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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

or

For the transition period from              to             .

Commission File No. 000-21001

NMT MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NMT Medical, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

See accompanying notes.

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NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

See accompanying notes.

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NMT Medical, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes.

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NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Operations

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

2. Interim Financial Statements

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

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

3. Stock-Based Compensation

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

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

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NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

3. Stock-Based Compensation (continued)

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

4. Cash, Cash Equivalents and Marketable Securities

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

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

5. Inventories

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

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

6. Net Royalty Income

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

7. Net Loss per Common and Common Equivalent Share

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

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NMT Medical, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

8. Comprehensive (Loss) Income

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

9. Commitments and Contingencies

Litigation

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

CLOSURE I

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

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

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

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CRITICAL ACCOUNTING POLICIES

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

RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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LIQUIDITY AND CAPITAL RESOURCES

Net Cash (Used in) Provided by Continuing Operations:

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

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

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

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

Net Cash Used in Discontinued Operations

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

Net Cash Used In Investing Activities

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

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Net Cash Provided By Financing Activities

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

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

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

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

OFF-BALANCE SHEET FINANCING

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

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

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

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

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

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

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

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

WE MAY FACE CHALLENGES IN EXECUTING OUR FOCUSED BUSINESS STRATEGY.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

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

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