Overview

The Company, through its Medical Graphics Corporation subsidiary, designs and markets non-invasive cardio-respiratory diagnostic systems that are sold under the MedGraphics and New Leaf brand and trade names. These cardio-respiratory diagnostic systems have a wide range of applications in healthcare, wellness and health and fitness. Revenue consists of equipment and supply sales as well as service revenues. Equipment and supply sales reflect sales of non-invasive cardio-respiratory diagnostic equipment and aftermarket sales of peripherals and supplies. Service revenue consists of revenue from extended service contracts, non-warranty service visits and additional training.

During the first quarter of fiscal 2009, the Company launched an all-new, updated CCM Express, which provides accurate resting energy expenditure measurements ("REE") for either ventilated or spontaneously breathing patients. The Company expects the added features of the CCM Express to expand the scope of use for this product and its REE function beyond critical care management into cardiology, oncology and other markets.

Total revenue for the first quarter of 2009 was $6.4 million, a decrease of 14.4% from $7.5 million in 2008. Operating expense for the first quarter of 2009 was $3.9 million, a decrease of 12.7% from $4.5 million in 2008. Net loss for the quarter was $622,000, or $0.15 per share, compared to a net loss of $675,000, or $0.17 per diluted share, for the same period in 2008.

For a discussion of risks associated with our business, see the section entitled Forward Looking Statements on page 17 of this Form 10-Q.

Results of Operations

     The following table contains selected information from the Company's
consolidated statements of operations, expressed as a percentage of revenues:


                                                    Three months ended
                                                       January 31,
                                                     2009         2008

            Revenues                                   100.0 %     100.0 %
            Cost of revenue                             48.7        49.7
            Gross margin                                51.3        50.3

            Selling and marketing expenses              28.0        31.6
            General and administrative expenses         17.9        17.6
            Research and development expenses           12.2         8.2
            Amortization of intangibles                  2.8         2.4
            Total operating expenses                    60.9        59.8
            Operating loss                              (9.6 )      (9.5 )
            Interest income                              0.0         0.9
            Provision for taxes                          0.1         0.4
            Net loss                                    (9.7 )%     (9.0 )%

Revenue

Total revenue for the three months ended January 31, 2009, decreased by 14.4% compared to 2008. Domestic product revenue decreased 19.6%, international product revenue decreased 5.3% and service revenue decreased 1.9%. International revenue decreased as a result of the inclusion of revenue from the Company's large clinical research customer in 2008. Excluding the clinical research business, international revenue increased 3.8% in the first quarter 2009 compared to the same quarter in 2008. The domestic business decreased as a result of the current economic environment which prompted a number of hospitals and other health care providers to institute freezes on capital spending. Service revenue declined only slightly because revenue from extended service contracts and non-warranty service visits both increased in 2009 compared to 2008 as a result of a larger installed customer base from higher sales in 2006 and 2007.

Gross Margin

Gross margin percentage for the three month period ended January 31, 2009 increased to 51.3% of revenue compared to 50.3% for the same period in 2008. Gross margin percentage increased slightly as a result of higher margin service revenue constituting a larger percentage of total sales (13.4% in 2009 and 11.7% in 2008) as well as cost reduction initiatives implemented during fiscal 2008.

Selling and Marketing

Selling and marketing expense for the three months ended January 31, 2009 decreased by 24.2%, or $573,000, to $1.8 million compared to $2.4 million for the same period in 2008.

The sales and sales support payroll, travel and customer support expense decreased by $425,000, or 27.7%, for the three months ended January 31, 2009 compared to the same period in 2008. During fiscal 2008, the Company terminated eight employees in the sales and marketing function to allow better management of operating expenses. The Company realized $220,000 in payroll and benefits savings as a result of this action. In addition, due to an internal reorganization, several employees were transferred to the research and development area, further reducing payroll and benefits expense.

Commission expense decreased by $81,000, or 28.2%, for the three months ended January 31, 2009 compared to the same period in 2008 which corresponded to the 14.4% reduction in Company revenue.

General and Administrative

General and administrative expenses for the three months ended January 31, 2009 decreased by 12.4%, or $164,000, to $1.2 million compared to $1.3 million for the same period in 2008.

Professional fees decreased by $62,000 for the three months ended January 31, 2009 compared to the same period in 2008. The majority of the expense savings were related to the change in our public auditing firm that occurred May 1, 2008.

On January 31, 2008, Dale Johnson, Angeion's then-Chief Financial Officer, retired. As a result of this event, costs of $148,000 were accrued in the first quarter of 2008 for severance and medical benefits. No similar event occurred in the first quarter of 2009.

Research and Development

Research and development expenses for the three months ended January 31, 2009 increased by 27.4%, or $169,000, to $787,000 from $618,000 for the same period in 2008.

Payroll and benefits costs increased $105,000 over the prior period as some current employees were transferred into this area from selling and marketing. This increase was partially offset by a $31,000 decrease in legal expenses related to intellectual property as the Company had incurred higher expenses in the 2008 first quarter related to the ongoing preparation and filing of patent and trademark applications.

Project expenses associated with new products increased by $48,000, or 89%, for the three months ended January 31, 2009 compared to the same period in 2008 as the Company prepared for and implemented the release of the all new CCM Express.

The Company's current product development initiatives include new or updated products targeted for hospital intensive care units, cardiology, dietary, asthma, allergy and primary care physicians, and health and fitness club professionals. In addition to selling these products in the United States, the Company intends to introduce some of these new products internationally as well as continuing to expand the international distribution of its existing products.

Amortization of Intangibles

Amortization of developed technology was $182,000 for the three months ended January 31, 2009 which did not change from the comparable period in 2008. There were no additions of intangible assets in the first quarter of 2009.

Interest Income

Interest income for the three months ended January 31, 2009 decreased to $4,000 from $63,000 for the same period in 2008. The decrease in interest income is principally due to significantly lower market interest rates as the Company moved its invested cash and cash equivalents into investments where the main goal is preservation of capital. The Company is exploring alternatives to increase its interest income while maintaining the highest degree of safety in its investments.

Provision for Income Taxes

The Company is required to present the provision for taxes as if it were fully taxable in accordance with SOP 90-7. The Company has utilized its pre-emergence bankruptcy NOLs in the past for the calculation of its income taxes payable but is still required to pay U.S. and State alternative minimum taxes ("AMT") in certain jurisdictions, even though it has substantial federal and state NOL carry forwards. During the quarters ended January 31, 2009 and 2008, the Company did not use any tax benefits related to pre-emergence bankruptcy NOLs. See note 8 to the consolidated financial statements, "Income Taxes," in this Form 10-Q for additional discussion of the accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

The Company has financed its liquidity needs over the last several years through revenue generated by the operations of its wholly owned subsidiary Medical Graphics Corporation.

The Company had cash and cash equivalents of $8.7 million and working capital of $14.9 million as of January 31, 2009. During the first quarter, the Company used $424,000 in cash from operating activities, primarily due to a net loss of $622,000 that included non-cash expenses of $293,000 for depreciation and amortization and $182,000 of stock-based compensation.

Cash was negatively impacted by a decrease in employee compensation payables of $165,000 and a decrease in the deferred income balance of $137,000. The decrease in employee compensation is typical for the first quarter of the fiscal year as employee bonuses are paid out during this period. Changes in inventory levels had a minimal impact on cash during the first quarter.

During the first quarter, the Company used $24,000 in cash for the purchase of property and equipment, which mainly consisted of computers and other information technology equipment. The Company has no material commitments for capital expenditures for the remainder of fiscal year 2009.

The Company generated cash from financing activities of $74,000 during the quarter from the exercise of options and the issuance of shares under the Employee Stock Purchase Plan.

The Company believes that its liquidity and capital resource needs for fiscal year 2009 and the next 12 months will be met through its current cash and cash equivalents as well as cash flows resulting from operations. In addition, as previously announced, the Company has developed a market-focused approach to leverage the strength of its MedGraphics brand and worldwide selling and distribution capability. Specifically, the Company has held discussions with various potential product and technology partners. If the Company is successful in concluding these negotiations, it may use some of its cash and capital resources in the acquisition of new technologies or businesses. Although the Company is continuing to look at a number of these opportunities, it currently has no agreements or understandings with any of these third parties.

Forward Looking Statements.

The discussion in this Form 10-Q, including statements in this Management Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements about Angeion's future financial results and business prospects that by their nature involve substantial risks and uncertainties. You can identify these statements by the use of words such as "anticipate," "believe," "estimate," "expect," "project," "intend," "plan," "will," "target," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects. Our actual results may differ materially depending on a variety of factors including: (1) national and worldwide economic and capital market conditions; (2) continuing cost-containment efforts in our hospital, clinics, and office market, (3) our ability to successfully operate our business including our ability to develop, improve, and update our cardiorespiratory diagnostic products and successfully sell these products under the MedGraphics and New Leaf Fitness brand names into existing and new markets, (4) our ability to maintain our cost structure at a level that is appropriate to our near to mid-term revenue expectations and that will enable us to increase revenues and profitability as opportunities develop, (5) our ability to achieve constant margins for our products and consistent and predictable operating expenses in light of variable revenues from our clinical research customers, (6) our ability to effectively manufacture and ship products in required quantities to meet customer demands, (7) our ability to expand our international revenue through our distribution partners and our Milan, Italy representative branch office; (8) our ability to successfully defend ourselves from product liability claims related to our cardiorespiratory diagnostic products and claims associated with our prior cardiac stimulation products, (9) our ability to defend our intellectual property, (10) our ability to develop and maintain an effective system of internal controls and procedures and disclosure controls and procedures, and (11) our dependence on third-party vendors.