Table of Contents





UNITED STATES 
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q


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|                                               |                                                                                          
|---------------------------------------------- | -----------------------------------------------------------------------------------------
|x                                              | QUARTERLY REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                               |                                                                                          
|for the quarterly
 period ended July 31, 2009.
|                                               |                                                                                          
|OR                                            
|                                               |                                                                                          
|o                                              | TRANSITION REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ___________________ to
____________________.

Commission File
Number 001-13543


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ANGEION CORPORATION  (Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Minnesota                       |  | 41-1579150         
|(State or other jurisdiction of |  | (IRS Employer      
|incorporation or organization)  |  | Identification No.)

350 Oak Grove Parkway, Saint Paul, Minnesota
55127-8599(Address of principal executive offices)

Registrants telephone number, including area
code: (651) 484-4874


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

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

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


Large Accelerated Filer o     Accelerated Filer
o     Non-Accelerated
Filer o     Smaller
Reporting Company x


Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). 
          Yes o     No x

As of September 10, 2009, the
Company had outstanding 4,140,371 shares of Common Stock, $0.10 par value.







TABLE OF CONTENTS

|                               |  |                                                                                        |  |   
|------------------------------ |  | -------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  |                                                                                       
|                               |  |                                                                                        |  |   
|Item 1.                        |  | Financial Statements                                                                   |  | 3 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and
 Results of Operations |  | 14
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                             |  | 18
|Item 4T.                       |  | Controls and Procedures                                                                |  | 18
|                               |  |                                                                                        |  |   
|PART II - OTHER INFORMATION    |  |                                                                                       
|                               |  |                                                                                        |  |   
|Item 1.                        |  | Legal Proceedings                                                                      |  | 19
|Item 1A.                       |  | Risk Factors                                                                           |  | 19
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                            |  | 19
|Item 3.                        |  | Defaults Upon Senior Securities                                                        |  | 19
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                    |  | 19
|Item 5.                        |  | Other Information                                                                      |  | 19
|Item 6.                        |  | Exhibits                                                                               |  | 19
|                               |  |                                                                                        |  |   
|SIGNATURES                     |  | 20                                                                                    

2

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ANGEION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets 
July 31, 2009 and October 31, 2008


(in thousands except share and per share data)


|                                                                                                                                                                                   |  |                 |        |                    |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ------------------ | - | ------ | -
|                                                                                                                                                                                   |  | July
 31,
 2009 |        | October
 31,
 2008 |  
|                                                                                                                                                                                   |  | (unaudited)     |        |                    |   |       
|Assets                                                                                                                                                                             |  |                 |        |                    |   |       
|Current
 assets:                                                                                                                                                                   |  |                 |        |                    |   |        |  
|Cash and cash equivalents                                                                                                                                                          |  | $               | 10,559 |                    | $ | 9,047  |  
|Accounts receivable, net of allowance for doubtful accounts of $173
 and $283, respectively                                                                                        |  |                 | 4,194  |                    |   | 5,446  |  
|Inventories, net of obsolecence reserve of $646 and $597,
 respectively.                                                                                                           |  |                 | 4,705  |                    |   | 5,143  |  
|Prepaid expenses and other current assets                                                                                                                                          |  |                 | 219    |                    |   | 292    |  
|Total current assets                                                                                                                                                               |  |                 | 19,677 |                    |   | 19,928 |  
|                                                                                                                                                                                   |  |                 |        |                    |   |        |  
|Property and equipment, net of accumulated depreciation of $3,213 and
 $2,897, respectively                                                                                        |  |                 | 757    |                    |   | 937    |  
|Intangible assets, net                                                                                                                                                             |  |                 | 1,580  |                    |   | 2,100  |  
|Total Assets                                                                                                                                                                       |  | $               | 22,014 |                    | $ | 22,965 |  
|                                                                                                                                                                                   |  |                 |        |                    |   |        |  
|Liabilities and Shareholders Equity                                                                                                                                               |  |                 |        |                    |   |        |  
|Current liabilities:                                                                                                                                                               |  |                 |        |                    |   |        |  
|Accounts payable                                                                                                                                                                   |  | $               | 1,365  |                    | $ | 1,544  |  
|Employee compensation                                                                                                                                                              |  |                 | 1,071  |                    |   | 1,288  |  
|Deferred income                                                                                                                                                                    |  |                 | 1,502  |                    |   | 1,531  |  
|Warranty reserve                                                                                                                                                                   |  |                 | 153    |                    |   | 157    |  
|Other current liabilities and accrued expenses                                                                                                                                     |  |                 | 344    |                    |   | 380    |  
|Total current liabilities                                                                                                                                                          |  |                 | 4,435  |                    |   | 4,900  |  
|                                                                                                                                                                                   |  |                 |        |                    |   |        |  
|Long-term liabilities:                                                                                                                                                             |  |                 |        |                    |   |        |  
|Long-term deferred income                                                                                                                                                          |  |                 | 676    |                    |   | 789    |  
|Total Liabilities                                                                                                                                                                  |  |                 | 5,111  |                    |   | 5,689  |  
|                                                                                                                                                                                   |  |                 |        |                    |   |        |  
|Shareholders equity:                                                                                                                                                              |  |                 |        |                    |   |        |  
|Common stock, $0.10 par value, authorized 25,000,000 shares, 4,378,873
 and 4,166,457 shares issued and 4,123,538 and 4,091,790 shares outstanding in
 2009 and 2008, respectively |  |                 | 412    |                    |   | 409    |  
|Additional paid-in capital                                                                                                                                                         |  |                 | 21,600 |                    |   | 20,956 |  
|Accumulated deficit                                                                                                                                                                |  |                 | (5,109 | )                  |   | (4,089 | )
|Total shareholders equity                                                                                                                                                         |  |                 | 16,903 |                    |   | 17,276 |  
|Total Liabilities and Shareholders Equity                                                                                                                                         |  | $               | 22,014 |                    | $ | 22,965 |  

See accompanying notes to consolidated
financial statements.

3

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Table of Contents

ANGEION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations(unaudited, in thousands except per share amounts)

|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|------------------------------------------ |  | ---------------------------- | ----- | --------------------------- | - | ----- |  | ---- | ------ | - | - | ------ | -
|                                           |  | Three Months Ended
 July 31, |       | Nine Months Ended
 July 31, |  
|                                           |  | 2009                         |       | 2008                        |   | 2009  |  | 2008 |       
|Revenues                                   |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Equipment and supply sales                 |  | $                            | 5,416 |                             | $ | 6,508 |  | $    | 16,381 |   | $ | 19,545 |  
|Service revenues                           |  |                              | 816   |                             |   | 1,090 |  |      | 2,489  |   |   | 2,879  |  
|                                           |  |                              | 6,232 |                             |   | 7,598 |  |      | 18,870 |   |   | 22,424 |  
|Cost of revenues                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Cost of equipment and supplies             |  |                              | 2,751 |                             |   | 3,569 |  |      | 8,610  |   |   | 10,530 |  
|Cost of service revenue                    |  |                              | 92    |                             |   | 112   |  |      | 264    |   |   | 363    |  
|                                           |  |                              | 2,843 |                             |   | 3,681 |  |      | 8,874  |   |   | 10,893 |  
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Gross margin                               |  |                              | 3,389 |                             |   | 3,917 |  |      | 9,996  |   |   | 11,531 |  
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Operating expenses:                        |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Selling and marketing                      |  |                              | 1,688 |                             |   | 1,977 |  |      | 5,101  |   |   | 6,660  |  
|General and administrative                 |  |                              | 979   |                             |   | 945   |  |      | 3,131  |   |   | 3,312  |  
|Research and development                   |  |                              | 710   |                             |   | 565   |  |      | 2,226  |   |   | 1,891  |  
|Amortization of intangibles                |  |                              | 182   |                             |   | 182   |  |      | 546    |   |   | 546    |  
|                                           |  |                              | 3,559 |                             |   | 3,669 |  |      | 11,004 |   |   | 12,409 |  
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Operating income / (loss)                  |  |                              | (170  | )                           |   | 248   |  |      | (1,008 | ) |   | (878   | )
|Interest income                            |  |                              | 6     |                             |   | 32    |  |      | 10     |   |   | 137    |  
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Income / (loss) before taxes               |  |                              | (164  | )                           |   | 280   |  |      | (998   | ) |   | (741   | )
|Provision for taxes                        |  |                              | 9     |                             |   | 21    |  |      | 22     |   |   | 48     |  
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Net income / (loss)                        |  | $                            | (173  | )                           | $ | 259   |  | $    | (1,020 | ) | $ | (789   | )
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Earnings / (loss) per share - basic        |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Net income / (loss) per share              |  | $                            | (0.04 | )                           | $ | 0.06  |  | $    | (0.25  | ) | $ | (0.19  | )
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Earnings / (loss) per share - diluted      |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Net income / (loss) per share              |  | $                            | (0.04 | )                           | $ | 0.06  |  | $    | (0.25  | ) | $ | (0.19  | )
|                                           |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Weighted average common shares outstanding |  |                              |       |                             |   |       |  |      |        |   |   |        |  
|Basic                                      |  |                              | 4,121 |                             |   | 4,090 |  |      | 4,114  |   |   | 4,090  |  
|Diluted                                    |  |                              | 4,121 |                             |   | 4,150 |  |      | 4,114  |   |   | 4,090  |  

See
accompanying notes to consolidated financial statements.

4

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Table of Contents

ANGEION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)

|                                                                                 |  |                             |        |      |   |       |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ----- | -
|                                                                                 |  | Nine Months Ended
 July 31, |       
|                                                                                 |  | 2009                        |        | 2008 |  
|Cash Flows From Operating Activities:                                            |  |                             |        |      |   |       |  
|Net loss                                                                         |  | $                           | (1,020 | )    | $ | (789  | )
|Adjustments to reconcile net loss to net cash provided by operating
 activities: |  |                             |        |      |   |       |  
|Depreciation and amortization                                                    |  |                             | 859    |      |   | 896   |  
|Stock-based compensation                                                         |  |                             | 564    |      |   | 347   |  
|Increase in inventory obsolescence reserve                                       |  |                             | 49     |      |   | 333   |  
|Increase/(decrease) in allowance for doubtful accounts                           |  |                             | (110   | )    |   | 55    |  
|Changes in operating assets and liabilities:                                     |  |                             |        |      |   |       |  
|Accounts receivable                                                              |  |                             | 1,362  |      |   | 2,382 |  
|Inventories                                                                      |  |                             | 389    |      |   | (797  | )
|Prepaid expenses and other current assets                                        |  |                             | 73     |      |   | 27    |  
|Accounts payable                                                                 |  |                             | (179   | )    |   | (441  | )
|Employee compensation                                                            |  |                             | (217   | )    |   | (992  | )
|Deferred income                                                                  |  |                             | (142   | )    |   | (202  | )
|Warranty reserve                                                                 |  |                             | (4     | )    |   | (81   | )
|Other current liabilities and accrued expenses                                   |  |                             | (36    | )    |   | (34   | )
|Net cash provided by operating activities                                        |  |                             | 1,588  |      |   | 704   |  
|                                                                                 |  |                             |        |      |   |       |  
|Cash Flows From Investing Activities:                                            |  |                             |        |      |   |       |  
|Purchase of property and equipment and intangible assets                         |  |                             | (159   | )    |   | (168  | )
|Net cash used in investing activities                                            |  |                             | (159   | )    |   | (168  | )
|                                                                                 |  |                             |        |      |   |       |  
|Cash Flows From Financing Activities:                                            |  |                             |        |      |   |       |  
|Proceeds from issuance of common stock under employee stock purchase
 plan       |  |                             | 20     |      |   | 20    |  
|Proceeds from the exercise of stock options                                      |  |                             | 63     |      |   |      |  
|Net cash provided by financing activities                                        |  |                             | 83     |      |   | 20    |  
|                                                                                 |  |                             |        |      |   |       |  
|Net increase in cash and cash equivalents                                        |  |                             | 1,512  |      |   | 556   |  
|                                                                                 |  |                             |        |      |   |       |  
|Cash and cash equivalents at beginning of period                                 |  |                             | 9,047  |      |   | 6,908 |  
|                                                                                 |  |                             |        |      |   |       |  
|Cash and cash equivalents at end of period                                       |  | $                           | 10,559 |      | $ | 7,464 |  

See accompanying notes to
consolidated financial statements.

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Table of Contents

ANGEION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|   |                                                   
|-- | --------------------------------------------------
|1. | Basis of
 Presentation and Description of Business

Angeion
Corporation (the Company), through its Medical Graphics Corporation
subsidiary, designs and markets non-invasive cardiorespiratory diagnostic
systems that are sold under the MedGraphics and New Leaf brand and trade names.
These cardiorespiratory diagnostic systems have a wide range of applications in
healthcare, wellness, and health and fitness.

The
consolidated balance sheet as of July 31, 2009, the consolidated statements of
operations for the three and nine months ended July 31, 2009 and 2008, and cash
flows for the nine months ended July 31, 2009 and 2008, and the related
information presented in these notes have been prepared by management in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X, without audit. Accordingly, they do not include all of the
information and notes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of results have been
included. The consolidated balance sheet at October 31, 2008 was derived from
the audited consolidated financial statements as of that date. Operating
results for the three and nine months ended July 31, 2009 are not necessarily
indicative of the results that may be expected for the year ending October 31,
2009. For further information, refer to the consolidated financial statements
and notes thereto included in Angeion Corporations Annual Report on Form 10-K
for the year ended October 31, 2008.

Comprehensive
income (loss) is a measure of all non-owner changes in shareholders equity and
includes items such as net income (loss), certain foreign currency translation
items, minimum pension liability adjustments and changes in the value of
available-for-sale securities. For the three and nine months ended July 31,
2009 and 2008, comprehensive income (loss) for Angeion Corporation was
equivalent to net income (loss) as reported.

Preparation
of the consolidated 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
disclosures of contingent assets and liabilities made in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Estimates include accounts receivable, product warranty and
inventory reserves, and depreciable lives of property, equipment and intangible
assets.

|   |                     
|-- | --------------------
|2. | Revenue
 Recognition

In
accordance with the SECs Staff Accounting Bulletin No. 104, Revenue Recognition, the Company
recognizes revenue when persuasive evidence of an arrangement exists, transfer
of title has occurred or services have been rendered, the selling price is
fixed or determinable and collectability is reasonably assured. The Companys
products are sold for cash or on unsecured credit terms requiring payment based
on the shipment date. Credit terms can vary between customers due to many
factors, but are generally 30-60 days. Revenue, net of discounts, is recognized
upon shipment or delivery to customers in accordance with written sales terms.
Standard sales terms do not include customer acceptance conditions, future
credits, rebates, price protection or general rights of return. The terms of
sales to both domestic customers and international distributors are identical.
In instances when a customer order specifies final acceptance of the system,
revenue is deferred until all customer acceptance criteria have been met.
Estimated warranty obligations are recorded upon shipment.

6

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Table of Contents

Service
contract revenue is based on a stated contractual rate and is deferred and
recognized ratably over the service period, which is typically from one to four
years. In accordance with paragraph 4 of the Emerging Issues Task Force
abstract 00-21, Revenue Arrangements with
Multiple Deliverables, the Company applies Financial Accounting
Standards Board (FASB) Technical Bulletin No. 90-1 to service contract
revenue. Deferred income associated with service contracts and supplies was
$1,985,000 and $2,005,000 at July 31, 2009 and October 31, 2008, respectively.
Revenue from installation and training services provided to customers is
deferred until the service has been performed. The amount of deferred
installation and training revenue was $140,000 and $223,000 at July 31, 2009
and October 31, 2008, respectively.

When
a sale involves multiple deliverables such as equipment, installation services
and training, the amount of the consideration from an arrangement is allocated
to each respective element based on the residual method and recognized as
revenue when revenue recognition criteria for each element is met.
Consideration allocated to delivered equipment is equal to the total
arrangement consideration less the fair value of installation and training. The
fair value of installation and training services is based on specific objective
evidence, including third-party invoices.

No
customer accounted for more than 10% of revenues for either the three or nine
months ended July 31, 2009 and 2008.

Advance Payments from Customers

The
Company typically does not receive advance payments from its customers in
connection with the sale of its products. The Company occasionally enters into
an arrangement under which a customer agrees to purchase a large quantity of
product that is to be delivered over a period of time. Depending on the size of
these arrangements, the Company may negotiate an advance payment from these
customers. Advance payments from customers aggregating $53,000 and $92,000 as
of July 31, 2009 and October 31, 2008, respectively, are included in deferred
income on the consolidated balance sheets. Revenue recognition for customer
orders that include advance payments is consistent with the Companys revenue
recognition policy described above.

|   |                              
|-- | -----------------------------
|3. | New
 Accounting Pronouncement

During
May 2009, the FASB issued Statements of Financial Standards No. 165 (SFAS No.
165), Subsequent Events. SFAS
No. 165 requires all public entities to evaluate subsequent events through the
date that the financial statements are available to be issued and disclose in
the notes the date through which the Company has evaluated subsequent events
and whether the financial statements were issued or were available to be issued
on the disclosed date. SFAS No. 165 defines two types of subsequent events, as
follows: the first type consists of events or transactions that provide
additional evidence about conditions that existed at the date of the balance
sheet and the second type consists of events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after
that date. SFAS No. 165 was adopted this quarter and did not have a material
impact on the Companys financial statements. The Company has evaluated subsequent
events occurring through September 14, 2009, the date on which this Quarterly
Report on Form 10-Q was issued.

|   |                                           
|-- | ------------------------------------------
|4. | Stock-Based Compensation and Stock Options

Effective
November 1, 2006, the Company adopted the provisions of FASB Statement No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123R). Under the fair value recognition provisions of SFAS No.
123R, the Company measures stock-based compensation cost at the grant date
based on the fair value of the award and
recognizes the compensation expense over the requisite service period, which is
generally the vesting period. Total stock-based compensation expense included
in the Companys statement of operations for the three and nine months ended
July 31, 2009 was $199,000 and $564,000, respectively, compared to $130,000 and
$347,000 for the three and nine months ended July 31, 2008, respectively.

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Table of Contents

Stock Options

A
summary of our option activity for the nine-month period ended July 31, 2009
and 2008 follows:

|                                 |  |                           |         |                                    |   |        |  |                                    |         |   |   |      | 
|-------------------------------- |  | ------------------------- | ------- | ---------------------------------- | - | ------ |  | ---------------------------------- | ------- | - | - | ---- | 
|                                 |  | For the nine months ended |        
|                                 |  | July 31, 2009             |         | July 31, 2008                      |  
|                                 |  | Shares                    |         | Weighted
 Average
 Exercise
 Price |   | Shares |  | Weighted
 Average
 Exercise
 Price |        
|Outstanding at beginning of year |  |                           | 730,953 |                                    | $ | 5.96   |  |                                    | 611,120 |   | $ | 6.12 | 
|Granted                          |  |                           |        |                                    |   |       |  |                                    | 112,000 |   |   | 5.83 | 
|Exercised                        |  |                           | (25,000 | )                                  |   | 2.53   |  |                                    |        |   |   |     | 
|Expired or cancelled             |  |                           |        |                                    |   |       |  |                                    | (41,167 | ) |   | 7.09 | 
|Outstanding at end of period     |  |                           | 705,953 |                                    | $ | 6.08   |  |                                    | 681,953 |   | $ | 6.01 | 

On
June 3, 2009, the shareholders of the Company approved an amendment to the
Angeion Corporation 2007 Stock Incentive Plan (the Plan) to increase by
100,000 the shares authorized for issuance under the Plan. The total shares
authorized for issuance under the Plan is now increased to 650,000.

The
following table summarizes information concerning stock options outstanding as
of July 31, 2009:

|                 |       |                     |  |                                                 |         |                              |  |      |  |  |         | 
|---------------- | ----- | ------------------- |  | ----------------------------------------------- | ------- | ---------------------------- |  | ---- |  |  | ------- | 
|Exercise
 Prices |       | Number
 Outstanding |  | Weighted
 Average
 Remaining
 Contractual
 Life |         | Number
 Subject to
 Exercise | 
|$                | 2.00  |                     |  |                                                 | 11,650  |                              |  | 4.19 |  |  | 11,650  | 
|                 | 2.53  |                     |  |                                                 | 72,000  |                              |  | 6.13 |  |  | 72,000  | 
|                 | 5.08  |                     |  |                                                 | 84,000  |                              |  | 6.82 |  |  | 84,000  | 
|                 | 5.16  |                     |  |                                                 | 49,000  |                              |  | 6.08 |  |  |        | 
|                 | 5.66  |                     |  |                                                 | 90,000  |                              |  | 5.80 |  |  | 30,003  | 
|                 | 6.23  |                     |  |                                                 | 84,500  |                              |  | 3.72 |  |  | 84,500  | 
|                 | 6.60  |                     |  |                                                 | 71,583  |                              |  | 5.06 |  |  | 46,099  | 
|                 | 7.08  |                     |  |                                                 | 10,000  |                              |  | 5.67 |  |  | 3,334   | 
|                 | 7.79  |                     |  |                                                 | 86,800  |                              |  | 4.19 |  |  | 86,800  | 
|                 | 7.81  |                     |  |                                                 | 2,000   |                              |  | 5.27 |  |  | 667     | 
|                 | 7.86  |                     |  |                                                 | 144,420 |                              |  | 5.25 |  |  | 48,151  | 
|                 |       |                     |  |                                                 |         |                              |  |      |  |  |         | 
|                 | Total |                     |  |                                                 | 705,953 |                              |  | 5.18 |  |  | 467,204 | 

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Table of Contents

The
total intrinsic value of options exercised during the three and nine months
ended July 31, 2009 was $0 and $15,000, respectively. The total intrinsic value
of options outstanding and exercisable at July 31, 2009 was $41,308, which was
calculated using the closing stock price as of July 31, 2009 less the exercise
price of in-the-money options. The Company issues new shares when stock options
are exercised. Cash received from the exercise of stock options was $63,000 for
the nine-month period ended July 31, 2009. Unrecognized compensation expense
related to outstanding stock options as of July 31, 2009 of $792,000 is
expected to be recognized over a weighted average period of 1.51 years, and
will be adjusted for any future changes in estimated forfeitures.

Restricted
Stock Awards

On
June 3, 2009, the Board of Directors authorized the issuance of 180,668
restricted shares of the Companys common stock. Restricted stock awards are
awards of common stock that are subject to restrictions on transfer and to a
risk of forfeiture if the awardee leaves the Company before the restrictions
lapse. The holder of a restricted stock award is generally entitled at all
times on and after the date of issuance of the restricted shares to exercise
the rights of a shareholder of the Company, including the right to vote the
shares. The value of the stock was established by the market price on the date
of grant which was $2.62 per share. The restricted stock awards will vest over
a three-year period and are included in common stock issued as of the grant
date.

On
August 28, 2008, the Board of Directors had authorized the issuance of 74,667
restricted shares of the Companys common stock when the market price of the
common stock was $5.16.

Unrecognized
compensation expense related to outstanding restricted stock awards as of July
31, 2009 was $715,000. The Company expects to recognize this over a weighted
average period of 2.59 years.

The
following table presents the statement of operations classification of pre-tax
stock-based compensation expense for stock options and restricted stock awards
recognized for the three and nine months ended July 31, 2009 and 2008:

|                                  |  |                             |     |                            |   |      |  |      |     |  |   |     | 
|--------------------------------- |  | --------------------------- | --- | -------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                                  |  | Three
 months ended July 31 |     | Nine
 months ended July 31 |  
|                                  |  | 2009                        |     | 2008                       |   | 2009 |  | 2008 |    
|Cost of
 revenues                 |  | $                           | 14  |                            | $ | 7    |  | $    | 40  |  | $ | 25  | 
|Selling and
 marketing            |  |                             | 49  |                            |   | 25   |  |      | 135 |  |   | 80  | 
|General and
 administrative       |  |                             | 124 |                            |   | 92   |  |      | 353 |  |   | 221 | 
|Research and
 development         |  |                             | 12  |                            |   | 6    |  |      | 36  |  |   | 21  | 
|Stock-based
 compensation expense |  | $                           | 199 |                            | $ | 130  |  | $    | 564 |  | $ | 347 | 

Valuation
Assumptions

The
Company uses the Black-Scholes option-pricing model (Black-Scholes model) to
determine the fair value of stock options as of the grant date. In determining
the fair value of stock options under the Black-Scholes model, management is
required to make assumptions regarding projected employee stock option exercise
behaviors, risk-free interest rates, volatility of the Companys stock price
and expected dividends.

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|   |                                                                               
|-- | ------------------------------------------------------------------------------
|5. | Inventories                                                                   
|   |                                                                               
|   | Inventories
 consisted of the following at July 31, 2009 and October 31, 2008:

|                |  |      |       |      |   |       | 
|--------------- |  | ---- | ----- | ---- | - | ----- | 
|(In
 thousands) |  | 2009 |       | 2008 |  
|Raw
 materials  |  | $    | 2,067 |      | $ | 2,035 | 
|Work-in-Process |  |      | 64    |      |   | 156   | 
|Finished
 goods |  |      | 2,574 |      |   | 2,952 | 
|                |  | $    | 4,705 |      | $ | 5,143 | 

|   |                                                                                     
|-- | ------------------------------------------------------------------------------------
|6. | Intangible Assets                                                                   
|   |                                                                                     
|   | Intangible
 assets consisted of the following at July 31, 2009 and October 31, 2008:

|                          |  |      |        |      |   |        |  
|------------------------- |  | ---- | ------ | ---- | - | ------ | -
|(In thousands)            |  | 2009 |        | 2008 |  
|Intangible
 assets:       |  |      |        |      |   |        |  
|Developed
 technology     |  | $    | 6,744  |      | $ | 6,722  |  
|Trademarks
 (unamortized) |  |      | 56     |      |   | 53     |  
|                          |  | $    | 6,800  |      | $ | 6,775  |  
|                          |  |      |        |      |   |        |  
|Amortization              |  |      | (5,220 | )    |   | (4,675 | )
|                          |  | $    | 1,580  |      | $ | 2,100  |  

The
intangible assets are being amortized using the straight-line method over the
estimated useful lives of the assets that range from seven to ten years.
Amortization expense was $546,000 for the nine months ended July 31, 2009 and
2008. If the Company continues to utilize pre-emergence bankruptcy net
operating loss carry forwards, the Company will further reduce the carrying
cost of its developed technology until the net carrying cost of these assets is
zero. To the extent that utilization of these NOLs reduces the cost of developed
technology, future amortization expense will be reduced.

Estimated
amortization expense for each of the succeeding fiscal years based on the
intangible assets as of July 31, 2009, which does not reflect the possible
reduction due to the use of NOLs discussed above, is as follows:

|                                      |  |              |       | 
|------------------------------------- |  | ------------ | ----- | 
|(In thousands)                        |  | Amortization |      
|Three months
 ending October 31, 2009 |  | $            | 182   | 
|2010                                  |  |              | 421   | 
|2011                                  |  |              | 420   | 
|2012                                  |  |              | 421   | 
|                                      |  | $            | 1,444 | 

The Company
did not realize any pre-bankruptcy tax benefits for the three and nine months
ended July 31, 2009 and 2008. The above table does not include estimated
amortization expense of $80.000 for patents, included in developed technology,
that are not yet placed in service.

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Table of Contents

|   |                 
|-- | ----------------
|7. | Warranty Reserve

Sales of
the Companys equipment are subject to a warranty obligation. Equipment
warranties typically extend for a period of twelve months from the date of
installation. Standard warranty terms are included in customer contracts. Under
the terms of these warranties, the Company is obligated to repair or replace
any components or assemblies that it deems defective in workmanship or
materials. The Company reserves the right to reject warranty claims where it
determines that failure is due to normal wear, customer modifications, improper
maintenance or misuse. The Company maintains a warranty reserve that reflects
the estimated expenses that it expects to incur to honor the warranties on its
products. The Company adjusts the warranty reserve based on the number and type
of equipment that is subject to warranty, adjusted for the remaining months of
warranty coverage. The warranty reserve adjustment reflects the Companys
historical warranty experience based on type of equipment. Warranty provisions and
claims for the three and nine months ended July 31, 2009 and 2008 were as
follows:

|                              |  |                             |     |                            |   |      |   |      |      |   |   |      |  
|----------------------------- |  | --------------------------- | --- | -------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                              |  | Three
 months ended July 31 |     | Nine
 months ended July 31 |  
|                              |  | 2009                        |     | 2008                       |   | 2009 |   | 2008 |     
|Balance,
 beginning of period |  | $                           | 158 |                            | $ | 188  |   | $    | 157  |   | $ | 253  |  
|Warranty Provisions           |  |                             | 59  |                            |   | 63   |   |      | 179  |   |   | 205  |  
|Warranty Claims               |  |                             | (64 | )                          |   | (79  | ) |      | (183 | ) |   | (286 | )
|Balance, end
 of period       |  | $                           | 153 |                            | $ | 172  |   | $    | 153  |   | $ | 172  |  

|   |                           
|-- | --------------------------
|8. | Earnings (Loss) per
 Share

Basic
earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average shares outstanding during the reporting period. Diluted
earnings (loss) per share is computed similarly to basic earnings (loss) per
share except that in computing income per share the weighted average shares
outstanding are increased to include additional shares from the assumed
exercise of stock options, if dilutive. The number of additional shares is
calculated by assuming that outstanding stock options were exercised and that
the proceeds from the exercise were used to acquire shares of common stock at
the average market price during the reporting period.

The
Company had options outstanding at July 31, 2009 and 2008 to purchase 705,953
and 681,953 shares, respectively, of its common stock.

Shares
used in the earnings (loss) per share computations are as follows:

|                                                      |  |                              |       |                             |  |       |  |      |       |  |  |       | 
|----------------------------------------------------- |  | ---------------------------- | ----- | --------------------------- |  | ----- |  | ---- | ----- |  |  | ----- | 
|                                                      |  | Three
 Months Ended July 31, |       | Nine
 Months Ended July 31, | 
|                                                      |  | 2009                         |       | 2008                        |  | 2009  |  | 2008 |      
|Weighted average common shares outstanding
 - basic   |  |                              | 4,121 |                             |  | 4,090 |  |      | 4,114 |  |  | 4,090 | 
|Dilutive effect of stock options                      |  |                              |      |                             |  | 60    |  |      |      |  |  |      | 
|Weighted average common shares outstanding
 - diluted |  |                              | 4,121 |                             |  | 4,150 |  |      | 4,114 |  |  | 4,090 | 

The
dilutive effect of stock options in the above table excludes all options for
which the exercise price was higher than the average market price for the
period. For the three-month period ending on July 31, 2008, a total of 399,303
stock options were excluded from the calculation. As a result of the net loss
position for the three and nine-month periods ended July 31, 2009 as well as
for the nine-month period ended on July 31, 2008, all outstanding stock options
were considered antidilutive and, therefore, were excluded from diluted
earnings (loss) per share.

11

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Table of Contents

|   |             
|-- | ------------
|9. | Income Taxes

The
Company has recorded a provision for taxes from operations of $9,000 and
$21,000 for the three months ended July 31, 2009 and 2008, respectively. For
the nine-month periods ended July 31, 2009 and 2008, the provision for taxes
from operations was $22,000 and $48,000, respectively. The Company believes it
is more likely than not that the Company will report a year-to-date loss.
Therefore, no tax benefit was recorded. This assessment was made in a manner
consistent with FASB Statement No. 109, Accounting for Income Taxes. The amount of
income taxes payable, if any, is determined after utilizing the Companys Net
Operating Losses (NOLs), including its pre-emergence bankruptcy NOLs. Under
American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code (SOP 90-7), the tax benefit for the
utilization of these pre-emergence bankruptcy NOL carry forwards must be
recognized as a reduction of intangibles rather than a reduction of the
provision for taxes in the statement of operations.

The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement 109
(FIN 48) on November 1, 2007. There was no additional reserve for uncertain
tax positions recognized as a result of adoption of FIN 48. During the three
and nine months ended July 31, 2009, the Company recognized no income tax
expense related to the reserves for uncertain tax positions. The total reserve
as of both October 31, 2008 and July 31, 2009 was $35,200. The entire amount of
the reserve related to uncertainties regarding income tax nexus with various
states in which the Company has limited activity. Included in the reserve is
$10,000 of estimated interest and penalties. The total amount of the reserve
has increased the Companys effective tax rate, and would therefore decrease the
effective tax rate if removed.

Estimated
interest and penalties related to potential underpayment of income taxes are
classified as a component of tax expense in the consolidated statement of
operations. The Company does not expect the amount of reserves for uncertain
tax positions to change significantly in the next twelve months. Similarly, the
Company does not anticipate that the total reserve for uncertain tax positions
will significantly change due to the settlement of audits and the expiration of
statutes of limitations within the next twelve months.

The
Company files a consolidated federal income tax return in the United States
Federal jurisdiction and files various combined and separate tax returns in
several state and local jurisdictions. With limited exceptions, the Company is
no longer subject to U.S. Federal, state and local tax examinations by tax
authorities for fiscal years ending prior to November 1, 2005. There is no
statute of limitations for assessments related to jurisdictions where the
Company may have nexus but has chosen not to file an income tax return.

The
Company had a federal net operating loss carry forward at October 31, 2008 of
approximately $20.3 million. This amount is the remaining utilizable carry
forward following the application of a limit due to an ownership change under
Internal Revenue Code Section 382 that occurred during the fourth quarter of
fiscal year 2006. This carry forward is available to offset a portion of taxes
payable in future years. If not used, this carry forward will expire in the
years 2009 through 2025. Approximately $7.0 million of this carry forward will
expire, if unused, during the next five years ending October 31, 2013. The
Company also has $109,000 of alternative minimum tax credit carry forwards that
do not have expiration dates. Even though the Company has substantial federal
net operating loss carry forwards, any income may still be subject to U.S. and
State alternative minimum taxes.

12

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Table of Contents

The
Company has recorded a full valuation allowance against its net deferred tax
asset based on its belief that it was more likely than not that the asset would
not be realized in the future. Although this determination was made in a prior
fiscal year, it is still applicable as of July 31, 2009, and the Company will
continue to assess the need for a full valuation allowance in future quarters.
Under SOP 90-7, a substantial portion of any future reversal of the valuation
allowance will first reduce any intangible assets and then be credited directly
to additional paid-in capital. After the exhaustion of pre-emergence bankruptcy
NOLs, approximately $2.3 million of the valuation allowance is related to
post-bankruptcy NOLs and would be available to reduce the provision for taxes
in the statement of operations and, thereafter, $778,000 related to excess
stock option tax deductions would be recognized as additional paid-in capital
if realized in the Companys income tax return.

|    |           
|--- | ----------
|10. | Litigation

The
Company may be subject to certain claims and lawsuits that have been filed in
the ordinary course of business. From time to time, the Company has initiated
lawsuits against others to enforce patents or to seek collection of debts in
the ordinary course of business. It is managements opinion that the settlement
of all litigation arising in the ordinary course of business would not have a
material effect on the financial position, results of operations or liquidity
of the Company.

|    |                
|--- | ---------------
|11. | Severance Costs

The following
table reconciles 2009 and 2008 third quarter activity for accrued severance
expenses:

|                                                                                 |  |      |   |      |   |      |  
|-------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|(In thousands)                                                                   |  | 2009 |   | 2008 |  
|Balance,
 beginning of period                                                    |  | $    |  |      | $ | 254  |  
|Severance payments                                                               |  |      |  |      |   | (197 | )
|Additional severance for Reduction in Force
 (RIF) and distributor termination |  |      |  |      |   |     |  
|Balance, end
 of period                                                          |  | $    |  |      | $ | 57   |  

The
following table reconciles 2009 and 2008 year-to-date activity for accrued
severance expenses:

|                                                          |  |      |    |      |   |      |  
|--------------------------------------------------------- |  | ---- | -- | ---- | - | ---- | -
|(In thousands)                                            |  | 2009 |    | 2008 |  
|Balance,
 beginning of period                             |  | $    |   |      | $ | 0    |  
|Severance payments                                        |  |      | (6 | )    |   | (309 | )
|Additional severance for RIF and
 distributor termination |  |      | 6  |      |   | 366  |  
|Balance, end
 of period                                   |  | $    |   |      | $ | 57   |  

13

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Table of Contents

Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations

Overview

The
Company, through its Medical Graphics Corporation subsidiary, designs and
markets non-invasive cardiorespiratory diagnostic systems that are sold under
the MedGraphics and New Leaf brand and trade names. These cardiorespiratory
diagnostic systems have a wide range of applications in healthcare, wellness
and health and fitness. Revenues consist of equipment and supply sales as well
as service revenues. Equipment and supply sales reflect sales of non-invasive
cardiorespiratory diagnostic equipment and aftermarket sales of peripherals and
supplies. Service revenues consist of revenues 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, rehabilitation medicine and other markets.

Total
revenue for the third quarter of 2009 was $6.2 million, a decrease of 18.0%
from $7.6 million in 2008. Operating expense for the third quarter of 2009 was
$3.6 million, a decrease of 3.0% from the same period in 2008. Net loss for the
three months ended July 31, 2009 was $173,000, or $0.04 per share, compared to
net earnings of $259,000, or $0.06 per diluted share, for the same period in
2008.

Total
revenues for the nine months ended July 31, 2009 was $18.9 million, a decrease
of 15.9% from $22.4 million in 2008. Operating expenses for the nine months
ended July 31, 2009 were $11.0 million, a decrease of 11.3% from the same
period in 2008. Net loss for the nine months ended July 31, 2009 was $1.0
million, or $0.25 per share, compared to a net loss of $789,000, or $0.19 per
share, for the same period in 2008.

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 July 31, |       | Nine
 Months Ended July 31, | 
|                            |  | 2009                         |       | 2008                        |  | 2009  |   | 2008 |      
|Revenues                    |  |                              | 100.0 | %                           |  | 100.0 | % |      | 100.0 | %  |  | 100.0 | % 
|Cost of
 revenues           |  |                              | 45.6  |                             |  | 48.4  |   |      | 47.0  |    |  | 48.6  |   
|Gross margin                |  |                              | 54.4  |                             |  | 51.6  |   |      | 53.0  |    |  | 51.4  |   
|                            |  |                              |       |                             |  |       |   |      |       |    |  |       |   
|Operating
 expenses:        |  |                              |       |                             |  |       |   |      |       |    |  |       |   
|Selling and marketing       |  |                              | 27.1  |                             |  | 26.0  |   |      | 27.0  |    |  | 29.7  |   
|General and administrative  |  |                              | 15.7  |                             |  | 12.5  |   |      | 16.6  |    |  | 14.8  |   
|Research and development    |  |                              | 11.4  |                             |  | 7.4   |   |      | 11.8  |    |  | 8.4   |   
|Amortization of intangibles |  |                              | 2.9   |                             |  | 2.4   |   |      | 2.9   |    |  | 2.4   |   
|                            |  |                              | 57.1  |                             |  | 48.3  |   |      | 58.3  |    |  | 55.3  |   
|Operating
 loss             |  |                              | (2.7  | )                           |  | 3.3   |   |      | (5.3  | )  |  | (3.9  | ) 
|Interest income             |  |                              | 0.1   |                             |  | 0.4   |   |      | 0.0   |    |  | 0.6   |   
|Loss before
 taxes          |  |                              | (2.6  | )                           |  | 3.7   |   |      | (5.3  | )  |  | (3.3  | ) 
|Provision for taxes         |  |                              | 0.2   |                             |  | 0.3   |   |      | 0.1   |    |  | 0.2   |   
|Net loss                    |  |                              | (2.8  | %)                          |  | 3.4   | % |      | (5.4  | %) |  | (3.5  | %)

14

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Table of Contents

The
following paragraphs discuss the Companys performance for the three and
nine-month periods ending July 31, 2009 and 2008:

Revenue

Total
revenue for the three and nine months ended July 31, 2009, decreased by 18.0%
and 15.9%, respectively, compared to the same periods in 2008. The decrease in
revenue of $1.4 million for the three-month period ended July 31, 2009 was
primarily caused by the general deterioration in the economic environment as
hospitals and other health care facilities continued to delay or freeze
spending on capital projects. A total of $378,000 of the decrease in revenues
resulted from a drop in clinical research customer revenue due to the early
conclusion of our large clinical research customers trials in late 2008.

The
decrease in revenue of $3.6 million for the nine-month period ended July 31,
2009 was primarily due to the economic conditions, and in part due to a $1.1
million decrease in clinical research customer revenue from the early
conclusion of our large clinical research customers trials.

Gross Margin

Gross
margin percentage for the three and nine-months ended July 31, 2009 increased
to 54.4% and 53.0% of revenue, respectively, compared to 51.6% and 51.4%,
respectively, for the same periods in 2008. Gross margin percentage for the
three-month period increased by almost three percentage points mainly as a result
of the Companys fiscal year 2008 change in estimate for the reserve for
obsolescence related to inventory used in sales and customer demonstrations due
to changing economic conditions and aging related to these inventory items -the
related inventory charge negatively impacted 2008 gross margin. The increase in
gross margin percentage for the 2009 nine-month period was positively affected
by the obsolescence charge in the prior year, but also included a larger
portion of high margin service revenues as a percentage of total sales.

Selling and Marketing

Selling
and marketing expenses decreased to $1.7 million and $5.1 million,
respectively, for the three and nine-month periods ended July 31, 2009 from
$2.0 million and $6.7 million for the same periods in 2008.

The
$289,000, or 14.6%, decrease for the three-month period ended July 31, 2009
compared to the same period in 2008, is partially due to a drop in payroll,
benefits and other employee-related expenses of $120,000 related to the reallocation
of resources within the Company. During the third quarter of the prior year,
the Company also took a one-time charge to write off $123,000 of obsolete
computer equipment and peripherals related to sales and marketing. In addition,
commissions decreased by $58,000 as a result of lower revenues due to the
challenging sales environment.

The
$1.6 million, or 23.4%, decrease for the nine-month period ended July 31, 2009
is primarily due to a drop in payroll, benefits and other employee-related
expenses of $1.0 million. During the first half of 2008, the Company
implemented two RIFs to better manage operating expenses. The Company also paid
a one-time termination fee of $63,000 to a distributor in the second quarter of
2008. As noted above, during the third quarter of 2008, the Company took a
one-time charge to write off $123,000 of obsolete computer equipment and
peripherals. In addition, commissions decreased by $264,000 as a result of
lower revenues due to the challenging sales environment.

15

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Table of Contents

General and
Administrative

For the
three months ended July 31, 2009, general and administrative expenses increased
by $34,000, or 3.6%, compared to the same period in 2008. For the nine months
ended July 31, 2009, general and administrative expenses decreased by $181,000,
or 5.5%, compared to the same period in 2008.

The
increase in expense compared to prior year for the third quarter was impacted
by the prior year elimination of a portion of the senior management incentive
bonus accrual due to a change in estimate, which decreased general and
administrative expense by $101,000 in the third quarter of fiscal 2008. Also,
2009 non-cash stock-based compensation expense increased by $32,000 primarily
as a result of the issuance of restricted stock awards and options on August
28, 2008 and June 3, 2009. These items were partially offset by professional
fees, mostly related to the audit function, which decreased by $114,000
compared to the same period in 2008.

For
the nine months ended July 31, 2009, audit and other professional fees
decreased by $238,000 compared to the prior year. In addition, a one-time
severance payment of $194,000 was made in the first quarter of 2008. This was
partially offset by an increase in non-cash stock-based compensation expense of
$132,000 due to restricted share grants and options issued August 28, 2008 and
June 3, 2009 as well as an increase in consulting expenses of $110,000.

Research and
Development

Research
and development expenses for the three and nine months ended July 31, 2009 were
$710,000 and $2.2 million, respectively, compared to $565,000 and $1.9 million,
respectively, for the same periods in 2008.

Payroll and
benefits expense increased by $296,000 for the nine months ended July 31, 2009
compared to the same period in 2008 as the Company expanded its investment in
new product development and quality assurance. Non-cash stock-based
compensation expense increased by $41,000 which was partially offset by a
decrease in legal and consulting fees of $17,000 due to less patent-related
work compared to the prior year. The Companys current new product development
initiatives include products targeted for hospital intensive care units,
cardiology, dietary, asthma, allergy and primary care physicians, health and
fitness club professionals, as well as international markets.

Amortization of
Intangibles

Amortization
of developed technology was $182,000 and $546,000, respectively, for the three
and nine months ended July 31, 2009, unchanged from the comparable periods in
2008.

Interest Income

Interest
income for the three months and nine month periods ended July 31,
2009 decreased $26,000 and $127,000,
respectively, compared to the same periods 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.

16

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Table of Contents

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. With respect to the actual payment of
taxes, however, the Company has utilized its pre-emergence bankruptcy NOLs in
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 July 31, 2009 and 2008, the Company did not use any tax benefits
related to pre-emergence bankruptcy NOLs. See note 9 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.

Liquidity and Capital
Resources

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 $10.6 million and working capital of
$15.2 million as of July 31, 2009. During the first three quarters of fiscal
2009, the Company reported a net loss of $1.0 million. However, cash flow from
operating activities was $1.6 million, primarily due to the collections of
accounts receivable for $1.4 million and the add-back of non-cash expenses
totaling $1.4 million for depreciation, amortization and stock-based
compensation expense.

Partially
offsetting these operating cash inflows were a decrease in accounts payable
balances of $179,000, a decrease in employee compensation payables of $217,000
and a decrease in deferred income of $142,000. Employee compensation accruals
decreased due to lower commission payables as a result of lower 2009
year-to-date sales performance compared to 2008. Accounts payable balances have
dropped as the business environment that the Company operates in has slowed.

For
the nine months ended July 31, 2009, the Company used $159,000 in cash for the
purchase of property and equipment and intangible assets. The Company has no
material commitments for capital expenditures for the remainder of fiscal year
2009.

The
Company generated cash from financing activities of $83,000 during the nine
months ended July 31, 2009 from the exercise of stock options and the issuance
of shares under the Employee Stock Purchase Plan.

The
Company believes that its liquidity and capital resource needs for at least 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.

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Table of Contents

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) any changes in national healthcare reform that
affects medical reimbursement; (4) our ability to explore and acquire new
businesses and products that complement our existing products; (5) 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; (6) 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; (7) our ability to effectively manufacture and ship products in
required quantities to meet customer demands; (8) our ability to expand our
international revenue through our distribution partners and our Milan, Italy
representative branch office; (9) 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;
(10) our ability to defend our existing intellectual property and to obtain
United States and international intellectual property protection for our new
products; (11) our ability to develop and maintain an effective system of
internal controls and procedures and disclosure controls and procedures; and
(12) our dependence on third-party vendors for some of our products.

Additional
information with respect to the risks and uncertainties faced by the Company
may be found in, and the above discussion is qualified in its entirety by, the
other risk factors that are described from time to time in the Companys
Securities and Exchange Commission reports, including the Annual Report on Form
10-K for the year ended October 31, 2008 and subsequentlyfiled reports.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

None.

Item 4T.
Controls and Procedures.

(a) Evaluation of Disclosure Controls and
Procedures

Management,
with the participation of the Companys chief executive officer, Rodney A.
Young, and chief financial officer, William J. Kullback, has evaluated the
effectiveness of the design and operation of the disclosure controls and
procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934, as of the end of the period covered by this report. Management has
concluded that the Companys disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that the
Company files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC
and that the disclosure controls are also effective to ensure that information
required to be disclosed in the Companys Exchange Act reports is accumulated
and communicated to management, including the chief executive officer and
principal accounting officer, to allow timely decisions regarding required
disclosure.

(b) Changes in Internal Controls.

There
have been no significant changes in internal control over financial
reporting that occurred during the third fiscal quarter of 2009 that have
materially affected, or are reasonably likely to materially affect, the
registrants internal control over financial reporting.

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Table of Contents

PART II
 OTHER INFORMATION

Item 1.
Legal Proceedings.

From time
to time, the Company is subject to certain claims and lawsuits that are filed
in the ordinary course of business. In addition, the Company brings suit
against others to enforce patent rights or to collect debts in the ordinary
course of business. Management believes that the settlement or other resolution
of all litigation would not have a material effect on the results of operations
or liquidity of the Company.

Item 1A.
Risk Factors

The
most significant risk factors applicable to the Company are described in Part
I, Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended
October 31, 2008. Except as set forth below, we believe there have been no
material changes from the risk factors disclosed in that Annual Report on Form
10-K.

The Company is
experiencing continuing slowness in its sales of its MedGraphics
cardiorespiratory products due to cost-containment measures in its hospital,
clinics and physician office market and is unable to predict when sales in this
market will recover.

The
Company sells its MedGraphics brand cardiorespiratory diagnostic systems and
services to hospitals, clinics and physician offices. During fiscal 2009, the
Company is experiencing lower than anticipated sales to these customers due to
continuing slowdowns in orders, delayed capital projects, and cuts in capital
and operating budgets. Although the Company is continuing to market its new and
existing products to these customers, the Company is unable to predict when
these customers will resume traditional or predictable purchasing patterns.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.
Defaults Upon Senior Securities.

None.

Item 4.
Submission of Matters to a Vote of Security Holders.

The
Company reported the results of its 2009 Annual Meeting of Shareholders in its
Form 10-Q for the quarter ended April 30, 2009.

Item 5.
Other Information.

None.

Item
6.Exhibits.

|    |                                                                         
|--- | ------------------------------------------------------------------------
|31. | Certifications
 pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.
|    |                                                                         
|32. | Certifications
 pursuant to 18 U.S.C. § 1350.                           

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Table of Contents

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                    |                                        |                         | 
|------------------- | -------------------------------------- | ----------------------- | 
|                    | ANGEION
 CORPORATION                  
|                    | (Registrant)                          
|September
 14, 2009 |                                        |                        
|                    | By:                                    | /s/ Rodney A. Young     | 
|                    | Rodney A. Young                       
|                    | President
 and Chief Executive Officer
|                   
|September
 14, 2009 |                                        |                        
|                    | By:                                    | /s/ William J. Kullback | 
|                    | William J. Kullback                   
|                    | Chief
 Financial Officer              

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