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 JULY 3, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

Commission file number 000-06523

MICRO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)


Delaware		33-0569235
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2 Goodyear, Irvine, California 92618

(Address of principal executive offices)

(949) 837-3700

(Issuer’s telephone number)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

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 15, 2005, 48,506,527 shares of the registrant’s only class of common stock were outstanding.

MICRO THERAPEUTICS, INC.

INDEX TO FORM 10-Q


		Page Number
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of July 3, 2005 (Unaudited) and December 31, 2004	3

	Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended July 3, 2005 and July 4, 2004 (Unaudited)	4

	Consolidated Statements of Cash Flows for the Six Months Ended July 3, 2005 and July 4, 2004 (Unaudited)	5

	Condensed Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

Part II. Other Information

Item 1.	Legal Proceedings	30

Item 4.	Submission of Matters to a Vote of Security Holders	30

Item 6.	Exhibits	31

Signatures		32

Item 1.

Financial Statements

MICRO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

July 3, 2005 and December 31, 2004

(Unaudited)


	July 3, 2005			December 31, 2004
ASSETS:
Current assets:
Cash and cash equivalents	$	5,488,000		$	11,647,000
Accounts receivable, net of allowances		8,542,000			7,712,000
Receivables from ev3 Inc., net		2,459,000			2,419,000
Inventories, net		6,571,000			6,365,000
Prepaid expenses and other current assets		1,228,000			633,000

Total current assets		24,288,000			28,776,000
Property and equipment, net		2,889,000			2,139,000
Intangible assets, net		6,681,000			7,893,000
Goodwill		20,982,000			20,982,000
Other assets		351,000			1,245,000

Total assets	$	55,191,000		$	61,035,000

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	1,076,000		$	924,000
Accrued salaries and benefits		2,146,000			1,972,000
Accrued liabilities		2,479,000			3,105,000
Accrued facility consolidation costs		689,000			1,296,000
Payable to sellers of Dendron GmbH		—			3,750,000
Deferred revenue and other liabilities		2,490,000			1,993,000

Total current liabilities		8,880,000			13,040,000

Commitments and Contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value, 70,000,000 shares authorized; 48,500,000 shares issued and outstanding at July 3, 2005 and 48,425,000 shares issued and outstanding at December 31, 2004		49,000			48,000
Additional paid-in capital		194,800,000			194,551,000
Accumulated deficit		(148,463,000	)		(146,214,000	)
Accumulated other comprehensive loss		(75,000	)		(390,000	)

Total stockholders’ equity		46,311,000			47,995,000

Total liabilities and stockholders’ equity	$	55,191,000		$	61,035,000

See notes to unaudited consolidated financial statements.

MICRO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For The Three and Six Months Ended July 3, 2005 and July 4, 2004

(Unaudited)


	For The Three Months Ended						For The Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
Net sales	$	13,074,000		$	9,102,000		$	24,459,000		$	16,676,000
Cost of sales		4,157,000			3,593,000			8,217,000			6,981,000

Gross margin		8,917,000			5,509,000			16,242,000			9,695,000
Costs and expenses:
Research and development		2,782,000			2,016,000			5,331,000			4,239,000
Clinical and regulatory		976,000			1,501,000			1,964,000			3,116,000
Marketing and sales		2,255,000			1,571,000			4,629,000			3,332,000
Distribution fees charged by ev3 Inc.		2,463,000			2,131,000			4,490,000			3,411,000
General and administrative		2,953,000			4,086,000			5,800,000			7,534,000
Facility consolidation		148,000			—			340,000			—

Total costs and expenses		11,577,000			11,305,000			22,554,000			21,632,000
Loss from operations		(2,660,000	)		(5,796,000	)		(6,312,000	)		(11,937,000	)
Other income (expense):
Amortization of exchange feature of notes payable		—			—			—			(6,190,000	)
Interest income		71,000			24,000			155,000			59,000
Interest expense		(2,000	)		(40,000	)		(6,000	)		(138,000	)
Gain on sale of investment		878,000			1,728,000			4,611,000			1,728,000
Foreign currency transaction loss		(480,000	)		(42,000	)		(792,000	)		(5,000	)
Other income		6,000			3,000			97,000			20,000

Total other income (expense)		473,000			1,673,000			4,065,000			(4,526,000	)

Loss before provision for income taxes		(2,187,000	)		(4,123,000	)		(2,247,000	)		(16,463,000	)
Provision for income taxes		—			—			2,000			2,000

Net loss		(2,187,000	)		(4,123,000	)		(2,249,000	)		(16,465,000	)
Other comprehensive income:
Foreign currency translation gain (loss)		(82,000	)		(140,000	)		315,000			(9,000	)

Total other comprehensive income (loss)		(82,000	)		(140,000	)		315,000			(9,000	)

Comprehensive loss	$	(2,269,000	)	$	(4,263,000	)	$	(1,934,000	)	$	(16,474,000	)

Per share information
Net loss available to common stockholders	$	(2,187,000	)	$	(4,123,000	)	$	(2,249,000	)	$	(16,465,000	)
Net loss per share (basic and diluted)	$	(0.05	)	$	(0.10	)	$	(0.05	)	$	(0.41	)
Weighted average shares used in computation of net loss per share (basic and diluted)		48,432,000			41,433,000			48,429,000			40,448,000

See notes to unaudited consolidated financial statements.

MICRO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended July 3, 2005 and July 4, 2004

(Unaudited)


	2005			2004
Cash flows from operating activities:
Net loss	$	(2,249,000	)	$	(16,465,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of exchange feature of notes payable		—			6,190,000
Non-cash interest expense		—			98,000
Abandonment of patents		179,000			—
Depreciation and amortization		1,787,000			1,648,000
Gain on sale of investment		(4,611,000	)		(1,728,000	)
Gain on sale of fixed assets		(7,000	)		—
Non-cash compensation		23,000			162,000
Provision for doubtful accounts		206,000			231,000
Provision for inventory obsolescence		328,000			289,000
Change in operating assets and liabilities:
Accounts receivable		(1,020,000	)		(1,266,000	)
Receivables from ev3 Inc., net		(40,000	)		(284,000	)
Inventories		(534,000	)		(1,993,000	)
Prepaid expenses and other current assets		(612,000	)		26,000
Accounts payable		152,000			(619,000	)
Accrued salaries and benefits		174,000			(300,000	)
Accrued liabilities		(626,000	)		(224,000	)
Deferred revenue and other liabilities		(110,000			1,181,000

Net cash used in operating activities		(6,960,000	)		(13,054,000	)
Cash flows from investing activities:
Proceeds from sale of investment		4,611,000			1,728,000
Proceeds from sale of fixed assets		7,000			—
Acquisition of Dendron GmbH		(3,750,000	)		(3,750,000	)
Additions to property and equipment		(1,229,000	)		(701,000	)
Additions to patents and licenses		(275,000	)		(185,000	)
Proceeds from conversion of formerly restricted certificates of deposit		880,000			—
Change in other assets		15,000			—

Net cash provided by (used in) investing activities		259,000			(2,908,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock purchase plan		213,000			178,000
Proceeds from exercise of stock options		14,000			9,000
Proceeds from issuance of notes payable		—			21,008,000
Costs from issuance of notes payable and exchange of notes for common stock		—			(774,000	)

Net cash provided by financing activities		227,000			20,421,000
Effect of exchange rates on cash		315,000			(9,000	)

Net (decrease) increase in cash and cash equivalents		(6,159,000	)		4,450,000
Cash and cash equivalents at beginning of period		11,647,000			16,551,000

Cash and cash equivalents at end of period	$	5,488,000		$	21,001,000

Cash paid for income taxes	$	—		$	2,000
Supplemental non-cash flow disclosure:
Exchange of notes payable and related accrued interest for issuance of common stock	$	—		$	11,000,000

See notes to unaudited consolidated financial statements.

MICRO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	The Company

Description

Micro Therapeutics, Inc. (“MTI” or the “Company”) was incorporated on June 11, 1993 in California and was reincorporated in Delaware in November 1996 to develop, manufacture and market minimally invasive medical devices for the diagnosis and treatment of vascular disease.

Liquidity and Capital Resources

Since inception, the Company’s costs and expenses have significantly exceeded its sales, resulting in an accumulated deficit of approximately $148.0 million at July 3, 2005. Consequently, the Company has historically financed its operations through debt and equity placements. The Company believes that current resources, including its credit facility described in Note 8, augmented by the proceeds available from a letter of support, described further below, from Warburg, Pincus Equity Partners, L.P., (“Warburg Pincus”), the majority stockholder of ev3 Inc., the Company’s majority stockholder, will be sufficient to fund its operations and satisfy its obligations for at least the next 12 months, at which time management expects the Company to have achieved positive cash flow from operations. In its letter of support, Warburg Pincus has committed to contribute up to $5.0 million in working capital to the Company, in either a debt or equity transaction. The Warburg Pincus commitment is effective through July 4, 2006 and will be reduced to the extent proceeds become available from a third-party lending or financing arrangement such as the credit facility described in Note 8. Financing from Warburg Pincus may be dilutive to current stockholders. The Company’s future liquidity and capital requirements will be influenced by numerous factors, including, but not limited to, progress of the Company’s clinical research and product development programs, the receipt of and the time required to obtain regulatory clearances and approvals, sales and marketing programs, the performance of ev3 Inc. and its subsidiaries under the terms of the agreements with the Company described in Note 10, and the effects of litigation regarding the Company’s intellectual property described in Note 9.

2.	Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Micro Therapeutics, Inc. and its wholly-owned subsidiaries, Micro Therapeutics International, Inc., incorporated on June 30, 2000 for the purpose of carrying out certain of the Company’s international activities, and Dendron GmbH, acquired on October 4, 2002 (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Reporting Periods

The Company’s fiscal quarters end on the Sunday nearest to the end of the related calendar quarter, except that the fourth fiscal quarter ends on December 31. Accordingly, the first three fiscal quarters in 2004 ended on April 4, July 4 and October 3. The corresponding fiscal quarters in 2005 ended or end on April 3, July 3 and October 2.

Unaudited Interim Financial Information

The unaudited consolidated financial statements included in this Form 10-Q have been prepared pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X, are unaudited and do not contain all of the information required by generally accepted accounting principles to be included in a full set of financial statements. The audited consolidated financial statements in the Company’s 2004 Annual Report on Form 10-KSB include a summary of significant accounting policies of the Company and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to state fairly the unaudited consolidated financial statements for such periods have been included. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year. Certain reclassifications have been made to prior period balances in order to conform to the current period presentation.

Intangible Assets

Costs incurred to obtain patents and licenses, and amounts ascribed to intangible assets acquired in connection with the Company’s acquisition of Dendron, are capitalized. All amounts assigned to these intangible assets are amortized on a straight-line basis over an estimated five-year useful life from the date of issue or acquisition. The Company continually evaluates the amortization period and carrying basis of intangible assets to determine whether later events and circumstances warrant a revised estimated useful life or reduction in value.

Recently Issued Accounting Standards

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” an Amendment of ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires those items be recognized as current-period charges. The provisions of this statement shall be effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material impact on its financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R. FAS 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” related interpretations, and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The Company is required to adopt SFAS 123R beginning January 1, 2006. The pro forma disclosures previously permitted under FAS 123 will no longer be an alternative to financial statement recognition. The Company is evaluating the requirements of FAS 123R and expects that the adoption of FAS 123R will have a material impact on the Company’s consolidated financial position and results of operation, although the Company has not determined the method of adoption among the alternatives permitted under the provisions of FAS 123R.

In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS 123 (R) and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular SAB 107 provides guidance related to share-based payment transaction with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123 (R) in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements under adoption of SFAS 123 (R), the modification of employee share options prior to adoption of SFAS 123 (R), and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS 123 (R). The Company is currently evaluating the impact that SAB 107 will have on its results of operations and financial position when they adopt it in fiscal 2007.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets—an amendment of Accounting Principles Board (“APB”) Opinion No. 29, Accounting for Non-monetary Transactions.” The guidance in APB 29 is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 are applicable for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the provisions of this statement. The Company does not expect adoption of this statement to have a material effect.

In December 2004, the FASB also issued FSP 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP 109-2 provides enterprises more time (beyond the financial-reporting period during which the American Jobs Creation act took effect) to evaluate the impact on the enterprise’s plan for reinvestment or repatriation of certain foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The FSP, issued on December 21, 2004, went into effect upon being issued. The Company does not expect adoption of this statement to have a material impact on its financial statements.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB No. 20 and FAS No. 3 (SFAS 154). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is required to be adopted in fiscal years beginning after December 15, 2005. The Company does not believe its adoption will have a material impact on its consolidated results of operations or financial position.

3.	Stock-Based Compensation

As permitted by SFAS No. 123, the Company accounts for its stock-based compensation arrangements pursuant to APB No. 25, and complies with the disclosure provisions of SFAS No. 123. Under APB Opinion No. 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock (i.e., the intrinsic value method). SFAS No. 123 defines a fair value based method of accounting for an employee stock option. Fair value of the stock option is determined considering factors such as the exercise price, the expected life of the option, the current price of the underlying stock and its volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period.

The Company accounts for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”

Had compensation cost been determined at the fair value on the grant dates for awards under those plans consistent with the method promulgated by SFAS No. 123, the Company’s net loss and related per share amounts would have been as follows:


	For The Three Months Ended						For The Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
Net loss
As reported	$	(2,187,000	)	$	(4,123,000	)	$	(2,249,000	)	$	(16,465,000	)
Deduct: Total stock-based employee compensation expense		(353,000	)		(246,000	)		(758,000	)		(492,000	)

Pro forma	$	(2,540,000	)	$	(4,369,000	)	$	(3,007,000	)	$	(16,957,000	)
Net loss per share (basic and diluted)
As reported	$	(0.05	)	$	(0.10	)	$	(0.05	)	$	(0.41	)
Pro forma	$	(0.05	)	$	(0.11	)	$	(0.06	)	$	(0.42	)

The fair value of each option grant subsequent to the Company’s 1997 initial public offering was estimated on the date of the grant using the Black-Scholes option-pricing model. The assumptions used for the period ended July 3, 2005 and July 4, 2004 were as follows: the average risk-free interest rate was 3.625% and 3.7%, respectively; the exercise price was equal to the fair market value of the underlying Common Stock at the grant date; the expected life of the option was the expected time to exercise, estimated to be four years from the date of grant, for options granted to employees, and the term to expiration, generally 10 years from the date of grant, for options granted to non-employees; expected

volatility was 44.91% and 63%, respectively. The weighted average grant date fair value of options was $2.46 and $3.29, respectively, and the common stock is expected to pay no dividends.

During the three months ended July 3, 2005, the Company granted 77,000 options to employees under its 1996 Stock Incentive Plan. The exercise price of the options granted equaled the market price of the underlying stock on the date of the grant, resulting in no charge to compensation expense.

The Company recognized consulting expense, related to options granted to non-employees of $2,000 and $81,000 in the three months ended July 3, 2005 and July 4, 2004, respectively, and $23,000 and $162,000 in the six months ended July 3, 2005 and July 4, 2004, respectively. There were 24,500 options granted to non-employees during the three month period ending July 3, 2005. These costs are included in research and development expense in the accompanying unaudited consolidated statements of operations, and reflect the Company’s estimate of such options’ fair value, using the Black-Scholes option pricing model. The assumptions used in such Black-Scholes pricing model are the same as those described above.

4.	Accounts Receivable

Accounts receivable at July 3, 2005 and December 31, 2004 consisted of the following:


	July 3, 2005			December 31, 2004
Trade	$	9,893,000		$	8,873,000
Other		133,000			117,000

		10,026,000			8,990,000
Reserve for allowances		(1,484,000	)		(1,278,000	)

	$	8,542,000		$	7,712,000

5.	Inventories

Inventories at July 3, 2005 and December 31, 2004 consisted of the following:


	July 3, 2005			December 31, 2004
Raw materials	$	3,666,000		$	3,965,000
Work–in-process		39,000			101,000
Finished goods		4,341,000			3,446,000

		8,046,000			7,512,000
Reserve for excess and obsolescence		(1,475,000	)		(1,147,000	)

	$	6,571,000		$	6,365,000

6.	Property & Equipment

Property and equipment at July 3, 2005 and December 31, 2004 consisted of the following:


	July 3, 2005			December 31, 2004
Machinery and equipment	$	3,463,000		$	3,324,000
Tooling		404,000			395,000
Leasehold improvements		1,942,000			2,009,000
Furniture and fixtures		716,000			731,000
Computer hardware and purchased software		2,540,000			2,524,000
Construction-in-progress		1,050,000			229,000

		10,115,000			9,212,000
Less: Accumulated depreciation		(7,226,000	)		(7,073,000	)

	$	2,889,000		$	2,139,000

Depreciation expense for property and equipment for the three months ended July 3, 2005 and July 4, 2004 was $247,000 and $253,000, respectively. Depreciation expense for property and equipment for the six months ended July 3, 2005 and July 4, 2004 was $479,000 and $513,000, respectively.

7.	Intangible Assets

Intangible assets at July 3, 2005 and December 31, 2004 consisted of the following:


	July 3, 2005			December 31, 2004
Patents and licenses	$	3,403,000		$	3,476,000
Acquired technology		10,100,000			10,100,000

		13,503,000			13,576,000
Less: Accumulated amortization		(6,822,000	)		(5,683,000	)

Patents and licenses	$	6,681,000		$	7,893,000

Amortization expense for intangible assets for the three months ended July 3, 2005 and July 4, 2004 was $561,000 and $568,000, respectively, and is included in research and development expenses in the accompanying consolidated statements of operations. Amortization expense for intangible assets for the six months ended July 3, 2005 and July 4, 2004 was $1,308,000 and $1,135,000, respectively,

The Company continually evaluates the amortization period and carrying basis of intangible assets to determine whether later events and circumstances warrant a revised estimated useful life or reduction in value. During the six months ended July 3, 2005, the Company determined that it would abandon its pursuit of certain patents for which additional investments would otherwise have been required, and recorded a charge of $179,000 to research and development expense in the accompanying unaudited consolidated statement of operations.

8.	Debt and Equity Financing

On December 4, 2003, the Company entered into a note purchase agreement with certain accredited institutional investors under which the Company issued $17 million aggregate principal amount of unsecured exchangeable promissory notes. The notes bore interest at a rate of 7% per annum. Holders of $13 million in aggregate principal amount of the notes are stockholders of ev3 Inc., the Company’s majority stockholder. On January 30, 2004, the Company’s stockholders approved an increase in the number of authorized shares of common stock from 45 million to 70 million, and approved the issuance of shares of the Company’s common stock in exchange for the aggregate principal amount of the notes and related accrued interest, at a price of $2.73 per share as set forth in the note purchase agreement, resulting in the issuance of 6,296,565 shares of the Company’s common stock.

Generally accepted accounting principles, or GAAP, in the United States considers the difference between the exchange price of $2.73 per share and the closing market price of $3.74 per share on December 4, 2003, the date the note purchase agreement was executed, to represent a beneficial conversion feature of the notes. Under GAAP, the per share beneficial conversion feature is multiplied by the number of shares to be issued in the exchange. The result is recorded as a discount to the notes as of the date of their issuance, and amortized on the interest method over their contractual life. Accordingly, upon issuance of the notes on December 4, 2003, the Company recorded a discount to the notes of approximately $6.3 million, and subsequently recognized amortization of $100,000 in its 2003 results of operations. In January 2004, upon completion of the exchange of the notes for the Company’s common stock, the Company recognized amortization of the remaining unamortized discount, amounting to approximately $6.2 million.

On June 25, 2004, the Company entered into a note purchase agreement with certain accredited institutional investors under which the Company issued $21 million aggregate principal amount of unsecured exchangeable promissory notes. The notes are due in one year, unless otherwise exchanged for shares of the Company’s common stock as described below, and bear interest at a rate of 7% per annum. Holders of $15 million in aggregate principal amount of the notes are members of ev3 Inc., the Company’s majority stockholder. On August 18, 2004, the Company’s stockholders approved the issuance of shares of the Company’s common stock in exchange for the aggregate principal amount of the notes and related accrued interest, at a price of $3.10 per share as set forth in the note purchase agreement, resulting in the issuance of 6,848,163 shares of the Company’s common stock in exchange for cancellation of the notes.

As described above, the notes included a beneficial conversion feature which was calculated as the difference between the exchange price of $3.10 per share and the closing market price of $4.45 per share on June 25, 2004, the date the

note purchase agreement was executed, which amounted to $9.1 million. Such amount was recorded as a discount to the notes, and reflected as additional paid-in capital in the Company’s consolidated balance sheet. In August 2004, upon completion of the exchange of the notes for the Company’s common stock, the Company recognized amortization of the entire $9.1 million discount.

On May 6, 2005, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”), which will expire on May 6, 2007. Pursuant to the terms of the Loan Agreement, the Company may borrow up to the lesser of (i) $3,000,000 or (ii) the sum of (a) 80% of the Company’s eligible accounts receivable, which exclude among other things accounts receivable relating to international sales, and (b) the lesser of (1) 30% of the Company’s eligible inventory, which excludes among other things inventory located outside of the United States, (2) 50% of outstanding loans under (a) above or (3) $750,000. All outstanding amounts under the Loan Agreement bear interest at a variable rate equal to SVB’s prime rate plus 2%. The Loan Agreement also contains customary covenants regarding operations of the Company’s business and financial covenants relating to minimum tangible net worth. At July 3, 2005, the Company was in compliance with meeting the financial covenants. As of July 3, 2005, the Company had no borrowings under this credit facility.

9.	Commitments and Contingencies

On October 4, 2002, the Company completed the purchase of all of the outstanding shares of equity stock of Dendron GmbH, a privately held, German-based developer and manufacturer of neurovascular focused products such as embolic coils for the treatment of brain aneurysms. Under the terms of the stock purchase agreement, future payments to the Dendron sellers, aggregating up to $15,000,000, are contingent upon Dendron products achieving certain revenue targets between 2003 and 2008. In December 2003, the $4 million revenue target for sales of Dendron products during 2003 was met. Accordingly, a payment to the Dendron sellers of $3.75 million was recognized in 2003 as additional consideration of the acquisition, and was paid to the Dendron sellers in 2004. In 2004, the $5 million revenue target for sales of Dendron products during 2004 was met. Accordingly, a second payment to the former Dendron stockholders of $3.75 million was recognized in 2004, and was paid in June 2005. A final additional payment of $7.5 million is contingent upon Dendron products achieving annual revenues of $25 million in any year during the years 2003 through 2008. Such final payment would be due in the year following the year of target achievement.

German tax authorities have not audited the income tax returns of Dendron since it was acquired by the Company. While the Company believes that Dendron has made its tax filings in conformity with German tax regulations, the Company is unable to predict what, if any, areas of inquiry might be made by German tax authorities in connection with an audit in general, or specifically in connection with either the Company’s acquisition of Dendron or the subsequent closure of the German manufacturing facility in December 2004. The Company has an operating lease for office, research and manufacturing space in a facility located in Irvine, California, which expires in 2005. In addition, the Company leases production facilities and office space in Bochum, Germany, under operating lease agreements with terms expiring through 2011.

The future noncancelable minimum lease commitments are as follows:


Years Ending December 31:
2005	$	437,000
2006		449,000
2007		264,000
2008		124,000
Thereafter		315,000

	$	1,589,000

Rent expense for the three months ended July 3, 2005 and July 4, 2004 was $127,000 and $207,000, respectively. Rent expense for the six months ended July 3, 2005 and July 4, 2004 was $251,000 and $389,000, respectively.

The Company has agreements with certain of its suppliers of coatings for its microcatheter, access and delivery products under which the Company pays royalties in a range of 3% to 5% of sales of such products bearing such coatings. Royalty expense under these agreements for the three months ended July 3, 2005 and July 4, 2004 was $147,000 and $146,000, respectively, and is included in cost of goods sold in the accompanying unaudited consolidated statements of operations. Royalty expense under these agreements for the six months ended July 3, 2005 and July 4, 2004 was $270,000 and $265,000, respectively.

A description of litigation to which the Company is a party is as follows:

In September 2000, Dendron, which was acquired by the Company in 2002, was named as the defendant in three patent infringement lawsuits brought by the Regents of the University of California, as the plaintiff, in the District Court (Landgericht) in Dusseldorf, Germany. The complaints requested a judgment that Dendron’s EDC I coil device infringed three European patents held by the plaintiff and asked for relief in the form of an injunction that would prevent Dendron from producing and selling the devices within Germany and selling from Germany to physician customers abroad, as well as an award of damages caused by Dendron’s alleged infringement, and other costs, disbursements and attorneys’ fees. In August 2001, the court issued a written decision that the EDC I coil devices did infringe the plaintiff’s patents, enjoined Dendron from selling the devices within Germany and from Germany to physician customers abroad, and requested that Dendron disclose the individual products’ costs as the basis for awarding damages. In September 2001, Dendron appealed the decision. In addition, Dendron instituted challenges to the validity of each of these patents by filing opposition proceedings with the European Patent Office, or EPO, against one of the patents (the Company joined Dendron in this action in connection with its acquisition of Dendron), and by filing, with the Company, nullity proceedings with the German Federal Patents Court against the German component of the other two patents. The opposition proceedings with the EPO on the one patent are complete, and the EPO has rejected the opposition and has upheld the validity of the one patent.

On July 4, 2001, the University of California filed another suit against Dendron alleging that the EDC I coil device infringed another European patent held by the plaintiff. The complaint was filed in the District Court of Dusseldorf, Germany seeking additional monetary and injunctive relief. In April 2002, the Court found that EDC I coil devices did infringe the plaintiff’s patent. The patent involved is the same patent that was involved in the case before the English Patents Court (see below) and that was ruled by a Dutch court to be invalid (see below). The opposition proceedings on the patent are complete, and the EPO has rejected the opposition and has upheld the validity of the patent. The case is under appeal and an oral hearing is scheduled to be held in the Dusseldorf Court of Appeal on March 9, 2006.

An accrual for the matters discussed above was included in the balance sheet of Dendron as of the date of its acquisition by the Company. As of July 3, 2005, approximately $800,000 was recorded in accrued liabilities in the accompanying unaudited consolidated balance sheet. Dendron ceased all activities with respect to the EDC I coil device prior to the Company’s October 2002 acquisition of Dendron.

Concurrent with its acquisition of Dendron, the Company initiated a series of legal actions related to its Sapphire coils in the Netherlands and the United Kingdom, which included a cross-border action that was heard by a Dutch court, as further described below. The primary purpose of these actions was to assert both invalidity and non-infringement by the Company of certain patents held by others. The range of patents at issue are held by the Regents of the University of California, with Boston Scientific Corporation subsidiaries named as exclusive licensees, collectively referred to as the “patent holders,” related to detachable coils and certain delivery catheters.

In October 2003, the Dutch court ruled the three patents at issue related to detachable coils are valid and that the Company’s Sapphire coils do infringe such patents. The Dutch court also ruled that the patent holders’ patent at issue related to the delivery catheter was invalid. Under the court’s ruling, the Company has been enjoined from engaging in infringing activities related to the Sapphire coils in most countries within the European Union, and may be liable for then-unspecified monetary damages for activities engaged in by the Company since September 27, 2002. In February 2005, the Company received an initial claim from the patent holders with respect to monetary damages amounting to €3.6 million, or approximately $4.3 million as of July 3, 2005, with which the Company disagrees. Court hearings will be held regarding such claims. The Company has filed an appeal with the Dutch court, and believes that, since the date of injunction in each separate country it is in compliance with the Dutch court’s injunction and the Company intends to continue such compliance. The Company believes that it has valid legal grounds for appeal, and has therefore determined that a loss is not probable at this time as defined by SFAS No. 5, “Accounting for Contingencies.” However, there can be no assurance that the ultimate resolution of this matter will not result in a material adverse effect on the Company’s business, financial condition or results of operations.

In January 2003, the Company initiated a legal action in the English Patents Court seeking a declaration that a patent held by the patent holders related to delivery catheters was invalid, and that the Company’s products did not infringe this patent. The patent in question was the U.K. designation of the same patent that was found by the Dutch court in October 2003 to be invalid, as discussed above. The patent holders counterclaimed for alleged infringement by the Company. In February 2005, the court approved an interim settlement between the parties under which the patent holders are required to surrender such patent to the U.K. Comptroller of Patents, and to pay the Company’s costs

associated with the legal action, including interest. As a result, the Company has received interim payments from the patent holders aggregating £500,000, equivalent to approximately $950,000 based on the dates of receipt, which the Company recorded as a reduction of litigation expense upon receipt of such funds in February and March 2005. The parties intend to continue discussions regarding payment by the patent holders of the remaining costs incurred by the Company in such litigation. As a result of the interim settlement, the Company anticipates that it will no longer be involved in litigation in the U.K., although no assurance can be given that no other litigation involving the Company may arise in the U.K.

In the United States, concurrent with the FDA’s marketing clearance of the Sapphire line of embolic coils received in July 2003, the Company initiated a declaratory judgment action against the patent holders in the United States District Court for the Western District of Wisconsin. The action included assertions of non-infringement by the Company and invalidity of a range of patents held by the patent holders related to detachable coils and certain delivery catheters. In October 2003, the court dismissed the Company’s actions for procedural reasons without prejudice and without decision as to the merits of the parties’ positions. In December 2003, the University of California filed an action against the Company in the United States District Court for the Northern District of California alleging infringement by the Company with respect to a range of patents held by the University of California related to detachable coils and certain delivery systems. The Company has filed a counterclaim against the University of California asserting non-infringement by the Company, invalidity of the patents and inequitable conduct in the procurement of certain patents. In addition, the Company filed a claim against the University of California and Boston Scientific Corporation for violation of federal antitrust laws, with the result that the court has subsequently decided to add Boston Scientific as a party to the litigation. A trial date has not been set. These matters are in early stages and, therefore, the Company cannot estimate the possible loss or range of loss, if any, associated with their resolution. However, there can be no assurance that the ultimate resolution of this matter will not result in a material adverse effect on the Company’s business, financial condition or results of operations.

The Company is involved in other litigation from time to time in the ordinary course of business; the outcome of which the Company’s management believes will not have a material adverse effect on the Company’s financial position or results of operations.

10.	Related Party Transactions

The Company has entered into various licensing and consulting agreements, some of which are either with stockholders or with consultants to whom the Company has granted options to purchase shares of the Company’s common stock. Under these agreements, the Company is required to pay royalties ranging from 1% to 5% of net sales on applicable products, some of which are in development, as defined in the individual licensing and consulting agreements. Royalty expense under these agreements for the three months ended July 3, 2005 and July 4, 2004 was $0 and $30,000, respectively, and $0 and $50,000 for the six months ended July 3, 2005 and July 4, 2004, respectively.

The Company’s majority stockholder is ev3 Inc. ev3 Inc., through its wholly owned subsidiary Micro Investment, LLC, owned approximately 70.3% of the Company’s common stock as of July 3, 2005. As described below, the Company is also a party to agreements with ev3 Endovascular, Inc., ev3 International, Inc., ev3 K.K. (Japan) and ev3 Canada, Inc., all of which are wholly owned subsidiaries of ev3 Inc. Of the seven members of the Company’s Board of Directors, four members are members of the board of directors of ev3 Inc. In addition, of these four individuals, the Chairman of the Company’s Board of Directors is President and Chief Executive Officer of ev3 Inc.

The Company has a Lease and Support Services Agreement with ev3 International, Inc. under which the Company provides ev3 International with office space and certain facility-related and administrative services in exchange for a fee. The agreement’s initial term extends into 2005, and may be renewed for an additional two years. The fee is to be recalculated annually, based on the square footage utilized by ev3 International and the Company’s budgeted facility costs. The Company also charges ev3 International for the cost of one administrative employee. Amounts charged to ev3 International by the Company for these items for the three months ended July 3, 2005 and July 4, 2004 amounted to $14,000 and $27,000, respectively, and $30,000 and $51,000 for the six months ended July 3, 2005 and July 4, 2004.

The Company has a Master Services Agreement with ev3 Endovascular, under which ev3 Endovascular installed the Company’s primary information system and renders information technology support services. Amounts charged by ev3 Endovascular for such services for the three months ended July 3, 2005 and July 4, 2004, amounted to $101,000 and $97,000, respectively. For the six months ended July 3, 2005 and July 4, 2004, amounts charged by ev3 Endovascular amounted to $202,000 and $194,000, respectively.

The Company and ev3 Endovascular are parties to a distribution support services agreement under which ev3 Endovascular performs inventory and administrative services with respect to certain finished goods inventory of the Company’s products. Under the terms of the agreement, ev3 Endovascular charges the Company a fee based on a fixed percentage of gross end-customer sales realized by the Company from sales of such products.

The Company and ev3 International are parties to a sales representative agreement, under which ev3 International provides product promotion, marketing, sales solicitation, inventory management, accounting, invoicing, collection and administrative services in certain countries outside the U.S. and Canada where the Company has no existing third-party distributor for its products, and distributor management services in certain countries outside the U.S. and Canada where the Company has existing third-party distributors for its products. As consideration for such services, the Company is charged a fee based on a fixed percentage of revenues the Company realizes from sales of products in territories in which ev3 International maintains sales representatives, and a fee based on a fixed percentage of sales to third party distributors with respect to whom ev3 International performs distributor management services.

Fees charged by ev3 Endovascular and ev3 International to the Company under the terms of the agreements described in the preceding two paragraphs aggregated $2,463,000 and $2,131,000 in the three months ended July 3, 2005 and July 4, 2004, respectively, and $4,490,000 and $3,411,000 in the six months ended July 3, 2005 and July 4, 2004, respectively.

At July 3, 2005 and December 31, 2004, amounts payable to ev3 Inc. and its wholly owned subsidiaries under the terms of such agreements and included as a component of the net receivables from ev3 Inc. in the accompanying unaudited consolidated balance sheet aggregated $675,000 and $625,000, respectively.

At July 3, 2005 and December 31, 2004, ev3 International owed the Company $2,110,000 and $2,484,000, respectively, for amounts it collected from customers on the Company’s behalf that was remitted to the Company in July 2005 and January 2005, respectively, in conformity with the terms of the sales representative agreement described above. In addition, included in accounts receivable in the accompanying unaudited consolidated balance sheet at July 3, 2005 and December 31, 2004 is approximately $7,677,000 and $7,050,000, respectively, representing amounts due to the Company from third parties pursuant to sales transactions in which ev3 International acted as the Company’s sales representative, and will act as the collection agent on the Company’s behalf, in conformity with the sales representative agreement described above.

In April 2003, the Company and ev3 Endovascular entered into a distribution agreement, which superseded a December 2002 distribution support services agreement. Under the terms of the agreement, ev3 Endovascular purchases peripheral vascular products from the Company at a fixed percentage of the actual sales prices realized by ev3 Endovascular from end-user customers. The Company’s collection of payment from ev3 Endovascular for such purchases is fixed by the terms of the agreement, and is not contingent upon ev3 Endovascular’s collections from its customers. However, based on the relationship of ev3 Endovascular to the Company, as described above, the Company adopted a revenue recognition policy under which revenues related to sales of product to ev3 Endovascular under the terms of the agreement are recognized only upon ev3 Endovascular’s sale of such product to its customers.

In June 2003, the Company entered into two separate distribution agreements with ev3 K.K. (Japan) and ev3 Canada, Inc. (collectively, the “ev3 subsidiaries”). Under the terms of such distribution agreements, both of the ev3 subsidiaries purchase peripheral and neurovascular products from the Company at a fixed percentage of the actual sales prices realized by the ev3 subsidiaries from end-user customers. The Company’s collection of payment from the ev3 subsidiaries for such purchases is fixed by the terms of the agreements, and is not contingent upon the ev3 subsidiaries’ collections from their customers. However, based on the relationship of the ev3 subsidiaries to the Company, as described above, the Company adopted a revenue recognition policy under which revenues related to sales of product to the ev3 subsidiaries under the terms of the agreements are recognized only upon the ev3 subsidiaries’ sales of such products to their customers.

At July 3, 2005 and December 31, 2004, ev3 Inc. and its wholly owned subsidiaries owed an aggregate of $1,023,000 and $560,000, respectively, to the Company for purchases made from the Company under the terms of the agreements as described above. Such amount is included as a component of the net receivable from ev3 in the accompanying unaudited consolidated balance sheet.

Other Distribution Agreements

The Company’s products are distributed internationally, other than under the terms of the agreements described above, by various independent distributors.

11.	Concentration of Credit Risk

At July 3, 2005, the Company had approximately $5,388,000 of cash and cash equivalents that were in excess of the federally insured limit of $100,000 per bank. All such investments are in the custody of one bank.

In addition, at July 3, 2005 the Company maintained certificates of deposit, amounting to $285,000, with the same bank described above. Such certificates serve as collateral for letters of credit issued by the bank in connection with requirements by foreign taxing authorities. Accordingly, such certificates are restricted as to use and are included in other assets in the accompanying unaudited consolidated balance sheet.

12.	Genyx Medical, Inc.

As partial consideration for entering into a license agreement in 1997, the Company received shares of common stock of Genyx Medical, Inc. which approximated 14% of Genyx’s outstanding equity voting interests as of the date of its acquisition as discussed below.

In January 2005, C.R. Bard Inc. acquired certain assets of Genyx. Pursuant to such acquisition, the Company received $3.7 million as its pro-rata distribution, which the Company recorded as gain on sale of investment upon receipt of such funds in January 2005.

13.	Enteric Medical Technologies. Inc.

As partial consideration for entering into a license agreement, the Company received shares of Enteric common stock, which approximated 20% of Enteric’s outstanding equity voting interests as of the date of its acquisition as discussed below.

In June 2002, Boston Scientific Corporation and Enteric entered into a merger agreement under which Boston Scientific acquired all the outstanding common and preferred stock of Enteric. Pursuant to the terms of the merger agreement, each Enteric stockholder received a pro rata share of a closing payment, net of amounts set aside in escrow to provide for future indemnity claims, if any. In addition, the merger agreement gave each Enteric stockholder the right to receive a pro rata share of two contingent payments, should Enteric have achieved defined milestones on or before the fifth anniversary of the merger agreement.

In May 2004, the Company received and recognized as a gain on sale of investment a $1.7 million distribution from amounts previously set aside in escrow, under the terms of the merger agreements. In May 2005, the Company received a $878,000 as a second distribution from the remaining 50% of the amounts in escrow. Accordingly, the Company recognized the amounts received as a gain on sale of investment.

14.	Per Share Information

The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period.

The Company considers common equivalent shares from the exercise of stock options and warrants in the instance where the shares are dilutive to net income of the Company by application of the treasury stock method. Potential common shares at July 3, 2005 and July 4, 2004, represented by options to purchase approximately 1,160,000 and 513,000 common shares, respectively, have been excluded from the diluted per share calculation due to their anti-dilutive effect.

15.	Product Line Information

Information with respect to net sales for the three and six months ended July 3, 2005 and July 4, 2004 is as follows:


	Three Months Ended				Six Months Ended
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Product Lines
Embolic products	$	4,176,000	$	3,215,000	$	8,094,000	$	5,517,000
Neuro access and delivery products		8,091,000		5,072,000		14,823,000		9,672,000
Peripheral blood clot therapy and other products		807,000		815,000		1,542,000		1,487,000

Total net sales	$	13,074,000	$	9,102,000	$	24,459,000	$	16,676,000

Geographic Markets
United States	$	4,263,000	$	3,000,000	$	8,447,000	$	5,698,000
International		8,811,000		6,102,000		16,012,000		10,978,000

Total net sales	$	13,074,000	$	9,102,000	$	24,459,000	$	16,676,000

No customer accounted for 10% or more of total net sales for the three and six months ended July 3, 2005 or July 4, 2004.

For the three months ended July 3, 2005, Germany accounted for 11% of total net sales. France accounted for 10% of total net sales for the three months ended July 4, 2004. For the six months ended July 3, 2005, Germany accounted for 11% of total net sales. No other countries outside the United States accounted for 10% or more of total net sales for the six months ended July 4, 2004.

16.	Facility Consolidation

In December 2004, the Company closed its manufacturing facility in Bochum, Germany in order to consolidate its manufacturing operations into a single manufacturing location at its headquarters in Irvine, California, and to eliminate redundant positions in all operating departments.

A reconciliation of accrued facility consolidation costs from December 31, 2004 to July 3, 2005 is as follows:


Accrued facility consolidation costs at December 31, 2004	$	1,296,000
Add: charges to expense, primarily related to employee termination benefits		340,000
Less payments for:
Employee termination benefits		(620,000	)
Contract terminations		(251,000	)

		(765,000	)
Effect of foreign currency translation		(76,000	)

Accrued facility consolidation costs at July 3, 2005	$	689,000

Of the accrued facility consolidation costs of $689,000 at July 3, 2005, the Company expects approximately $660,000 to be paid during the remainder of 2005, and the remaining balance, consisting primarily of building lease payments, to be paid ratably over a period from 2006 through 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 the Company should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference are discussed under “Certain Factors that May Affect Our Business and Future Results.”

OVERVIEW

The Company is engaged in the design, development, manufacturing and marketing of minimally invasive devices for treatment of vascular disease. The Company derives its revenues principally from three product lines: embolic products, neuro access and delivery products and peripheral blood clot therapy products.

The Company manufactures its products at its facilities in Irvine, California. Certain accessories are manufactured and processes performed by contract manufacturers.

Future revenues and results of operations may fluctuate significantly from quarter to quarter and will depend upon, among other factors, regulatory approval of new products, the extent to which the Company’s products gain market acceptance, the rate at which the Company and third-party distributors, as applicable, establish their domestic and international sales and distribution networks, the progress of clinical trials and the introduction of competitive products for diagnosis and treatment of neuro and peripheral vascular disease. Given these factors, accurate prediction of future operating results is difficult. Although the Company has experienced sales growth in certain recent periods, the Company may not be able to sustain sales growth or gain profitability on a quarterly or annual basis, and its growth may not be consistent with predictions made by securities analysts.

The Company manufactures product for stock and ships product shortly after the receipt of orders, and anticipates that it will do so in the future. Accordingly, the Company has not developed a significant backlog and does not anticipate that it will develop a significant backlog in the near term.

The Company’s majority stockholder is ev3 Inc. ev3 Inc., through its wholly owned subsidiary Micro Investment, LLC, owned approximately 70.3% of the Company’s common stock as of July 3, 2005. As described below and in Note 10 to the unaudited consolidated financial statements included herein, the Company is also a party to agreements with ev3 Endovascular, Inc., ev3 International, Inc., ev3 K.K. (Japan) and ev3 Canada, Inc., all of which are wholly owned subsidiaries of ev3 Inc.

Neurovascular Embolic and Access and Delivery Products

The Company’s embolic products consist primarily of the Sapphire and NXT families of embolic coils, and Onyx, a proprietary embolic material developed internally by the Company. The Sapphire coil family became a product line as part of the Company’s acquisition of Dendron in October 2002. The NXT coil family was developed by the Company as an enhancement to the original Sapphire family.

The Company’s neuro access and delivery products consist of guidewires, microcatheters and occlusion balloon systems, developed internally by the Company to access remote vessels in the brain primarily for the delivery of embolic products, including the Company’s Sapphire and NXT coils, and Onyx. All of the Company’s neuro access and delivery products currently marketed have received CE Mark in Europe and 510(k) clearance in the United States.

United States

In the United States, the Company received FDA approval in 2001 to begin a pivotal clinical trial for the use of Onyx in treating brain aneurysms, the protocol for which was modified, with FDA approval, in July 2002. In November 2003, Onyx for the treatment of large and wide-neck brain aneurysms received designation from the FDA as a Humanitarian Use Device, or HUD. Concurrent with receiving the HUD designation, the Company suspended the pivotal clinical trial described above in order to focus its efforts on the related Humanitarian Device Exemption, or HDE, application process. The Company expects to submit the HDE application in 2005.

In July 2005, the Company received PMA approval to commercially market Onyx for the treatment of brain arterio-venous malformations (AVMs) in the United States.

The Company directly markets and sells its neurovascular products in the United States. In June, 2003, the Company and ev3 Endovascular entered into a distribution support services agreement under which ev3 Endovascular performs inventory and administrative services with respect to finished goods inventory of the Company’s neurovascular products. Under the terms of the agreement, ev3 Endovascular charges the Company a fee based on a fixed percentage of gross end-customer sales realized by the Company from sales of such products.

International

Internationally, the Company’s products are marketed and sold under an amended and restated sales representative agreement, executed in August 2003 with ev3 International, which superceded a November 2001 agreement. Under the terms of the August 2003 agreement, ev3 International provides product promotion, marketing, sales solicitation, inventory management, accounting, invoicing, collection and administrative services in certain countries outside the U.S., Japan, and Canada where the Company has no existing third-party distributor for its products, and distributor management services in certain countries outside the U.S., Japan, and Canada where the Company has an existing third-party distributor for its products. Under the agreement, ev3 International charges the Company a fee based on a fixed percentage of revenues the Company realizes from sales of products to end-user customers in territories in which ev3 International maintains sales representatives, and a fee based on a fixed percentage of sales to third party distributors with respect to whom ev3 International performs distributor management services.

In connection with the Company’s acquisition of Dendron in October 2002, the Company terminated the then-existing distribution agreements with substantially all of Dendron’s distributors, and transferred sales, marketing and distribution responsibilities for Dendron’s products to ev3 International in conformity with the terms of the August 2003 agreement described above.

The Company distributes its peripheral and neurovascular products in Japan and Canada pursuant to distributions agreements with ev3 K.K. (Japan) and ev3 Canada, respectively. Under the distribution agreements, these ev3 Inc. subsidiaries purchase the Company’s products at a fixed percentage of the actual sales prices realized them from end-user customers. The Company’s collection of payment from ev3 K.K. (Japan) and ev3 Canada for these purchases is fixed by the terms of the distribution agreements, and is not contingent upon the collection from the end-user customers. However, based on the relationship of these ev3 subsidiaries to the Company, as described above, the Company adopted a revenue recognition policy under which revenues related to sales of product to these ev3 subsidiaries under the terms of the agreements are recognized only upon the ev3 subsidiaries’ sales of such products to their customers.

In the first quarter of 2004, the Company commercially launched the NXT family of embolic coils in Europe, which replaced the Sapphire embolic coil product line in that geographic market. In the first quarter of 2005, the NXT family of embolic coils was commercially launched in the United States.

Peripheral Blood Clot Therapy Products

The Company’s peripheral blood clot therapy products consist of microcatheters, infusion wires and a mechanical brush for the delivery of thrombolytic agents for the dissolution of blood clots. Effective January 2003, the Company entered into a distribution support services agreement with ev3 Endovascular, under which ev3 Endovascular provided warehousing for the Company’s peripheral blood clot therapy products, which comprise nearly all of the Company’s peripheral blood clot therapy product segment sales, and charged the Company a fee at a fixed percentage of the Company’s sales of such products. In April 2003, the Company and ev3 Endovascular entered into a distribution agreement, which superseded the January 2003 distribution support services agreement. Under the terms of the April 2003 agreement, ev3 Endovascular purchases peripheral blood clot therapy products from the Company at a fixed percentage of the actual sales prices realized by ev3 Endovascular from end-user customers. The Company’s collection of payment from ev3 Endovascular for these purchases is fixed by the terms of the distribution agreements, and is not contingent upon the collection from the end-user customers. However, based on the relationship of ev3 Endovascular to the Company, as described above, the Company adopted a revenue recognition policy under which revenues related to sales of product to ev3 Endovascular under the terms of the agreements are recognized only upon ev3 Endovascular’s sales of such products to their customers.

The Company markets its peripheral blood clot therapy products internationally principally under the terms of the August 2003 agreement with ev3 International described above.

RESULTS OF OPERATIONS

Comparison of the Three Months and Six Months Ended July 3, 2005 and July 4, 2004

The following table sets forth, for the three months and six months ended July 3, 2005 and July 4, 2004, the Company’s results of operations expressed as dollar amounts and as percentages of net sales:


	Three Months Ended										Six Months Ended
	July 3, 2005					July 4, 2004					July 3, 2005					July 4, 2004
	Amount			% of Sales		Amount			% of Sales		Amount			% of Sales		Amount			% of Sales
Net sales	$	13,074,000		100	%	$	9,102,000		100	%	$	24,459,000		100	%	$	16,676,000		100	%
Cost of sales		4,157,000		32	%		3,593,000		39	%		8,217,000		34	%		6,981,000		42	%

Gross margin		8,917,000		68	%		5,509,000		61	%		16,242,000		66	%		9,695,000		58	%

Costs and expenses:
Research and development		2,782,000		21	%		2,016,000		22	%		5,331,000		22	%		4,239,000		25	%
Clinical and regulatory		976,000		8	%		1,501,000		16	%		1,964,000		8	%		3,116,000		19	%
Marketing and sales		2,255,000		17	%		1,571,000		17	%		4,629,000		19	%		3,332,000		20	%
Distribution fees charged by ev3 Inc.		2,463,000		19	%		2,131,000		23	%		4,490,000		18	%		3,411,000		20	%
General and administrative		2,953,000		23	%		3,817,000		42	%		5,800,000		24	%		7,265,000		44	%
Facility Consolidation		148,000		1	%		—		0	%		340,000		1	%		—		0	%
Distributor termination		—		0	%		269,000		3	%		—		0	%		269,000		2	%

Total costs and expenses		11,577,000		89	%		11,305,000		124	%		22,554,000		92	%		21,632,000		130	%

Loss from operations		(2,660,000	)	-20	%		(5,796,000	)	-64	%		(6,312,000	)	-26	%		(11,937,000	)	-72	%

Other income (expense):
Amortization of beneficial conversion feature of notes payable		—		0	%		—		0	%		—		0	%		(6,190,000	)	-37	%
Interest income (expense), net		69,000		1	%		(16,000	)	0	%		149,000		1	%		(79,000	)	0	%
Gain on sale of investment		878,000		7	%		1,728,000		19	%		4,611,000		19	%		1,728,000		10	%
Foreign currency transaction loss		(480,000	)	-4	%		(42,000	)	-1	%		(792,000	)	-3	%		(5,000	)	0	%
Other income		6,000		0	%		3,000		0	%		97,000		0	%		20,000		0	%

Total other income (expense)		473,000		4	%		1,673,000		18	%		4,065,000		17	%		(4,526,000	)	-27	%

Loss before provision for income taxes		(2,187,000	)	-17	%		(4,123,000	)	-45	%		(2,247,000	)	-9	%		(16,463,000	)	-99	%
Provision for income taxes		—		0	%		—		0	%		2,000		0	%		2,000		0	%

Net loss	$	(2,187,000	)	-17	%	$	(4,123,000	)	-45	%	$	(2,249,000	)	-9	%	$	(16,465,000	)	-99	%

Following is information with respect to net sales for the three and six months ended July 3, 2005 and July 4, 2004 for the Company’s product lines and geographic markets:


	Three Months Ended				Six Months Ended
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Product Lines
Embolic products	$	4,176,000	$	3,215,000	$	8,094,000	$	5,517,000
Neuro access and delivery products		8,091,000		5,072,000		14,823,000		9,672,000
Peripheral blood clot therapy and other products		807,000		815,000		1,542,000		1,487,000

Total net sales	$	13,074,000	$	9,102,000	$	24,459,000	$	16,676,000

Geographic Markets
United States	$	4,263,000	$	3,000,000	$	8,447,000	$	5,698,000
International		8,811,000		6,102,000		16,012,000		10,978,000

Total net sales	$	13,074,000	$	9,102,000	$	24,459,000	$	16,676,000

For the three months ended July 3, 2005, embolic product sales increased 30% to $4.2 million compared to $3.2 million for the three months ended July 4, 2004. For the six months ended July 3, 2005, embolic product sales increased 47% to $8.1 million compared to $5.5 million for the six months ended July 4, 2004. The increase in embolic product sales for the three and six months ended July 3, 2005 compared to the three and six months ended July 4, 2004 is attributable primarily to volume increases in sales of the NXT coil family.

Sales from the neuro access and delivery products increased 59% to $8.1 million for the three months ended July 3, 2005 compared to $5.1 million for the three months ended July 4, 2004. For the six months ended July 3, 2005, sales of neuro access and delivery product increased 53% to $14.8 million compared to $9.7 million for the six months ended July 4, 2004. The increase in neuro access product sales for the three and six months ended July 3, 2005 compared to the three and six months ended July 4, 2004 is primarily attributable to volume increases across multiple product lines including the Echelon microcatheters, the Marathon microcatheter, and the HyperForm and HyperGlide occlusion balloon systems.

Sales of peripheral vascular and other products for the three and six months ended July 3, 2005 remained relatively unchanged from the corresponding period in 2004.

Cost of sales for the three months ended July 3, 2005 were $4.2 million as compared to $3.6 million for the three months ended July 4, 2004. This increase resulted primarily from volume increases in sales of product as discussed above. As a percentage of sales, cost of sales for the three-month period ended July 3, 2005 was 32% as compared to 39% for the corresponding period of 2004. This reduction arose primarily from increased production volume.

Cost of sales for the six months ended July 3, 2005 were $8.2 million as compared to $7.0 million for the six months ended July 4, 2004. This increase primarily resulted from increased production volume. Cost of sales incurred in the first quarter of 2004 were impacted by the initiation of commercial manufacturing of the NXT embolic coil product line in the Company’s German facility and of the Sapphire embolic coil product line in the United States.

Research and development expenses were $2.8 million for the three-month period ended July 3, 2005 as compared to $2.0 million for the three month-period ended July 4, 2004. For the six months ended July 3, 2005, research and development expenses were $5.3 million as compared to $4.2 million for the six months ended July 4, 2004. The increase is attributed to the development costs related to the Nexus coil family for the three and six months ended July 3, 2005 compared to the three and six months ended July 4, 2004.

Clinical and regulatory expenses decreased $525,000 to $976,000 for the three months ended July 3, 2005 from $1,501,000 for the three months ended July 4, 2004. For the six months ended July 3, 2005, clinical and regulatory expenses decreased $1.2 million to $2.0 million from $3.1 million for the six months ended July 4, 2004. In 2004, clinical and regulatory expenses were higher due to costs incurred in connection with the Company’s Onyx clinical trial activity in the U.S., which activity had been substantially reduced by the end of 2004.

Marketing and sales expenses, including fees charged to the Company by ev3 Inc. and its wholly owned subsidiaries increased $1.0 million to $4.7 million for the three months ended July 3, 2005 from $3.7 million for the three months ended July 4, 2004. Of the $1.0 million increase in marketing and sales expenses, $0.7 million is attributable to the recent expansion of the Company’s U.S. sales force and $0.3 million is attributable to increases in distribution costs that vary positively with increases in sales. For the six-month period ended July 3, 2005, marketing and sales expenses increased $2.4 million to $9.1 million for the six months ended July 3, 2005 compared to $6.7 million for the six months ended July 4, 2004. Of the $2.4

million increase in marketing and sales expenses, $1.3 million is attributable to the recent expansion of the Company’s U.S. sales force and $1.1 million is attributable to distribution costs that vary positively with increases in sales.

General and administrative expenses decreased $1.1 million to $3.0 million for the three-month period ended July 3, 2005 from $4.1 million for the three-month period ended July 4, 2004. This decrease is attributable primarily to reduced legal expenses in 2005, amounting to $1.3 million in connection with intellectual property litigation, as compared to $2.5 million of such legal expenses for the three months ended July 3, 2004.

General and administrative expenses decreased $1.7 million to $5.8 million for the six-month period ended July 3, 2005 from $7.5 million for the six-month period ended July 4, 2004. Legal expenses for the six-month period ended July 3, 2005 include reimbursement of approximately $950,000 of previously expensed litigation costs which was received under the terms of an interim settlement in the United Kingdom litigation matter, under which the opposing party agreed to pay the Company its costs associated with that action. The Company recorded such proceeds as a reduction of litigation expense upon receipt of such funds in February and March 2005. The parties intend to continue discussions regarding payment by the opposing party of the remaining costs incurred by the Company in this matter. Should the Company continue to actively pursue its position with respect to such litigation, it is possible that the rate at which litigation costs are incurred could increase in future periods. See Note 9 of Notes to Unaudited Consolidated Financial Statements.

On December 4, 2003, the Company entered into a note purchase agreement under which it sold exchangeable promissory notes, in an aggregate principal amount of $17.0 million, which the Company exchanged for shares of its common stock pursuant to exchange provisions in the note purchase agreement in January 2004. Under generally accepted accounting principles, or GAAP, in the United States, the difference between the exchange price and the closing market price per share represents a beneficial conversion feature of the notes, which is reflected as a discount to the notes and amortized over the contractual life of the notes. On January 30, 2004, upon the exchange of the notes for the Company’s common stock, the Company expensed the remaining unamortized discount as of that date, amounting to approximately $6.2 million.

Interest income increased to $71,000 for the three months ended July 3, 2005 from $24,000 in the same period of 2004 due to higher average cash balances in 2005 relative to 2004. Interest expense decreased to $2,000 for the three months ended July 3, 2005 from $40,000 in the same period of 2004. Interest expense was higher for the three months ended July 4, 2004 due to the interest related to the exchangeable promissory notes described above that were exchanged for shares of the Company’s common stock in August 2004.

For the six months ended July 3, 2005, interest income increased to $155,000 from $59,000 compared to the same period in 2004. This increase is due to higher average cash balances in 2005 relative to 2004. Interest expense decreased to $6,000 for the six months ended July 3, 2005 from $138,000 in the same period of 2004. Interest expense was higher for the six months ended July 4, 2004 due to the interest related to the exchangeable promissory notes described above that were exchanged for shares of the Company’s common stock in August 2004.

In January 2005, the Company received $3.7 million as a result of the consummation of a sale of certain assets by Genyx Medical, Inc., in which the Company owned a minority equity interest. The Company recorded such amount as a gain on sale of investment upon its receipt. In May 2005, the Company received $878,000 as a result of the Boston Scientific merger with Enteric Medical Technologies, Inc. in which the Company owned a minority equity interest. The payment represents a second pro rata distribution of the amounts in escrow under the terms of the merger agreement and accordingly, the Company recorded such amount as a gain on sale of investment.

In December 2004, the Company closed its manufacturing facility in Bochum, Germany, and consolidated its manufacturing operations into a single manufacturing location at its headquarters in Irvine, California. In connection with the facility closure, the Company accrued estimated costs of termination benefits, contractual termination costs and asset impairment costs as of the date of closure. During the six months ended July 3, 2005, the Company accrued additional facility consolidation cost, consisting primarily of period costs related to employee termination benefits amounting to $340,000.

The Company believes it will incur additional facility consolidation costs in the remainder of 2005 for period related costs and as negotiations related to certain of its terminated contractual relationships progress. The Company does not currently expect significant additional costs to be incurred after 2005.

Liquidity and Capital Resources

debt and equity placements. In late 2003 and 2004, the Company completed two private placements of exchangeable promissory notes resulting in aggregate proceeds to the Company of $38 million, of which $28 million resulted from sales of notes to stockholders, and their affiliates, of ev3 Inc. The exchangeable promissory notes were subsequently exchanged for an aggregate of 13,144,728 shares of the Company’s common stock.

In addition to its operations, the Company has received cash payments from two private medical device companies in which the Company owned a minority equity interest. In January 2005, the Company received $3.7 million as a result of the consummation of a sale of certain assets by Genyx Medical, Inc. Also, in May 2004, the Company received $1.7 million of the amounts set aside in escrow in connection with Boston Scientific’s merger with Enteric Medical Technologies, Inc. In May 2005, the Company received $878,000 of the remaining portion of escrowed amounts under the merger agreement. The Company expects to receive the remaining amount of approximately $850,000 in May 2006, provided that no claims are made against the amounts in escrow.

As of July 3, 2005, the Company had cash and cash equivalents of $5.5 million. Cash used by the Company’s operations during the six months ended July 3, 2005 was $7.0 million, reflecting primarily the loss from operations, increases in trade receivables from third-party customers and inventories, increases in prepaid expenses, increases in accounts payable, and increases in accrued compensation and decreases in accrued liabilities, which represent payments of bonuses earned during 2004 and employee termination benefits in connection with the Company’s December 2004 closure of its German facility, respectively. Partially offsetting such changes was an increase in the net receivables from ev3 Inc. The Company expects that operations will continue to consume cash during 2005.

Cash provided by investing activities during the six months ended July 3, 2005 was $259,000, primarily resulting from the receipt of $3.7 million from the sale of assets of Genyx, receipt of $878,000 in connection with Boston Scientific’s merger with Enteric Medical, Inc., both described above, and the restoration to cash of certificates of deposit, aggregating $880,000, that had been segregated from cash balances during the period that such certificates of deposit served as collateral for bank letters of credit which expired in 2005. Cash provided by investing activities during the six months ended July 3, 2005 was offset by a $3.75 million payment to the former Dendron stockholders and the acquisition of property and equipment and capitalized patents costs.

Cash provided by financing activities during the six months ended July 3, 2005 was $227,000, primarily consisting of proceeds from the exercise of stock options.

Under the terms of the stock purchase agreement entered into in connection with its acquisition of Dendron, the Company agreed to make additional payments, aggregating up to $15 million, contingent upon Dendron products achieving certain revenue targets between 2003 and 2008. In 2003, the $4 million revenue target for sales of Dendron products during 2003 was met. Accordingly, an additional payment to the former Dendron stockholders of $3.75 million was made in 2004. Also in 2004, the $5 million revenue target for sales of Dendron products during that year was met. Accordingly, a second payment to the former Dendron stockholders of $3.75 million was accrued in 2004 and was paid in June 2005. A final additional payment of $7.5 million is contingent upon Dendron products achieving revenues of $25 million in any fiscal year during the period 2003 through 2008. This additional payment would be due in the year following the year of target achievement.

On June 25, 2004, the Company entered into a note purchase agreement under which it sold exchangeable promissory notes in an aggregate principal amount of $21 million. Similar to the notes issued under the December 2003 agreement described above, the notes issued under the June 2004 agreement contain a beneficial conversion feature amounting to $9.1 million. Accordingly, upon issuance of the notes on June 25, 2004, the Company recorded a discount to the notes of $9.1 million, and upon exchanging of the notes for the Company’s common stock on August 18, 2004, the Company expensed the entire $9.1 million unamortized discount.

The Company is party to a number of alleged patent infringement claims in the United States and Europe as described in Note 9 of “Notes to Unaudited Consolidated Financial Statements” included elsewhere in this report. During 2004 and 2003, the Company incurred legal expenses of approximately $7.7 million and $4.6 million, respectively, in connection with these claims. In February 2005, the English Patents Court approved an interim settlement between the Company and the patent holders involved in the proceeding whereby the patent holders agreed to pay the Company’s legal costs associated with the proceeding, including interest. As a result, the Company received interim payments from the patent holders aggregating £500,000, equivalent to approximately $950,000 based on the dates of receipt. The parties intend to continue discussions regarding payment by the patent holders of the remaining costs incurred by the Company in such litigation. Although the Company has reached an interim settlement for the proceeding initiated in the United Kingdom, a number of similar proceedings remain active. If the Company actively pursues its position in the remaining litigation matters, it will likely incur significant legal expenses through at least the remainder of 2005.

As described in more detail in Note 9 of “Notes to Unaudited Consolidated Financial Statements” included elsewhere in this report, and the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004, the Company established, as of the date of its acquisition of Dendron, an accrual for potential payment of claims related to matters in which Dendron was involved prior to the acquisition. In addition, in February 2005, the Company received an initial claim from the patent holders with respect to monetary damages, amounting to €3.6 million, or approximately $4.3 million as of July 3, 2005, related to the matter being heard in a Dutch court, with which the Company disagrees and which is subject to further legal proceedings, and therefore cannot be reasonably estimated. The Company does not expect that payments for claims will result from either of these matters during 2005.

At July 3, 2005, accrued facility consolidation costs of $689,000 represents costs related to the Company’s December 2004 closure of its manufacturing facility in Germany. Of this amount, the Company expects approximately $660,000 to be paid during the remainder of 2005, and the remaining balance, consisting primarily of building lease payments, to be paid ratably over a period from 2006 through 2008.

German tax authorities have not audited the income tax returns of the Company’s German subsidiary, Dendron GmbH, since the Company’s acquisition of Dendron in October 2002. While the Company believes that Dendron has made its tax filings in conformity with German tax regulations, the Company is unable to predict what, if any, areas of inquiry might be made by German tax authorities in connection with an audit in general, or specifically in connection with either the Company’s acquisition of Dendron or the subsequent closure of the German manufacturing facility described above.

In the first quarter of 2005, the Company received a support letter from Warburg Pincus Equity Partner, L.P., pursuant to which Warburg Pincus has agreed to provide additional financing, up to $5 million, to the Company. The Warburg Pincus commitment is effective through July 4, 2006 and will be reduced to the extent of proceeds that become available from a third party lender such as the credit facility described below. The Company believes that the combination of its existing cash at July 3, 2005, net cash anticipated to be consumed for 2005 operations, and proceeds either under the credit facility described below or its support letter with Warburg Pincus, will be sufficient to fund the Company’s operations for the next twelve months.

On May 6, 2005, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which will expire on May 6, 2007. Pursuant to the terms of the Agreement, the Company may borrow up to the lesser of (i) $3,000,000 or (ii) the sum of (a) 80% of the Company’s eligible accounts receivable, which exclude among other things accounts receivable relating to international sales, and (b) the lesser of (1) 30% of the Company’s eligible inventory, which excludes among other things inventory located outside of the United States, (2) 50% of outstanding loans under (a) above or (3) $750,000. All outstanding amounts under the Agreement bear interest at a variable rate equal to the bank’s prime rate plus 2%. The agreement also contains customary covenants regarding operations of the Company’s business and financial covenants relating to minimum tangible net worth. The Company was in compliance with meeting the financial covenants at July 3, 2005. As of July 3, 2005, the Company had no borrowings under this credit facility.

During the second quarter of 2005, the Company commenced activities related to a potential relocation of its operations in Irvine, California to a larger facility in the same vicinity. The Company believes that a larger facility will be required to support its continued growth. The Company is in final negotiations with a prospective landlord to lease a larger facility, but has yet to enter into a definitive lease agreement. The Company expects to occupy a new facility in 2006. The lease for the Company’s current facility expires in September 2005. However, the Company has reached an agreement with its current landlord under which it will lease its current facility on a month-to-month basis until such time as it has completed its relocation to a new facility. In connection with this planned facility move, the Company has agreed in principle with, and is currently negotiating a definitive agreement with ev3 Inc., the Company’s majority stockholder, under which ev3 Inc. will make available to the Company a credit facility of $3.3 million. This facility would bear interest at a floating prime rate plus 2.3%, and would provide the Company with the necessary financing to support the facility expansion needs.

The Company’s future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future revenues and expenditures, market acceptance of new products, the results and scope of ongoing research and development projects, competing technologies, market and regulatory developments and the future course of intellectual property litigation. If any of these factors, either individually or in combination, prevent the Company from attaining its anticipated cash flows, the Company may need to complete a financing transaction to provide sufficient working capital. There is no assurance that any financing transaction will be available on terms acceptable to the Company, or at all, or that any financing transaction will not be dilutive to current stockholders. If the Company requires additional working capital, but is not able to raise additional funds, it may be required to significantly curtail or cease its ongoing operations.

CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS

Some of the information included herein contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of, estimates made by and information currently available to, our management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including, without limitation, statements to the effect that Micro Therapeutics or our management “may,” “will,” “expects,” “anticipates,” “estimates,” “continues,” “plans,” “believes,” or “projects,” or statements concerning “potential” or “opportunity,” any variations thereof, comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. Our actual results may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impaired by risks including, but not limited to the following:

We continue to incur negative cash flows from operations.

Our operations to date have consumed substantial amounts of cash, and we expect this condition will continue into at least the fourth quarter of 2005. We expect that our current working capital and expected cash flows from operations, augmented by the available borrowings under our credit facility, will be sufficient to fund our operations for the next twelve months, at which time we believe we will have achieved cash flow positive operations. In addition, we have received a letter of support from Warburg Pincus, who owns or controls the majority portion of our outstanding common stock, in which Warburg Pincus has committed to contribute up to $5 million of working capital subject to certain limitations. However, positive cash flow from operations may not be achieved in the expected time frame and the funding from Warburg Pincus may be on terms that are dilutive to existing stockholders. Our ability to achieve cash flow positive operations will be influenced by many factors, including the extent and duration of our future operating losses, the level and timing of future sales and expenditures, market acceptance of new products, the results and scope of ongoing research and development projects, competing technologies, market and regulatory developments and the future course of intellectual property litigation.

If we are not able to achieve positive cash flow from operations in the time frame we expect or obtain sufficient funds from Warburg Pincus, we may have to raise additional working capital through either a public or private debt or equity financing. However, an additional financing may not be available on acceptable terms or at all. If we raise additional funds by issuing equity securities, further dilution to our existing stockholders could result. If adequate funds were not available to us, our business would be negatively impacted.

If we fail to protect our intellectual property rights, our ability to operate our business may be materially harmed.

We depend on a combination of patents, trademarks, trade secrets and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology, our revenue base and our business. Our success will depend in part on our ability to:

•

obtain patents for new technologies and maintain our existing patents;

•

preserve our trade secrets; and

•

operate without infringing the proprietary rights of others.

The patent position of a medical device company often involves complex legal and factual issues. Our issued patents cover technology underlying our neuro vascular products, such as our embolic products and microcatheters, and our peripheral vascular products, such as the thrombolytic brush. Issued patents may not provide us significant proprietary protection, pending patent applications may not be issued, and products incorporating the technology in issued patents or pending applications may not be free of challenge from competitors. It is possible that patents belonging to competitors will require us to alter our technology and products, pay licensing fees, or cease to market or develop our current or future technology and products. We also rely on trade secrets to protect our proprietary technology, and it is possible that others will independently develop or otherwise acquire equivalent technology or that we will be unable to maintain our technology as trade secrets. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. If we fail to adequately protect our intellectual property rights, there would be a negative impact on our business.

We may be involved in claims alleging infringement of intellectual property rights, which could be costly and time consuming.

There has been extensive litigation in the medical device industry regarding alleged infringement of patents and other intellectual property rights. Prior to our acquisition of Dendron, it became involved in litigation in Europe involving patents covering certain of its products, which litigation is still active. Concurrent with our acquisition of Dendron, we initiated a series of legal actions in Europe and the U.K. with the primary purpose of asserting both invalidity and non-infringement by us of certain patents held by others with respect to detachable coils and certain delivery systems. In addition, the patent holders against whom we initiated the actions in Europe and the U.K. have initiated legal actions against us in the United States that allege infringement by us of certain patents held by them. See Note 9 of “Notes to Unaudited Consolidated Financial Statements” included elsewhere in this report, and our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 for a more detailed description of the legal actions. It is possible that other infringement, invalidity, right to use or ownership claims could be asserted against us with respect to our products.

Claims involving alleged infringement of intellectual property rights are often time-consuming and costly and may divert management’s attention away from other operational matters. Although patent and intellectual property disputes in the medical device industry have often been settled through licensing or similar arrangements, these arrangements can be costly and the necessary licenses may not be available to us on satisfactory terms or at all under such circumstances. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business.

One of our stockholders beneficially owns a majority of our common stock, which enables it to control our Board of Directors and cause or prevent significant transactions.

ev3 Inc. beneficially owns an aggregate of approximately 70.3% of our outstanding common stock. In addition, four members of our Board of Directors, James Corbett, Dale A. Spencer, Richard B. Emmitt and Elizabeth H. Weatherman, are members of the board of directors of ev3 Inc. Ms. Weatherman is a general partner of Warburg, Pincus & Co., the sole general partner of Warburg Pincus, which, together with three affiliated entities, owns a majority of the outstanding shares of ev3 Inc.

ev3 Inc. will be able to exercise voting control over us for the foreseeable future and will be able to elect the entire Board of Directors, set dividend policy and otherwise generally determine our management. ev3 Inc., through its wholly owned subsidiary Micro Investment, LLC, appointed three of the seven members of our current Board of Directors, and so long as Micro Investment holds 30% of the outstanding shares of our common stock, Micro Investment is entitled to designate four of the members of our Board of Directors. This control by ev3 Inc. could prevent, or make more difficult, a sale of Micro Therapeutics that is not on terms acceptable to Micro Investment and its affiliates. In addition, this control would allow Micro Investment to prevent, or alternatively, to cause to occur, significant corporate transactions.

Our quarterly operating results may fluctuate significantly because of several factors, including:

•

the timing of regulatory approvals and clearances;

•

the rate at which we and third-party distributors, as applicable, establish domestic and international sales and distribution networks;

•

our levels of expenses, in particular with respect to intellectual property litigation;

•

the progress of clinical trials and the introduction of competitive products for diagnosis and treatment of neuro and peripheral vascular disease;

•

the level of orders within a given quarter and preceding quarters;

•

the timing of product shipments within a given quarter;

•

our timing in introducing new products;

•

changes in our pricing policies or in the pricing policies of our competitors or suppliers;

•

the availability and cost of key components used to manufacture our products;

•

termination of supply or distribution contracts for our products;

•

the need to incur or record significant non-cash charges or write down the carrying value of intangible assets;

•

our ability to manufacture a sufficient quantity of our products to meet customer demand; and

•

fluctuations in foreign currency exchange rates.

Due to these and other factors, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. In any quarterly period, our results may be below the expectations of market analysts and investors, which would likely cause the trading price of our common stock to decrease.

Several of our products are in developmental stages and may not successfully come to market, which could harm our sales and revenues.

We have only recently introduced a number of products commercially, and several of our products, including extensions of existing products, are in the early stage of development. Some of our products only recently emerged from clinical trials and others have not yet reached the clinical trial stage. Our ability to market these products will depend upon a number of factors, including our ability to demonstrate the safety and efficacy of our products in the clinical setting. Our products may not be found to be safe and effective in clinical trials and may not ultimately be cleared for marketing by U.S. or foreign regulatory authorities. Our failure to develop safe and effective products that are approved for sale on a timely basis would have a negative impact on our business.

If we cannot obtain approval from governmental agencies we will be unable to sell our products in some countries.

We are required to obtain U.S. Food and Drug Administration, or FDA, approval prior to marketing our products in the United States and foreign regulatory approval prior to marketing our products internationally. The process of obtaining required FDA and foreign regulatory approvals is lengthy, expensive and uncertain. We may not receive regulatory clearance for some of our products or, if regulatory clearance is granted, it may include significant limitations on the indicated uses for which a product may be marketed.

With respect to certain modifications we have made to products covered under 510(k) clearances, the FDA may not agree with our determinations that a new 510(k) notice was not required for such changes and could require us to submit a new 510(k) notice for any of the changes made to a device. If the FDA requires us to submit a new 510(k) notice for any device modification, we may be prohibited from marketing the modified device until the FDA clears the 510(k) notice. Delays that would be caused by the submission of a new 510(k) notice could materially adversely affect our business.

Delays in receipt of, failure to receive, or loss of regulatory approvals or clearances to market our products would negatively impact our business.

Our products may not be accepted by the market, which could harm our sales and revenues.

Even if we are successful in developing safe and effective products that have received marketing clearance from government regulatory authorities, our products may not gain market acceptance. In order for any of our products to be accepted, we must successfully identify and address the needs of potential customers. However, even if we are successful in getting customers to accept our products, this acceptance may not translate into sales, which could negatively impact our results of operations.

New products and technologies in the market could create additional competition, which may reduce the demand for our products.

The markets in which we compete involve rapidly changing technologies and new product introductions and enhancements. We must enhance and expand the utility of our products, and develop and introduce innovative new products that gain market acceptance. New technologies, products or drug therapies developed by others could reduce the demand for our products. We may encounter technical problems in connection with our own product development that could delay introduction of new products or product enhancements. While we maintain research and development programs to continually improve our product offerings, which include adding interventional devices, our efforts may not be successful, and other companies could develop and commercialize products based on new technologies that are superior to our products either in performance or cost-effectiveness. If we are not able to effectively compete with new products or technologies, our business would be harmed.

We face intense competition from many large companies, which may reduce the demand for our products.

The medical technology industry is intensely competitive. Our products compete with other medical devices, surgical procedures and pharmaceutical products. A number of the companies in the medical technology industry, including manufacturers of neuro vascular and peripheral vascular products, have substantially greater capital resources, larger customer bases, broader product lines, greater marketing and management resources, larger research and development staffs and larger facilities than ours. These competitors have developed and may continue to develop products that are competitive with ours. They may develop and market technologies and products that are more readily accepted than ours. Their products could make our technology and products obsolete or noncompetitive. Although we believe that our products may offer certain advantages over our competitors’ currently marketed products, companies entering the market early often obtain and maintain significant market share relative to those entering the market later. While we believe we have designed our products to be cost effective and more efficient than competing technologies, we might not be able to provide better methods or products at comparable or lower costs, which would negatively impact the demand for our existing products.

We also compete with other manufacturers of medical devices for clinical sites to conduct human trials. If we are not able to locate such clinical sites on a timely basis, it could hamper our ability to conduct trials of our products, which may be necessary to obtain required regulatory clearance or approval.

We rely heavily on affiliated third parties for the distribution of our products.

Certain subsidiaries of ev3 Inc. distribute most of our products outside the United States and our peripheral blood clot therapy products in the United States. ev3 Inc., which is affiliated with us as described elsewhere in this report, and these subsidiaries may not be successful in performing their obligations under their agreements with us. If these ev3 entities are not successful, we may not be able to enter into substitute agreements on acceptable terms or at all, in order to continue selling our products. Alternatively, we may not be able to attract, motivate and retain qualified sales personnel in a timely enough manner to continue selling our products. Accordingly, if these ev3 entities are not successful in distributing our products, our revenues could be negatively impacted.

We are exposed to product liability claims that could have a negative effect on our business.

The nature of our business exposes us to risk from product liability claims. We currently maintain product liability insurance for our products, with limits of $30 million per occurrence and an annual aggregate maximum of $30 million. However, our insurance may not be adequate to cover existing and future product liability claims. Additionally, we may not be able to maintain adequate product liability insurance at acceptable rates. Any litigation involving product liability claims could result in the payment of financial judgments by us, may impair the reputation and marketability of our products and may divert management’s attention from other matters, all of which may have a negative effect on our business.

If our manufacturing facility does not have sufficient capacity or we experience a delay in the proposed relocation of our existing manufacturing facility, the production of our products may be delayed.

The expansion of our manufacturing capacity will be necessary in the future. We are currently in discussion with a prospective landlord for the leasing of a larger facility, which will include significantly greater manufacturing capacity. We expect to incur approximately $3.0 million for facilities, tooling and equipment, regulatory approvals and leasehold improvements for the new facility. We expect to enter into definitive agreements with ev3 Inc., the Company’s majority stockholder, to borrow up to $3.3 million for the payment of the expenses associated with the relocation. If we are not able to achieve the expected improved efficiencies from our new manufacturing facility or we experience any delay in completing our relocation or regulatory qualification of our new facility, including obtaining the anticipated borrowing from ev3, our business could be materially adversely affected.

Our dependence on single source suppliers puts us at risk of interruptions in our business.

We purchase some components and services used in connection with our products from third parties. Our dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality, and delivery schedules. Delays in delivery, services or component shortages could cause delays in the shipment of our products. Our single-source components are generally acquired through purchase orders placed in the ordinary course of business, and we have no guaranteed supply arrangements with any of our single-source suppliers. Given of our reliance on these vendors, we may also be subject to increases in component costs. It is possible that we could experience quality control problems, supply shortages or price increases with respect to one or more of these components in the future. If we need to establish additional, or alternative, suppliers for some of these components, our access to the components might be delayed while we qualify such

suppliers. Any quality control problems, interruptions in supply or component price increases with respect to one or more components could have a negative impact on our business.

We rely on independent contract manufacturers to produce some of our products and components.

Our reliance on independent contract manufacturers to manufacture some of our products involves several risks, including:

•

inadequate capacity of the manufacturer’s facilities;

•

interruptions in access to certain process technologies; and

•

reduced control over product quality, delivery schedules, manufacturing yields and costs.

Independent manufacturers have possession of and in some cases hold title to molds for certain manufactured components of our products. Shortages of raw materials, production capacity constraints or delays by our contract manufacturers could negatively affect our ability to meet our production obligations and result in increased prices for affected parts. Any such reduction, constraint or delay may result in delays in shipments of our products or increases in the prices of components, either of which could have a material adverse effect on our business.

We do not have supply agreements with all of our current contract manufacturers and we often utilize purchase orders, which are subject to acceptance by the supplier.

An unanticipated loss of any of our contract manufacturers could cause delays in our ability to deliver our products while we identify and qualify a replacement manufacturer, which delays could negatively impact our revenues.

We depend upon key personnel to operate our business, which puts us at risk of a loss of expertise if key personnel were to leave us.

We depend upon the contributions, experience and expertise of certain members of our management team. The competition for top management as well as for skilled sales, product development and technical personnel in the medical device industry is intense and we may not be able to recruit and retain the personnel we need. Our success will depend upon our ability to attract and retain existing and additional highly qualified management, sales, technical, clinical and consulting personnel.

Our revenues could be diminished if we cannot obtain third party reimbursement for sales of our products.

We believe that health care providers will be able to obtain reimbursement for our products based on reimbursement policies for embolization procedures currently in effect. However, these reimbursement policies may not be applied by healthcare payors in all markets to procedures in which our products are used, or, even if currently applicable, may be changed in the future. Changes in reimbursement policies of governmental (both domestic and international) or private healthcare payors could negatively impact our business to the extent any such changes affect reimbursement for procedures in which our products are used.

Reimbursement systems in international markets vary significantly by country, and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed health care systems that govern reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. Obtaining reimbursement approvals in each country could take up to 18 months, or longer in some circumstances. Any delays in obtaining, or an inability to obtain, reimbursement approvals could have a material adverse effect on the demand for our products.

Our international operations subject us to additional business risks, such as business interruption, increased costs and currency exchange rate fluctuations, and may cause our profitability to decline.

We derive a significant portion of our revenues from international sales, which exposes us to a number of risks, including:

•

unexpected changes in regulatory requirements;

•

fluctuating exchange rates;

•

difficulties in staffing and managing foreign sales and support operations;

•

additional working capital requirements;

•

changes in tariffs and other trade restrictions;

•

less favorable third-party reimbursement policies;

•

export license requirements;

•

political and economic instability;

•

longer payment cycles;

•

increased risk of exposure to terrorist activities;

•

potentially limited intellectual property protection; and

•

difficulties with distributors.

In particular, our international sales are denominated primarily in local currencies and not in U.S. dollars, which means our revenue is subject to fluctuations in foreign exchange rates. Fluctuating exchange rates could also, potentially, make our products less price competitive. If we experience any of the risks associated with international operations, our business could be harmed.

Our stockholder rights plan and provisions in our charter documents, stock option plans and Delaware law may make an acquisition of us more difficult.

Our stockholder rights plan and provisions of our amended and restated certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to stockholders. Our amended and restated certificate of incorporation provides for 5,000,000 authorized shares of preferred stock, the rights, preferences and privileges of which may be fixed by our board of directors without any further vote or action by our stockholders. In addition, our stock option plans, under certain circumstances, provide for the acceleration of vesting of options granted under such plans in the event of certain transactions that result in a change of control of Micro Therapeutics. Further, Section 203 of the General Corporation Law of Delaware prohibits us from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of Micro Therapeutics without action by our stockholders, and therefore, could materially adversely affect the price of our common stock.

Our stockholder rights plan generally provides that, unless approved by our board of directors, after a person acquires or announces a tender offer that would result in ownership of 20% or more of our common stock, each of our stockholders will have the right to buy shares of our common stock at a discount to the then market price. Our stockholder rights plan may have the effect of delaying, deferring or preventing a change in control of our stock. This may discourage bids for our common stock at a premium over the market price of the common stock and may adversely affect the market price of the common stock.

Stock prices are particularly volatile in some market sectors and our stock price could decrease.

The stock market sometimes experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations can cause a decrease in the price of our common stock. Changes in the medical device industry generally may have a material adverse effect on the market price of our common stock.

Most of our outstanding shares of common stock are freely tradable.

The market price of our common stock could drop due to sales of a large number of shares or the perception that such sales could occur. These factors also could make it more difficult to raise funds through future offerings of common stock.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate and Market Risk

Under the Company’s new credit facility with Silicon Valley Bank, which was entered into on May 6, 2005, the Company is exposed to market risk from changes in interest rates on borrowing under the credit facility, which bears interest at a variable rate equal to the bank’s prime rate plus 2%. The Company currently does not have any outstanding borrowings under the credit facility.

Impact of Foreign Currency Exchange Rates

The Company’s sales in Europe and certain countries outside Europe are either denominated in or determined by the local currency, primarily the Euro, of the Company’s customers. During the three months ended July 3, 2005, the U.S. dollar was lower in value against such currencies than during the corresponding period in 2004. The Company estimates that approximately $215,000 of the increase in total revenues and approximately $83,000 of the increase in operating expenses from the three months ended July 4, 2004 to the corresponding period in 2005 were attributable to fluctuation in currency exchange rates.

Item 4.

Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer, who is currently acting in the dual capacity as the Company’s principal financial officer, to allow timely decisions regarding required disclosure.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, of the effectiveness of the Company’s “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer has concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective to ensure that information the Company is required to disclose in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchanged Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including the Chief Executive Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is a party to litigation in the United States, the Netherlands and Germany involving embolic coils developed by the Company’s wholly owned subsidiary, Dendron GmbH, and whether such coils infringe certain patents of the University of California licensed to Boston Scientific Corp. In addition, the Company is involved in other litigation from time to time in the ordinary course of business; the outcome of which the Company’s management believes will not have a material adverse effect on the Company’s financial position or results of operations. During the period covered by this Quarterly Report no material developments occurred in such litigation.

For more information regarding such litigation see Note 9 in the “Notes to Unaudited Consolidated Financial Statements” included elsewhere in this report, and the Company’s Annual Report of Form 10-KSB for the year ended December 31, 2004.

Item 4.

Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders was held on May 26, 2005, at which four proposals were presented and voted on.


Proposal One:		Each of the seven nominees to the Board of Directors was elected for a one-year term by the stockholders. The following directors were elected with the following voting results:


	Number of shares:
Name	For	Withheld
James Corbett	42,036,741	1,187,035
Richard Emmitt	42,409,604	814,172
Richard D. Randall	42,407,018	816,758
Dale A. Spencer	42,407,118	816,758
George Wallace	42,039,147	1,184,649
Elizabeth Weatherman	42,142,121	1,081,655
Thomas C. Wilder, III	42,042,567	1,181,209


Proposal Two:		To approve an amendment to the Company’s 1996 Stock Incentive Plan to increase the number of shares subject thereto to a total of 6,750,000 shares. The voting results were:


For	Against	Abstain
35,910,600	810,035	8,519


Proposal Three:		To approve an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares subject thereto to a total of 750,000 shares.


For	Against	Abstain
36,544,958	178,096	6,100


Proposal Four:		To ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the Company for the fiscal year ending December 31, 2005. The voting results were:


For	Against	Abstain
43,179,588	27,500	16,688

Item 6.

Exhibits

See Index to Exhibits on Page 33 of this Quarterly Report on Form 10-Q.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MICRO THERAPEUTICS, INC.

Date: August 17, 2005	By:	/s/ THOMAS C. WILDER, III
		Thomas C. Wilder III
		President, Chief Executive Officer and
		Acting Chief Financial Officer

Exhibit Index


Exhibit Number		Description

31.1		Certification by Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934.

31.2		Certification by Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a), of the Securities Exchange Act of 1934.

32		Certifications Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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MICRO THERAPEUTICS INC 10-Q