The following information should be read together with the consolidated financial statements and the notes thereto and other information included elsewhere in this quarterly report on Form 10-Q.

Forward-Looking Statements

This quarterly report on Form 10-Q, including the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding AngioDynamics' expected future financial position, results of operations, cash flows, business strategy, budgets, projected costs, capital expenditures, products, competitive positions, growth opportunities, plans and objectives of management for future operations, as well as statements that include the words such as "expects," "reaffirms" "intends," "anticipates," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions, are forward-looking statements. These forward looking statements are not guarantees of future performance and are subject to risks and uncertainties. Investors are cautioned that actual events or results may differ from our expectations. Factors that may affect our actual results achieved include, without limitation, our ability to develop existing and new products, future actions by the FDA or other regulatory agencies, results of pending or future clinical trials, overall economic conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, as well as our ability to integrate purchased businesses. Other risks and uncertainties include, but are not limited to, the factors described from time to time in our reports filed with the SEC, including our Form 10-K for the fiscal year ended May 31, 2009.

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this quarterly report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. AngioDynamics disclaims any obligation to update the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date stated, or if no date is stated, as of the date of this document.

Overview

AngioDynamics is a provider of innovative medical devices used in minimally invasive, image-guided procedures to treat peripheral vascular disease, or PVD, and local oncology therapy options for treating cancer, including radiofrequency ablation ("RF" or "RFA") systems, irreversible electroporation ("IRE") surgical resection systems and embolization products for treating benign and malignant tumors. We design, develop, manufacture and market a broad line of therapeutic and diagnostic devices that enable interventional physicians (interventional radiologists, vascular surgeons, interventional and surgical oncologists and others) to treat PVD, tumors, and other non-coronary diseases. For the past five fiscal years, over 95% of our net sales were from single-use, disposable products.

Our business is organized in three reportable segments: Peripheral Vascular, Access and Oncology/Surgery. The Peripheral Vascular segment is comprised of the venous, angiographic, PTA, drainage and thrombolytic product lines. The Access segment is comprised of the dialysis, ports and PICC product lines. The Oncology/Surgery segment is comprised of the RFA, embolization, Habib and NanoKnife product lines.

We sell our broad line of quality devices in the United States through a direct sales force and outside the U.S. through a combination of direct sales and distributor relationships. As of August 31, 2009, our sales organization numbered 140 in the U.S. and 18 outside the U.S. For the quarter ended August 31, 2009, approximately 10% of our net sales were from non US markets, compared with approximately 11% in the same period of the prior year.

Our growth depends in large part on the continuous introduction of new and innovative products, together with ongoing enhancements to our existing products, through internal product development, technology licensing and strategic alliances. We recognize the importance of, and intend to continue to make investments in, research and development. For the quarter ended August 31, 2009, our research and development ("R&D") expenditures were $4.8 million, compared to $4.0 million in the prior year period which constituted 9.7%, and 8.9% respectively, of net sales. R&D activities include research, product development, intellectual property affairs and regulatory affairs. We expect that our R&D expenditures will approach 10% of net sales in fiscal 2010 primarily due to investment in IRE technology and remain in the range of 8 to 10% of net sales thereafter. However, downturns in our business could cause us to reduce our R&D spending.

We are also seeking to grow through selective acquisitions of complementary businesses and technologies. In January 2007, we acquired RITA Medical Systems, Inc. This acquisition created a diversified medical technology company with a broad line of access, diagnostic and therapeutic products that enable interventional physicians and surgeons to treat peripheral vascular disease and cancerous tumors. Interventional oncology is a large and growing area for our existing customer base and RITA's leadership position, premium products and excellent reputation fit our strategy. RITA had a very strong position in vascular access ports, which are an ideal sales fit with our Morpheus ® CT PICC. In addition, in May 2008 we acquired irreversible electroporation (IRE) technology which will be complementary to RITA's diverse offering of local oncology therapies, including its market-leading RFA systems, Habib Sealer TM resection devices and LC Beads TM for tumor embolization. We are in the process of commercializing the IRE technology and recently introduced the NanoKnife generator. In June 2008, we completed the acquisition of certain U.S. and U.K. assets of Diomed, Inc. With this acquisition, we substantially strengthened our position in the market for the treatment of varicose veins. The combination of Diomed endovenous laser products with our existing venous product line provides us with a comprehensive venous product offering. In January 2009, we completed the acquisition of certain assets of FlowMedica, Inc. providing us with the Benephit product line, a therapeutic approach to deliver drugs directly to the kidneys in order to prevent and treat acute kidney injury, in the emerging field of Targeted Renal Therapy.

Except to the extent we can further use our cash and short term investments or our equity securities as acquisition capital, we will require additional equity or debt financing to fund any future significant acquisitions.

In recent years, we expanded our manufacturing and warehousing facilities in Queensbury, New York, to provide us with significantly greater manufacturing and warehousing capacity and to accommodate additional research, development and administrative requirements. We are not currently operating our manufacturing facilities at full capacity. In July 2009, we entered into an agreement to lease, for a ten year period plus 2 five year renewal options, a 52,500 square foot office building in Latham, New York that will house our corporate headquarters and certain business operations. The building will be constructed by a commercial real estate developer with a targeted occupancy date of March 2010.

Our ability to further increase our profitability will depend in part on improving gross profit margins. Factors such as changes in our product mix, new technologies and unforeseen price pressures may cause our margins to grow at a slower rate than we have anticipated, or to decline.

Recent Developments

CEO Transition

On January 20, 2009, we entered into an Employment Agreement and Non-Statutory Stock Option Agreement with our then chief executive officer that provided, among other things, for a transition to a new chief executive officer. The transition to the new chief executive was completed in the third quarter of fiscal 2009. The former chief executive officer did not have an operating role after February 28, 2009. Accordingly, we recorded a provision in fiscal 2009 of approximately $2.9 million in general and administrative expenses for all current and future costs associated with the aforementioned Employment Agreement and Non-Statutory Stock Option Agreement and certain costs associated with the recruitment of a new chief executive officer. The new CEO commenced employment with us on March 1, 2009.

Acquisition of FlowMedica, Inc.

On January 12, 2009, we completed the acquisition of certain assets of FlowMedica, Inc. for approximately $1.75 million in cash and a contingent payment based on fiscal 2011 sales of FlowMedica products. With this acquisition, we purchased the Benephit product line, a therapeutic approach to deliver drugs directly to the kidneys in order to prevent and treat acute kidney injury, in the emerging field of Targeted Renal Therapy. Intangible assets acquired totaled approximately $1.3 million which have been identified as product technologies (10-year weighted average useful life). Inventory acquired totaled approximately $400,000. The acquisition has been accounted for as a purchase and accordingly, we have included the results of operations in the financial statements effective January 12, 2009. The pro-forma effects of the acquisition were not material to our income statement and balance sheet. Ten employees of FlowMedica, Inc. became employees upon completion of the acquisition.

Acquisition of certain assets of Diomed

On June 17, 2008, we completed the acquisition of certain U.S. assets of Diomed, Inc. and UK assets of Diomed UK Limited., in separate transactions, for an aggregate purchase price of approximately $11.1 million in cash including capitalized acquisition costs. With this acquisition, we substantially strengthened our position in the market for the treatment of varicose veins. The combination of Diomed endovenous laser products with our existing venous product line provides us with a comprehensive venous product offering. The total of the net tangible assets acquired was $5.5 million. Goodwill recorded as a result of these acquisitions was approximately $1.9 million. Intangibles assets acquired, other than goodwill, totaled approximately $3.7 million of which $3.6 million has been identified as customer relationships (8 -year estimated weighted average useful life) and $100,000 has been identified as product technologies (10 -year estimated weighted average useful life).

The acquisition has been accounted for as a purchase and, accordingly, we have included the results of operations in the financial statements effective June 17, 2008. The pro-forma effects of the Diomed acquisition on our income statement and balance sheet were not material. Thirty five employees of Diomed became employees of ours upon completion of the acquisition.

Acquisition of Oncobionic, Inc.

On May 9, 2008, we completed the acquisition of all the issued and outstanding shares of capital stock of Oncobionic, Inc. pursuant to the terms of the Stock Purchase Agreement entered into on October 12, 2006. The closing of the acquisition came as a result of the successful use of irreversible electroporation (IRE) technology in the first human clinical trial for the treatment of soft tissue, conducted during the first week of April 2008.

Under the October 2006 Stock Purchase Agreement, we agreed to pay a total purchase price of $25.4 million, including $400,000 of assumed liabilities. We made payments of $5.0 million upon the execution of the stock purchase agreement in October 2006, $10.0 million on May 9, 2008 upon the closing of the acquisition, and $5.0 million in November 2008. The remaining $5.0 million is payable in November 2009.

The Stock Purchase Agreement also provides for future royalty payments due on net sales of any catheter-based products sold by us that incorporate irreversible electroporation technology ("IRE"). We hold a license to such technology under a license agreement with the Regents of the University of California (the "UC License").

We have accounted for the acquisition of Oncobionic as a purchase under accounting principles generally accepted in the United States of America. Under the purchase method of accounting, the assets and liabilities of Oncobionic were recorded as of the acquisition date, at their respective fair values, and consolidated with those of AngioDynamics. Substantially all of the purchase price was recorded as product technology and is being amortized over a 15 year useful life. We have recorded goodwill and a deferred tax liability of $9.3 million. In future periods the deferred tax liability will be reduced to offset the tax impact of non-deductible amortization expense on the intangible assets acquired.

Results of Operations

Three Months ended August 31, 2009 and August 31, 2008

Financial Summary. For the first quarter of fiscal 2010, we reported net income of $2.1 million, or $0.09 per diluted common share, on net sales of $50.1 million, compared with net income of $2.2 million, or $0.09 per diluted common share, on net sales of $44.3 million in the first quarter of the prior year. Gross profit was 60.2% in the first quarter of fiscal 2010 compared with 61.9% in the first quarter of the prior year.

The following table sets forth certain operating data as a percentage of net sales:

                                                     Quarter Ended
                                              August 31,       August 31,
                                                 2009             2008
        Net sales                                  100.0 %          100.0 %
        Gross profit                                60.2 %           61.9 %
        Research and development expenses            9.7 %            8.9 %
        Sales and marketing expenses                30.7 %           29.5 %
        General and administrative expenses          8.1 %            9.8 %
        Amortization of intangibles                  4.6 %            5.1 %
        Operating income                             7.1 %            8.6 %
        Other income (expenses)                     (0.3 )%          (0.6 )%
        Net income                                   4.2 %            5.0 %

Net sales. Net sales are derived from the sale of our products and related freight charges, less discounts and returns. Net sales for the fiscal first quarter of 2010 increased by 13%, or $5.8 million, to $50.1 million from $44.3 million in the fiscal first quarter of 2009. The growth in net sales was primarily attributable to increased unit sales of LC Bead, increased sales of laser ablation products, increased unit sales of the SmartPort CT and sales of the Benephit renal infusion systems acquired in the FlowMedica acquisition.

From a business unit perspective, Peripheral Vascular sales increased 14% to $21.1 million from $18.4 million. This increase was driven primarily by laser ablation sales and sales of the Benephit renal infusion systems acquired in the FlowMedica acquisition. Access sales were $16.2 million, an increase of 3%, primarily attributable to increased unit sales of SmartPort CT. Oncology/Surgery sales were $12.8 million, an increase of 25% over the prior year primarily as a result of strong sales of our embolization product, LC Bead. IRE sales totaled $74,000 in the first quarter of fiscal 2010.

From a geographical perspective, US sales increased $5.8 million or 15% in the first quarter of 2010 to $45.0 million from $39.3 million a year ago. This increase is primarily attributable to increased unit sales of LC Bead, increased sales of laser ablation products, including those acquired from Diomed, and increased unit sales of the SmartPort CT. International sales were $5.1 million in the fiscal first quarter of 2010 and 2009. IRE products (Nanoknife) contributed $74,000 in the first quarter of 2010 in International Oncology/Surgery business segment sales.

Gross profit. Gross profit consists of net sales less the cost of goods sold, which includes the costs of materials, products purchased from third parties and sold by us, manufacturing personnel, royalties, freight, business insurance, depreciation of property and equipment and other manufacturing overhead. Our gross profit as a percentage of sales decreased to 60.2% for the first quarter of 2010 from 61.9% for the same period in the prior year. The decrease in gross profit percentage was primarily due to sales mix, competition pricing factors on certain products, material cost increases on certain purchased products and labor utilization variances.

Research and development expenses. Research and development ("R&D") expenses include costs to develop new products, enhance existing products, validate new and enhanced products and register and maintain our intellectual property. R&D expenses increased by $887,000, or 22%, to $4.9 million in the first quarter of 2010. The increase is primarily due to increased engineering personnel to support IRE development and commercialization activities, as $1.8 million in R&D expenses was spent on the IRE program in the first quarter of fiscal 2010. As a percentage of net sales, R&D expenses were 9.7% for the fiscal first quarter of 2010, compared with 8.9% for the same prior year period. At August 31, 2009, we employed 82 people in research, development and regulatory activities compared with 62 people in the prior year quarter.

Sales and marketing expenses. Sales and marketing ("S&M") expenses consist primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and samples. S&M expenses increased $2.3 million or 17% to $15.4 million in the first quarter of fiscal 2010. Sales expenses accounted for $1.3 million of the increase, which represented a 12% increase over the prior year, primarily due to personnel expenses related to the increased number of sales territories under the program to expand our Peripheral Vascular and Access sales forces and begin commercial sales of IRE products. 21 new sales representatives have been added since we began implementing the business unit strategy at the beginning of fiscal 2009.

Marketing expenses increased approximately $1.0 million, or 35%, over the prior year period, primarily due to IRE marketing activities, increased headcount to support the business unit structure and the start up of an internal training function. As a percentage of net sales, S&M expenses were 30.7% for the fiscal first quarter of 2010, compared with 29.5% for the prior year period. $357,000 was spent on IRE sales and marketing activity in the first quarter of fiscal 2010. At August 31, 2009, we employed 204 people in sales and marketing activities compared with 175 people in the prior year quarter.

General and administrative expenses. General and administrative ("G&A") expenses include executive management, finance and accounting, human resources and information technology and the administrative and professional costs associated with those activities. G&A expenses decreased $254,000, or 6%, to $4.1 million in the first quarter of 2010 due to decreased legal costs from now settled litigation and decreased travel and other integration costs related to the Diomed acquisition that were incurred in the prior year first quarter. G&A expenses were 8.1% of net sales compared with 9.8 % for the prior year first fiscal quarter. As of August 31, 2009, we employed 56 people in general and administrative activities compared with 52 people in the prior year period.

Amortization of intangibles. Amortization of intangibles remained constant at $2.3 million in the first quarter of fiscal 2010 as compared to the prior year. Amortization of IRE intangibles was $432,000 in the first quarter of fiscal 2010.

Operating income. Operating income was $3.6 million and $3.8 million for the first quarter of fiscal 2010 and 2009, respectively. As a percentage of sales, operating income for the first quarter of 2010 was 7.1% compared with 8.6% in the prior year same period.

Other income (expenses). Other income and expenses for the first quarter of fiscal 2010 improved $86,000 to expense of $165,000 compared with the expense of $251,000 in the same period of the prior year. This improvement is primarily due to foreign exchange gains in the current period compared with losses a year ago, improved performance on an interest rate swap and less interest expense in the fiscal first quarter of 2010 compared with a year ago, offset by decreased interest income in fiscal 2010.

Income taxes. Our effective tax rate was 38% for both the fiscal first quarter of 2010 and 2009. In September 2009, we received $1.7 million in cash as a tax refund related to completion of an examination of our federal income tax returns for fiscal years 2006 and 2007 by the Internal Revenue Service. This refund was primarily related to the tax deduction of costs incurred related to the acquisition of Rita Medical Systems, Inc. and was recorded as a reduction in goodwill during the third quarter of fiscal 2009 when notification from the Internal Revenue Service was received.

Net income. For the first quarter of 2010, we reported net income of $2.1 million, a decrease of $100,000 from net income of $2.2 million for the prior year first quarter.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities totaled $68.8 million at August 31, 2009, compared with $68.2 million at May 31, 2009. Marketable securities are comprised of U.S. government issued or guaranteed securities, corporate bonds and auction rate securities. At August 31, 2009, total debt was $7.0 million comprised of short and long-term bank debt that financed our facility expansions in Queensbury, New York. This compared with $7.1 million at May 31, 2009.

Net cash provided by operating activities for the quarter ended August 31, 2009 was $1.1 million compared with $1.7 million in the same prior year period. Cash generated from operating activities during the first quarter of fiscal year 2010 was primarily the result of net income and the effect on net income of non cash items, such as depreciation and amortization, the provision for deferred income taxes and stock-based compensation, as well as a decrease in accounts receivable, offset by increases in inventories and decreases in accounts payable and accrued liabilities.

Net cash provided by investing activities was $2.7 million for the quarter ended August 31, 2009 compared with net cash used of $6.4 million for the same prior year period. The net cash provided in the first fiscal quarter of 2010 consisted of net proceeds from the sale, maturity and purchase of available-for-sale short term investments. The prior year first quarter consisted of similar components but also included a $10.6 million use of cash for the acquisition of Diomed assets

Net cash provided by financing activities was $0.5 million for the quarter ended August 31, 2009 compared with cash used in financing activities of $8.6 million for the comparable prior year period. Cash provided by financing activities for the quarter ended August 31, 2009 primarily consisted of proceeds from purchases under the employee stock purchase plan ("ESPP"). The prior year first quarter use of cash for financing activities primarily consisted of repayment of long term debt and convertible note obligations of $9.8 million offset by proceeds from the exercise of stock options and purchases under the ESPP of $1.1 million.

Our contractual obligations and their effect on liquidity and cash flows have not changed substantially from that disclosed in our Annual Report on Form 10-K for our fiscal year ended May 31, 2009.

In fiscal 2003, we financed an expansion of our headquarters and manufacturing facility with industrial revenue bonds for $3.5 million. To secure this financing, we entered into agreements with local municipalities, a bank, a trustee and a remarketing agent. These agreements are referred to as the IDA agreements. The proceeds of the bonds were advanced as construction occurred. The bonds reprice every seven days and are resold by a Remarketing Agent. The bonds bear interest based on the market rate on the date the bonds are repriced and require quarterly principal payments ranging from $25,000 to $65,000 plus accrued interest through May 2022. We entered into an interest rate swap with a bank to convert the initial variable rate payments to a fixed interest rate of 4.45% per annum. The IDA agreements contain financial covenants relating to fixed charge coverage and interest coverage. The outstanding debt is collateralized by a letter of credit ($2.3 million at August 31, 2009) and a first mortgage on the land, building and equipment comprising our facility in Queensbury, and we are required to pay an annual fee ranging from 1.0% to 1.9% of the outstanding balance depending on our financial results. The current fee is 1.75% and is in effect until August 22, 2010.

In fiscal 2007, we financed the expansion of our warehouse and manufacturing facility in Queensbury, New York. The expansion was financed principally with taxable adjustable rate notes (the "Notes") issued by us aggregating $5,000,000. The Notes were issued under a trust agreement by and between us and a bank, as trustee. In connection with the issuance of the Notes, we entered into a letter of credit and reimbursement agreement (the "Reimbursement Agreement") with the Bank that requires the maintenance of a letter of credit to support principal and certain interest payments on the Notes and requires payment of an annual fee on the outstanding balance. The current fee is 0.75% and is in effect until December 2009. We also entered into a remarketing agreement, pursuant to which the remarketing agent is required to use its best efforts to arrange for sales of the Notes in the secondary market. In connection with this financing, we entered into an interest rate swap agreement (the "2006 Swap Agreement") with the Bank, effective December 2006, with an initial notional amount of $5,000,000, to limit the effect of variability due to interest rates on the rollover of the Notes. The 2006 Swap Agreement is a contract to exchange floating interest rate payments for fixed interest payments periodically over the life of the agreement without the exchange of the underlying notional amounts. The 2006 Swap Agreement requires us to pay a fixed rate of 5.06% and receive payments based on 30-day LIBOR repriced every seven days through December 2016. The Reimbursement Agreement contains certain financial covenants relating to fixed charge coverage and interest coverage, as defined. Amounts . . .