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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 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 November 8, 2004, there were 12,119,007 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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Consolidated Statements of Operations

(Unaudited)

See accompanying notes.

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Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes.

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Notes to Consolidated Financial Statements

1. Operations

NMT Medical, Inc. (together with its subsidiaries, the “Company” or “NMT”), designs, develops and markets proprietary implant technologies that allow interventional cardiologists to treat cardiac sources of stroke and other potential brain attacks through minimally invasive, catheter-based procedures. We are investigating the potential connection between a common cardiac defect called a patent foramen ovale (PFO) and brain attacks such as stroke, transient ischemic attacks (TIA’s) and migraine headaches. A PFO can allow venous blood, unfiltered by the lungs, to enter the arterial circulation of the brain, possibly triggering a cerebral event or brain attack. We are a leader in designing and developing implants to seal the PFO defect in a minimally invasive, catheter-based procedure performed by the interventional cardiologist.

2. Interim Financial Statements

The accompanying consolidated financial statements at September 30, 2004 and for the three and nine-month periods ended September 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 nine-month periods ended September 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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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 pro forma effects of applying SFAS No. 123 for the three and nine-month periods ended September 30, 2004 and 2003 are not necessarily indicative of the effects expected in future periods.

4. Cash, Cash Equivalents and Marketable Securities

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

Available-for-sale marketable securities at September 30, 2004 consisted of approximately $22.2 million of debt instruments with maturities ranging from November 2004 to March 2006. Approximately $121,000 of accumulated unrealized losses were recorded at September 30, 2004 as a component of other comprehensive income. Accrued interest receivable of approximately $203,000 and $61,000 were included in prepaid expenses and other current assets in the accompanying consolidated balance sheets at September 30, 2004 and December 31, 2003, respectively.

At September 30, 2004, cash and cash equivalents included a certificate of deposit of approximately $1.1 million, which was restricted to collateralize a bank guarantee issued in October 2004 in favor of the French tax authorities in connection with the Company’s appeal of a tax assessment (see Note 10).

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 $1.1 million and $3.0 million during the three and nine-month periods ended September 30, 2004, respectively, and approximately $499,000 and $745,000 during the three and nine-month periods ended September 30, 2003, respectively.

7. Settlement of Litigation

On June 1, 2002, we received a Demand for Arbitration in the amount of $10 million, plus legal fees and interest, from Bio-Tech Engineering, Inc., Kevin Maughan and Ferenc Schmidt (collectively, “BTE”), claiming that we were in breach of contract. Following hearings, on September 22, 2003, the Company and BTE entered into a settlement agreement, pursuant to which we paid $950,000 to BTE and BTE agreed to a general release of any and all claims against the Company. Also as part of the settlement, the Company and BTE terminated the license and technology agreement, BTE transferred all associated patent rights to the Company and the parties agreed to have the case dismissed with prejudice. The Company and BTE each paid half of the arbitration fees. Included in our consolidated statements of operations for the three and nine-month periods ended September 30, 2003 was a settlement of litigation charge of approximately $1.2 million, which consisted of the settlement amount plus legal fees.

8. 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 1,894,968 and 2,051,227 common shares have been excluded from the computation of diluted weighted average shares outstanding for the three and nine-month periods ended September 30, 2004 and 2003, respectively, because they were not dilutive.

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Notes to Consolidated Financial Statements

9. 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 our 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.

10. Commitments and Contingencies

Litigation

We are a party to the following legal proceedings 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 each of these matters vigorously, we cannot predict the ultimate outcome.

In September 2004, the Company and the Children’s Medical Center Corporation (“CMCC”) filed a civil complaint in the U.S. District Court for the District of Minnesota for infringement of a patent owned by CMCC and licensed to us. The complaint alleges that Cardia, Inc. of Burnsville, Minnesota is making, selling and/or offering to sell a medical device in the United States that infringes CMCC’s U.S. patent relating to a device and method for repairing septal defects.

On or about September 24, 2001, each of the three French subsidiaries of our former neurosciences business unit received a Notification of Reassessment Following Verification of the Accounts (Notification de redressements suite à une vérification de comptabilité) from the French Direction de Controle Fiscal Sud-est (Nice) (“Reassessment”). The French authorities are seeking back taxes, interest and penalties in excess of FF 11 million, which is the currency in which the assessment was made (approximately $2.1 million based upon the exchange rate at September 30, 2004). In connection with our sale of the neurosciences business unit to Integra LifeSciences Holding Corporation (“Integra”) in July 2002, we agreed to specifically indemnify Integra against any liability in connection with these tax claims. In order to continue to appeal the Reassessment, in October 2004 we provided the French authorities with a bank guarantee on behalf of Integra Neurosciences Implants SA totaling approximately 824,000 Euros (approximately $1.0 million based upon the exchange rate at September 30, 2004). Pursuant to the terms of a settlement agreement with Elekta AB (“Elekta”), completed in early 2002, a portion of any resulting tax claim may be recoverable from Elekta.

In December 1998, we filed a patent infringement suit against AGA Medical claiming that certain of AGA’s products infringe U.S. Patent No. 5,108,420 (the “420 Patent”), for which we maintain the exclusive license. During the litigation, AGA identified certain third party patents that it argued would invalidate the claims of the 420 Patent. In September 2003, the Court dismissed our suit against AGA without prejudice to our ability to refile suit after the conclusion of the reexamination proceedings. Although a Patent Office examiner initially rejected the claims of the 420 Patent, the Patent Office Board of Appeals reversed the examiner’s rejection of the claims on August 19, 2004 and returned the reexamination for action consistent with its decision.

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

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$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 $2.5 million was incurred during the nine months ended September 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.

MIST

In November 2004, we received approval to initiate a clinical study in the United Kingdom designed to evaluate the effectiveness of transcatheter closure of a common cardiac defect, using our proprietary STARFlex^® septal repair technology, in the treatment and prevention of migraine headaches. The clinical study, named MIST (Migraine Intervention with STARFlex^® Technology), is the first prospective, randomized, controlled study to evaluate the potential relationship between a PFO and certain migraine attacks and to determine whether sealing the PFO is an effective treatment in the resolution of these migraines. MIST is a double-blinded study randomizing migraine patients with PFOs to either PFO closure with the STARFlex^® implant or a control arm. Enrollment is expected to be completed during 2005. Study patients will be followed for six months.

In connection with MIST, we will enter into various contractual obligations with third party service providers and 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 MIST costs to be approximately $3.0 million to $4.0 million through the completion of the study.

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”.

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 September 30, 2004.

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RESULTS OF OPERATIONS

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

The following table presents consolidated statements of operations information as a reference for management’s discussion and analysis which follows thereafter. This table presents dollar and percentage changes for each listed line item for the three months ended September 30, 2004 compared to the three months ended September 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 September 30, 2004 and 2003 were as follows:

CardioSEAL^® and STARFlex^® product sales decreased by approximately $1.4 million, or 26.1%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. North American sales decreased approximately $1.4 million, or 31.2%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. Management believes that this sales trend has been influenced primarily by the FDA’s announcement that it is enforcing stricter end-user adherence to Humanitarian Device Exemption (“HDE”) guidelines, specifically related to off-label procedures, and also by commercial sales competition. European sales increased approximately $34,000, or 4.5%, during the same period, primarily due to the weakening of the U.S. dollar and a higher proportion of direct versus distributor sales, partially offset by decreased total unit sales volume. European sales represented approximately 20.2% and 14.3% of total CardioSEAL^® and STARFlex^® product sales for the three months ended September 30, 2004 and 2003, respectively.

Based upon current sales trends, we anticipate that total fiscal year 2004 revenues, which includes net royalty income, will decrease approximately 6% compared to fiscal year 2003. CardioSEAL^® and STARFlex^® implant sales for fiscal year 2004 are currently expected to decrease approximately 20% to 25% compared to fiscal year 2003. Continued weakening or strengthening of the U.S. dollar will have 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. Separately, we currently anticipate that future royalties earned from BSC during 2004 will trend downward 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 primarily due to a combination of reduced production volumes and fixed manufacturing overhead costs, resulting in higher unit product costs. This increase was partially offset by a higher European average selling price in 2004, which was due to a combination of a higher proportion of direct versus distributor sales and by the effect of the weakening U.S dollar. For the full year 2004, we currently expect cost of product sales as a percentage of total product sales to be approximately 26%, 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 $377,000 and $529,000 for the three months ended September 30, 2004 and 2003, respectively.

Research and Development. Initial costs related to the planned pilot study to evaluate the clinical relevance of a connection between PFO closure and migraine headaches (“MIST”) were offset by reductions in personnel related costs, legal costs associated with patent applications, and CLOSURE I. 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 $785,000 for the three months ended September 30, 2004 compared to approximately $840,000 in the comparable period of 2003.

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We currently expect fiscal year 2004 research and development expense to increase by approximately 30% to 40% compared to 2003, primarily attributable to (i) early stage costs related to the planned MIST pilot study, which is anticipated to commence patient enrollment in the United Kingdom before the end of 2004; (ii) an estimated $3.5 million to $4.5 million of CLOSURE I costs in 2004 compared to approximately $2.5 million in 2003; and (iii) increased patent application legal costs. Estimated CLOSURE I costs for fiscal 2004 have been reduced from our earlier estimates 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. Research and development expense as a percentage of total revenues, which was 40.7% for the three months ended September 30, 2004, is currently expected to be approximately 42% 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; (ii) reduced stock-based compensation associated with our 2001 stock option re-pricing; and (iii) a reduction in insurance costs. We currently expect general and administrative expense to decrease approximately 7% to 12% in 2004 when compared to 2003.

Selling and Marketing. The decrease in selling and marketing expense in 2004 was primarily attributable to reductions in sales-based commissions and travel related expenses, partially offset by a combination of increased marketing programs, costs related to our collaboration with the National Stroke Association and a weakening U.S. dollar. We currently expect selling and marketing expense to be flat for fiscal 2004 compared to 2003.

Settlement of Litigation. During the three months ended September 30, 2003, we incurred a charge of approximately $1.2 million in connection with the settlement, effective as of September 22, 2003, of an arbitration proceeding with BTE. The charge consisted of a $950,000 settlement payment to BTE plus legal costs (see Note 7 of Notes to Consolidated Financial Statements).

Interest Income, Net. The increase in interest income, net in 2004 was primarily attributable to higher interest rates earned on marketable securities, which made up approximately 62.6% of our interest-bearing assets compared to approximately 28.3% in the comparable period of 2003. The balance of our interest-bearing assets were money market accounts and short-term debt instruments, which earned lower rates of interest. We currently expect average interest-bearing assets during the remainder of 2004 to decrease as a result of the cash requirements of MIST and 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 Septemeber 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.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2003

The following table presents consolidated statements of operations information as a reference for management’s discussion and analysis which follows thereafter. This table presents dollar and percentage changes for each listed line item for the nine months ended September 30, 2004 compared to the nine months ended September 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 nine months ended September 30, 2004 and 2003 were as follows: