but less than or equal to $[**] per share	.75% of the Total Deal Consideration
Greater than $[**] per share	.875% of the Total Deal Consideration

For purposes of this Schedule I, “Deal Consideration Per Share” for any transaction shall be determined by dividing the Total Deal Consideration by the number of shares of Common Stock issued and outstanding (or deemed to be issued and outstanding) immediately prior to the consummation of such transaction.

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, John E. Ahern, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NMT Medical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2004	/s/ JOHN E. AHERN
	John E. Ahern President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Richard E. Davis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NMT Medical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2004	/s/ RICHARD E. DAVIS
	Richard E. Davis Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of NMT Medical, Inc. (the “Company”) for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, John E. Ahern, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 10, 2004	/s/ JOHN E. AHERN
	John E. Ahern President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of NMT Medical, Inc. (the “Company”) for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Richard E. Davis, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 10, 2004	/s/ RICHARD E. DAVIS
	Richard E. Davis Vice President and Chief Financial Officer