The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Our management's discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, "Risk Factors."

OVERVIEW

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 common right to left shunt 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.

In 2001, we began divesting certain non-strategic assets in order to focus on this emerging PFO market opportunity utilizing our proprietary implant technologies. These divestitures included the November 2001 sale of our vena cava filter product line to Bard and the July 2002 sale of our neurosciences business unit to Integra. Net cash proceeds from these sales transactions of approximately $33.8 million, the related net royalty income from Bard that commenced in 2003 and the on-going business operations have provided us with the financial and operational flexibility to aggressively pursue this emerging market opportunity with our CardioSEAL®, STARFlex ® and BioSTAR® implants, clinical research studies and development of next generation catheter-based implant technologies. More than 30,000 PFOs have been closed globally using our CardioSEAL®, STARFlex® and BioSTAR ® implant technologies.

2008 Revenues

Our 2008 revenues were predominantly derived from sales of our CardioSEAL ®, STARFlex® and BioSTAR® products in the U.S. and Europe. CardioSEAL ®, STARFlex® and BioSTAR® product sales decreased by approximately 10% from 2007 to 2008. Sales in North America decreased by approximately 17% in 2008 compared to 2007, primarily due to decreased sales in the United States. We believe that sales in the United States continue to be impacted by delays in third party payors in approving reimbursement for the procedure as a result of the voluntary withdrawal of the Humanitarian Device Exemption, or HDE, for our CardioSEAL® septal repair system. In addition, we believe that given enrollment in CLOSURE I is complete, certain referring physicians may be waiting for the data prior to increasing their referral patterns thereby resulting in a short-term reduction in referrals. We believe that a combination of increased market awareness of PFO closure and our proprietary closure technology and targeted marketing efforts has resulted in the addition of new customers, predominantly in Europe. In 2009 we currently expect total product revenues to be approximately $18 million. Beginning in 2008, the royalty rate we receive from Bard has decreased substantially from its former rate, while the royalty rate we pay to the estate of the original inventor of these products has remained the same. This has resulted in a net royalty expense that has been reflected in general and administrative expenses.

PFO/Stroke

Stroke is the third leading cause of death in the United States and the leading cause of disability in adults. Each year, approximately 750,000 Americans suffer a new or recurrent stroke and 500,000 Americans experience a TIA. In October 2008, we announced that we completed patient enrollment in our pivotal CLOSURE I clinical trial. In 2003, we launched the CLOSURE I clinical trial to compare our STARFlex® cardiac septal repair implant with current medical therapy in stroke prevention. On March 2, 2007, we participated in a public and private FDA advisory panel meeting to discuss the current status of the ongoing PFO/stroke trials being sponsored by us and other companies. At the close of the meeting, both the FDA and advisory panel concurred that only randomized, controlled trials would provide the necessary data to be considered for premarket approval, or PMA, for devices intended for transcatheter PFO closure in the stroke and TIA indication. During a private session, we provided the FDA and advisory panel with a revised study hypothesis and statistical plan to complete the CLOSURE I study as a randomized controlled trial. On April 23, 2007, we announced that we received conditional approval from the FDA for our revised study hypothesis and statistical plan in the CLOSURE I PFO/stroke and TIA trial in the U.S. Subsequent to this meeting, a review of the revised plan and a look at the interim data was performed by the Data Safety Monitoring Board. Based on these analyses, the conditional probability of a statistically significant benefit will require an enrollment of 900 patients. In October 2008, we announced that we completed patient enrollment in this clinical trial.

We currently expect that total costs for CLOSURE I will be approximately $30 million through completion of the trial and submission to the FDA. Of this total, approximately $22.6 million was incurred through 2008, and we currently project 2009 costs to be approximately $4.6 million.

PFO/Migraine

The prevalence of migraines in the United States is estimated to be slightly less than 10% of the general population or roughly 28 million individuals. We estimate that 20% of all migraine sufferers, or approximately 6 million individuals, have the classic form of migraine, sometimes referred to as migraine with aura. It has also been reported that 50% of these patients do not satisfactorily respond to current approved forms of medication. Furthermore, data as reported at the Transcatheter Cardiovascular Therapeutic symposium, or TCT, meeting in October 2005 indicated that 60% of the patient subset in our MIST trial had a right to left shunt. That is more than twice what would be expected in the general population.

In 2005, we completed enrollment in our MIST study in the United Kingdom. Total costs for MIST were $4.9 million. Study enrollment was completed in July 2005 and results were presented at the American College of Cardiology meeting on March 13, 2006. Results of the MIST study were published online on March 3, 2008 in the peer-reviewed journal, Circulation.

In October 2005, we received approval from the regulatory authorities in the United Kingdom to begin enrollment in MIST III. In MIST III, control patients from the original MIST study, those who did not receive the STARFlex® implant, have the option to receive an implant after they have been unblinded as part of the MIST study. These patients will follow the identical protocol as in MIST after which they will be followed for an additional 18 months. In addition, migraine patients with a PFO who did receive a STARFlex ® implant in MIST will be followed for an additional 18 months. We currently estimate the cost of MIST III to be approximately $1.2 million, with substantially all of the spending having been incurred through 2008. We expect minimal spending in 2009.

BioSTAR ® and BioTREK™

In November 2005, we completed enrollment in our BEST study, which commenced in July 2005 following regulatory approval in the United Kingdom. This study evaluated our new bioabsorbable, biological closure technology designed to promote a more natural, rapid and complete sealing of heart defects such as PFO. Approximately 60 patients were enrolled in the BEST study and were followed for six months. Data was published in the October 2006 edition of Circulation and was presented at the 2006 Transcatheter Cardiovascular Therapeutics 18th Annual Scientific Symposium. The study was designed to gain commercial approval for BioSTAR ® through the CE Mark process which was granted in June 2007.

In January 2006, we announced that we received a Phase I grant from the National Institute of Health's, or NIH, Small Business Technology Transfer Program to initiate a research program to evaluate our advanced septal repair implant called BioTREK™, a bioabsorbable, biological closure technology. We believe that the biomaterials in the BioSTAR® and BioTREK™ implants, whether used alone or in combination, further complement our current CardioSEAL® and STARFlex® closure technology, providing us with an exceptionally promising and well-protected technology pipeline.

CRITICAL ACCOUNTING POLICIES

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our results of operations and the valuation of certain assets and liabilities on our balance sheet. These estimates, assumptions and judgments about future events and their effects on our results of operations cannot be made with certainty, and are made based on our experience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or as additional information is obtained. While there are a number of accounting policies, methods and estimates affecting our financial statements described in Note 2 of Notes to Consolidated Financial Statements, our most critical accounting policies, described below, include: (i) revenue recognition;
(ii) accounts receivable reserves; (iii) inventories; (iv) expenses associated with clinical trials, and (v) share-based compensation. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make subjective or complex judgments that could have a material effect on our financial condition and results of operations. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Revenue Recognition

We recognize revenue in accordance with Securities and Exchange Commission (SEC), Staff Accounting Bulletin No. 104, or SAB 104, "Revenue Recognition in Financial Statements." SAB 104 requires that four basic criteria must be met before revenue

can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred and title has transferred to the customer; (3) the fee is fixed and determinable; and (4) collection is reasonably assured. We use judgment concerning the satisfaction of these criteria, particularly with respect to collectibility. Should changes in conditions cause us to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

We require receipt of purchase orders from our customers for our products. Prior to fulfillment of a customer order, we review that customer's account history and outstanding balances to determine if we believe that collectibility of the order value is reasonably assured. We recognize product revenues upon shipment unless customer purchase orders specifically designate that title to the products transfers upon receipt. Products sold to distributors, which accounted for approximately 4% of our product sales in 2008, are not subject to a right of return for unsold product.

We recognize royalty income as it is earned in accordance with relevant contract provisions. Where applicable, we report royalty income in our financial statements net of corresponding royalty obligations to third parties.

Accounts Receivable Reserves

We provide allowances for doubtful accounts based on estimates of losses related to customer receivable balances. In establishing these allowances, we make assumptions with respect to the future collectibility of our receivable balances. Our assumptions are based on an individual assessment of a customer's credit quality, primarily its payment history, as well as subjective factors and trends, including the aging of receivable balances, the positive or negative effects of the current and projected industry outlook and the economy in general. Once we consider all of these factors, we determine the probability of customer default, the appropriateness of our current reserve balance and the need to record a charge or credit to operating expense to increase or decrease our reserve level. The amount of the reserve level for our customer accounts receivable fluctuates depending upon all of these factors. If our assumptions are incorrect, or if the financial condition of certain of our customers were to deteriorate, we may need to make additional allowances. The amount of the allowance at both December 31, 2008 and 2007 was $60,000.

We also maintain a provision for estimated sales returns and allowances on product sales. We base these estimates on our assessment of historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to estimate accounts receivable or sales returns do not properly reflect future returns, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be adversely affected. The amount of the allowance at December 31, 2008 and 2007 was $75,000 and $101,341, respectively.

Inventories

In accordance with Financial Accounting Standards Board (FASB) Statement No. 151, "Inventory Costs, an amendment of ARB, No. 43, Chapter 4", or SFAS 151, abnormal amounts of idle facility expenses should be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of production be based on the normal capacity of the production facilities. Management judgment will be required in the determination of a range of normal capacity levels, which will directly affect the allocation of fixed manufacturing overhead costs between inventory costs and period expense. Inventory levels at the end of 2008 decreased approximately 3% compared to the end of 2007. We also experienced an increase in cost of product sales as a percentage of product sales in 2008, which was partially the result of the impact of fixed manufacturing overhead on lower than budgeted production volumes.

In addition, as a manufacturer of medical devices, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. In such an event, we would need to take a charge against earnings upon making such a determination. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, reliability and replacement of and the availability of key components from our suppliers.

Our policy is to establish inventory reserves when we believe that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value of our inventory based on a combination of factors, including usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. The assumptions we use in determining our estimates of future product demand may prove to be incorrect; in which case any provision required for excess or obsolete inventory would have to be adjusted. If we determine that our inventory is overvalued, we would be required to recognize such costs as cost of product sales at the time of that determination and such recognition could have a significant impact on our reported operating results. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value.

Expenses Associated With Clinical Trials

We have invested significant resources in several clinical trials designed to investigate the potential connection between a PFO and brain attacks such as, strokes, TIAs and migraine headaches. We completed enrollment in July 2005 for MIST in the United Kingdom. In October 2005, we announced approval of MIST III. Our CLOSURE I trial, commenced in 2003, is an FDA-approved IDE study in the U.S. to evaluate the safety and efficacy of the STARFlex® closure technology to prevent a recurrent embolic stroke and/or TIA in patients with a PFO. In October 2008, we announced that we completed patient enrollment in this trial. In November 2005, we completed enrollment in the BEST study. Total expenses for all of our clinical trials were approximately $5.4 million, $6.0 million and $8.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Our judgment is required in determining methodologies used to recognize various costs related to our clinical trials. We generally enter into contracts with vendors who render services over an extended period of time. Typically, we enter into three types of vendor contracts (i) time-based, (ii) patient-based, or
(iii) a combination thereof. Under a time-based contract, using critical factors contained within the contract, usually the stated duration of the contract and the timing of services provided, we record the contractual expense for each service provided under the contract ratably over the period during which we estimate the service will be performed. Under a patient-based contract, we first determine an appropriate per patient cost using critical factors contained within the contract, which include the estimated number of patients and the total dollar value of the contract. We then record the expense based upon the total number of patients enrolled and/or monitored during the period. On a quarterly basis, we review both the timetable of services to be rendered and the timing of services actually rendered. Based upon this review, revisions may be made to the forecasted timetable or to the extent of services performed, or both, in order to reflect our most current estimate of the contract. Adjustments are recorded in the period in which the revisions are estimable. These adjustments could have a material effect on our results of operations. Additional STARFlex® and BioSTAR® products manufactured to accommodate the expected requirements of our clinical trials are included in inventory because they are saleable units with alternative use outside of the trials. These units will be expensed as a cost of the trials as they are implanted. Substantially all expenses related to our clinical trials are included in research and development in our consolidated statements of operations.

Share-Based Compensation

We adopted the provisions of FASB No. 123R, "Share-Based Payment," or SFAS 123R, beginning January 1, 2006, using a modified prospective transition method. SFAS 123R requires us to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting. However, compensation expense is recognized for (i) all share-based payments granted after the effective date under SFAS 123R, and (ii) all awards granted under SFAS 123R to employees prior to the effective date that remain unvested on the effective date. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period. We use the Black-Scholes option-pricing model to estimate fair value of share-based awards. The fair value of our share-based awards are dependent on the assumptions we use for expected life (in years), the expected stock price volatility, the expected dividend yield and the risk free interest rate.

Comparison of Years ended December 31, 2008, 2007 and 2006

The following two tables present consolidated statements of operations information as a reference for management's discussion which follows. The first table presents dollar and percentage changes for each listed line item for 2008 compared with 2007 and for 2007 compared with 2006. The second table presents consolidated statements of operations information for each of the three years in the period ended December 31, 2008 as a percentage of total revenues (except for cost of product sales, which is stated as a percentage of product sales).

                                             Years Ended December 31,                   Increase (Decrease)                     % Change
                                       2008           2007            2006         2007 to 2008      2006 to 2007     2007 to 2008    2006 to 2007
                                                                          (In thousands, except percentages)
Revenues:
Product sales                       $    17,857    $    19,855    $     22,135    $      (1,998)    $      (2,280)         (10.1)%         (10.3)%
Net royalty income                           18          6,900           6,016           (6,882)    $          884         (99.7)%           14.7%

Total revenues                           17,875         26,755          28,151           (8,880)           (1,396)         (33.2)%          (5.0)%

Costs and expenses:
Cost of product sales                     5,969          5,409           5,938               560             (529)           10.4%          (8.9)%
Research and development                 13,194         15,407          15,455           (2,213)              (48)         (14.4)%          (0.3)%
General and administrative                8,579          7,988           8,681               591             (693)            7.4%          (8.0)%
Selling and marketing                     8,784          9,093           8,704             (309)               389          (3.4)%            4.5%

Total costs and expenses                 36,526         37,897          38,778           (1,371)             (881)          (3.6)%          (2.3)%

Net gain from settlement of
litigation                                    -              -          15,184                 -          (15,184)               -               -

(Loss) income from operations          (18,651)       (11,142)           4,557           (7,509)          (15,699)           67.4%        (344.5)%
Other income (expense):
Currency transaction (loss) gain          (123)             88              15             (211)                73        (239.8)%          486.7%
Interest income                             767          1,830           1,816           (1,063)                14         (58.1)%            0.8%

Total other income, net                     644          1,918           1,831           (1,274)                87         (66.4)%            4.8%

(Loss) income before income
taxes                                  (18,007)        (9,224)           6,388           (8,783)          (15,612)           95.2%               -
Income tax expense (benefit)                 69          (122)             502               191             (624)        (156.6)%               -

Net (loss) income                     $(18,076)    $   (9,102)    $      5,886    $      (8,974)    $     (14,988)           98.6%               -


                                             Years Ended December 31,
                                       2008           2007            2006
Revenues:
Product sales                             99.9%          74.2%           78.6%
Net royalty income                         0.1%          25.8%           21.4%

Total revenues                           100.0%         100.0%          100.0%

Costs and expenses:
Cost of product sales                     33.4%          27.2%           26.8%
Research and development                  73.8%          57.6%           54.9%
General and administrative                48.0%          29.9%           30.8%
Selling and marketing                     49.1%          34.0%           30.9%
Total costs and expenses                 204.3%         141.6%          137.7%

Net gain from settlement of
litigation                                    -              -           53.9%
(Loss) income from operations          (104.3)%        (41.6)%           16.2%
Other income (expense):
Currency transaction (loss) gain         (0.7)%           0.3%               -
Interest income                            4.3%           6.8%            6.5%

Total other income, net                    3.6%           7.2%            6.5%

(Loss) income before income
taxes                                  (100.7)%        (34.5)%           22.7%
Income tax (benefit) provision
                                           0.4%         (0.5)%            1.8%

Net (loss) income                      (101.1)%        (34.0)%           20.9%

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2008 COMPARED WITH YEAR ENDED DECEMBER 31, 2007

Revenues. Revenues for the years ended December 31, 2008 and 2007 were as
follows:



                                                                             Increase
                                           Years Ended December 31,         (Decrease)          % Change
                                            2008              2007         2007 to 2008       2007 to 2008
                                                       (In thousands, except percentages)
Product sales:
CardioSEAL®, STARFlex®and BioSTAR®:
North America                          $       11,716    $       14,185    $      (2,469 )         (17.4)%
Europe                                          6,141             5,670              471              8.3%

Total product sales                            17,857            19,855           (1,998 )         (10.1)%

Net royalty income:
Bard                                                -             6,849           (6,849 )        (100.0)%
BSC                                                18                51              (33 )         (64.7)%

Total net royalty income                           18             6,900           (6,882 )         (99.7)%

Total revenues                         $       17,875    $       26,755      $   (8,880)           (33.2)%

The decrease in CardioSEAL ® and STARFlex® implant sales for 2008 compared to 2007 was primarily the result of decreased product demand in North America, primarily in the United States. We believe that sales in the United States continue to be impacted by delays by third party payors in approving reimbursement for the procedures as a result of the voluntary withdrawal of the HDE of our CardioSEAL® septal repair system. In addition, we believe that given enrollment in CLOSURE I is complete, certain referring physicians are waiting for the data prior to increasing their referral patterns thereby resulting in a short-term reduction in referrals.

The increase in European sales was primarily related to the launch of BioSTAR®, . . .