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 September 30, 2009

or

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

For the transition period from              to              .

Commission File No. 000-21001

NMT MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

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

27 Wormwood Street, Boston, Massachusetts 02210

(Address of Principal Executive Offices, Including Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer  ¨	Accelerated filer  x	Non-accelerated filer  ¨	Smaller reporting company  x
		(Do not check if a smaller reporting company)

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

Yes  ¨    No  x

As of October 30, 2009, there were 13,228,294 shares of Common Stock, $.001 par value per share, outstanding.

INDEX

		Page Number
Part I. Financial Information
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
Part II. Other Information
Item 1	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 6.	Exhibits	22
Signatures		23
Exhibit Index		24

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NMT Medical, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	At September 30, 2009			At December 31, 2008
Assets
Current assets:
Cash and cash equivalents	$	8,990,718		$	4,899,179
Marketable securities		-			12,674,639
Accounts receivable, net of allowances of $95,000 at September 30, 2009 and $135,000 at December 31, 2008		1,650,159			2,511,934
Inventories		1,781,794			2,018,173
Prepaid expenses and other current assets		1,256,598			1,212,947
Total current assets		13,679,269			23,316,872
Property and equipment, at cost:
Laboratory and computer equipment		1,999,889			1,974,468
Leasehold improvements		1,276,121			1,276,121
Office furniture and equipment		331,415			334,300
		3,607,425			3,584,889
Less accumulated depreciation and amortization		2,853,550			2,656,196
Total property and equipment, net		753,875			928,693
Total Assets	$	14,433,144		$	24,245,565
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,975,765		$	2,870,606
Accrued expenses		5,486,094			6,468,167
Total current liabilities		9,461,859			9,338,773
Long-term liabilities		548,614			507,426
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $.001 par value Authorized--3,000,000 shares Issued and outstanding--none		-			-
Common stock, $.001 par value Authorized--30,000,000 shares Issued and outstanding--13,268,294 shares at September 30, 2009 and 13,122,391 shares at December 31, 2008		13,268			13,122
Additional paid-in capital		53,084,690			52,659,855
Treasury stock - 40,000 shares at cost		(119,600	)		(119,600	)
Accumulated other comprehensive loss		-			(108,407	)
Accumulated deficit		(48,555,687	)		(38,045,604	)
Total stockholders’ equity		4,422,671			14,399,366
Total Liabilities and Stockholders’ Equity	$	14,433,144		$	24,245,565

See accompanying notes.

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NMT Medical, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Product sales	$	3,002,832		$	4,153,590		$	9,662,446		$	13,418,495
Net royalty income		-			-			-			18,170
Total revenues		3,002,832			4,153,590			9,662,446			13,436,665
Costs and expenses:
Cost of product sales		1,195,081			1,546,064			4,021,087			4,362,167
Research and development		2,009,843			2,876,984			6,636,501			9,621,280
General and administrative		1,390,647			2,105,867			5,495,128			6,989,108
Selling and marketing		1,275,212			1,977,280			4,092,130			6,865,810
Total costs and expenses		5,870,783			8,506,195			20,244,846			27,838,365
Loss from operations		(2,867,951	)		(4,352,605	)		(10,582,400	)		(14,401,700	)
Other income (expense):
Currency transaction gain (loss)		11,231			(142,185	)		13,964			(72,355	)
Interest income		6,926			159,870			88,319			662,437
Total other income, net		18,157			17,685			102,283			590,082
Loss before income taxes		(2,849,794	)		(4,334,920	)		(10,480,117	)		(13,811,618	)
Income tax expense		9,571			16,302			29,966			57,972
Net loss	$	(2,859,365	)	$	(4,351,222	)	$	(10,510,083	)	$	(13,869,590	)
Basic and diluted loss per common share:	$	(0.22	)	$	(0.33	)	$	(0.80	)	$	(1.07	)
Basic and diluted weighted average common shares outstanding:		13,221,195			13,013,904			13,175,941			12,998,587

See accompanying notes.

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NMT Medical, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(10,510,083	)	$	(13,869,590	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		204,239			232,764
Amortization of bond premium (discount)		23,321			(91,417	)
Share-based compensation expense		305,101			552,527
Change in assets and liabilities-
Accounts receivable		861,775			690,068
Inventories		236,379			(195,381	)
Prepaid expenses and other current assets		(43,651	)		2,089,524
Accounts payable		1,105,159			602,465
Accrued expenses and long-term liabilities		(827,442	)		170,380
Net cash used in operating activities		(8,645,202	)		(9,818,660	)
Cash flows from investing activities:
Purchases of property and equipment		(29,421	)		(117,936	)
Purchases of marketable securities		(515,275	)		(13,029,110	)
Maturities of marketable securities		13,275,000			24,820,000
Net cash provided by investing activities		12,730,304			11,672,954
Cash flows from financing activities:
Proceeds from exercise of common stock options		-			37,625
Proceeds from issuance of common stock under the employee stock purchase plan		6,437			274,171
Net cash provided by financing activities		6,437			311,796
Net increase in cash and cash equivalents		4,091,539			2,166,090
Cash and cash equivalents, beginning of period		4,899,179			6,984,383
Cash and cash equivalents, end of period	$	8,990,718		$	9,150,473
Supplemental cash flow information:
Settlement of accrued expenses with company stock	$	71,840		$	-

See accompanying notes.

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NMT Medical, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Operations

We are an advanced medical technology company that designs, develops, manufactures and markets proprietary implant technologies that allow interventional cardiologists to treat structural heart disease through minimally invasive, catheter-based procedures. We are investigating the potential connection between a common heart defect that allows a right to left shunt or flow of blood through a defect like a patent foramen ovale, or PFO, and brain attacks such as embolic stroke, transient ischemic attacks, or TIA, and migraine headaches. A PFO is a common right to left shunt that can allow venous blood, unfiltered and unmanaged by the lungs, to directly enter the arterial circulation of the brain, possibly triggering a cerebral event or brain attack. More than 31,000 PFOs have been treated globally with our minimally invasive, catheter-based implant technology.

2. Interim Financial Statements

The accompanying condensed consolidated financial statements at September 30, 2009 and for the three and nine month periods ended September 30, 2009 and 2008 are unaudited and include the accounts of our company and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. We consider events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated to the date of issuance of these financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results expected for the fiscal year ending December 31, 2009.

We have incurred operating losses of $18.7 million and $11.1 million during each of the past two fiscal years, respectively, and have experienced decreasing sales over those time periods. We also incurred an operating loss of $10.6 million for the nine months ended September 30, 2009. Our cash used in operations significantly parallels the operating losses we have incurred and we have an accumulated deficit of $48.6 million as of September 30, 2009. In addition, we expect to incur significant additional research and development and other costs for the remainder of fiscal 2009 and in fiscal 2010—including costs to complete our CLOSURE I trial and bring our STARFlex^® implant with an indication for PFO closure to commercial market in the United States, subject to U.S. Food and Drug Administration, or FDA, approval. Our costs, including research and development for our product candidates and sales, marketing and promotion expenses for any of our existing or future products to be marketed by us or our distributors currently exceed and will likely continue to exceed revenues during this period.

We have historically funded our operations primarily through public offerings, the sale of non-strategic business assets, and settlements from the successful defense of our patents. At September 30, 2009, we had cash and cash equivalents of approximately $9.0 million. We have taken several actions over the last year to both reduce our expenditures, such as reducing resources allocated to our development programs, and further enhance our ability to generate revenue. We continually evaluate our cost structure and it may be necessary to further reduce expenses in the short term. We believe that our current cash position, combined with a reduction in expenses and expected increase in revenues outside of North America in addition to our two-year $4 million revolving credit facility with Silicon Valley Bank will be sufficient to bring our STARFlex^® implant with an indication for PFO closure to the commercial market in the United States, subject to FDA approval. We will also continue to review financing alternatives to raise capital, if necessary. The aforementioned reductions are anticipated to reduce our cash outflows by more than $5.0 million in 2009 compared to 2008. We have also repositioned our sales force in Europe and the rest of the world to increase our sales. We also believe that, while the completion of the CLOSURE I trial will continue to require working capital, expenditures related to CLOSURE I will be approximately $1.0 million less in 2009 than 2008, given that the data analysis for our CLOSURE I trial is currently expected to commence in April of 2010. Should such actions not be sufficient to ensure that the cash and cash equivalents we have on hand at September 30, 2009 is enough to support our operations, we have the ability to further adjust our investment in research and development activities and, if necessary, take additional actions to reduce cash outflows.

Successful completion of our CLOSURE I clinical trial and bringing the STARFlex^® implant with an indication for PFO closure to commercial market in the United States, subject to FDA approval, and, ultimately, the attainment of profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure and if necessary, obtaining additional financing and/or reducing expenditures. There are no assurances, however, that we will be able to achieve an adequate level of sales to support our cost structure or obtain additional financing on favorable terms, or at all. Failure to raise capital if needed could materially adversely impact our business, financial condition, results of operations and cash flows and impact our ability to continue as a going concern.

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3. Share-Based Compensation

We have various types of share-based compensation plans. These plans are administered by our Joint Compensation and Options Committee of our Board of Directors. A description of our share-based compensation plans is contained in Note 8 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008.

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

	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2009		2008		2009		2008
Cost of product sales	$	2,527	$	12,162	$	5,548	$	34,908
Research and development		16,607		47,928		59,282		129,289
General and administrative		66,055		135,403		211,779		311,585
Selling and marketing		6,227		20,027		28,492		76,745
	$	91,416	$	215,520	$	305,101	$	552,527

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

	For the Nine Months Ended
	September 30,
	2009	2008
Expected life (years)	4	4
Expected stock price volatility	74.18% - 81.41%	57.35% - 60.64%
Weighted average stock price volatility	78.80%	60.40%
Expected dividend yield	0%	0%
Risk-free interest rate	1.31% - 2.56%	2.46% - 3.57%

The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Expected volatility, weighted average volatility and expected life are based on our historical experience. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future. We adjust the estimated forfeiture rate based upon actual experience. The expected life for options granted during the nine months ended September 30, 2009 and 2008 was based upon the actual forfeiture rate for the preceding four years, which resulted in an expected life equal to the vesting period.

The following table summarizes a reconciliation of all stock option activity for the nine months ended September 30, 2009:

	Number of shares of common stock issuable upon exercise of options	Weighted average exercise price per share		Weighted average remaining contractual term	Aggregate intrinsic value
				(in years)	(in thousands)
Options outstanding at January 1, 2009	1,702,463	$	6.96
Granted	395,450		3.25
Cancelled	120,654		6.64
Options outstanding at September 30, 2009	1,977,259	$	6.24	5.27	$	151
Options vested or expected to vest at September 30, 2009	1,866,849	$	6.36	5.04	$	131
Options exercisable at September 30, 2009	1,425,207	$	7.06	3.73	$	20

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

The weighted average grant-date fair value of options granted during the three and nine months ended September 30, 2009 was $1.20 and $0.90, respectively. There were no options exercised during the nine months ended September 30, 2009.

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The weighted average grant-date fair value of options granted during the nine months ended September 30, 2008 was $2.06. There were no grants during the three month period ended September 30, 2008. The aggregate intrinsic value of options exercised during the three and nine months ended September 30, 2008 was $15,000 and $20,000, respectively. Net cash proceeds from the exercise of stock options were $21,600 and $37,625 for the three and nine months ended September 30, 2008, respectively.

At September 30, 2009, there was approximately $600,000, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of approximately 3 years.

We have not recorded any tax benefit from stock option exercises, since the realization of tax benefits is not considered likely.

4. Cash, Cash Equivalents and Marketable Securities

We consider investments with maturities of 90 days or less from the date of purchase to be cash equivalents and investments with original maturity dates greater than 90 days to be marketable securities. Cash and cash equivalents, which are carried at cost and approximate market, consist of cash, money market accounts and commercial paper investments.

We have classified our marketable securities as available-for-sale. We did not have any available-for-sale marketable securities at September 30, 2009. Accrued interest receivable of approximately $136,000 was included in prepaid expenses and other current assets in the accompanying consolidated balance sheet at December 31, 2008.

Marketable securities are recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

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

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. We determine the fair value of our corporate bonds, commercial paper and certificates of deposit at the reporting date using Level 2 inputs. These types of instruments trade in markets that are not considered to be active, but our initial value is based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. We engage a financial advisor to assist us in validating the assumptions and data obtained from our primary valuation source. We also access publicly available market activity from third party databases and credit ratings of the issuers of the securities we hold to corroborate the data used in the fair value calculations obtained from our primary source.

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

All marketable securities that we held as of June 30, 2009 have matured. As of September 30, 2009, we did not have any marketable securities.

5. Inventories

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

	At September 30,		At December 31,
	2009		2008
Raw materials	$	724,450	$	573,417
Work-in-process		114,919		134,154
Finished goods		942,425		1,310,602
	$	1,781,794	$	2,018,173

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

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6. Income Taxes

For the three and nine months ended September 30, 2009, we recorded a provision for income taxes of $9,571 and $29,966, respectively, and for the three and nine months ended September 30, 2008, we recorded a provision for income taxes of $16,302 and $57,972, respectively, as a result of the increase to the liability for uncertain tax positions not recorded during these periods.

Our uncertain tax positions were $200,012 and $218,608 at December 31, 2008 and September 30, 2009, respectively and relate to various tax jurisdictions. If the uncertain tax positions of $218,608 at September 30, 2009 were recognized, they would decrease our annual effective tax rate. We also recorded a liability during the three and nine months ended September 30, 2009 for potential interest in the amount of $2,659 and $7,979, respectively. The uncertain tax positions and the accrual for potential interest are included in long-term liabilities. It is our policy to record and classify interest and penalties as income tax expense. We do not expect our uncertain tax positions to change significantly over the next twelve months.

We are subject to U. S. federal income tax as well as income tax of certain state jurisdictions. The tax years ranging from 2006 to 2008 remain subject to examination by federal authorities and the 2004 through 2008 tax years remain subject to examination by their respective state and foreign tax authorities.

7. Net loss per Common and Common Equivalent Share

Basic and diluted net loss per share were determined by dividing net loss by the weighted average common shares outstanding during the periods presented. The number of diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average share price for each period using the treasury stock method. For the periods ended September 30, 2009, options to purchase 1,977,259 common shares have been excluded from the computation of diluted weighted average shares outstanding because including them would be anti-dilutive. For the periods ended September 30, 2008, options to purchase 1,724,456 common shares have been excluded from the computation of diluted weighted average shares outstanding because including them would be anti-dilutive.

8. Comprehensive loss

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

	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2009			2008			2009			2008
Net loss	$	(2,859,365	)	$	(4,351,222	)	$	(10,510,083	)	$	(13,869,590	)
Unrealized loss on marketable securities		-			(277,965	)		-			(291,069	)
Net comprehensive loss	$	(2,859,365	)	$	(4,629,187	)	$	(10,510,083	)	$	(14,160,659	)

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

9. Recent Accounting Pronouncements

(a) Recently adopted

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was primarily codified into Topic 855 “Subsequent Events” in the Accounting Standards Codification, or ASC. This guidance describes the subsequent events or transactions period, circumstances under which such events or transactions should be recognized, and disclosures regarding subsequent events or transactions. This guidance is effective for interim or annual periods ending after June 15, 2009. We adopted the provisions of this pronouncement as of June 30, 2009. Although the adoption of this guidance did not materially impact our financial condition, results of operations, or cash flow, we are now required to provide additional disclosures, which are included in Note 2.

10. Commitments and Contingencies

(a) Litigation

In September 2004, we and the Children’s Medical Center Corporation, or CMCC, filed a civil complaint in the U.S. District Court for the District of Minnesota, or the District Court, for infringement of a patent owned by CMCC and licensed exclusively to us. The complaint alleges that Cardia, Inc., or Cardia, of Burnsville, Minnesota is making, selling and/or offering to sell a medical device in the United States that infringes CMCC’s U.S. patent relating to a device and method for repairing septal defects. We sought an injunction from the District Court to prevent further infringement by Cardia, as well as monetary damages. On August 30, 2006, the District Court entered an order holding that Cardia’s device does not infringe the patent-in-suit. The order had no effect on the validity and enforceability of the patent-in-suit and had no impact on our ability to sell our products. We appealed the ruling to the U.S. Court

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of Appeals for the Federal Circuit and on June 6, 2007 the Federal Circuit ruled that the District Court incorrectly interpreted one of the patent’s claims and incorrectly found no triable issue of fact concerning other claims. The Federal Circuit remanded the case to the District Court for further proceedings consistent with its opinion and instructed that on remand the district court may reconsider the question of summary judgment for us and CMCC based on the Federal Circuit’s claim construction. On November 8, 2007, the District Court granted summary judgment in our and CMCC’s favor, ruling that Cardia’s device infringes the patent-in-suit and striking all of Cardia’s invalidity defenses. On March 19, 2008, we and CMCC agreed with Cardia to settle this litigation. As part of the settlement, a judgment was entered against Cardia and in favor of us and CMCC, with Cardia agreeing to pay $2.25 million. The settlement will be shared equally between us and CMCC after deduction of our legal fees and expenses. The first and second payments of $500,000 each were received on September 30, 2008 and December 15, 2008. We received the third and fourth installments of $375,000 each on March 31, 2009 and June 30, 2009 and we received the fifth installment of $250,000 on September 30, 2009. All of these payments were recorded as a reduction to general and administrative expenses, to offset legal fees incurred in connection with this legal proceeding. The final $250,000 payment is due December 15, 2009.

In December 2007, we commenced proceedings for defamation against Dr. Peter Wilmshurst in the English High Court. Dr. Wilmshurst has filed a defense to the claim arguing, inter alia, that the words alleged to be defamatory are true. If the matter proceeds to trial, this is likely to take place in 2011. If the case continues, we will be required to pay money into court by way of security for costs. The amount of security depends on whether Dr. Wilmshurst has the funds to pay for further legal representation. Our potential liability is to pay Dr. Wilmshursts’ costs, if we either lose, or withdraw from, the proceedings.

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

(b) Clinical Trials

We have commitments to third parties in excess of amounts accrued. While these commitments are not significant, we expect to spend significant amounts in our clinical trials.

CLOSURE I

We have committed significant financial and personnel resources to the execution of our pivotal CLOSURE I clinical trial. Including contracts with third party providers, agreements with participating clinical sites, internal clinical department costs and manufacturing costs of the STARFlex^® devices to be implanted, total costs are currently estimated to be approximately $30 million through completion of the trial and submission to the FDA. Of this total, approximately $22.6 million was incurred through December 31, 2008. We project 2009 costs to approximate $4.0 million and approximately $2.8 million was incurred during the nine months ended September 30, 2009. Patient enrollment was completed in October 2008. On September 16, 2009 we announced that, with guidance from an independent group of statistical advisors and the approval of the CLOSURE I Executive Committee and the FDA, we have elected to initiate the data analysis in April 2010, six months earlier than the originally planned October 2010 date. By April 2010, the data is expected to have statistical power to support a primary outcome result and thus it would be scientifically appropriate to begin the analysis at that time. At that time, 99.4% of all patient follow-up months will have been completed and 95.1% of patients will have completed the two-year follow-up. The results of the analysis are anticipated during the third quarter of 2010 at which point the trial will be complete, with 100% of the randomized patient follow-up available. If the results prove positive for device closure, we will be in a position to submit a PMA application for our STARFlex^® device for the stroke and TIA indication to the FDA.

11. Loan and Security Agreement

On June 26, 2009 we entered into a Loan and Security Agreement, or the Agreement, with Silicon Valley Bank.

The Agreement provides for a $4 million revolving credit facility, or the Revolving Line. Up to $500,000 of the Revolving Line may be used to secure letters of credit, foreign exchange contracts and cash management services of the calendar month following the advance under the Agreement. The Revolving Line may be used by us to finance working capital needs and matures on June 25, 2011, or the Maturity Date.

The principal amount outstanding under the Revolving Line made pursuant to the Agreement will accrue interest at a floating rate equal to the Lender’s prime rate plus two and one-half percentage points (2.50%), but in no event less than 6.5%, with such interest to be paid monthly, in arrears, and any unpaid principal to be due and payable on the Maturity Date. In addition, the Borrower will pay 0.5% per annum to the Lender for any amount not advanced under the line, payable monthly.

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

The following discussion of the financial condition and results of operations of our Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008. Matters discussed in this Quarterly Report on Form 10-Q and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, of our anticipated growth, operating results, future earnings per share, plans and objectives, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are often identified by the words “believe”, “plans”, “estimate”, “project”, “target”, “continue”, “intend”, “expect”, “future”, “anticipates”, and similar expressions that are not statements of historical fact. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our other public filings with the Securities and Exchange Commission, or the SEC. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that all forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q and may change. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are particularly important to the portrayal and understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, we use our judgment in making certain assumptions and estimates. Our critical accounting policies, which consist of revenue recognition, accounts receivable reserves, inventories, expenses associated with clinical trials, share-based compensation and fair value measurements of marketable securities are described in our Annual Report on Form 10-K for the year ended December 31, 2008, or are described below. There have been no material changes to our critical accounting policies in the quarter ended September 30, 2009.

Fair Value Measurements of Marketable Securities

In determining the fair value of our marketable securities, we consider the level of market activity and the availability of prices for the specific security that we hold. If a security is traded in an active market and prices are regularly and readily available (“Level 1 inputs”), valuation of these securities does not entail a significant degree of judgment. When using Level 1 inputs, we do not adjust the market price for such instruments, even in situations where we hold a large position and a sale could reasonably impact the market price. If we conclude that the market is not active for the identical security we hold, we evaluate various observable data points (“Level 2 inputs”) for the identical security or similar securities in developing the fair value estimates. The identification of similar securities requires some level of judgment. We use quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency to develop our initial value. We also access publicly available market activity from third party databases and credit ratings of the issuers of the securities we hold to corroborate the data used in the fair value calculations obtained from our primary source. We then apply judgment to ensure the fair value is reflective of any credit rating degradation of the issuer or recent marketplace activity. Adjustments to the Level 2 inputs, which are primarily to reflect the volume and level of activity in the markets for the similar securities compared to the security we hold, are evaluated for significance to the overall fair value measurement. We do not have any securities for which the fair value is determined using Level 3 inputs.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2008

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, 2009 compared to the three months ended September 30, 2008, as well as consolidated statements of operations information as a percentage of product sales for such periods.

	Three Months Ended						Increase
	September 30,						(Decrease)		% Change
	2009		%	2008		%	2008 to 2009		2008 to 2009
	(In thousands, except percentages)
Product sales	$	3,003	100.0%	$	4,154	100.0%	$	(1,151)	(27.7)%
Costs and expenses:
Cost of product sales		1,195	39.8%		1,546	37.2%		(351)	(22.7)%
Research and development		2,010	66.9%		2,877	69.3%		(867)	(30.1)%
General and administrative		1,391	46.3%		2,106	50.7%		(715)	(34.0)%
Selling and marketing		1,275	42.5%		1,977	47.6%		(702)	(35.5)%
Total costs and expenses		5,871	195.5%		8,506	204.8%		(2,635)	(31.0)%
Loss from operations		(2,868)	(95.5)%		(4,352)	(104.8)%		1,484	(34.1)%
Other income (expense):
Currency transaction gain (loss)		11	0.4%		(142)	(3.4)%		153	(107.7)%
Interest income		7	0.2%		159	3.8%		(152)	(95.6)%
Total other income, net		18	0.6%		17	0.4%		1	5.9%
Loss before income taxes		(2,850)	(94.9)%		(4,335)	(104.4)%		1,485	(34.3)%
Income tax expense		9	0.3%		16	0.4%		(7)	(43.8)%
						0.0%
Net loss	$	(2,859)	(95.2)%	$	(4,351)	(104.7)%	$	1,492	(34.3)%

REVENUES

THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2008

	Three Months Ended September 30,				Increase (Decrease)		% Change
	2009		2008		2008 to 2009		2008 to 2009
	(In thousands, except percentages)
Product sales:
CardioSEAL®, STARFlex® and BioSTAR®:
North America	$	2,308	$	3,021	$	(713)	(23.6)%
Rest of world		695		1,133		(438)	(38.7)%
Total product sales	$	3,003	$	4,154	$	(1,151)	(27.7)%

Product sales for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 decreased by 27.7%. The challenging global economy combined with the tightly managed hospital inventories, have continued to impact our sales performance. In an effort to more tightly manage their cash flow, we believe that hospitals are reducing their inventories. As a result, while our implants continue to be used in procedures, hospitals are taking longer to re-order product in the near-term, thus slowing our sales cycle. Outside of North America, we are continuing to transition from direct sales to distribution

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partnerships in several key markets while expanding into new territories. However, several of our recently established international territories are not yet contributing revenue due to the time necessary to complete product registrations in those markets. We currently expect this sales strategy to show incremental revenue beginning in the fourth quarter of 2009. Sales outside of North America represented approximately 23.1% and 27.3% of total product sales for the three months ended September 30, 2009 and 2008, respectively. In addition, in Europe we continue to be faced with competitive pricing and ongoing clinical trials that are competing for procedure market share.

Cost of Product Sales. For the three months ended September 30, 2009, cost of product sales, as a percentage of total product sales, was approximately 39.8% compared with approximately 37.2% in 2008. The increase in cost of product sales as a percentage of product sales was primarily the result of the impact of fixed manufacturing overhead expenses on lower than budgeted production volumes. In addition, royalty expenses also increased as a percentage of sales due to lower sales volumes. For the full year 2009, we currently expect cost of product sales to be approximately 41.0% of total product sales, compared with approximately 33.4% for fiscal 2008. Included in cost of product sales are royalty expenses of approximately $465,000 and $520,000 for the three months ended September 30, 2009 and 2008, respectively.

Research and Development. Research and development expense decreased approximately $867,000, or 30.1%, for the three months ended September 30, 2009 compared with the three months ended September 30, 2008. The decrease in research and development expenses was primarily due to reduced costs associated with our clinical trials and reduced resources allocated to our development programs.

We currently expect full year 2009 research and development expense to decrease to approximately $10.0 million compared to approximately $13.2 million in 2008. This anticipated decrease is primarily related to the completion of our clinical trial enrollment work. As programs develop or mature, we also have the ability to further adjust our investment in research and development activities.

General and Administrative. General and administrative expense decreased approximately $715,000, or 34.0%, for the three months ended September 30, 2009 compared with the three months ended September 30, 2008. Included as a reduction to general and administrative expense for the three months ended September 30, 2009, is a payment received of $250,000 pursuant to a settlement agreement with Cardia, Inc. The decrease in general and administrative expenses was also due to reduced costs for personnel related expenses of approximately $350,000.

General and administrative expense is currently expected to decrease to approximately $7.6 million in 2009 compared to approximately $8.6 million in 2008.

Selling and Marketing. Selling and marketing expense decreased approximately $700,000, or 35.5%, for the three months ended September 30, 2009 compared to the same period in 2008. This decrease was primarily the result of decreased expenses related to lower headcount, as well as lower commissions and sales bonuses due to lower sales. We currently expect worldwide selling and marketing expense in 2009 to decrease approximately $3.5 million compared to 2008, the result of a restructured and refocused sales infrastructure which includes increased use of distributors.

Interest Income. The decrease in interest income for the three months ended September 30, 2009 compared to the same period in 2008 was primarily related to lower cash balances and lower interest rates during 2009. We currently expect interest income to approximate $100,000 in 2009 compared to $768,000 in 2008, primarily due to reduced cash balances resulting from the use of approximately $11 million of cash, cash equivalents and marketable securities to fund 2009 operations.

Income Tax Provision. We provide for taxes on income from continuing operations based upon our anticipated effective income tax rate. We anticipate incurring a loss from continuing operations in 2009 and therefore have not made a provision for taxes on continuing operations in the three months ended September 30, 2009. For the three months ended September 30, 2009 and 2008, we recorded income tax expense of $9,571 and $16,302, respectively, for the establishment of a liability for uncertain tax positions.

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NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2008

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, 2009 compared to the nine months ended September 30, 2008, as well as consolidated statements of operations information as a percentage of total revenues (except for cost of product sales, which is stated as a percentage of product sales) for such periods.

	Nine Months Ended						Increase
	September 30,						(Decrease)		% Change
	2009		%	2008		%	2008 to 2009		2008 to 2009
	(In thousands, except percentages)
Revenues:
Product sales	$	9,662	100.0%	$	13,419	99.9%	$	(3,757)	(28.0)%
Net royalty income		-	0.0%		18	0.1%		(18)	(100.0)%
Total revenues		9,662	100.0%		13,437	100.0%		(3,775)	(28.1)%
Costs and expenses:
Cost of product sales		4,021	41.6%		4,362	32.5%		(341)	(7.8)%
Research and development		6,636	68.7%		9,621	71.6%		(2,985)	(31.0)%
General and administrative		5,495	56.9%		6,989	52.0%		(1,494)	(21.4)%
Selling and marketing		4,092	42.4%		6,866	51.1%		(2,774)	(40.4)%
Total costs and expenses		20,244	209.5%		27,838	207.2%		(7,594)	(27.3)%
Loss from operations		(10,582)	(109.5)%		(14,401)	(107.2)%		3,819	(26.5)%
Other income (expense):
Currency transaction gain (loss)		14	0.1%		(72)	(0.5)%		86	(119.4)%
Interest income		88	0.9%		662	4.9%		(574)	(86.7)%
Total other income, net		102	1.1%		590	4.4%		(488)	(82.7)%
Loss before income taxes		(10,480)	(108.5)%		(13,811)	(102.8)%		3,331	(24.1)%
Income tax expense		30	0.3%		58	0.4%		(28)	(48.3)%
Net loss	$	(10,510)	(108.8)%	$	(13,869)	(103.2)%	$	3,359	(24.2)%

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REVENUES

NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2008

	Nine Months Ended September 30,				Increase (Decrease)			% Change
	2009		2008		2008 to 2009			2008 to 2009
	(In thousands, except percentages)
Product sales:
CardioSEAL®, STARFlex® and BioSTAR®:
North America	$	7,003	$	8,720	$	(1,717	)	(19.7	)%
Rest of world		2,659		4,699		(2,040	)	(43.4	)%
Total product sales		9,662		13,419		(3,757	)	(28.0	)%
Net royalty income:
Boston Scientific Corporation		-		18		(18	)	(100.0	)%
Total net royalty income		-		18		(18	)	(100.0	)%
Total revenues	$	9,662	$	13,437	$	(3,775	)	(28.1	)%

The decrease in product sales for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily a result of the challenging global economy. In an effort to more tightly manage their cash flow, we believe that hospitals are reducing their inventories. As a result, while our implants continue to be used in procedures, hospitals are taking longer to re-order product in the near-term, thus slowing our sales cycle. Outside of North America, we are continuing to transition from direct sales to distribution partnerships in several key markets while expanding into new territories. However, several of our recently established international territories are not yet contributing revenue due to the time necessary to complete product registrations in those markets. Sales outside of North America represented approximately 27.5% and 35.0% of total product sales for the nine months ended September 30, 2009 and 2008, respectively. In Europe, we continue to be faced with competitive pricing and ongoing clinical trials that are competing for procedure market share.

Cost of Product Sales. For the nine months ended September 30, 2009, cost of product sales, as a percentage of total product sales, was approximately 41.6% compared with approximately 32.5% in the comparable period of 2008. The increase in cost of product sales as a percentage of product sales was primarily the result of the impact of fixed manufacturing overhead expenses on lower than budgeted production volumes. In addition, royalty expenses also increased as a percentage of sales due to lower sales volumes. Included in cost of product sales were royalty expenses of approximately $1.5 million and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively.

Research and Development. Research and development expense decreased approximately $3.0 million, or 31.0%, for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008. The decrease in research and development expenses was primarily due to reduced costs associated with our clinical trials and reduced resources allocated to our development programs.

General and Administrative. General and administrative expense decreased approximately $1.5 million, or 21.4%, for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008. Included as a reduction to expense are payments received totaling $1.0 million pursuant to a settlement agreement with Cardia, Inc. for the nine months ended September 30, 2009, compared with a payment of $500,000 for the nine months ended September 30, 2008. The decrease in general and administrative expenses was also due to lower legal costs relating to patent work as well as additional savings spread across numerous account classifications. The favorable variances were offset by the impact on expenses of our former CEO’s retirement. Our former CEO retired as of February 9, 2009 and we entered into a Settlement Agreement and Release at that time. The charges in connection with this agreement, including severance in the form of continued payment of his salary for twelve months in the amount of $460,000, accrued and unused vacation pay in the amount of approximately $35,000, health benefits for a period of 18 months, and the acceleration of the vesting of the former CEO’s unvested stock options in the amount of approximately $50,000 were included in general and administrative expenses for the nine months ended September 30, 2009.

Selling and Marketing. Selling and marketing expense decreased approximately $2.8 million, or 40.4%, for the nine months ended September 30, 2009 compared to the same period in 2008. This decrease was primarily the result of decreased expenses related to

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salary costs due to lower headcount, lower commissions and sales bonuses due to lower sales, and decreased travel and promotion expenses related to BioSTAR^®.

Interest Income. The decrease in interest income for the nine months ended September 30, 2009 compared to the same period in 2008 was primarily related to lower cash balances and lower interest rates during 2009.

Income Tax Provision. We provide for taxes on income from continuing operations based upon our anticipated effective income tax rate. We anticipate incurring a loss from continuing operations in 2009 and therefore have not made a provision for taxes on continuing operations in the nine months ended September 30, 2009. For the nine months ended September 30, 2009 and 2008, we recorded income tax expense of $29,966 and $57,972, respectively, for the establishment of a liability for uncertain tax positions.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2009, we had cash and cash equivalents of approximately $9.0 million. We have taken several actions over the last year to both reduce our expenditures and further enhance our ability to generate revenue. We continually evaluate our cost structure and, it may be necessary to further reduce expenses in the short term. We believe that our current cash position, combined with a reduction in expenses and expected increase in revenues outside of North America in addition to our two-year $4 million revolving credit facility with Silicon Valley Bank will be sufficient to bring our STARFlex^® implant with an indication for PFO closure to the commercial market in the United States, subject to FDA approval. We will also continue to review financing alternatives to raise capital, if necessary. We expect the data from this trial to be reviewed in April of 2010 and anticipate that a submission will be made to the FDA for PMA approval during the third quarter of 2010. Based upon current projections, we expect that the aggregate of cash and cash equivalents will approximate $6 million at the end of 2009. This projection assumes a use of cash for 2009 of approximately $11 million compared to $13.4 million in 2008. We believe our cash use for 2009 will decrease compared to 2008, with clinical trial spending decreasing approximately $1.0 million, given that the data analysis for our CLOSURE I trial is currently expected to be in April of 2010. We have also implemented a series of cost reduction initiatives, including reducing headcount throughout the organization, reprioritizing our internal programs and restructuring various departments, that we believe will decrease expenses by greater than $5.0 million in 2009 compared to 2008. Based on current projections and plans, we believe that our current capital resources, including the $4 million revolving credit facility with Silicon Valley Bank, in addition to increased worldwide sales and reduced expenses, will be sufficient to complete the CLOSURE I trial and fund operations at least until we receive a decision with respect to a PMA with a PFO/stroke and TIA indication in the U.S. However, these forecasts are forward-looking statements that involve risks and uncertainties and actual results could vary materially.

We have incurred operating losses of $18.7 million and $11.1 million during each of the past two fiscal years, respectively, and have experienced decreasing sales over those time periods. We also incurred an operating loss of $10.6 million for the nine months ended September 30, 2009. Our cash used in operations significantly parallels the operating losses we have incurred and we have an accumulated deficit of $48.6 million as of September 30, 2009. In addition, we expect to incur significant additional research and development and other costs during the fourth quarter of fiscal 2009 and in fiscal 2010—including costs to complete our CLOSURE I trial and bring our STARFlex^® implant with an indication for PFO closure to commercial market in the United States, subject to U.S. FDA approval. Our costs, including research and development for our product candidates and sales, marketing and promotion expenses for any of our existing or future products to be marketed by us or our distributors currently exceed and will likely continue to exceed revenues during this period. In addition, while we have recently secured a two-year credit facility with Silicon Valley Bank, we will also continue to review financing alternatives to raise additional capital, if necessary.

	For the Nine Months Ended September 30,
	2009			2008
	(In thousands)
Cash, cash equivalents and marketable securities	$	8,991		$	21,146
Net cash used in operating activities		(8,645	)		(9,819	)
Net cash provided by investing activities		12,730			11,673
Net cash provided by financing activities		6			312

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2009 totaled approximately $8.6 million and consisted of a net loss of approximately $10.5 million partially offset by a net decrease in working capital requirements of approximately $1.3 million and non-cash charges of approximately $533,000.

The non-cash charges of approximately $533,000 during the nine months ended September 30, 2009 consisted of (i) share-based compensation, (ii) depreciation of property and equipment and (iii) amortization of bond premium.

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The primary elements of the $1.3 million net decrease in working capital during the nine months ended September 30, 2009 consisted of an increase in accounts payable of approximately $1.1 million due primarily to the timing of royalty payments and decreases in accounts receivable of approximately $860,000, offset by a decrease in accrued expenses and long-term liabilities of approximately $830,000.

Net cash used in operating activities for the nine months ended September 30, 2008 totaled approximately $9.8 million and consisted of a net loss of approximately $13.9 million partially offset by a net decrease in working capital requirements of approximately $3.4 million and non-cash charges of approximately $700,000.

The non-cash charges of approximately $700,000 during the nine months ended September 30, 2008 consisted of (i) share-based compensation expense, (ii) amortization of bond discount, and (iii) depreciation and amortization of property and equipment.

The primary elements of the $3.4 million net decrease in working capital during the nine months ended September 30, 2008 consisted of a decrease in prepaid expenses and other current assets of approximately $2.1 million, due primarily to the reduction in the royalty receivable due from Bard as a result of the decrease in the royalty rate we receive from Bard, a decrease in accounts receivable of approximately $690,000 and an increase in accounts payable of approximately $602,000.

Net Cash Provided By Investing Activities

Net cash provided by investing activities of approximately $12.7 million during the nine months ended September 30, 2009 consisted primarily of approximately $13.3 million of proceeds from maturities of marketable securities, offset by approximately $515,000 of purchases of marketable securities. This compared to net cash provided by investing activities of approximately $11.7 million during the nine months ended September 30, 2008.

Net Cash Provided By Financing Activities

Net cash provided by financing activities was approximately $6,000 and $312,000 for the nine months ended September 30, 2009 and 2008, respectively. For both periods, this was primarily attributable to proceeds from the issuance of shares of common stock pursuant to our employee stock purchase plan. The period ended September 30, 2008 also included proceeds from the exercise of common stock options.

Factors Affecting Sources of Liquidity

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. On October 19, 2006, we filed a shelf registration statement on Form S-3 with the SEC and that will permit us to offer and sell up to $65 million of equity or debt securities. However, given the current market conditions it is not clear how much market capital, if any, we would be able to raise using this registration statement or otherwise. Any additional equity financing will be dilutive to 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 recently secured a two-year, $4 million revolving credit facility with Silicon Valley Bank.

OFF-BALANCE SHEET FINANCING

During the quarter ended September 30, 2009, we did not engage in any off-balance sheet activities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2009 and December 31, 2008, we did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required. Our investments are primarily short-term money market accounts that are carried on our books at cost, which approximates fair market value, and corporate and U.S. government agency debt instruments that are carried on our books at amortized cost, increased or decreased by unrealized gains or losses, net of tax, respectively, which amounts are recorded as a component of stockholders’ equity in our consolidated financial statements. Accordingly, we have no quantitative information concerning the market risk of participating in such investments.

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

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The functional currency of our foreign subsidiaries is the U.S. dollar and, accordingly, translation gains and losses are reflected in the consolidated statements of operations. Revenue and expense accounts are translated using the weighted average exchange rate in effect during the period. We are subject to foreign currency exposure, although this has not been significant.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In September 2004, we and the Children’s Medical Center Corporation, or CMCC, filed a civil complaint in the U.S. District Court for the District of Minnesota, or the District Court, for infringement of a patent owned by CMCC and licensed exclusively to us. The complaint alleges that Cardia, Inc., or Cardia, of Burnsville, Minnesota is making, selling and/or offering to sell a medical device in the United States that infringes CMCC’s U.S. patent relating to a device and method for repairing septal defects. We sought an injunction from the District Court to prevent further infringement by Cardia, as well as monetary damages. On August 30, 2006, the District Court entered an order holding that Cardia’s device does not infringe the patent-in-suit. The order had no effect on the validity and enforceability of the patent-in-suit and had no impact on our ability to sell our products. We appealed the ruling to the U.S. Court of Appeals for the Federal Circuit and on June 6, 2007 the Federal Circuit ruled that the District Court incorrectly interpreted one of the patent’s claims and incorrectly found no triable issue of fact concerning other claims. The Federal Circuit remanded the case to the District Court for further proceedings consistent with its opinion and instructed that on remand the district court may reconsider the question of summary judgment for us and CMCC based on the Federal Circuit’s claim construction. On November 8, 2007, the District Court granted summary judgment in our and CMCC’s favor, ruling that Cardia’s device infringes the patent-in-suit and striking all of Cardia’s invalidity defenses. On March 19, 2008, we and CMCC agreed with Cardia to settle this litigation. As part of the settlement, a judgment was entered against Cardia and in favor of us and CMCC, with Cardia agreeing to pay $2.25 million. The settlement will be shared equally between us and CMCC after deduction of our legal fees and expenses. The first and second payments of $500,000 each were received on September 30, 2008 and December 15, 2008. We received the third and fourth installments of $375,000 each on March 31, 2009 and June 30, 2009 and we received the fifth installment of $250,000 on September 30, 2009. All of these payments were recorded as a reduction to general and administrative expenses, to offset legal fees incurred in connection with this legal proceeding. The final $250,000 payment is due December 15, 2009.

In December 2007, we commenced proceedings for defamation against Dr. Peter Wilmshurst in the English High Court. Dr. Wilmshurst has filed a defense to the claim arguing, inter alia, that the words alleged to be defamatory are true. If the matter proceeds to trial, this is likely to take place in 2010. If the case continues, we will be required to pay money into court by way of security for costs. The amount of security depends on whether Dr. Wilmshurst has the funds to pay for further legal representation. Our potential liability is to pay Dr. Wilmshursts’ costs, if we either lose, or withdraw from, the proceedings.

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

ITEM 1A. RISK FACTORS

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

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

Given the current tightening of financing markets and the general economic environment, we believe it prudent to evaluate financing alternatives that will provide increased liquidity to the company if needed. In the future we may require additional funds for our research and product development programs, regulatory processes, preclinical and clinical testing, sales, marketing and manufacturing infrastructure and programs and potential licenses and acquisitions. On October 19, 2006, we announced that we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration statement will permit us to offer and sell up to $65 million of equity or debt securities. However, given the current market conditions, we may not be able to raise sufficient market capital using this registration statement or otherwise. Any additional equity financing or other transaction involving securities exercisable or convertible into our equity securities may be dilutive to our stockholders, and additional debt financing, if available, may involve restrictive covenants. Our capital requirements will depend on numerous factors, including the level of sales of our products, the progress of our research and development programs, the progress of clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, developments and changes in our existing research, licensing and other relationships and the terms of any collaborative, licensing and other similar arrangements that we may establish. Based on current projections and plans, we believe that we have sufficient capital resources to complete the CLOSURE I trial and fund operations at least until we receive a decision with respect to a PMA with a PFO/stroke and TIA indication in the U.S. While we have recently secured a two-year, $4 million revolving credit facility with Silicon Valley Bank, given the current global economic climate, it is unlikely that equity sources of additional capital at acceptable value will be available in the short-term.

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

Upon receipt of final FDA approval, we commenced our CLOSURE I study in June 2003. On April 23, 2007, we announced that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Based on an analysis, the conditional probability of a statistically significant benefit at the end of the data reviewed will require an enrollment of 900 patients. In October 2008, we announced that we completed patient enrollment in this clinical trial. We currently anticipate that when completed, study data from CLOSURE I will be used to support a PFO PMA application. In September 2009 we announced that, upon recommendation of the CLOSURE I Executive Committee, we will commence data analysis in April of 2010. We currently estimate the total costs of CLOSURE I to be approximately $30 million through completion of the clinical trial and submission to the FDA. We have limited direct experience conducting a clinical trial of this magnitude. We cannot be certain that the projected costs of CLOSURE I will not need to be adjusted upwards. Furthermore, we cannot be certain that we will obtain a PMA from the FDA based upon the final results of the trial. If CLOSURE I does not result in a PMA, we may face uncertainties and/or limitations as to the growth of revenues of our CardioSEAL^® and STARFlex^® products, which will negatively impact our profitability.

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

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

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

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

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

Our structural heart repair implant devices are marketed primarily through our direct sales force. Our combined U.S. and European sales and marketing organization headcount is 16. Because we had previously marketed our initial products, such as stents

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and vena cava filters, through third parties, we have limited experience marketing our products directly. We are uncertain that we can further expand geographically in Europe, Latin America or other potential markets for our products. In order to market directly the CardioSEAL^®, STARFlex^® and BioSTAR^® septal implants and any related products, we will have to continue to develop a marketing and sales organization with technical expertise and distribution capabilities. Expanding in these markets could also impose foreign currency risks on sales not denominated in US dollars, increase our costs to remain in compliance with foreign laws, and heighten risk of non-performance by the other parties to agreements to which the company is a party.

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

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

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

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

WE MAY FACE CHALLENGES IN EXECUTING OUR FOCUSED BUSINESS STRATEGY.

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

• achieving successful stroke-related clinical trials;

• developing next generation product lines;

• improving our sales and marketing capabilities;

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

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

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

REVENUE GENERATED BY CARS IDE MAY BE LIMITED.

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

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IDE is a significant competitive achievement for us and is necessary to accommodate the growing demand for more advanced PFO/stroke treatments.

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

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

CURRENT LEVELS OF MARKET VOLATILITY ARE UNPRECEDENTED.

The capital markets have been experiencing extreme volatility and disruption for more than 12 months. In some cases, the markets have exerted downward pressure on stock prices for certain issuers, including, but not limited to, the Company. We believe the price of our common stock has been and may continue to be negatively effected in a manner unrelated to our business. The markets have also exerted downward pressure on the value of the marketable securities carried on our balance sheet, including corporate debentures and corporate bonds, resulting in further downward pressure on our stock price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Our issued U.S. patents expire at various dates ranging from 2009 to 2026. When each of our patents expires, competitors may develop and sell products based on the same or similar technologies as those covered by the expired patent. We have invested in significant new patent applications, and we cannot be certain that any of these applications will result in an issued patent to enhance our intellectual property rights.

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

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

WE ARE EXPOSED TO UNCERTAIN ROYALTY EXPENSE IN EXCESS OF ROYALTY REVENUE.

The royalty rate we receive from Bard decreased substantially from the royalty rate we earned prior to 2008, while the royalty rate we pay to the estate of the original inventor of these products will remain the same. Accordingly, we cannot assure you of the actual royalty expense we will incur in 2009.

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

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

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

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

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

OUR EXPANDING NON-US OPERATIONS EXPOSE US TO RISK INHERENT IN FOREIGN OPERATIONS.

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

ITEM 6. EXHIBITS

See the Exhibit Index on page 24 of this quarterly report on Form 10-Q.

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SIGNATURES

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

	NMT MEDICAL, INC.
Date: November 5, 2009	By:	/s/ FRANCIS J. MARTIN
		Francis J. Martin
		President and Chief Executive Officer
Date: November 5, 2009	By:	/s/ RICHARD E. DAVIS
		Richard E. Davis
		Chief Operating Officer and Chief Financial Officer

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EXHIBIT INDEX

Number	Description of Exhibit
31.1	Certification of Francis J. Martin, President and Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Richard E. Davis, Chief Operating Officer and Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Francis J. Martin, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Richard E. Davis, Chief Operating Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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