Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 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, 2008

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

For the transition period from to .

Commission File No. 000-21001

NMT MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

95-4090463

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

27 Wormwood Street, Boston, Massachusetts 02210

(Address of Principal Executive Offices, Including Zip Code)

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

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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No x

As of August 1, 2008, there were 13,007,767 shares of Common Stock, $.001 par value per share, outstanding.

INDEX



		Page Number

Part I. Financial Information

Item 1.	Unaudited Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	18

Part II. Other Information

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 6.	Exhibits	24

Signatures		25

Exhibit Index		26

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NMT Medical, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)


	At June 30, 2008		At December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	14,019,900	$	6,984,383
Marketable securities		11,235,642		23,989,995
Accounts receivable, net of allowances of $140,000 at June 30, 2008 and $161,341 at December 31, 2007		2,811,928		3,046,308
Inventories		2,495,787		2,071,534
Prepaid expenses and other current assets		1,228,089		3,407,084

Total current assets		31,791,346		39,499,304


Property and equipment, at cost:
Laboratory and computer equipment		3,464,720		3,393,215
Leasehold improvements		1,302,649		1,302,649
Office furniture and equipment		596,713		583,038

		5,364,082		5,278,902
Less accumulated depreciation and amortization		4,324,176		4,175,357

Total property and equipment, net		1,039,906		1,103,545

Total Assets	$	32,831,252	$	40,602,849


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,607,375	$	2,456,316
Accrued expenses		6,391,968		6,221,427

Total current liabilities		9,999,343		8,677,743


Long-term liabilities		338,512		352,185

Commitments and contingencies (Note 11)

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 and outstanding--13,047,767 shares at June 30, 2008 and 13,012,142 shares at December 31, 2007		13,048		13,012
Additional paid-in capital		52,101,274		51,645,489
Less treasury stock - 40,000 shares at cost		(119,600)		(119,600)
Accumulated other comprehensive (loss) income		(13,104)		3,873
Accumulated deficit		(29,488,221)		(19,969,853)

Total stockholders’ equity		22,493,397		31,572,921


Total Liabilities and Stockholders’ Equity	$	32,831,252	$	40,602,849

See accompanying notes.

NMT Medical, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2008		2007		2008		2007
Revenues:
Product sales	$	4,456,920	$	4,922,265	$	9,264,905	$	10,037,768
Net royalty income		5,900		1,549,570		18,170		3,267,895

Total revenues		4,462,820		6,471,835		9,283,075		13,305,663


Costs and expenses:
Cost of product sales		1,353,867		1,358,739		2,816,103		2,588,692
Research and development		3,769,167		4,091,456		6,744,296		6,605,954
General and administrative		2,427,616		1,886,356		4,883,241		3,899,516
Selling and marketing		2,724,405		2,304,740		4,888,530		4,351,430

Total costs and expenses		10,275,055		9,641,291		19,332,170		17,445,592


Loss from operations		(5,812,235)		(3,169,456)		(10,049,095)		(4,139,929)


Other income (expense):
Currency transaction gain (loss)		8,760		(18,689)		69,830		30,716
Interest income		203,206		476,611		502,567		985,691

Total other income		211,966		457,922		572,397		1,016,407


Loss before income taxes		(5,600,269)		(2,711,534)		(9,476,698)		(3,123,522)

Income tax expense (benefit)		24,326		(75,500)		41,670		(151,000)

Net loss	$	(5,624,595)	$	(2,636,034)	$	(9,518,368)	$	(2,972,522)


Basic and diluted loss per common share:	$	(0.43)	$	(0.20)	$	(0.73)	$	(0.23)


Basic and diluted weighted average common shares outstanding:		13,007,547		12,916,357		12,990,844		12,894,762

See accompanying notes.

NMT Medical, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)


	For the Six Months Ended June 30,
	2008		2007
Cash flows from operating activities:
Net loss	$	(9,518,368)	$	(2,972,522)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		148,819		154,697
Amortization of bond discount		(84,975)		(215,006)
Share-based compensation expense		337,007		246,271
Change in assets and liabilities-
Accounts receivable		234,380		144,556
Inventories		(424,253)		(290,913)
Prepaid expenses and other current assets		2,178,995		114,336
Accounts payable		1,151,059		(587,509)
Accrued expenses		156,868		(2,458,600)

Net cash used in operating activities		(5,820,468)		(5,864,690)


Cash flows from investing activities:
Purchases of property and equipment		(85,180)		(180,182)
Purchases of marketable securities		(9,227,649)		(11,246,038)
Maturities of marketable securities		22,050,000		14,700,000

Net cash provided by investing activities		12,737,171		3,273,780


Cash flows from financing activities:
Proceeds from exercise of common stock options		16,026		210,967
Proceeds from issuance of common stock under the employee stock purchase plan		102,788		156,462
Change in estimated tax benefit from stock option exercises		-		(151,000)

Net cash provided by financing activities		118,814		216,429


Net increase (decrease) in cash and cash equivalents		7,035,517		(2,374,481)
Cash and cash equivalents, beginning of period		6,984,383		8,285,561

Cash and cash equivalents, end of period	$	14,019,900	$	5,911,080

See accompanying notes.

NMT Medical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Operations

We are an advanced medical technology company that designs, develops, manufactures and markets proprietary implant technologies that allow interventional cardiologists to treat certain kinds of cardiac structural heart disease through minimally invasive, catheter-based procedures. We are investigating the potential connection between a common cardiac defect that allows a right to left shunt or flow of blood through a defect like a patent foramen ovale, or PFO, and brain attacks such as, stroke, transient ischemic attacks, or TIA, and migraine headaches. A PFO can allow venous blood, unfiltered and unmanaged by the lungs, to directly enter the arterial circulation of the brain, possibly triggering a cerebral event or brain attack. More than 28,000 PFOs have been closed globally with our minimally invasive, catheter-based implant technology.

2. Interim Financial Statements

The accompanying condensed consolidated financial statements as of June 30, 2008 and for the three and six month periods ended June 30, 2008 and 2007 are unaudited and include the accounts of our company and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed 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 for the year ended December 31, 2007, 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 for the year ended December 31, 2007. The results of operations for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results expected for the fiscal year ending December 31, 2008.

3. Share-Based Compensation

We have various types of share-based compensation plans. These plans are administered by our Joint Compensation and Options Committee of our Board of Directors. A description of our share-based compensation plans is contained in Note 10 of the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no amendments to these plans in the six months ended June 30, 2008.

The expense for share-based payment awards made to our employees and directors consisting of stock options issued based on the estimated fair values of the share-based payments on date of grant was recorded on the following lines in the consolidated statements of income:


	For The Three Months Ended June 30,				For The Six Months Ended June 30,
	2008		2007		2008		2007
Cost of product sales	$	13,240	$	9,920	$	22,747	$	14,286
Research and development		36,816		43,364		81,361		75,443
General and administrative		97,203		56,769		176,182		95,152
Selling and marketing		28,275		37,683		56,718		61,390

	$	175,534	$	147,736	$	337,008	$	246,271

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


	For the Six Months Ended June 30,
	2008	2007
Expected life (years)	4	4
Expected stock price volatility	57.35% - 60.64%	56.20% - 57.74%
Weighted average stock price volatility	59.67%	56.58%
Expected dividend yield	0	0
Risk-free interest rate	2.46% - 3.57%	4.41% - 5.18%

The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Expected volatility, weighted average volatility and expected life are based on our historical experience. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future. As required by Statement of Financial Accounting Standards No. 123R, “Share- Based Payment,” or

SFAS 123R, we adjust the estimated forfeiture rate based upon actual experience. The expected life for options granted during the three and six months ended June 30, 2008 and 2007 was based upon the actual forfeiture rate for the preceding four years, which resulted in an expected life equal to the vesting period.

The following table summarizes a reconciliation of all stock option activity for the six months ended June 30, 2008:


	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
					(in years)	(in thousands)
Options outstanding at January 1, 2008	1,731,807		$	7.41
Granted	128,650			4.26
Exercised	(4,275	)		3.75		$	5
Cancelled	(43,975	)		8.24

Options outstanding at June 30, 2008	1,812,207		$	7.18	5.93	$	834


Options expected to vest at June 30, 2008	377,601		$	7.87	8.89	$	90

Options exercisable at June 30, 2008	1,340,206		$	6.93	4.88	$	745

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

The weighted average grant-date fair value of options granted during the three and six months ended June 30, 2008 was $2.34 and $2.06, respectively. The aggregate intrinsic value of options exercised during the three and six months ended June 30, 2008 was $1,000 and $5,000, respectively.

The weighted average grant-date fair value of options granted during the three and six months ended June 30, 2007 was $6.23 and $6.27, respectively. The aggregate intrinsic value of options exercised during the three and six months ended June 30, 2007 was $335,000 and $597,000, respectively.

At June 30, 2008, there was $1.5 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of approximately 4 years.

Net cash proceeds from the exercise of stock options were $7,275 and $16,026 for the three and six months ended June 30, 2008, respectively, and were $117,356 and $210,967 for the three and six months ended June 30, 2007, respectively. We have not recorded any tax benefit from stock option exercises, since the realization of tax benefits is not considered likely.

4. Cash, Cash Equivalents and Marketable Securities

We consider investments with maturities of 90 days or less from the date of purchase to be cash equivalents and investments with original maturity dates greater than 90 days to be marketable securities. Cash and cash equivalents, which are carried at cost and approximate market, consist of cash, money market accounts and commercial paper investments. We have no other-than-temporary impairments at this time.

In accordance with SFAS No. 115 “Accounting for Certain Investments in Debt Equity Securities,” we have classified our marketable securities as available-for-sale. Available-for-sale marketable securities at June 30, 2008, consisted of approximately $11.2 million of debt instruments with maturities ranging from August 2008 to September 2009. Accrued interest receivable of approximately $149,000 and $238,000 was included in prepaid expenses and other current assets in the accompanying consolidated balance sheets at June 30, 2008 and December 31, 2007, respectively.

On January 1, 2008 we adopted SFAS No. 157 “Fair Value Measurements,” or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard

describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 - Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.



			Fair Value Measurements at the Reporting Date Using
	June 30, 2008		Level 1		Level 2	Level 3
Corporate Debentures/Bonds	$	8,310,122	$	-	$ 8,310,122	$	-
Commercial Paper		2,323,870		-	2,323,870		-
Certificates of Deposit		601,650		-	601,650		-

Total	$	11,235,642	$	-	$ 11,235,642	$	-

5. Inventories

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


	At June 30, 2008		At December 31, 2007
Raw materials	$	815,028	$	750,389
Work-in-process		166,255		109,058
Finished goods		1,514,504		1,212,087

	$	2,495,787	$	2,071,534

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

6. Net Royalty Income

In connection with the November 2001 sale of our vena cava filter product line to C.R. Bard, Inc., or Bard, we entered into a royalty agreement pursuant to which Bard commenced payment of royalties in 2003. As part of that agreement, we continue to pay related royalty obligations to the estate of the original inventor of these products. On November 22, 1994, we granted to an unrelated third party an exclusive, worldwide license, including the right to sublicense to others, to develop, produce and market our stent technology. For the three and six months ended June 30, 2007, royalty income is reported in the accompanying condensed consolidated statements of operations net of related royalty obligations to third parties. Beginning in 2008, the royalty rate we receive from Bard has decreased substantially from the royalty rate we earned prior to 2008, while the royalty rate we pay to the estate of the original inventor of these products remains the same. For the three and six months ended June 30, 2008, this results in a net royalty expense reflected in general and administrative expenses of approximately $265,000 and $629,000, respectively. The net royalty income for the three and six months ended June 30, 2008 was earned from Boston Scientific Corporation.

7. Income Taxes

For the three and six months ended June 30, 2008, we recorded a provision for income taxes of $24,326 and $41,670, respectively, as a result of the increase to the liability for unrecognized tax benefits recorded during the period. For the three and six months ended June 30, 2007, we recorded a benefit from income taxes of $75,500 and $151,000, respectively, as a result of the anticipated benefit from fiscal 2007 loss carrybacks.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes”, or FIN 48, effective January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The impact of uncertain income tax positions taken in the income tax return must be recognized at the

largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, and accounting for interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. As of the date of adoption, there was no material effect on the financial statements. There was no cumulative effect related to adopting FIN 48.

Our unrecognized tax benefits were $157,929 and $190,172 at December 31, 2007 and June 30, 2008 respectively and relate to various tax jurisdictions. If the unrecognized benefits of $190,172 at June 30, 2008 were recognized, they would decrease our annual effective tax rate. We also recorded a liability during the three and six months ended June 30, 2008 for potential interest in the amount of $3,530 and $5,238, respectively. The unrecognized tax benefit and the accrual for potential interest are included in long-term liabilities. It is our policy to record and classify interest and penalties as income tax expense. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.

We are subject to U. S. federal income tax as well as income tax of certain state and foreign jurisdictions. The tax years ranging from 2005 to 2007 remain subject to examination by federal authorities and the 2004 through 2007 tax years remain subject to examination by their respective state and foreign tax authorities.

8. Net loss per Common and Common Equivalent Share

Basic and diluted net loss per share is 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 are determined by dividing net loss by the weighted average common shares outstanding during the periods presented. The number of diluted shares outstanding include the dilutive effect of in-the-money options and warrants which is calculated based on the average share price for each period using the treasury stock method. Options to purchase 150,663 and 160,851 common shares have been excluded from the computation of diluted weighted average shares outstanding because including them would be anti-dilutive for the three and six months ended June 30, 2008, respectively. For the three and six months ended June 30, 2007, options to purchase 737,098 and 741,495 common shares have been excluded from the computation of diluted weighted average shares outstanding because including them would be anti-dilutive.

9. Comprehensive loss

Comprehensive loss, defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, is as follows:


	For The Three Months Ended June 30,				For The Six Months Ended June 30,
	2008		2007		2008		2007
Net loss	$	(5,624,595)	$	(2,636,034)	$	(9,518,368)	$	(2,972,522)

Unrealized loss on marketable securities		(32,551)		(10,065)		(16,977)		(13,125)


Net comprehensive loss	$	(5,657,146)	$	(2,646,099)	$	(9,535,345)	$	(2,985,647)

The accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets consists entirely of unrealized gains and losses on marketable securities.

10. Recent Accounting Pronouncements

(a) Recently adopted

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or SFAS 157. The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position 157-2, which defers the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB No. 115”, or SFAS 159. The Statement permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. On January 1, 2008 we adopted SFAS 159 and have made no election under SFAS 159.

(b) Future Adoption

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

11. Commitments and Contingencies

(a) Litigation

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

In September 2004, we and the Children’s Medical Center Corporation, or CMCC, filed a civil complaint in the U.S. District Court for the District of Minnesota, or the District Court, for infringement of a patent owned by CMCC and licensed exclusively to us. The complaint alleges that Cardia, Inc., or Cardia, of Burnsville, Minnesota is making, selling and/or offering to sell a medical device in the United States that infringes CMCC’s U.S. patent relating to a device and method for repairing septal defects. We sought an injunction from the District Court to prevent further infringement by Cardia, as well as monetary damages. On August 30, 2006, the District Court entered an order holding that Cardia’s device does not infringe the patent-in-suit. The order has no effect on the validity and enforceability of the patent-in-suit and has no impact on our ability to sell our products. We appealed the ruling to the U.S. Court of Appeals for the Federal Circuit and on June 6, 2007 the Federal Circuit ruled that the District Court incorrectly interpreted one of the patent’s claims and incorrectly found no triable issue of fact concerning other claims. The Federal Circuit remanded the case to the District Court for further proceedings consistent with its opinion and instructed that on remand the district court may reconsider the question of summary judgment for us and CMCC based on the Federal Circuit’s claim construction. On November 8, 2007, the District Court granted summary judgment in our and CMCC’s favor, ruling that Cardia’s device infringes the patent-in-suit and striking all of Cardia’s invalidity defenses. On March 19, 2008, we and CMCC agreed with Cardia to settle this litigation. As part of the settlement, a judgment was entered against Cardia and in favor of us and CMCC, with Cardia agreeing to pay $2.25 million. The settlement will be shared equally between us and CMCC after deduction of our legal fees and expenses. The payments are scheduled to begin on September 30, 2008, and continue quarterly through December 2009. NMT will recognize the payments when received.

(b) Clinical Trials

CLOSURE I

We have committed significant financial and personnel resources to the execution of our pivotal CLOSURE I clinical trial. Including contracts with third party providers, agreements with participating clinical sites, internal clinical department costs and manufacturing costs of the STARFlex^® devices to be implanted, total costs are currently estimated to be approximately $24 million through completion of the trial and submission to the FDA. Of this total, approximately $17.4 million was incurred through 2007. We currently project 2008 costs to approximate $4.0 million, and approximately $2.4 million was incurred during the six months ended June 30, 2008. On March 2, 2007, we participated in a public and private FDA advisory panel meeting to discuss the current status of the ongoing PFO/stroke trials being sponsored by us and other companies. At the close of the meeting, both the FDA and advisory panel concurred that only randomized, controlled trials would provide the necessary data to be considered for premarket approval, or PMA, for devices intended for transcatheter PFO closure in the stroke and TIA indication. During a private session, we provided the FDA and advisory panel with a revised study hypothesis and statistical plan to complete the CLOSURE I study as a randomized controlled trial. On April 23, 2007, we announced that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Subsequent to this meeting, a review of the revised plan and a look at the interim data was performed by the Data Safety Monitoring Board. Based on these analyses, the conditional probability of a statistically significant benefit will require an enrollment of 900 patients. Currently there are approximately 875 patients enrolled. Enrollment is currently expected to be completed soon. The original CLOSURE I statistical plan required an enrollment of 1,600 patients.

MIST II

In September 2005, we received conditional approval from the FDA for an IDE to initiate enrollment in our PFO/migraine clinical study, named MIST II. MIST II was initially designed to be a prospective, randomized, multi-center,

controlled study. In January 2008, we announced that we were closing down this clinical study. Due to strict enrollment requirements, MIST II had little likelihood of being completed in a reasonable timeframe. More than 1,400 patients had been screened for enrollment in the trial, but only two patients met the requirements to be randomized. Through the end of 2007, we spent $3.9 million on this trial.

MIST III

In October 2005, we received approval from the regulatory authorities in the United Kingdom to begin enrollment in MIST III. In MIST III, control patients from the original MIST study, those who did not receive the STARFlex^® implant, have the option to receive an implant after they have been unblinded as part of the MIST study. These patients will follow the identical protocol as in MIST after which they will be followed for an additional 18 months. In addition, migraine patients with a PFO who did receive a STARFlex^® implant in MIST will be followed for an additional 18 months. We currently estimate the cost of MIST III to be approximately $1.0 million. Of this total, approximately $900,000 was incurred through 2007. We currently believe 2008 costs will be $100,000, of which $82,000 was incurred during the six months ended June 30, 2008.

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 our 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 for the year ended December 31, 2007. Matters discussed in this Quarterly Report on Form 10-Q and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, of our anticipated growth, operating results, future earnings per share, plans and objectives, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are often identified by the words “believe”, “plans”, “estimate”, “project”, “target”, “continue”, “intend”, “expect”, “future”, “anticipates”, and similar expressions that are not statements of historical fact. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our other public filings with the Securities and Exchange Commission, or the SEC. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that all forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q and may change. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

OVERVIEW

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, expenses associated with clinical trials and share-based compensation are described in our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to our critical accounting policies as of June 30, 2008.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2008 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2007

The following table presents consolidated statements of operations information as a reference for management’s discussion and analysis which follows thereafter. This table presents dollar and percentage changes for each listed line item for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, 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 product sales) for such periods.


	Three Months Ended June 30,								Increase (Decrease) 2007 to 2008			% Change 2007 to 2008
	2008			%	2007			%	Increase (Decrease) 2007 to 2008			% Change 2007 to 2008
	(In thousands, except percentages)
Revenues:
Product sales	$	4,457		99.9%	$	4,922		76.1%	$	(465	)	-9.4%
Net royalty income		6		0.1%		1,550		23.9%		(1,544	)	-99.6%

Total revenues		4,463		100.0%		6,472		100.0%		(2,009	)	-31.0%

Costs and expenses:
Cost of product sales		1,354		30.4%		1,359		27.6%		(5	)	-0.4%
Research and development		3,769		84.4%		4,091		63.2%		(322	)	-7.9%
General and administrative		2,428		54.4%		1,886		29.1%		542		28.7%
Selling and marketing		2,724		61.0%		2,305		35.6%		419		18.2%

Total costs and expenses		10,275		230.2%		9,641		149.0%		634		6.6%


Loss from operations		(5,812	)	-130.2%		(3,169	)	-49.0%		(2,643	)	83.4%

Other income (expense):
Currency transaction gain (loss)		9		0.2%		(19	)	-0.3%		28		—
Interest income		203		4.5%		477		7.4%		(274	)	-57.4%

Total other income		212		4.8%		458		7.1%		(246	)	-53.7%


Loss before income taxes		(5,600	)	-125.5%		(2,711	)	-41.9%		(2,889	)	106.6%

Income tax expense (benefit)		24		0.5%		(75	)	-1.2%		99		—

Net loss	$	(5,624	)	-126.0%	$	(2,636	)	-40.7%	$	(2,988	)	113.4%

REVENUES

THREE MONTHS ENDED JUNE 30, 2008 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2007


	Three Months Ended June 30,				Increase (Decrease) 2007 to 2008		% Change 2007 to 2008
	2008		2007		Increase (Decrease) 2007 to 2008		% Change 2007 to 2008
	(In thousands, except percentages)
Product sales:
CardioSEAL^®, STARFlex^® and BioSTAR^®:
North America	$	2,864	$	3,738	$	(874)	(23.4)%
Europe		1,593		1,184		409	34.5%

Total product sales		4,457		4,922		(465)	(9.4)%

Net royalty income:
Bard		-		1,524		(1,524)	(100.0)%
BSC		6		26		(20)	(76.9)%

Total net royalty income		6		1,550		(1,544)	(99.6)%


Total revenues	$	4,463	$	6,472	$	(2,009)	(31.0)%

The decrease in CardioSEAL^® and STARFlex^® product sales for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 was largely the result of decreased product demand in North America, primarily in the United States. We believe that sales in the United States, while they remained relatively level compared to the first quarter of fiscal 2008, continue to be impacted by delays by third party payors in approving reimbursement for the procedures as a result of the voluntary withdrawal of the HDE of our CardioSEAL^® septal repair system. The increase in European sales was primarily related to the launch of BioSTAR^®, our bioabsorbable structural heart repair implant technology and our Rapid Transport™ delivery system following the awarding of the CE Mark for BioSTAR^® in June 2007 and HPB approval in Canada in June 2007. The increase was also attributable to increased sales and marketing programs, as well as greater acceptance of our technology by the clinical community throughout Europe. We believe that as a result of the combination of (i) our marketing efforts and headcount investments in the UK and other planned investments in Europe having increased awareness of the positive treatment effect on certain patients with a PFO using our technology along with (ii) the impact of the June 2007 awarding of the CE Mark for BioSTAR^®, our European product sales will continue to increase as a percentage of total sales. European sales represented approximately 35.7% and 24.1% of total product sales for the three months ended June 30, 2008 and 2007, respectively. Despite greater than 30% growth in European sales, we did not achieve our targeted level of revenue there due to several factors including increased competition and greater clinical trial activity for PFO devices and percutaneous valve repair. Both of these activities compete for limited cath-lab time and reduce elective PFO procedure revenues. We believe this will continue as a short-term challenge to expanding our revenue growth in Europe. We currently anticipate that product revenue in the third quarter will be approximately $4.8 to $5.2 million and product revenue for the fourth quarter will be approximately $5.3 to $5.7 million.

Beginning in 2008, the royalty rate we receive from Bard for sales by Bard of its RNF product decreased substantially from the rate we received prior to 2008, while the royalty rate we pay to the estate of the original inventor of the product remains the same. For the three months ended June 30, 2008, this results in a net royalty expense reflected in general and administrative expenses of approximately $265,000.

Cost of Product Sales. For the three months ended June 30, 2008, cost of product sales, as a percentage of total product sales, was approximately 30.4% compared with approximately 27.6% in the comparable period of 2007. The increase in cost of product sales as a percentage of product sales was primarily the result of increased sales in Europe, where the selling price of our product is lower then the selling price of our products in North America and product costs of BioSTAR^® are greater than products sold in the United States. Contributing to the increased costs of BioSTAR^® are additional costs to distribute BioSTAR ^® and additional royalties. For the full year 2008, we currently expect cost of product sales to be approximately 30% of total product sales, compared with approximately 27.2% for fiscal 2007. Included in cost of product sales were royalty expenses of approximately $556,000 and $481,000 for the three months ended June 30, 2008 and 2007, respectively.

Research and Development. Research and development expense decreased approximately $322,000, or 7.9%, for the three months ended June 30, 2008 compared with the three months ended June 30, 2007. The decrease in research and development expenses was primarily related to reductions as a result of closing down our MIST II clinical study, partially offset by an increase in costs for our CLOSURE I trial compared to the same period last year. We currently expect 2008 research and development expense to be approximately $15.0 million dollars, virtually level with 2007.

General and Administrative. General and administrative expense increased approximately $542,000, or 28.7%, for the three months ended June 30, 2008 compared with the three months ended June 30, 2007. Included in general and administrative expense for the three months ended June 30, 2008 is $265,000 of net royalty expense related to our agreement with Bard. Legal expenses also increased compared to the same period last year.

General and administrative expense is currently expected to increase to approximately $10 million in 2008 compared to approximately $8 million in 2007 primarily due to the classification of net royalty expense related to Bard of approximately $1.4 million.

Selling and Marketing. Selling and marketing expense increased approximately $419,000, or 18.2%, for the three months ended June 30, 2008 compared to the same period in 2007. This increase was primarily the result of increased travel costs, as well as additional promotion expenses related to BioSTAR^®. We currently expect worldwide selling and marketing expense in 2008 to decrease slightly compared to 2007.

Interest Income. The decrease in interest income for the three months ended June 30, 2008 compared to the same period in 2007 was related to lower cash balances as well as decreased interest rates offered on our investments during 2008. We currently expect interest income to approximate $900,000 in 2008 compared to $1.8 million in 2007, primarily due to the use of approximately $15 million of cash, cash equivalents and marketable securities to fund 2008 operations.

Income Tax Provision. We provide for taxes on income from continuing operations based upon our anticipated effective income tax rate. We anticipate incurring a loss from continuing operations in 2008 and therefore have not made a provision for taxes on continuing operations in the three months ended June 30, 2008. For the three months ended June 30, 2008, we recorded income tax expense of $24,326 for the establishment of a liability for uncertain tax positions. For the three months ended June 30, 2007, we recorded a benefit from income taxes of $75,500 as a result of the anticipated benefit from fiscal 2007 loss carrybacks.

SIX MONTHS ENDED JUNE 30, 2008 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2007

The following table presents consolidated statements of operations information as a reference for management’s discussion and analysis which follows thereafter. This table presents dollar and percentage changes for each listed line item for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, 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 product sales) for such periods.


	Six Months Ended June 30,						Increase (Decrease) 2007 to 2008		% Change 2007 to 2008
	2008		%	2007		%	Increase (Decrease) 2007 to 2008		% Change 2007 to 2008
	(In thousands, except percentages)
Revenues:
Product sales	$	9,265	99.8%	$	10,038	75.4%	$	(773)	-7.7%
Net royalty income		18	0.2%		3,268	24.6%		(3,250)	-99.4%

Total revenues		9,283	100.0%		13,306	100.0%		(4,023)	-30.2%

Costs and expenses:
Cost of product sales		2,816	30.4%		2,589	25.8%		227	8.8%
Research and development		6,744	72.6%		6,606	49.6%		138	2.1%
General and administrative		4,883	52.6%		3,900	29.3%		983	25.2%
Selling and marketing		4,889	52.7%		4,351	32.7%		538	12.4%

Total costs and expenses		19,332	208.3%		17,446	131.1%		1,886	10.8%


Loss from operations		(10,049)	-108.3%		(4,140)	-31.1%		(5,909)	142.7%

Other income:
Currency transaction gain		70	0.8%		31	0.2%		39	125.8%
Interest income		502	5.4%		985	7.4%		(483)	-49.0%

Total other income		572	6.2%		1,016	7.6%		(444)	-43.7%


Loss before income taxes		(9,477)	-102.1%		(3,124)	-23.5%		(6,353)	203.4%

Income tax expense (benefit)		41	0.4%		(151)	-1.1%		192	—


Net loss	$	(9,518)	-102.5%	$	(2,973)	-22.3%	$	(6,545)	220.1%

REVENUES

SIX MONTHS ENDED JUNE 30, 2008 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2007


	Six Months Ended June 30,				Increase (Decrease) 2007 to 2008		% Change 2007 to 2008
	2008		2007		Increase (Decrease) 2007 to 2008		% Change 2007 to 2008
	(In thousands, except percentages)
Product sales:
CardioSEAL^®, STARFlex^® and BioSTAR^®:
North America	$	5,698	$	7,722	$	(2,024)	(26.2)%
Europe		3,567		2,316		1,251	54.0%


Total product sales		9,265		10,038		(773)	(7.7)%

Net royalty income:
Bard		-		3,218		(3,218)	(100.0)%
BSC		18		50		(32)	(64.0)%


Total net royalty income		18		3,268		(3,250)	(99.4)%


Total revenues	$	9,283	$	13,306	$	(4,023)	(30.2)%

The decrease in CardioSEAL^® and STARFlex^® product sales for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 was largely the result of decreased product demand in North America, primarily in the United States. We believe that sales in the United States, while they remained relatively level on a quarter to quarter basis, continue to be impacted by delays by third party payors in approving reimbursement for the procedures as a result of the voluntary withdrawal of the HDE of our CardioSEAL^® septal repair system. The increase in European sales was primarily related to the launch of BioSTAR^®, our bioabsorbable structural heart repair implant technology and our Rapid Transport™ delivery system following the awarding of the CE Mark for BioSTAR^® in June 2007 and HPB approval in Canada in June 2007. The increase was also attributable to increased sales and marketing programs, as well as greater acceptance of our technology by the clinical community throughout Europe. We believe that as a result of the combination of (i) our marketing efforts and headcount investments in the UK and other planned investments in Europe having increased awareness of the positive treatment effect on certain patients with a PFO using our technology along with (ii) the impact of the June 2007 awarding of the CE Mark for BioSTAR^®, our European product sales will continue to increase as a percentage of total sales. European sales represented approximately 38.5% and 23.1% of total product sales for the six months ended June 30, 2008 and 2007, respectively. Despite greater than 30% growth in European sales, we did not achieve our targeted level of revenue there due to several factors including increased competition and greater clinical trial activity for PFO devices and percutaneous valve repair. Both of these activities compete for limited cath-lab time and reduce elective PFO procedure revenues.

Beginning in 2008, the royalty rate we receive from Bard for sales by Bard of its RNF product decreased substantially from the rate we received prior to 2008, while the royalty rate we pay to the estate of the original inventor of the product remains the same. For the six months ended June 30, 2008, this results in a net royalty expense reflected in general and administrative expenses of approximately $629,000.

Cost of Product Sales. For the six months ended June 30, 2008, cost of product sales, as a percentage of total product sales, was approximately 30.4% compared with approximately 25.8% in the comparable period of 2007. The increase in cost of product sales as a percentage of product sales was primarily the result of increased sales in Europe, where the selling price of our product is lower than the selling price of our products in North America and product costs of BioSTAR^® are greater than products sold in the United States. Contributing to the increased costs of BioSTAR^® are additional costs to distribute BioSTAR ^® and additional royalties. Included in cost of product sales were royalty expenses of approximately $1.1 million and $981,000 for the six months ended June 30, 2008 and 2007, respectively.

Research and Development. Research and development expense increased approximately $138,000, or 2.1%, for the six months ended June 30, 2008 compared with the six months ended June 30, 2007. The increase in research and development expenses was primarily related to an increase in costs for our CLOSURE I trial compared to the same period last year, partially offset by reductions as a result of closing down our MIST II clinical study.

General and Administrative. General and administrative expense increased approximately $983,000, or 25.2%, for the six months ended June 30, 2008 compared with the six months ended June 30, 2007. Included in general and administrative

expense for the six months ended June 30, 2008 is $629,000 of net royalty expense related to our agreement with Bard. Legal expenses also increased compared to the same period last year.

Selling and Marketing. Selling and marketing expense increased approximately $538,000, or 12.4%, for the six months ended June 30, 2008 compared to the same period in 2007. This increase was primarily the result of increased travel costs, as well as additional promotion expenses related to BioSTAR^®.

Interest Income. The decrease in interest income for the six months ended June 30, 2008 compared to the same period in 2007 was primarily related to lower cash balances during 2008. Decreased interest rates offered on our investments also contributed to the decrease in interest income for the period.

Income Tax Provision. We provide for taxes on income from continuing operations based upon our anticipated effective income tax rate. We anticipate incurring a loss from continuing operations in 2008 and therefore have not made a provision for taxes on continuing operations in the six months ended June 30, 2008. For the six months ended June 30, 2008, we recorded income tax expense of $41,670 for the establishment of a liability for uncertain tax positions. For the six months ended June 30, 2007, we recorded a benefit from income taxes of $151,000 as a result of the anticipated benefit from fiscal 2007 loss carrybacks.

LIQUIDITY AND CAPITAL RESOURCES

We had approximately $25.3 million of cash and cash equivalents as of June 30, 2008.

Primarily as a result of the anticipated ongoing costs of CLOSURE I and other research and product development programs, we currently expect to incur annual operating losses at least through 2009. The total cost of our CLOSURE I clinical trial is currently estimated to be approximately $24.0 million through completion of the trial and submission to the FDA. Of this amount, approximately $19.8 million was incurred through June 30, 2008. We currently expect to incur approximately $4.0 million in costs relating to our CLOSURE I clinical trial in 2008.

Capital expenditures are projected to total approximately $500,000 during 2008, primarily for manufacturing and research and development equipment.

We currently believe that aggregate cash, cash equivalents, and marketable securities balances of approximately $25.3 million as of June 30, 2008 will be sufficient to meet our working capital, financing and capital expenditure requirements through at least 2009. Based upon current projections, we expect that the aggregate of cash, cash equivalents, and marketable securities will approximate $16 million at the end of 2008. However, these two forecasts are forward-looking statements that involve risks and uncertainties and actual results could vary materially.


	For the Six Months Ended June 30,
	2008		2007
	(In thousands)
Cash, cash equivalents and marketable securities	$	25,255	$	35,823
Net cash used in operating activities		(5,820)		(5,865)
Net cash provided by investing activities		12,737		3,274
Net cash provided by financing activities		119		216

Net Cash Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 2008 totaled approximately $5.8 million and consisted of a net loss of approximately $9.5 million partially offset by a net decrease in working capital requirements of approximately $3.3 million and non-cash charges of approximately $401,000.

The non-cash charges of approximately $401,000 during the six months ended June 30, 2008 consisted of (i) stock-based compensation, (ii) amortization of bond discount, and (iii) depreciation of property and equipment.

The primary elements of the $3.3 million net decrease in working capital during the six months ended June 30, 2008 consisted of a decrease in prepaid expenses and other current assets of approximately $2.2 million, due primarily to the reduction in the royalty receivable due from Bard as a result of the decrease in the royalty rate we receive from Bard, and increases in accounts payable of approximately $1.2 million.

Net cash used in operating activities for the six months ended June 30, 2007 totaled approximately $5.9 million and consisted of (i) a net loss of approximately $3.0 million and (ii) a net increase in working capital requirements of approximately $3.1 million, partially offset by non-cash charges of approximately $186,000.

The non-cash charges of approximately $186,000 during the six months ended June 30, 2007 consisted of (i) stock-based compensation, principally related to the new accounting rules, effective January 1, 2006, prescribed by SFAS 123(R); (ii) amortization of bond discount; and (iii) depreciation of property and equipment.

The net increase in working capital during the six months ended June 30, 2007 of $3.1 million was primarily related to a decrease in current liabilities of approximately $3.0 million, related to decreases in accounts payable and accrued expenses of approximately $588,000 and $2.5 million, respectively. The reduction in accrued expenses was primarily attributed to a reduction in accruals related to our clinical trials.

Net Cash Provided By Investing Activities

Net cash provided by investing activities of approximately $12.7 million during the six months ended June 30, 2008 consisted primarily of approximately $22.1 million of proceeds from maturities of marketable securities, offset by approximately $9.2 million of purchases of marketable securities. Purchases of property and equipment for use in our manufacturing, research and development and general and administrative activities totaled approximately $85,000 during the six months ended June 30, 2008. This compared to net cash provided by investing activities of approximately $3.3 million during the six months ended June 30, 2007.

Net Cash Provided By Financing Activities

Net cash provided by financing activities was approximately $119,000 and $216,000 for the six months ended June 30, 2008 and 2007, respectively. For both periods, this was primarily attributable to proceeds from the exercise of common stock options and the issuance of shares of common stock pursuant to our employee stock purchase plan.

OFF-BALANCE SHEET FINANCING

During the quarter ended June 30, 2008, we did not engage in any off-balance sheet activities.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2008 and December 31, 2007, 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 corporate and U.S. government agency debt instruments that are carried on our books at amortized cost, increased or decreased by unrealized gains or losses, net of tax, respectively, which amounts are recorded as a component of stockholders’ equity in our consolidated financial statements. Accordingly, we have no quantitative information concerning the market risk of participating in such investments.

We are subject to market risk in the form of foreign currency risk. We denominate certain product sales and operating expenses in non-U.S. currencies, resulting in exposure to adverse movements in foreign currency exchange rates. These exposures may change over time and could have a material adverse impact on our financial condition.

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

ITEM 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 of June 30, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable

assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

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

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

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

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

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

Upon receipt of final FDA approval, we commenced our CLOSURE I study in June 2003. On April 23, 2007, we announced that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Based on an analysis, the conditional probability of a statistically significant benefit at the end of the data reviewed will require an enrollment of 900 patients, of which approximately 875 patients are already enrolled. The original CLOSURE I statistical plan required an enrollment of 1,600 patients. We currently anticipate that when completed, study data from CLOSURE I will be used to support a PFO PMA application. We currently estimate the total costs of CLOSURE I to be approximately $24 million through completion of the clinical trial and submission to the FDA. We have limited direct experience conducting a clinical trial of this magnitude. We cannot be certain that patient enrollment will be completed at all. We cannot be certain that the projected costs of CLOSURE I will not need to be adjusted upwards, primarily related to the extended enrollment period. Furthermore, we cannot be certain that we will obtain a PMA from the FDA based upon the final results of the trial. If CLOSURE I does not result in a PMA, we may face uncertainties and/or limitations as to the continued growth of revenues of our CardioSEAL^® and STARFlex^® products, which will negatively impact our profitability.

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

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

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

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

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, marketing and manufacturing infrastructure and programs and potential licenses and acquisitions. On October 19, 2006, we announced that we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration statement will permit us to offer and sell up to $65 million of equity or debt securities. Any additional equity financing or other transaction involving securities exercisable or convertible into our equitable securities 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 have any line of credit arrangements, and we may not be able to obtain any such credit facilities on acceptable terms, if at all.

REVENUE GENERATED BY CARS IDE MAY BE LIMITED.

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

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

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

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

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

•

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

•

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

•

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

•

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

•

our failure to comply with existing or future regulatory requirements.

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

WE MAY FACE CHALLENGES IN EXECUTING OUR FOCUSED BUSINESS STRATEGY.

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

•

achieving successful stroke-related clinical trials;

•

developing next generation product lines;

•

improving our sales and marketing capabilities;

•

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

•

continuing to train, motivate and manage our employees; and

•

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

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

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

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

ROYALTY REVENUE RATE DECREASES INCREASING ROYALTY EXPENSE.

Through 2007, we received substantial royalty revenue from Bard, related to sales by Bard of its RNF product, for which Bard received FDA approval for commercial sales and use as of December 31, 2002. Beginning in 2008, the royalty rate we receive from Bard has decreased substantially from the royalty rate we earned prior to 2008, while the royalty rate we pay to the estate of the original inventor of these products will remain the same. For the six months ended June 30, 2008, this resulted in a net royalty expense reflected in general and administrative expenses of approximately $629,000.

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

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

The FDA and other regulatory authorities require that our products be manufactured according to rigorous standards including, but not limited to, Good Manufacturing Practices and International Standards Organization, or ISO, standards.

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

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

Our structural heart repair implant devices are marketed primarily through our direct sales force. Since 2001, we have increased our combined U.S. and European sales and marketing organization headcount from 9 to 27. Because we had marketed our initial products, such as stents and vena cava filters, through third parties, we have limited experience marketing our products directly. We are uncertain that we can further expand geographically in Europe or other potential markets for our products. In order to market directly the CardioSEAL ^®, STARFlex^® and BioSTAR^® septal implants and any related products, we will have to continue to develop a marketing and sales organization with technical expertise and distribution capabilities.

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

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

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

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

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

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

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our 2008 annual meeting of stockholders was held on June 18, 2008. Present at the annual meeting in person or through representation by proxy were 10,215,489 out of a total of 13,007,767 shares of common stock entitled to vote, thereby constituting a quorum. The actions taken at the meeting consisted of:

(1) election of seven members to our board of directors, each to serve for a term expiring at the 2009 Annual Meeting of Shareholders;


DIRECTORS	VOTES FOR	VOTES WITHHELD
John E. Ahern	9,925,243	290,246
Cheryl L. Clarkson	9,632,391	583,098
Daniel F. Hanley, M.D.	8,292,666	1,922,823
James E. Lock, M.D.	9,408,234	807,255
James J. Mahoney, Jr.	9,963,622	251,867
Francis J. Martin	8,152,946	2,062,543
David L. West, Ph.D., M.P.H.	8,309,604	1,905,885

(2) ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the current fiscal year;


	VOTES FOR	VOTES AGAINST	VOTES ABSTAINED
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP	10,138,880	64,311	12,296

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

ITEM 6.

EXHIBITS

See the Exhibit Index on page 26 of this quarterly report on Form 10-Q.

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 5, 2008	By:	/s/ JOHN E. AHERN

		John E. Ahern
		President and Chief Executive Officer




Date: August 5, 2008	By:	/s/ RICHARD E. DAVIS

		Richard E. Davis
		Executive Vice President and Chief Financial Officer

EXHIBIT INDEX


Number		Description of Exhibit

31.1		Certification of John E. Ahern, President and Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of Richard E. Davis, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-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, Executive 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.

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