UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from            to                     .

CABG MEDICAL, INC.

(Exact name of registrant as specified in its charter)

Minnesota (State or Other Jurisdiction of Incorporation or Organization)		No. 41-1958628 (IRS Employer Identification No.)

14505 — 21st Avenue North, Suite 212, Minneapolis, MN 55447
(Address of Principal Executive Offices)

Registrant’s telephone number (763) 258-8005

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YESo  NOþ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YESo  NOþ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. YESþ  NOo

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 13b-2 of the Exchange Act. (Check one):

     Large Accelerated Filer  o    Accelerated Filer  o    Non-Accelerated Filer  þ

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

     The aggregate market value of the voting stock held by non-affiliates was $54,640,405 million based on the closing sale price of the Company’s Common Stock as reported on the Nasdaq Stock Market on July 1, 2005.

     There were 18,612,278 shares of common stock outstanding as of February 14, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

 

 

PART I

ITEM 1. BUSINESS

Overview

     We were formed as a medical technology company seeking to improve the treatment of coronary heart disease by advancing conventional bypass surgery. From November 2004 through November 2005 we conducted clinical trials for our first product, the Holly Graft System. In December 2004 and January 2005, we completed an initial public offering of our common stock with net proceeds of approximately $31.2 million, the majority of such proceeds were to be utilized to fund human clinical trials and develop a sales and marketing team for the Holly Graft System.

Recent Developments

     On November 28, 2005, we announced the suspension of enrollment in our human clinical trials of the Holly Graft System due to safety and efficacy issues relating to our clinical results. After the announcement, the Board of Directors asked management to initiate a comprehensive investigation into the cause or causes of the Holly Graft System failures and possible remedies. At a Board of Directors meeting on February 7, 2006, management reviewed with the Board of Directors their views that the Holly Graft System would have to be substantially redesigned, that such a redesign would likely be extremely costly and that it would likely be at least two years before new clinical trials could begin. More importantly, there was no assurance that the redesign would be successful. Based on this report and the information it has received in various meetings and individual conferences with management since early December 2005, the Board of Directors concluded that beginning a redesign of the Holly Graft System and continuing to operate in a research mode which, at a minimum, would last for two years, was not in the best interests of shareholders.

     The Board of Directors unanimously agreed that the focus of our efforts should be on winding down our operations and obtaining shareholder approval of a Plan of Liquidation and Dissolution (“the Plan”), while at the same time continuing to review certain limited strategic alternatives. Accordingly, management was authorized to reduce our staff by seven employees, investigate opportunities for sale of assets, resolve creditor matters and begin preparations for and the filing of a proxy statement seeking shareholder approval of the Plan. The Board of Directors also discussed with management the timing of and process for making distributions to shareholders.

     Review of Alternatives

     During December 2005, we began contacting numerous potential business collaborators and strategic acquirers to explore various business combinations. There have been no serious discussions to date with any of these parties. On February 7, 2006, the Board of Directors concluded that management should begin preparing for our formal dissolution as this course of action would most likely offer the best return to stockholders and be the least subject to risk.

     However, the Board of Directors also agreed that the Company should continue to identify and evaluate strategic alternatives until approval by the shareholders of the Plan, and authorized management to engage Goldsmith Agio Helms, a Minneapolis investment bank, to assist us in identifying and evaluating strategic alternatives.

     We intend to move as quickly as possible to have the shareholders approve the Plan and begin our liquidation and dissolution, unless the Board of Directors determines that a strategic alternative is clearly

superior to the our liquidation and dissolution. In connection with any such strategic alternative, the Board of Directors will obtain the opinion of a qualified investment banker that the transaction is fair and in the best interests of the shareholders from a financial perspective and obtain assurances that the risk that such an alternative will not get consummated is insignificant. If any strategic alternative is identified and determined by the Board of Directors to be in the best interests of our shareholders, we will amend the attached proxy statement, or take such other action as may be required by law, to set forth the material provisions of any such alternative transaction and to otherwise comply with applicable law in connection with consummating any such alternative transaction.

     Estimated Aggregate Distribution Amount and Timing

     If we proceed with a dissolution, we will ultimately liquidate all of our non-cash assets, satisfy all of our debts, and distribute all remaining cash to our shareholders. We plan to make an initial distribution to shareholders of a portion of our net assets within 30 days following approval of the plan by shareholders. After we liquidate our remaining non-cash assets and settle outstanding obligations to our creditors, we will distribute the remaining available liquidation proceeds, if any, to shareholders as our Board of Directors deems appropriate.

     As of December 31, 2005, our total assets were approximately $33.3 million, including $0.07 million of non-current assets, and our outstanding liabilities were approximately $0.7 million, all of which were current liabilities. Subsequent to December 31, 2005, and in connection with the planned dissolution, we paid $985,000 in severance payments. In addition, we anticipate that we will incur additional expenses and charges (both cash and non-cash) of $1,200,000 to $1,600,000 in connection with formulating and receiving shareholder approval of the Plan, selling our non-cash assets and in connection with making distributions to shareholders and dissolving our business. After giving effect to these items, and based upon our current projections for the outcome of other anticipated events, we anticipate we will be able to distribute a total of approximately $1.20 per share to $1.47 per share in cash to our shareholders in a dissolution.

     The $1.47 per share amount represents the Board of Directors’ estimate of the amount that could be distributed to the shareholders if: (i) the dissolution is approved by shareholders on or about April 27, 2006, (ii) there are no significant legal actions brought against us prior to effecting the dissolution and (iii) there are no other significant contingent obligations arising prior to the effective date of the dissolution. The $1.20 per share amount represents the Board of Directors’ best estimate of the distributions the shareholders could reasonably expect to receive in the event the dissolution process does not proceed as currently anticipated. The $1.20 per share amount is a general estimate, and is not based upon specific scenarios or projections. Unforeseen patient or legal actions, contingent obligations, larger than anticipated impairments and discounts on the sale of illiquid assets and larger than expected operational expenses may reduce the amount of cash available for distribution to a greater extent than we anticipate, and depending on their magnitude, could reduce the actual cash distribution to significantly lower than $1.20 per share.

     While we believe the range of $1.20 to $1.47 per share is reasonable, the actual aggregate per share distribution amount and the timing of distributions in connection with the Plan is impossible to predict with certainty. Our initial determination is subject to many uncertainties, primarily arising from determining the realizable value of our illiquid assets, the settlement amount of any contingent and unforeseen obligations and the amount of assets that will be consumed during the liquidation and dissolution of our business.

Product Liability and Insurance

     Cardiovascular device companies are subject to an inherent risk of product liability and other liability claims in the event that the use of their products results in personal injury. An artificial coronary bypass graft is a life-sustaining device, and the failure of any such graft could result in injury to or disability or death of the patient. Any product liability claim could subject us to costly litigation, damages and adverse publicity.

     We have procured a product liability insurance policy with an annual coverage limit of  €5 million in the aggregate. We are responsible for any uninsured claims or claims which exceed the insurance policy limits. Product liability insurance is expensive for mechanical medical devices. If insurance becomes completely unavailable, we must either develop a self-insurance program or sell without insurance. The development of a self-insurance program would require significant capital.

Employees

     At December 31, 2005 we had twelve full-time and one part-time employee. However, in February 2006 we terminated seven employees which were not essential to the ongoing operations of the Company. As of February 13, 2006, we had four full-time employees and one part-time employee. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements. We believe our employee relations are good.

AVAILABLE INFORMATION

     We make available free of charge on or through our internet website at http://www.cabgmedical.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

     The foregoing discussion and the discussion, including in particular the discussion under “Recent Developments” and the related discussion of our planned dissolution, contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. There are risks associated with forward looking statements. Forward-looking statements are based on current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similar words or expressions. Our most significant forward-looking statements in this Form 10-K include the amount of the per share distribution we may make to our shareholders and timing of payment of per share distribution. You should not place undue reliance on forward-looking statements since actual results may vary significantly from forward looking statements.

     Some of the factors that may cause the actual amount distributed to shareholders in a dissolution to be less than the distribution projected in our forward looking statements include: (i) unforeseen litigation in connection with the dissolution or other matters, (ii) costly settlements of contingent obligations, (iii) impairments and discounts incurred on the sale of illiquid assets, (iv) higher than expected professional fees and costs (including legal, accounting, consulting and distribution fees) incurred in connection with the liquidation and dissolution, and (v) the failure to complete the dissolution on the anticipated date, requiring us to continue paying operating costs. The foregoing list may not include all events that could cause the actual cash distribution to shareholders in a dissolution to be significantly less than projected.

We are not making any representation or warranty of any kind with respect to the accuracy of the projected range. Some assumptions on which the projected range is based inevitably will not materialize, and unanticipated events and circumstances will occur. There could be errors of omission or of estimation, and new events or circumstances could arise that require additional time or capital. As such, the actual cash distribution may be significantly lower than projected.

     In particular, you should consider the following specific risk factors carefully:

After selling our assets and settling our obligations, there may significantly less cash available for distribution to shareholders than we currently anticipate.

     In connection with the planned dissolution, we have paid $985,000 in severance payments to our employees (excluding up to an additional $165,000 in retention payments that may be made to officers and essential employees who remain employed through our final dissolution). In addition, we anticipate we will incur additional expenses and charges (both cash and non-cash) of $1,200,000 to $1,600,000 in connection with receiving shareholder approval for the Plan, selling our non-cash assets and in connection with making distributions to shareholders and effecting the legal dissolution of our business. Based upon our current projections, we anticipate that we will distribute a total of approximately $1.20 per share to $1.47 per share in cash to shareholders in a dissolution.

     While we believe the range of $1.20 to $1.47 per share in cash distributions to shareholders is a reasonable range, there is no way to predict with any certainty the aggregate cash which will ultimately be distributed to shareholders. The $1.47 per share amount represents the Board of Directors’ estimate of the amount that could be distributed to the shareholders if: (i) the dissolution is approved by shareholders on or about April 27, 2006, (ii) there are no significant legal actions brought against us prior to effecting the dissolution and (iii) there are no other significant contingent obligations arising prior to the effective date of the dissolution. The $1.20 per share amount represents the Board of Directors’ best estimate of the distributions the shareholders could reasonably expect to receive in the event the dissolution process does not proceed as currently anticipated. The $1.20 per share amount is a general estimate, and is not based upon specific scenarios or projections. Unforeseen patient or shareholder claims, legal actions, contingent obligations, larger than anticipated impairments and discounts on the sale of illiquid assets and larger than expected operational expenses may reduce the amount of cash available for distribution to a greater extent than we anticipate, and depending on their magnitude, could reduce the actual cash distribution to significantly lower than $1.20 per share.

     Securities claims have been brought against companies in the past where the market price of the company’s securities has fallen due to adverse clinical results of early stage medical technologies. Any such litigation could be very costly and divert our remaining resources from being available for distribution to our shareholders. Any adverse determination in this kind of litigation could also substantially reduce our cash position, and reduce proceeds that would otherwise be distributed to our shareholders.

The timing of any distributions to our shareholders is difficult to predict.

     We intend to make an initial cash distribution to shareholders within 30 days following approval of the Plan by shareholders. After we sell all of our illiquid assets (such as equipment and other tangible and intangible assets used in the conduct of our business) and settle any remaining contingent and unforeseen obligations, we intend to make a second distribution to shareholders with respect to all of our remaining cash. We anticipate that all distributions will be made no later than December 2006. However, we cannot assure you that distributions will be made according to the foregoing time estimates because of uncertainties inherent in liquidating our business. These difficulties may include unanticipated delays

selling our non-liquid assets, in determining the nature and scope of settlement amounts for our known and contingent obligations and from being unable to control unforeseen claims that must be settled before we can make distributions to shareholders.

The proceeds from any sale of our assets may be less than anticipated.

     Sales of our remaining assets will be made on such terms as are approved by the Board of Directors and may be conducted by competitive bidding, public sales or privately negotiated sales. The prices at which we will be able to sell these assets will depend largely on factors beyond our control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets public market perceptions and limitations on transferability of certain assets. Because some of our remaining assets, particularly intellectual property assets, may decline in value over time, we may not be able to consummate the sale of these assets in time to generate meaningful value. In addition, we likely will not obtain as high a price for our illiquid assets as we might obtain if we were not liquidating and dissolving our business.

If we fail to retain the services of current personnel, the Plan of Liquidation and Dissolution may not succeed.

     The success of the Plan depends in large part upon our ability to retain the services of our remaining personnel. The retention of qualified personnel is particularly difficult under our current circumstances and we have only four remaining full-time employees. All of these employees, including Messrs. Villafaña and Babitt, have indicated that they will continue to provide their services to the Company until the shareholders approve the Plan, although there is no legal obligation for them to do so. For as long as they maintain their employment they will continue to receive their current salaries and benenfits. Three of these employees, including Mr. Babitt will receive a retention bonus as an incentive to continue their employment with the Company until the Plan or a business combination is approved by shareholders. Mr. Babitt will receive a retention bonus of approximately $71,740 if he continues to be employed by CABG Medical at the time of a shareholder approved business combination or dissolution. The amount of the retention bonus received by Mr. Babitt may increase by up to $93,260 if the two other eligible employees are not employed at the time of a business combination or dissolution.

Our stock transfer books will close promptly after the date shareholders approve the Plan, after which it will not be possible for shareholders to trade our stock.

     We intend to close our stock transfer books and discontinue recording transfers of common stock effective as of the opening of business on the first business day (“Cut-Off Time”) after shareholders approve the Plan. Thereafter, certificates representing our common stock will not be assignable or transferable except by will, intestate succession or operation of law. The proportionate interests of all of our shareholders will be fixed on the basis of their respective stock holdings at the Cut-Off Time, and, after the Cut-Off Time, any distributions we make will be made solely to the shareholders of record at the Cut-Off Time, except as may be necessary to reflect subsequent transfers recorded on our books as a result of any assignments by will, intestate succession or operation of law.

ITEM 2. PROPERTIES

     We lease approximately 7,400 square feet of space in a suburb of Minneapolis, Minnesota. The lease expires in March 2007.

ITEM 3. LEGAL PROCEEDINGS

     We are currently not a party to any legal proceedings. However, it is possible that we may become party to various legal proceedings arising from the settlement of our outstanding liabilities.

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

     No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

     Our common stock began trading on December 8, 2004 on the Nasdaq National Stock Market under the symbol “CABG” in connection with our initial public offering. The following table sets forth, for the periods indicated, the high and low closing bid prices of our common stock. These bid quotations represent inter-dealer prices and do not include retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.

Fiscal Year Ended December 31, 2005:		High				Low
First Quarter		$	6.05			$	3.70
Second Quarter			4.94				3.04
Third Quarter			5.00				2.20
Fourth Quarter			3.00				1.03

Fiscal Year Ended December 31, 2004:		High				Low
Fourth Quarter		$	6.98			$	5.79

Holders

     As of February 14, 2006, there were approximately 93 record holders of our common stock, excluding shareholders whose stock is held either in nominee name and/or street name brokerage accounts. Based on information which we have obtained from our transfer agent, there are approximately 2,900 shareholders of our common stock whose stock is held either in nominee name and/or street name brokerage accounts.

Dividends

     We have never declared or paid cash dividends on our capital stock. We do not anticipate declaring or paying any cash dividends in the foreseeable future, due to the potential liquidation of the Company and other events discussed elsewhere in this Form 10-K.

Sales of Unregistered Securities

     There were no sales of unregistered securities in the fourth quarter of 2005.

ITEM 6. SELECTED FINANCIAL DATA

     The following summary information should be read in conjunction with the Financial Statements and related Notes thereto set forth in Item 8 of this Form 10-K.

		Period from
		December 3,
		1999 (date of
		inception) to
		December 31,				Year Ended December 31,
		2005				2001				2002				2003				2004				2005
										(In thousands)
Statements of Operations Data:
Revenue		$	125			$	—			$	—			$	—			$	21			$	104
Expenses:
Research and development			13,976				659				559				1,153				2,647				8,822
Marketing, general and administrative			3,833				118				151				405				996				2,105
Loss from operations			17,684				777				710				1,558				3622				10,823
Interest income			1,290				59				22				16				71				1,099
Net loss		$	(16,394	)		$	(718	)		$	(688	)		$	(1,542	)		$	(3,551	)		$	(9,724	)
Loss per common share — basic and diluted						$	(0.09	)		$	(0.08	)		$	(0.17	)		$	(0.34	)		$	(0.52	)
Weighted average shares outstanding — basic and diluted							8,152,521				8,490,000				8,967,308				10,298,639				18,624,697

		December 31,
		2001				2002				2003				2004				2005
		(In thousands)
Balance Sheet Data:
Cash and short-term investments		$	1,614			$	940			$	1,737			$	28,936			$	32,648
Total current assets			1,622				950				1,767				29,227				33,263
Total assets			1,692				1,007				1,841				29,426				33,333
Total current liabilities			30				37				158				860				695
Total liabilities			33				37				158				860				695
Deficit accumulated during the development stage			(889	)			(1,577	)			(3,119	)			(6,670	)			(16,394	)
Total stockholders’ equity			1,658				970				1,683				28,566				32,638

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements and Notes thereto, and the other financial information included elsewhere in this Form 10-K Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of the Company’s expectations regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following discussion sets forth certain factors we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.

OVERVIEW

     We were formed as a medical technology company in 1999. From November 2004 through November 2005 we conducted clinical trials for our first product, the Holly Graft System. In December 2004 and January 2005, we completed an initial public offering of our common stock with net proceeds of approximately $31.2 million, the majority of such proceeds were to be utilized to fund human clinical trials and develop a sales and marketing team for the Holly Graft System.

     On November 28, 2005, we announced the suspension of enrollment in our human clinical trials of the Holly Graft System, due to disappointing clinical results. During December 2005 and January 2006, we initiated a comprehensive investigative process into the causation of the Holly Graft System clinical failures and possible remedies. Our evaluation of the Holly Graft System included engineering reviews, additional product testing and meetings with our scientific and medical collaborators.

     On February 8, 2006, we announced the cessation of research and development activities for the Holly Graft System and a significant reduction in staff. After exhaustive efforts to propose solutions for the Holly Graft System failures, the Company’s Board of Directors determined that the extensive design modifications required to re-engage human clinical trials, coupled with the significant risk associated with such research and development actives did not justify further investment in the project and continuing as a publicly traded company.

     Most of our expenditures to date have been for research and development activities and general and administrative purposes. Research and development expenses represent costs incurred for product acquisition, clinical trials, activities relating to regulatory filings and manufacturing development efforts. We expense all of our research and development costs as they are incurred.

     Our research and development expenses incurred through December 31, 2005, were related primarily to the development of the Holly Graft System. On February 8, 2006, we ceased research and development activities for the Holly Graft System.

     Marketing, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with building a commercial infrastructure to market and sell the Holly Graft System. We anticipate that general and administrative expenses may increase as we incur significant costs related to the wind down of our operations and pursuit of possible business combinations or ultimately a dissolution.

     At December 31, 2005, we had federal and state income tax net operating loss carryforwards of approximately $12.1 million. The operating loss carryforwards will expire beginning in 2019. At December 31, 2005, we had federal and state research credit carryforwards of approximately $309,000. The research credit carryforwards will expire beginning in 2019. Under the Tax Reform Act of 1986, the utilization of these

net operating loss and research credit carryforwards may be limited as a result of significant changes in ownership.

     The following comparative analysis of our results of operations does not expressly take into account our planned liquidation in 2006. As a result, the foregoing discussion is not necessarily indicative of the results of operations you should expect for fiscal 2006.

RESULTS OF OPERATIONS

Year ended December 31, 2005 compared to year ended December 31, 2004

     Revenue. Revenue was $104,000 for the year ended December 31, 2005 compared to $21,000 for the year ended December 31, 2004. The increase in revenue during 2005 was related to the sale of products used in our clinical trials, which accelerated in 2005.

     Research & Development. Research and development expenses increased 233% to $8,822,000 for the year ended December 31, 2005 from $2,647,000 for the year ended December 31, 2004. During 2005, we recognized $4.3 million of non-cash expense related to the execution of license and investment agreements with Angiotech Pharmaceuticals, Inc., or Angiotech. We increased our product development and preclinical testing of the Holly Graft System in 2005, which resulted in an increase of $812,000 compared to the same period of 2004. In May 2005, we commenced human clinical trials of the Holly Graft System outside the United States, which has resulted in approximately $510,000 of incremental expense. During 2005, we employed an average of four additional employees in research and development compared to the same period of 2004. The increase in employees coupled with compensation increases to existing employees resulted in incremental salary expense of $528,000. In December 2005, we recognized an impairment charge of $203,000 related to manufacturing equipment and regulatory software assets. These increases were offset by a $181,000 decrease in stock compensation expense in 2005 compared to the same period of 2004 related to stock option grants to our clinical advisors.

     Marketing, General and Administrative. Marketing, general and administrative expenses increased 111% from $996,000 for the year ended December 31, 2004 to $2,105,000 for the year ended December 31, 2005. Salaries and benefits increased $313,000 due to the addition of two employees and salary increases to existing employees. Additionally, during 2005, our costs associated with being a public company were approximately $528,000. These public company costs include higher legal and audit fees, directors’ and officers’ insurance premiums and securities related regulatory fees. Costs associated with recruiting and initiating clinical sites and attendance at investor and industry conferences increased $115,000 in 2005 compared to the same period of 2004. Stock compensation expense related to vesting of restricted stock was $206,000 in 2005 compared to $158,000 in same period of 2004. The Company recognized an impairment charge of $45,000 during 2005, as it determined that certain assets were impaired. Stock based compensation during 2005, was related to the vesting of restricted stock issued to our Board of Directors in December 2004. The majority of stock based compensation in 2004 is related to the vesting of performance based stock options.

     Interest Income. Interest income increased $1,028,000 from $71,000 for the year ended December 31, 2004 to $1,099,000 for the year ended December 31, 2005. The increase is due to higher cash balances in 2005 as a result of timing of common stock offerings and increases in interest rates.

Year ended December 31, 2004 compared to year ended December 31, 2003

     Revenue. Revenue was $21,000 for the year ended December 31, 2004 compared to no revenue for the year ended December 31, 2003. Revenue during 2004 was a result of sales of our Holly Graft System to our international distributor.

     Research and Development. Research and development expenses increased 130% to $2,647,000 for the year ended December 31, 2004 from $1,153,000 for the year ended December 31, 2003. The $1,494,000 increase was principally related to an increase in preclinical animal testing and the purchasing of related components/parts to conduct such testing. During 2004, we changed the platform of the Holly Graft System to incorporate drug eluting technology to prevent graft failure. We increased our level of activity for evaluation of the drug eluting Holly Graft System in preclinical animal models, which resulted in an increase of approximately $650,000 for the year ended December 31, 2004 compared to the same period in 2003. The analytical, chemistry and characterization testing for the drug eluting component resulted in an increase of approximately $243,000 for the year ended December 31, 2004 compared to the same period in 2003. Additionally, we incurred higher compensation expense due to salary increases to existing employees and the addition of one employee in the area of product research. During 2004, we recognized $195,000 as research and development expense related to stock options issued to members of our Scientific Advisory Board compared to $3,000 recorded in 2003.

     Marketing, General and Administrative. Marketing, general and administrative expenses increased 146% from $405,000 for the year ended December 31, 2003 to $996,000 for the year ended December 31, 2004. The $591,000 increase can be primarily attributed to the following factors:

	•		$257,000 increase due to (i) the addition of our president in August 2003, (ii) an increase in compensation of our chairman and chief executive officer, (iii) the addition of a part time administrative employee and (iv) increases in salaries for existing employees;
	•		$57,000 increase related to financial audit fees; and
	•		$158,000 increase in stock-based compensation expense related to the vesting of certain performance based stock options and the issuance of restricted stock issued to non-employee members of our board of directors.

     Interest Income. Interest income increased 344% from $16,000 for the year ended December 31, 2003 to $71,000 for the year ended December 31, 2004. The $55,000 increase was due to higher cash balances in 2004 as a result of common stock offerings.

LIQUIDITY AND CAPITAL RESOURCES

     We have financed all of our operations since inception through the issuance of equity securities. Through December 31, 2005, we have sold common stock generating aggregate net proceeds of approximately $43.9 million. At December 31, 2005, we had $32,648,000 in cash, cash equivalents and short-term investments on-hand compared to $28,936,000 at December 31, 2004.

     Cash Flows from Operating Activities. Net cash used in operations was $1,420,000 in 2003, $2,747,000 in 2004 and $5,413,000 in 2005. For all periods, cash used in operations was attributable primarily to net losses after adjustment for non-cash charges related to asset impairment charges in 2005, depreciation and other changes in operating assets and liabilities.

     Cash Flows from Investing Activities. Net cash used in investing activities was $1,363,000 in 2003 and $20,016,000 in 2005. The increase in cash used in investing activities in 2003 and 2005 was the net purchase of investments from the proceeds of our stock offerings. Net cash provided by investing activities was $166,000 in 2004 as a result of net sales of investments in 2004.

     Cash Flows from Financing Activities. Net cash provided by financing activities was $2,250,000 in 2003, $30,081,000 in 2004 and $9,292,000 in 2005. For these periods, financing cash flows reflected the proceeds from the issuance of common stock and employee exercises of stock options.

     The following table of contractual obligations does not expressly take into account our potential settlement of such obligations as a result of planned liquidation in 2006.

     Contractual Obligations and Commitments. The following table sets forth certain information concerning our obligations and commitments to make future payments as of December 31, 2005.

		Payments Due by Period
		(In thousands)
		Less Than				1-3				4-5				After 5
		One Year				Years				Years				Years				Total
Operating leases		$	83			$	21			$	—			$	—			$	104
Purchase obligations (1)			76				—				—				—				76
Employment agreements (2)			248				310				—				—				558
Total		$	407			$	331			$	—			$	—			$	738

     Notes to Table:

	(1)		In January 2004, we entered into a supply agreement that requires us to purchase a minimum of approximately $191,000 of materials from 2004 to 2006. At December 31, 2005, our future contractual obligations under this agreement were $76,000. In February 2006, we notified our supplier that we were terminating the purchase agreement in accordance with the terms of the supply agreement.
	(2)		The above table includes obligations of the Company to Manny Villafaña, our Chairman and Chief Executive Officer under his contract that was in place at December 31, 2005. In the event of a business combination, Mr. Villafaña would be entitled to the payments as detailed in the table above or if he was terminated he would receive a severance payment of up to three times his annual salary. In the event of a dissolution of the Company, Mr. Villafaña would receive no severance benefits.

Off-Balance Sheet Arrangements

     We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our judgments related to accounting estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     While our significant accounting policies are more fully described in Note 1 to our financial statements appearing at the end of this Form 10-K, we believe that the following accounting policies are most critical to aid you in fully understanding and evaluating our reported financial results.

Stock-Based Compensation

     We account for stock-based compensation to employees under the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and disclosed the effect of the differences which would result had we applied the fair-value-based method of accounting, on a pro forma basis, as required by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” In future accounting periods, the determination of valuation variables such as expected term, volatility and interest rates could effect our expense computation.

     We account for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with the EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services.”

     Prior to the IPO, the determination of the fair value of our common stock involved considerable judgment. In making this determination, we evaluated, among other things, our common stock transactions, current market conditions, and operational milestones.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our investment policy requires investments with investment grade issuers. Our investments principally consist of certificates of deposit, federal agency obligations and mortgage backed securities with a maturity of greater than 90 days but less than three years. Because of the credit criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Financial Statements and Notes thereto required pursuant to this Item begin on page F-1 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the our disclosure controls and procedures are effective to ensure that information required to be disclosed by CABG Medical in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following information is provided with respect to each director nominee:

Name		Age				Position with Company
Manny Villafaña			65			Chairman and Chief Executive Officer
John L. Babitt			36			Director, President, Chief Operating Officer and Chief Financial Officer
A. Jay Graf (1) (2) (4)			58			Director
Robert E. Munzenrider (1) (2) (3) (4)			61			Director
Arch C. Smith (1) (2) (4)			51			Director

     Manny Villafaña is the founder, CEO and Chairman of the Board of CABG Medical. Mr. Villafaña has more than 37 years experience in the medical industry. He founded ATS Medical, Inc. to develop, manufacture and market a next-generation pyrolytic carbon bileaflet mechanical heart valve and served as Chief Executive Officer, Chairman of the Board and a director from ATS Medical’s inception in 1987 through May 2004. From 1983 to 1987, Mr. Villafaña served as Chairman of GV Medical, Inc., a company co-founded by Mr. Villafaña to develop, manufacture and market the LASTAC System, a laser transluminal angioplasty catheter system. From 1976 to 1982, Mr. Villafaña served as President and Chairman of St. Jude Medical, Inc., a company founded by Mr. Villafaña to develop, manufacture and market a pyrolytic carbon bileaflet mechanical heart valve. From 1972 to 1976, he served as President and Chairman of Cardiac Pacemakers, Inc. (now a division of Guidant Corporation), a company founded by Mr. Villafaña to develop, manufacture and market a new generation of lithium powered pacemakers.

     John L. Babitt, CPA, joined CABG Medical in August 2003 as President, Chief Operating Officer and Chief Financial Officer and became a director in December 2004. Mr. Babitt joined our company from Bioheart, Inc., where he served as Chief Financial Officer and Vice President of Finance from 2000 to August 2003. Mr. Babitt was responsible for structuring strategic investor transactions and procuring contract manufacturing operations for Bioheart’s biologic and medical device activities. Prior to Bioheart, Mr. Babitt was with Ernst & Young LLP, where his most recent position was Senior Manager in the Mergers & Acquisitions Group. His primary responsibility in such capacity involved the supervision of the acquisition/financing of businesses by financial and strategic buyers in the technology and healthcare industries. Mr. Babitt holds a Bachelor of Arts degree specializing in accounting and a Masters of Business Administration with a concentration in finance from the University of Miami. Mr. Babitt is a Certified Public Accountant.

     A. Jay Graf has been a director of CABG Medical since December 2004. Mr. Graf is currently a Venture Partner focusing on early stage medical technology investments for New Enterprise Associates, a venture capital firm. From April 2000 until June 2004, Mr. Graf served as a Group Chairman, Office of the President, for Guidant Corporation. Prior to this assignment, Mr. Graf served as President of Guidant’s Cardiac

Rhythm Management Division, a position he held since Guidant was formed in 1994. Prior to the formation of Guidant Corporation, Mr. Graf was President of Cardiac Pacemakers, Inc., the business of which is now part of Guidant Corporation’s Cardiac Rhythm Management Group. Mr. Graf graduated from Boston University with a Bachelor of Science degree in economics and earned a Master of Business Administration degree in finance from Indiana University. Mr. Graf serves on the Board of Directors for American Medical Systems, Inc., Intermagnetics General Corporation, ANP and CVRX, Inc.. He also is a member of the Dean’s Advisory Counsel of the Kelly School of Management at Indiana University.

     Robert E. Munzenrider has been a director of CABG Medical since December 2004. Mr. Munzenrider is a retired financial and operating executive. From 2000 to 2002, Mr. Munzenrider was President of Harmon AutoGlass, a subsidiary of Apogee Enterprises, Inc. In 1999, he served as Vice President and Chief Financial Officer of the Glass Services Segment of Apogee Enterprises. He also served as Executive Vice President and Chief Financial Officer of Eliance Corp., an e-commerce service provider, during part of 1999. From 1998 to 1999, Mr. Munzenrider served as Vice President and Chief Financial Officer of St. Jude Medical, Inc. Mr. Munzenrider graduated from the University of Montana with a Bachelor of Science degree in business with an emphasis in accounting. Mr. Munzenrider serves on the Board of Directors for ATS Medical, Inc. and Viad Corp. He is also a Trustee on the University of Montana Foundation. Mr. Munzenrider is a Certified Public Accountant.

     Arch C. Smith has been a director of CABG Medical since December 2004. Mr. Smith is currently a Managing Director focusing on early stage medical technology investments for Sightline Partners, a venture capital firm. From 1984 to 2003, Mr. Smith worked for Piper Jaffray, a Minneapolis-based investment banking firm. Mr. Smith contributed in roles of increasing responsibility and most recently as a senior healthcare analyst and Managing Director for equity research, specializing in medical technology companies. Mr. Smith initially covered large capitalization stocks in the cardiovascular device arena, but later shifted the focus of his practice to small capitalization medical technology companies where he was responsible for identifying many of the new and emerging technologies that have changed the way healthcare is delivered today. Mr. Smith serves on the Board of the Minneapolis Heart Institute Foundation and is a graduate of Bowdoin College and the Tuck School of Business at Dartmouth.

Code of Ethics and Business Conduct

     We have adopted the CABG Medical Code of Ethics and Business Conduct (the “Code of Conduct”), a code of conduct that applies to our directors, officers and employees. The Code of Conduct is publicly available on our website at www.cabgmedical.com. If we make any substantive amendments to the Code of Conduct or grant any waiver, including any implicit waiver from a provision of the Code of Conduct to our directors or executive officers, we will disclose the nature of such amendment or waiver on our website or in a report to the SEC on Form 8-K.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who own more than 10 percent of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders (“Insiders”) are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based on a review of the copies of such reports furnished to the Company, during the fiscal year ended December 31, 2005, all Section 16(a) filing requirements applicable to Insiders were complied with, except that John Babitt reported an option grant on a Form 4 that was not timely filed.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Committee Report on Executive Compensation

     On December 13, 2004, the date that the initial public offering of CABG Medical was closed and outside directors were initially elected, the Compensation Committee (the “Committee”) was formed. The Committee determines the compensation of the executive officers, including the Chief Executive Officer, using the policies set forth in this report.

     Compensation Committee Interlocks and Insider Participation

     The Committee is currently composed of our three outside directors. None of the members of the Committee is an employee or executive officer of the Company.

     Compensation Philosophy

     The Committee’s executive compensation policies are designed to enhance our financial and operational performance, and thus our shareholder value, by aligning the financial and operational interests of executive officers and employees with those of shareholders. The executive compensation program is viewed in total considering all of the component parts: base salary, annual performance incentives, benefits and long-term incentive opportunities in the form of stock options, restricted stock grants and stock ownership. The Committee’s position is that stock ownership by executive officers and employees is beneficial in aligning management’s and shareholders’ interests in the enhancement of shareholder value.

     Base Salary

     Base salaries for our executive officers have been set by the Committee. The Committee assesses the executive officer’s level of responsibility, experience, individual performance, and accountabilities relative to our other executive officers and external market practices. Annual base salaries and incentive plans for our executive officers are considered to be competitive to base salaries offered by comparable companies. Our pay-for-performance philosophy places a substantial portion of executive officers’ total compensation “at risk” while providing compensation opportunities which are comparable to the market levels.

     Incentives

     We grant some executive officers long-term awards, including performance awards, stock options and restricted stock. The purposes of the awards are to:

	(i)		focus executives on the achievement of performance objectives that enhance shareholder value;
	(ii)		emphasize the importance of balancing present business needs and long-term goals critical to the future success of CABG Medical; and
			(iii)attract and retain executive officers of superior ability.

     General

     We provide medical and insurance benefits to our executive officers which are generally available to all of our employees. We also maintain a Simple IRA savings plan in which all qualified employees, including the executive officers, may participate. We provide matching contributions to the savings plan for all participating employees, allowing such employees to earn up to an additional 3% of their annual base salary or $10,000 ($12,000 if age 50 or older), whichever is less.

     Other

     Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), limits the deductibility of certain compensation paid to the chief executive officer and each of the four other most highly compensated executives of a publicly-held corporation to $1 million per executive. In fiscal 2004, we did not pay “compensation” within the meaning of Section 162(m) to any of our executive officers in excess of $1 million and do not believe we will do so in the near future. Therefore, we do not have a policy at this time regarding qualifying compensation paid to its executive officers for deductibility under Section 162(m), but will formulate such a policy if compensation levels for any executive ever approach $1 million.

		Members		of the Compensation Committee:
				A. Jay Graf, Chair
				Robert E. Munzenrider
				Arch C. Smith

Summary Compensation Table

     The following table sets forth certain information regarding compensation paid during each of the Company’s last three fiscal years to the Chief Executive Officer and of the only other executive officer of the Company (the “Named Executive Officers”).

																		Long-Term
						Annual Compensation												Compensation Awards
														Other
														Annual				Restricted				Securities				All Other
		Fiscal				Salary								Compensation				Stock				Underlying				Compensation
Name and Principal Position		Year				($)				Bonus ($)(1)				($)(2)				Awards ($)				Options (#)				($)
Manny Villafaña,			2005			$	247,500			$	22,275				—				—				—				—
Chairman and Chief			2004				—				—			$	218,750				—				—				—
Executive Officer			2003				—				—				150,000				—				—				—
John L. Babitt			2005			$	211,750			$	19,058				—				—				140,000				—
President, Chief Operating			2004				194,500				10,000				—				—				5,000				—
Officer and Chief Financial			2003				57,200				—				—				—				275,000				—
Officer

Option/SAR Grants During 2005 Fiscal Year

     The following table sets forth information regarding stock options granted to Named Executive Officers during 2005. The Company has not granted stock appreciation rights.

		Number of				Percent of												Potential Realizable Value at
		Securities				Total Options												Assumed Annual Rates of
		Underlying				Granted to				Exercise or								Stock Price Appreciation for
		Options				Employees in				Base Price				Expiration				Option Term
Name		Granted (#)(1)				Fiscal Year (%)				($/Share)				Date				5%				10%
Manny Villafaña,			0				—				—				—				—				—
John L. Babitt (1)			100,000				27.3	%		$	4.90				03/01/15			$	308,000			$	781,000
John L. Babitt (2)			40,000				10.9	%		$	1.13				12/15/15				28,000				72,000

Aggregated Option/SAR Exercises during 2005 and Year End Option/SAR Values

     The following table provides information related to the exercise of stock options during 2005 by the Named Executive Officers and the number and value of options held at fiscal year end by such persons:

Shares

Number of Unexercised

Value of Unexercised

Acquired

Securities Underlying

In-the-Money Options at

on

Value

Options at 12/31/05

12/31/05 (1)

Name

Exercise

Realized

Exercisable

Unexercisable

Exercisable

Unexercisable

Manny Villafaña

NA

NA

NA

NA

NA

NA

John L. Babitt

NA

NA

280,000

140,000

—

—

Employment Agreements

     The Company has entered into an employment agreement dated December 31, 2004, as amended, with Manny Villafaña as Chief Executive Officer, which agreement provides for an annual salary of $247,500 and terminates on April 1, 2008. In accordance with the terms of the agreement, the Company may terminate the relationship upon a 60-day notice to Mr. Villafaña; however, if such termination is without cause, Mr. Villafaña will be entitled to his annual salary for the term of the agreement. During the period of employment and for a period of five (5) years following the termination of employment, except pursuant to the dissolution or liquidation of the Company, Mr. Villafaña has agreed not to compete with the Company, and he has agreed not to disclose confidential information with respect to the Company. The employment agreement also includes a customary assignment of inventions provision. In addition to the employment agreement, the Company entered into a letter agreement dated June 17, 2003, as amended, with Mr. Villafaña, which provides that, if Mr. Villafaña’s employment is terminated without cause following a change of control, Mr. Villafaña will receive compensation up to his base salary plus bonus for three (3) years following change in control date and health care benefits for twelve (12) months. On February 24, 2006, Mr. Villafaña and the Company agreed to amend the letter agreement in Section 2(d) thereof to provide that a change of control shall not mean

a dissolution or liquidation of the Company. Therefore, in a dissolution of the Company, Mr. Villafaña will not receive any change of control or severance payments under his June 17, 2003 letter agreement or any severance or other payments under his employment agreement.

     Pursuant to an employment agreement dated August 18, 2003 between the Company and John L. Babitt, President, Chief Operating Officer and Chief Financial Officer, Mr. Babitt currently receives an annual salary of $211,750 for employment on an “at will” basis. The agreement may be terminated by either party with a ten-day notice. Pursuant to the employment agreement, Mr. Babitt has agreed not to compete with the Company during his employment and for one (1) year following termination of employment, except in the case of dissolution or liquidation of the Company, and Mr. Babitt has also agreed not to disclose confidential information with respect to the Company. The employment agreement also includes a customary assignment of inventions provision. On February 7, 2006, the Company entered into an agreement with Mr. Babitt, pursuant to which Mr. Babitt agreed to terminate the July 31, 2003 letter agreement between him and the Company, which letter agreement provided for change of control payments to Mr. Babitt. As consideration for the termination of the change of control payments, the Company paid $211,750 to Mr. Babitt. In addition, the Company entered into a stay bonus agreement with Mr. Babitt, which entitles Mr. Babitt to a portion of the $165,000 retention bonus pool set up for three employees, including Mr. Babitt. If Mr. Babitt continues employment with the Company until the Company is sold, dissolved or acquires another entity, he will be entitled to a payment of approximately $71,740, subject to increase if either of the other two employees do not continue their employment.

Stock Performance Chart

     The following chart compares the cumulative total shareholder return on the Company’s Common Stock with the cumulative total return on the Nasdaq Stock Market and the Nasdaq Medical Industry Index (Medical Devices, Instruments and Supplies). The comparison assumes $100 was invested on December 8, 2004, the date of our initial public offering, and assumes reinvestment of dividends.

Comparison of Cumulative Total Return Among CABG Medical, Inc.,
the Nasdaq Stock Market (U.S.) and the Nasdaq Medical Industry Index
(Medical Devices, Instruments and Supplies)

		December 8, 2004				December 31, 2004				December 31, 2005
CABG Medical, Inc.			100				108.91				20.73
Nasdaq US			100				102.36				104.53
Nasdaq Medical			100				102.00				105.01

Directors’ Fees

     Each member of our Board of Directors who is not an employee of CABG Medical (“Non-Employee Directors”) receives a one-time grant of 50,000 shares of restricted common stock upon such director’s initial election. Such stock vests ratably over a four-year period beginning on the one-year anniversary of the date of grant. Each Non-Employee Director also receives a meeting fee of $1,000 for each full Board meeting attended and $500 for each committee meeting attended. In addition, the chair of our Audit Committee receives annual compensation equal to $10,000. In addition, we reimburse each Non-Employee Director for reasonable travel and other expenses in connection with attending meetings of the Board of Directors and committees.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED

STOCKHOLDER MATTERS

     The following table sets forth certain information regarding beneficial ownership of our common stock, as of March 30, 2006, by: (i) each person who is known by us to beneficially own more than 5% of the common stock, (ii) each of our directors, (iii) each of our named executive officers (i.e., our executive officers who we paid $100,000 or more in compensation in fiscal 2005) and (iv) all of our directors and executive officers as a group. Unless otherwise noted below, the address of each of the following shareholders is the same as our address, 14505 — 21st Avenue North, Suite 212, Minneapolis, MN 55447.

		Shares				Percentage of
		Beneficially				Outstanding Shares
Name and Address		Owned(1)				Owned(1)
Manny Villafaña			5,784,000				31.1	%
Angiotech Pharmaceuticals, Inc. (2)			2,366,538				12.7	%
John L. Babitt (3)			530,000				2.8	%
A. Jay Graf (4)			110,000				*
Robert E. Munzenrider (4)			50,000				*
Arch C. Smith (4)			51,500				*
All officers and directors as a group (5 persons)			6,525,500				34.5	%

     The following table summarizes the Company’s equity compensation plan information as of December 31, 2005.

Number of securities

remaining available

for future issuance

Number of Securities

(excluding

to be issued upon

Weighted average

securities

exercise of

exercise price of

reflected in column

Plan Category

outstanding options

outstanding options

(a)

(a)

(b)

(c)

Equity compensation plans approved by security holders

1,030,288

$

2.49

3,822,500

Equity compensation plans not approved by security holders(1)

550,000

$

6.875

—

Total

1,580,288

$

4.016

3,822,500

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

     We paid the following fees to KPMG LLP:

		2004				2005
Audit Fees (1)		$	121,100			$	102,500
Audit-Related Fees			—				—
Tax Fees (2)			—				2,450
All Other Fees (3)			213,500				—
		$	334,600			$	104,950

     The Audit Committee has considered whether provision of the above non-audit services is compatible with maintaining KPMG’s independence and has determined that such services are compatible with maintaining their independence.

Pre-Approval of Audit Fees

     Pursuant to its written charter, the Audit Committee is responsible for pre-approving all audit and permitted non-audit services to be performed for CABG Medical by its independent registered public accounting firm or any other auditing or accounting firm.

Report of Audit Committee

     The Board of Directors maintains an Audit Committee comprised of three independent outside directors. The Board of Directors and the Audit Committee believe that the Audit Committee’s current member composition satisfies the rule of the National Association of Securities Dealers, Inc. (“NASD”) that governs audit committees, Rule 4310(c)(26)(B)(i), including the requirement that audit committee members all be “independent directors” as that term is defined by NASD Rule 4200(a)(14).

     In accordance with its written charter adopted by the Board of Directors, which is filed was filed as Appendix A to our proxy statement for our 2005 annual shareholders’ meeting (and also available on CABG Medical’s website at www.cabgmedical.com), the Audit Committee assists the Board of Directors with fulfilling its oversight responsibility regarding the quality and integrity of the accounting, auditing and financial reporting practices of CABG Medical, Inc. In performing its oversight responsibilities regarding the audit process, the Audit Committee:

	(1)		reviewed and discussed the audited financial statements with management;
	(2)		discussed with the independent certified registered public accounting firm the material required to be discussed by Statement on Auditing Standards No. 61; and
	(3)		reviewed the written disclosures and the letter from the independent registered public accounting firm required by the Independence Standards Board’s Standard No.1, and discussed with the independent registered public accounting firm any relationships that may impact their objectivity and independence.

     Based upon the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

		Members of the Audit Committee:
				Robert E. Munzenrider, Chair
				A. Jay Graf
				Arch C. Smith

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements. The following Financial Statements and the Independent Registered Public Accounting Firm’s Report thereon are included herein (page numbers refer to pages in this Annual Report on Form 10-K)

Report of Independent Registered Public Accounting Firm		F-1
Statements of Operations		F-2
Balance Sheets		F-3
Statements of Stockholders’ Equity		F-4
Statements of Cash Flows		F-5
Notes to Financial Statements		F-6

(b) Exhibits. See “Exhibit Index” following the signature page of this Form 10-K for a description of the documents that are filed as Exhibits to this report on Form 10-K or incorporated by reference herein.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
CABG Medical, Inc.
(A Development Stage Company)

We have audited the accompanying balance sheets of CABG Medical, Inc. (a development stage company) as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2005 and for the period from December 3, 1999 (date of inception) to December, 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CABG Medical, Inc. (a development stage company) as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 and for the period from December 3, 1999 (date of inception) to December, 31, 2005, in conformity with U.S. generally accepted accounting principles.

As further described in notes 1 and 11 to the financial statements, the Company’s board of directors has approved a plan that may result in the liquidation and dissolution of the Company.

/s/ KPMG LLP

Minneapolis, Minnesota
February 22, 2006

CABG MEDICAL, INC.
(A Development Stage Company)

STATEMENTS OF OPERATIONS

		Period from
		December 3, 1999
		(Date of
		Inception) to
		December 31,				Year Ended December 31,
		2005				2003				2004				2005
		(In thousands, except share and per share amounts)
Revenue		$	125			$	—			$	21			$	104
Expenses:
Research and development			13,976				1,153				2,647				8,822
Marketing, general and administrative			3,833				405				996				2,105
Operating loss			17,684				1,558				3,622				10,823
Interest income			1,290				16				71				1,099
Net loss		$	(16,394	)		$	(1,542	)		$	(3,551	)		$	(9,724	)
Basic and diluted net loss per share						$	(0.17	)		$	(0.34	)		$	(0.52	)
Weighted average shares outstanding — basic and diluted							8,967,308				10,298,639				18,624,697

     See accompanying notes to financial statements.

CABG MEDICAL, INC.
(A Development Stage Company)

BALANCE SHEETS

		December 31,
		2004				2005
		(In thousands, except share
		and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	27,746			$	11,609
Short-term investments			1,190				21,039
Accounts receivable			21				102
Prepaid expenses			253				485
Other current assets			17				28
Total current assets			29,227				33,263
Property and equipment, net			199				70
Total assets		$	29,426			$	33,333
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	841			$	647
Accrued liabilities			19				48
Total current liabilities			860				695
Commitments and contingencies (notes 3 and 11)
Stockholders’ equity:
Undesignated stock (no par value) 6,000,000 shares authorized, none issued and outstanding			—				—
Common stock (no par value) 54,000,000 shares authorized, 15,972,975 and 18,396,755 shares issued and outstanding as of December 31, 2004 and 2005			36,378				49,685
Deferred compensation			(1,142	)			(602	)
Accumulated other comprehensive loss			—				(51	)
Deficit accumulated during development stage			(6,670	)			(16,394	)
Total stockholders’ equity			28,566				32,638
Total liabilities and stockholders’ equity		$	29,426			$	33,333

     See accompanying notes to financial statements.

CABG MEDICAL, INC.
(A Development Stage Company)

STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
Period from December 3, 1999 (Date of Inception) to December 31, 2005,
and for the Years Ended December 31, 2003, 2004 and 2005

																		Deficit
														Accumulated				Accumulated
														Other				During the
		Common Stock								Deferred				Comprehensive				Development
		Shares				Amount				Compensation				Loss				Stage				Total
		(In thousands except share amounts)
Balance at December 3, 1999 (date of inception)			—			$	—			$	—			$	—			$	—			$	—
Common stock issued to founder at incorporation, $0.01 per share, December 3, 1999			6,000,000				50				—				—				—				50
Common stock issued to non-employees for research and development consulting services, $0.03 per share, May 26, 2000			525,000				17				—				—				—				17
Common stock issued, $1.67 per share, October 16, 2000 (net of issuance costs Of $11,000)			1,425,000				2,364				—				—				—				2,364
Net loss and comprehensive loss			—				—				—				—				(171	)			(171	)
Balance at December 31, 2000			7,950,000				2,431				—				—				(171	)			2,260
Common stock issued to laboratory facility for research and development services $1.67 per share, April 1, 2001			60,000				100				—				—				—				100
Common stock issued for employee stock option exercise			480,000				16				—				—				—				16
Net loss and comprehensive loss			—				—				—				—				(718	)			(718	)
Balance at December 31, 2001			8,490,000				2,547				—				—				(889	)			1,658
Net loss and comprehensive loss			—				—				—				—				(688	)			(688	)
Balance at December 31, 2002			8,490,000				2,547				—				—				(1,577	)			970
Common stock issued, $2.65 per share, August 18, 2003 (net of issuance costs of $33,000)			862,294				2,252				—				—				—				2,252
Non-employee stock options granted for research and development consulting services, $2.65 per share, October 1, 2003			—				3				—				—				—				3
Net loss and comprehensive loss			—				—				—				—				(1,542	)			(1,542	)
Balance at December 31, 2003			9,352,294				4,802				—				—				(3,119	)			1,683
Common stock issued, $3.25 per share, March 31, 2004			477,258				1,551				—				—				—				1,551
Common stock issued for employee stock option exercise			16,500				—				—				—				—				—
Non-employee stock options granted for research and development consulting services, $3.25 per share, March 31, 2004			—				195				—				—				—				195
Common stock issued, $3.25 per share, July 21, 2004			476,923				1,551				—				—				—				1,551
Common stock issued, $5.50 per share, December 8, 2004 (net of issuance costs of $3,271)			5,500,000				26,979				—				—				—				26,979
Warrants to purchase 550,000 shares of common stock at $6.875 per share, issued in connection with December 8, 2004 stock offering			—				—				—				—				—				—
Restricted stock issued to non-employee members of the board of directors at $5.50 Per share, December 7, 2004			150,000				825				(825	)			—				—				—
Increase in intrinsic value of unvested employee stock options			—				475				(475	)			—				—				—
Amortization of deferred compensation			—				—				158				—				—				158
Net loss and comprehensive loss			—				—				—				—				(3,551	)			(3,551	)
Balance at December 31, 2004			15,972,975				36,378				(1,142	)			—				(6,670	)			28,566
Unrealized loss on available for sale securities			—				—				—				(51	)			—				(51	)
Net loss			—				—				—				—				(9,724	)			(9,724	)
Total comprehensive loss			—				—				—				—				—				(9,775	)
Common stock issued, $5.50 per share, January 14, 2005 (net of issuance costs of $343)			825,000				4,195				—				—				—				4,195
Common stock issued, $4.54 per share, March 22, 2005 (net of issuance costs of $15)			1,100,715				4,985				—				—				—				4,985
Common stock issued for employee stock option exercises			498,065				112				—				—				—				112
Warrants to purchase 1,265,823 shares of common stock at $0.01 per share, issued on connection with license agreement			—				4,335				—				—				—				4,335
Non-employee stock options granted for research and development consulting services, $3.95 per share, August 4, 2005			—				14				—				—				—				14
Decrease in intrinsic value of unvested employee stock options			—				(334	)			334				—				—				—
Amortization of deferred compensation			—				—				206				—				—				206
Balance at December 31, 2005			18,396,755			$	49,685			$	(602	)		$	(51	)		$	(16,394	)		$	32,638

     See accompanying notes to financial statements.

CABG MEDICAL, INC.
(A Development Stage Company)

STATEMENTS OF CASH FLOWS

		Period from
		December 3, 1999
		(Date of Inception)
		to December 31,				Year Ended December 31,
		2005				2003				2004				2005
						(In thousands)
Cash flows from operating activities:
Net loss		$	(16,394	)		$	(1,542	)		$	(3,551	)		$	(9,724	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense			140				15				23				77
Impairment loss on fixed assets			248				—				—				248
Stock-based compensation			364				3				195				206
Stock-based research and development			4,664				—				158				4,349
Changes in operating assets and liabilities:
Accounts receivable			(102	)			—				(21	)			(81	)
Prepaid expenses and other current assets			(605	)			(19	)			(253	)			(323	)
Accounts payable			647				64				739				(194	)
Accrued liabilities			48				59				(37	)			29
Net cash used in operating activities			(10,990	)			(1,420	)			(2,747	)			(5,413	)
Cash flows from investing activities:
Purchases of property and equipment			(459	)			(33	)			(147	)			(197	)
Purchases of short-term investments			(26,898	)			(2,288	)			(1,476	)			(22,081	)
Proceeds from short-term investments			5,901				958				1,789				2,262
Net cash provided by (used in) investing activities			(21,456	)			(1,363	)			166				(20,016	)
Cash flows from financing activities:
Capital lease payments			—				(2	)			—				—
Proceeds from issuances of common stock, net of issuance costs			43,926				2,252				30,081				9,180
Proceeds from exercise of employee stock options			129				—				—				112
Net cash provided by financing activities			44,055				2,250				30,081				9,292
Net increase (decrease) in cash and cash equivalents			11,609				(533	)			27,500				(16,137	)
Cash and cash equivalents at beginning of period			—				779				246				27,746
Cash and cash equivalents at end of period		$	11,609			$	246			$	27,746			$	11,609
Supplemental non-cash disclosures:
Deferred compensation		$	966			$	—			$	1,300			$	334

     See accompanying notes to financial statements.

CABG MEDICAL, INC.
(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

  Organization and Business

     CABG Medical, Inc. (the “Company” or “CABG Medical”) is a development stage medical technology company. On February 7, 2006, the Company’s Board of Directors approved a plan to substantially reduce its operations, eliminate research and development efforts, and review strategic alternatives for the Company, including a dissolution of the Company. If the Company proceeds with a dissolution, it will ultimately liquidate all of its non-cash assets, satisfy all of its debts, and distribute all remaining cash to its shareholders. The Company’s plan of dissolution and related costs are detailed in note 11.

     The Company was incorporated in Minnesota on December 3, 1999 and operates in a single business segment.

  Cash and Cash Equivalents

     Cash and cash equivalents consist of cash and money market funds with original maturities of three months or less. The carrying value of these instruments approximates fair value. The Company has not experienced any losses on its cash and cash equivalents.

  Short-term Investments

     Short-term investments consist of certificates of deposits, state and federal agency notes and municipal securities with a maturity of greater than three months and less than three years. Available for sale investments are recorded on the balance sheet at fair value with unrealized gains or losses being recognized as a component of other comprehensive income. For the years ended December 31, 2003, 2004, the carrying amount of these available for sale investments approximated market value. During December 2005, the Company reclassified certain investments previously classified as “held-to-maturity” to “available-for-sale.” At December 31, 2005, the Company had an unrealized loss of $51,000 on these investments as the market value of certain longer term investments exceeded the amortized cost.

  Accounts Receivable

     Accounts receivable represent amounts due from hospitals and institutions outside the United States that are participating in the Company’s clinical trial. Receivables are stated net of allowances for collectible accounts and projected returns. The majority of receivables are denominated in Euros and are translated to US Dollars at the prevailing year-end exchange rates. Fluctuations in exchange rate between the Euro to the US Dollar will impact on the amount of US Dollars ultimately received on the settlement of these receivables.

  Property and Equipment

     Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets, ranging from three to seven years, using the straight-line method.

  Long-Lived Assets

     The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the

amount by which the carrying amount of the assets exceeds the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.

  Revenue Recognition

     The Company recognizes revenue in accordance with generally accepted accounting principles as outlined in the SEC’s Staff Accounting Bulletin No. 104 “Revenue Recognition,” which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company’s revenues consist of sales to foreign jurisdictions for products to be used in clinical trials of the Holly Graft System. The majority of the Company’s sales consist of hospital consignment inventory and revenue is recognized upon implant of products used in clinical trials.

  Research and Development Expenses

     Research and development expenditures, including payments to suppliers, are charged to expense as incurred. The Company expenses amounts paid to obtain patents or acquire licenses as the ultimate recoverability of the amounts paid is uncertain.

  Income Taxes

     The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

  Stock-Based Compensation

     The Company applies the intrinsic-value method of accounting prescribed in Accounting Priciples Board Opinion (“APB”)No. 25, “Accounting for Stock Issued to Employees” for employee stock and option grants. Generally, the Company’s employee stock option grants qualify for fixed plan accounting. Accordingly, the Company does not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the fair market value of the stock at the date of grant. Stock grants are recorded at fair value upon grant and charged to expense over the vesting period using the straight-line method. The Company has issued certain stock options that require variable accounting resulting in a final determination of non-cash compensation expense upon vesting of the option based on the then current intrinsic value.

     The Company accounts for options issued to nonemployees under Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” and Emerging Issues Task Force Issue No. 96-18 “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services.” All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date on which it is probable that the performance will occur, which is typically the vesting date.

     Adjusted pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The weighted average fair value per share of options granted during 2003, 2004 and 2005 was $1.57, $2.16 and $3.67, respectively. The fair value of these options granted to employees was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions:

		2003				2004				2005
Risk free interest rate			3.71	%			4.00	%			4.18-4.54	%
Expected dividend rate			0.00	%			0.00	%			0.00	%
Volatility (1)			0.55				0.55				0.55-0.88
Expected life of option		7 years				7 years				7 years

     For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period.

		December 31,
		2003				2004				2005
		(In thousands, except per share amounts)
Net loss		$	(1,542	)		$	(3,551	)		$	(9,724	)
Add: Stock-based employee compensation expense included in net loss			—				158				206
Less: Employee stock compensation expense determined under the fair value method for all awards			(44	)			(260	)			(1,100	)
Pro forma net loss		$	(1,586	)		$	(3,653	)		$	(10,618	)
Pro forma net loss per share — basic and diluted		$	(0.18	)		$	(0.35	)		$	(0.57	)

     The table above includes approximately $701,000 of pro forma stock based compensation expense related to the Board of Directors election to accelerate the vesting of options to purchase 363,750 shares of common stock at a weighted average exercise price of $3.94 on December 15, 2005. On the date the Board made the election to accelerate these options the Company’s common stock price was $1.13 per share. The Board of Directors determined that the option acceleration was appropriate as the compensation expense that would have been recognized by the Company upon adoption of SFAS No. 123R “Share Based Payment” did not accurately reflect the economic value of the options to option holders, the Company or its shareholders. Had the Company not accelerated the vesting of these options, the Company would have been required under SFAS No. 123R to recognize as compensation expense of up to $701,000 through December 31, 2009.

     Net Loss Per Share

     Weighted average basic and diluted net loss per share amounts were calculated as follows:

		December 31,
		2003				2004				2005
		(In thousands, except per share amounts)
Net loss		$	(1,542	)		$	(3,551	)		$	(9,724	)
Weighted average common shares and equivalents outstanding Common shares outstanding			8,967,308				10,298,639				17,639,783
Warrants issued at a nominal exercise price (note 2)			—				—				984,914
Weighted average shares outstanding — basic and diluted			8,967,308				10,298,639				18,624,697
Pro forma net loss per share — basic and diluted		$	(0.17	)		$	(0.34	)		$	(0.52	)

     Basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted-average number of common shares and equivalents outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options,

warrants and the vesting of restricted stock grants. The warrant issued to Angiotech (see note 6) for 1,265,823 shares of common stock is included in the calculation of basic and diluted earnings per share due to the nominal exercise price of $0.01 per share. Diluted EPS is identical to Basic EPS since potential common shares, consisting of unvested restricted stock grants and unexercised stock options and certain warrants are excluded from the calculation, as their effect is anti-dilutive. Historical outstanding potential common shares not included in diluted net loss per share attributable to common stockholders calculations were 1,135,000, 1,997,500 and 1,692,788 as of December 31, 2003, 2004 and 2005, respectively.

  New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity compensates employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. The Statement is effective for the Company beginning in fiscal 2006. The Company plans to implement SFAS 123R using the modified prospective method. Based on the value of unvested awards at December 31, 2005, the Company expects the impact of SFAS 123R would be approximately $19,000 of expense annually from 2006 to 2009. However, the Company cannot precisely determine the impact on net loss, because the ultimate amount of increased compensation expense will be dependent on the number of option shares granted, their timing and vesting period and the method used to calculate the fair value of the awards, among other factors. Estimated compensation expense related to prior periods can be found within Note 1 to these financial statements.

  Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Development Stage Activities

     The Company has operated as a development stage enterprise since its inception by devoting substantially all of its effort to financial planning, raising capital, research and development, and developing markets for its products. Accordingly, the financial statements of the Company have been prepared in accordance with the accounting and reporting principles prescribed by SFAS No. 7, “Accounting and Reporting by Development Stage Enterprises.”

     The Company has incurred losses of $16.4 million and negative operating cash flow of $11.0 million from inception through December 31, 2005. Although, the Company has been successful in raising funds in the past there is no assurance that any such financing or borrowings can be obtained in the future on terms acceptable to the Company. As further described in note 11, the Company has suspended substantially all of its development activities on February 7, 2006 and is considering several strategic alternatives including liquidation of the Company’s net assets. The accompanying financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts of liabilities and existing commitments that may result from the outcome of these uncertainties.

3. Commitments and Contingencies

  Leases

     The Company entered into an operating lease agreement for its facility. Terms of certain lease arrangements include renewal options, payment of executory costs such as real estate taxes, insurance, common area maintenance and escalation clauses.

     Annual future minimum lease obligations under our operating lease agreement as of December 31, 2005 are as follows (in thousands):

2006			83
2007			21
Total		$	104

     Rent expense was approximately $108,000, $84,000 and $73,000 for the years ended December 31, 2003, 2004 and 2005, respectively, and $493,000 for the period from December 3, 1999 (date of inception) to December 31, 2005.

  Royalty Payments

     The Company is obligated to pay royalties on commercial sales of certain products that may be developed and sold under various licenses and agreements that have been obtained by the Company. To date, the Company has not incurred any obligations for royalty payments. Upon a change of control of the Company, certain royalty provisions could increase.

  Legal Proceedings

     The Company is not currently engaged in litigation.

  Employment Agreements

     The Company has entered into employment agreements with certain key employees providing for an annual salary, stock options and such benefits in the future as may be approved by the Board of Directors. Certain agreements also contain change of control provisions pursuant to which upon a merger in which more than 50% of the Company’s voting stock is acquired by a third party, an acquisition of more than 20% of our voting stock by anyone other than the Company’s founder, Manny Villafaña, the sale of substantially all of our assets, a liquidation, or a change in the control of the Company’s board, the applicable employees will receive severance payments equal to their monthly salary for 24-36 months. In February 2006, these agreements were amended as described in note 11.

  Supply Agreements

     In January 2004, the Company entered into a supply agreement that requires the Company to purchase a minimum of approximately $76,000 of materials in 2006. In February 2006, the Company notified the supplier that it was exercising its contractual right to terminate this supply agreement.

4. Property and Equipment

     Property and equipment consists of the following:

		December 31,
		2004				2005
		(In thousands)
Furniture and office equipment		$	34			$	39
Machinery and production equipment			183				137
Computers and technology equipment			44				34
			261				210
Accumulated depreciation			(62	)			(140	)
		$	199			$	70

     In December 2005, the Company determined that certain property and equipment was impaired. Upon evaluation of the recoverability of the fixed asset balances, primarily through discussions with market place participants, the Company recorded an impairment charge of approximately $248,000 to reflect the estimated fair market value. The actual amount realized on these assets may differ materially from our estimates.

     Depreciation expense was $15,000, $23,000 and $77,000 for the years ended December 31, 2003, 2004 and 2005, respectively, and $140,000 for the period from December 3, 1999 (date of inception) to December 31, 2005.

5. Accrued Liabilities

     Accrued liabilities consist of the following:

		December 31,
		2004				2005
		(In thousands)
Accrued compensation		$	19			$	42
Other expenses			—				6
		$	19			$	48

6. Stockholders’ Equity

Common Stock Offerings

     During 2000, the Company sold 1,425,000 shares of common stock at a price of $1.67 per share to various investors resulting in net proceeds of $2,364,000 to the Company.

     During 2003, the Company sold 862,294 shares of common stock at a price of $2.65 per share to various investors resulting in net proceeds of $2,252,000 to the Company.

     In March 2004, the Company sold 477,258 shares of common stock at a purchase price of $3.25 per share to various investors resulting in net proceeds of $1,551,000.

     In July 2004, the Company sold 476,923 shares of common stock at a price of $3.25 per share to various investors resulting in net proceeds of $1,551,000.

     In December 2004, the Company sold 5,500,000 shares at $5.50 per share in an initial public offering (IPO) of the Company’s common stock. Net proceeds to the Company totaled approximately $26,979,000 after deducting offering expenses of approximately $3,271,000. In connection with the IPO, the Company granted warrants to the underwriters to purchase 550,000 shares of the Company’s common stock at an exercise price equal to $6.875 per share. The warrants are exercisable between December 8, 2005 and December 7, 2009.

     In January 2005, the Company issued 825,000 shares of common stock at $5.50 per share in connection with the underwriter’s purchase of the IPO over-allotment. Net proceeds to the Company totaled approximately $4,195,000 after deducting offering expenses of approximately $343,000.

     On March 22, 2005, Company entered into a license agreement with Angiotech Pharmaceuticals, Inc. (“Angiotech”). The license agreement provides the Company with an exclusive license to use the Angiotech technology in the manufacture and sale of synthetic and/or biologic coronary artery bypass graft products or systems that release or elute paclitaxel in the coronary artery bypass graft field. As partial consideration for the grant of this exclusive license, the Company issued Angiodevice International GmbH, a wholly-owned subsidiary of Angiotech, a warrant to purchase 1,265,823 shares of common stock with an exercise price of $0.01 per share. The license agreement also requires the Company to make future license fee payments to Angiotech based on the achievement of certain regulatory approvals, and a royalty based on the sale of products incorporating Angiotech’s technology.

     Pursuant to an investment agreement dated March 22, 2005 with Angiotech, the Company sold a total of 1,100,715 shares of common stock for a total of $5.0 million, representing a 15 percent premium to the closing price of such stock on March 22. As part of this transaction, the Company agreed to issue Angiotech up to an additional $5.0 million worth of its common stock, again at a 15 percent premium to the market value of the stock on the date prior to issuance, upon the achievement of certain revenue milestones.

7. Stock-Based Compensation

     In December 1999, the Company adopted stock option plans for employees, directors and consultants (collectively referred to as the Stock Option Plan), under which a total of 6,000,000 shares of common stock were reserved for issuance upon exercise of options granted by the Company. The Stock Option Plan provides for the granting of incentive and nonstatutory options. The exercise price of incentive stock options must equal at least the fair value on the date of grant, and the exercise price of nonstatutory stock options may be no less than the par value per share. The options have terms of up to ten years after the date of grant and become exercisable as determined upon grant, typically over a four-year period from the date of grant.

     A summary of option activity is as follows:

						Weighted
		Shares Under				Average				Available
		Option				Exercise Price				For Grant
Options outstanding at December 3, 1999 (date of inception)			—			$	—				6,000,000
Granted			1,935,000				0.06				(1,935,000	)
Options outstanding at December 31, 2000			1,935,000				0.06				4,065,000
Granted			30,000				1.67				(30,000	)
Exercised			(480,000	)			0.03				—
Cancelled			(720,000	)			0.03				720,000
Options outstanding at December 31, 2001			765,000				0.17				4,755,000
Cancelled			(30,000	)			0.03				30,000
Options outstanding at December 31, 2002			735,000				0.17				4,785,000
Granted			400,000				2.65				(400,000	)
Options outstanding at December 31, 2003			1,135,000				1.05				4,385,000
Granted			257,000				3.51				(257,000	)
Restricted stock grant			—				—				(150,000	)
Exercised			(16,500	)			0.03				—
Cancelled			(78,000	)			2.65				78,000
Options outstanding at December 31, 2004			1,297,500				1.45				4,056,000
Granted			371,500				3.67				(371,500	)
Exercised			(500,712	)			0.25				—
Cancelled			(138,000	)			4.04				138,000
Options outstanding at December 31, 2005			1,030,288				2.49				3,822,500

The following table summarizes outstanding stock options at December 31, 2005:

						Weighted Average
						Remaining
Per Share						Contractual Life				Weighted Average				Options
Exercise Price		Shares				(Years)				Exercise Price				Exercisable
$0.03			221,788				4.41			$	0.03				221,788
1.13			86,500				9.96				1.13				—
2.65 – 2.87			390,000				7.96				2.68				290,000
3.25 – 3.95			115,000				8.33				3.28				115,000
4.25 – 4.90			217,000				9.19				4.80				217,000
			1,030,288				7.67				2.49				843,788